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DPL Inc. 1065 Woodman Drive, Dayton, Ohio 45432 www.dplinc.com
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Annual Report
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3/6/07 11:20:00 AM
Highlights
Offi cers
Board of Directors
Market value per share at December 31
Earnings (millions)
Earnings per share of common stock – Basic:
From continuing operations
From discontinued operations
From cumulative effect of accounting change
Total
Earnings per share of common stock – Diluted:
From continuing operations
From discontinued operations
From cumulative effect of accounting change
Total
Average shares outstanding (millions)
Basic
Diluted
Cash provided by operating activities (millions)
Long term debt including current portion (millions)
Interest expense (millions)
Total capital additions (millions)
Environmental capital additions (millions)
Dividends paid per share
$
$
$
$
$
$
$
$
$
$
2006
27.78
139.6
1.12
0.12
–
1.24
1.03
0.12
–
1.15
112.3
121.9
308.7
$
$ 1,777.7
102.2
$
358
245
1.00
$
$
$
System peak load – MW (calendar year)
Average retail price per kWh (calendar year) (cents/kWh)
3,240
7.59
$
$
$
$
$
$
$
$
$
$
2005
26.01
174.4
1.03
0.44
(0.03)
1.44
0.97
0.41
(0.03)
1.35
121.0
129.1
$
$
$
$
$
$
$
$
$
$
2004
25.11
217.3
1.01
0.80
–
1.81
1.00
0.78
–
1.78
120.1
122.1
$
314.1
$ 1,678.0
$
132.7
$ 2,130.8
$
$
$
$
137.7
180
90
0.96
3,243
6.96
$
$
$
$
160.2
88
18
0.96
2,896
6.94
Corporate Profi le
DPL Generating Units & Service Area
DPL Inc. (NYSE: DPL) is a regional electric energy and utility
company. DPL’s principal subsidiaries include The Dayton
Power and Light Company (DP&L); DPL Energy, LLC (DPLE);
and DPL Energy Resources, Inc. (DPLER). DP&L, a regulated
electric utility, provides service to over 500,000 retail custom-
ers in West Central Ohio; DPLE engages in the operation
of peaking generation facilities; and DPLER is a competitive
retail electric supplier in Ohio, selling to major industrial
and commercial customers. DPL, through its subsidiaries,
owns approximately 4,400* megawatts of generation capacity,
of which 2,800 megawatts are low cost coal-fi red units and
1,600* megawatts are natural gas and diesel peaking units.
Further information can be found at www.dplinc.com.
*DPL expects to close on the sale of two peaking plants in 2007, which will result in
total capacity of 3,750 megawatts and peaking capacity of 950 megawatts.
About the Cover
M i c h i g a n
L a k e E r
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Cleveland
O H I O
Columbus
Conesville
W e s t
V i
r g i n i a
Montpelier
Hutchings
Tait
Dayton
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Miami For t
Cincinnati
Beckjord
Zimmer
Stuart
East Bend
Killen
K e n t u c k y
■ DP&L Service Area
Pictured is downtown Dayton’s Riverscape area which hosts a
● Natural Gas Peaking Generation Units
number of cultural and family events. Riverscape’s renovation was
● Wholly & Commonly Owned Coal-Fired Generating Plants
made possible, in part, by support from DPL.
Paul M. Barbas
President and
Chief Executive Offi cer
DPL Inc. and DP&L
Joseph R. Boni III
Treasurer
DPL Inc. and DP&L
Frederick J. Boyle
Controller and
Chief Accounting Offi cer
DPL Inc. and DP&L
Miggie E. Cramblit
Vice President,
General Counsel and
Corporate Secretary
DPL Inc. and DP&L
John J. Gillen
Senior Vice President and
Chief Financial Offi cer
DPL Inc. and DP&L
Arthur G. Meyer
Vice President
DPL Inc. and DP&L
Gary G. Stephenson
Vice President
Commercial Operations
DPL Inc. and DP&L
Patricia K. Swanke
Vice President, Operations
DP&L
W. Steven Wolff
President, Power Production
DPL Inc. and DP&L
Glenn E. Harder
Non-Executive Chairman
DPL Inc. and DP&L
President, GEH Advisory Services
Former Executive Vice President and
Chief Financial Offi cer
Carolina Power and Light
Raleigh, North Carolina
Ernie Green
President and Chief Executive Offi cer
Ernie Green Industries
Dayton, Ohio
Paul M. Barbas
President and Chief Executive Offi cer
DPL Inc. and DP&L
Dayton, Ohio
W August Hillenbrand
Non-Executive Vice-Chairman
DPL Inc. and DP&L
Principal
Hillenbrand Capital Partners
Retired President and
Chief Executive Offi cer
Hillenbrand Industries
Batesville, Indiana
Robert D. Biggs
Former Executive Chairman
DPL Inc. and DP&L
Retired Managing Partner
PricewaterhouseCoopers
Lester L. Lyles
Retired General, U.S. Air Force
Former Commander of the
Air Force Materiel Command
Dayton, Ohio
Paul R. Bishop
Chairman and Chief Executive Offi cer
H-P Products, Inc.
Louisville, Ohio
Dr. Ned J. Sifferlen
President Emeritus
Sinclair Community College
Dayton, Ohio
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Barbara S. Graham
Former Senior Vice President
Pepco Holdings
Washington, D.C.
141586_CVR_R2.indd 2
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3/6/07 11:20:05 AM
Chairman’s Letter
Dear Fellow Stakeholders:
In June of 2006, I was honored to be elected by the
Board of Directors to the position of Non-Executive Chairman.
It was an easy decision for me to accept this role. My fellow
Directors are capable and dedicated to DPL’s success.
They care deeply about DPL.
And over the past several years, DPL has made a
number of sound strategic moves that have strengthened
our Company and sharpened our focus on the electric utility
business. These include selling the private equity funds,
reducing debt by $450 million, and completing a $400 million
stock buyback. We believe we have created a company
with a strong foundation for the future.
There is evidence of this strong foundation in DPL’s 2006
performance and improved profi tability. Shareholders were
rewarded with a competitive return, including a 4% dividend
increase in 2006 followed by another 4% increase in 2007.
In addition, all three rating agencies now rate DPL debt
as investment grade.
The year 2006 was a year of transition as well as a year
of improvement. Bob Biggs chose to step down as Executive
Chairman, although he remains a Director. We are fortunate
to have his continued counsel. Likewise, Jim Mahoney,
Chief Executive Offi cer, elected to move on to new challenges
in the energy industry.
On behalf of the Board of Directors, I would like to
express our sincere gratitude for the leadership and service
that both of these talented individuals provided. Bob’s
fi nancial and strategic acumen were critical to DPL’s success
in the face of challenges that were unprecedented in its
history. At the same time, Jim Mahoney’s day-to-day
leadership was instrumental in the Company’s transition
to a more open and transparent culture.
Now, we look to the future with excitement and anticipation.
We are pleased to have Paul Barbas as our new
Chief Executive Offi cer. Paul brings strong experience in both
regulated and unregulated businesses, including 17 years
at General Electric. I am confi dent that Paul will successfully
capitalize on the positive momentum.
As Chairman, you have my commitment that DPL will
continue to focus on delivering value to customers, investors,
employees and the communities we serve.
Thank you for your investment in DPL Inc.
Glenn E. Harder
Chairman
March 1, 2007
Glenn E. Harder
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3/6/07 11:33:24 AM
President & CEO’s Letter
To My Fellow DPL Stakeholders:
I am very excited to have joined the DPL team.
DPL is a sound company with a bright future. On behalf
of our employees, I am proud to report on the many
signifi cant accomplishments of 2006.
Increased Earnings
Financially, DPL had a good year, with earnings per
share from continuing operations up more than 8%.
There were a number of factors driving this fi nancial
performance. Retail revenues increased as we imple-
mented the fi rst year of DP&L’s fi ve-year rate stabilization
plan. In addition, record base load generation output led
to a 34% increase in wholesale sales. These positives
more than offset the impact of mild weather and higher
purchased power costs, increasing gross margin by 9%.
At the same time, fi nancial actions initiated in 2005 had
a favorable impact, including lower interest expense due
to debt reduction and the $400 million stock buyback.
Refl ective of these positive fi nancial results and a com-
mitment to shareholder return, the Board of Directors
announced a 4% dividend increase in February of 2007.
The Strengths of DPL
After several months in my new position, it is clear we
have a number of strengths.
(cid:129) Our 1,500 employees are committed to delivering
safe and reliable service to our customers.
They are relentless in identifying improvements that
enhance the level of service we provide.
(cid:129) We are a solid electric utility. Our coal-fi red generating
assets are cost competitive and the distribution
system continues to deliver reliable service to more than
500,000 customers in West Central Ohio.
(cid:129) DP&L is currently the only utility in Ohio to have a rate
stabilization plan in place through 2010. It allows the
Company to recover increased fuel and environmental
costs while protecting customers from potentially volatile
energy markets. With discussions occurring in Ohio
and other states about the future regulatory framework,
having a rate plan in place for an extended period of
time provides security for customers and investors alike.
(cid:129) Strategically, DPL has taken a number of signifi cant
steps over the past several years to sharpen its
focus. Most recently, we announced the sale of two
peaking generation plants for over $150 million
in cash. These sales better align generation capacity
with generation needs.
Paul M. Barbas
Near-Term Focus
As we look to the future, near-term success will be
determined by our ability to execute in several critical
areas: customer satisfaction, generation performance
and fuel procurement.
Customer Satisfaction, Reliable Service: The DP&L
team takes great pride in their ability to provide reliable
service, regardless of the weather. During 2006, the
Company once again met and exceeded all regulatory
reliability goals. We constantly communicate with our
customers, and although pleased by customer percep-
tions of DP&L, during 2007 we plan to utilize customer
feedback to further improve the value of the services we
provide to our customers. At the same time, we will
keep a vigilant eye on controlling costs.
Generation Performance: The priorities in the production
business will remain operational excellence and cost
control. Last year, DPL’s base load, coal-fi red generation
– the plants that generate 97% of our electricity –
produced the highest level of output in Company history.
2
141586_NARR_R2.indd Sec1:2
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3/6/07 11:33:28 AM
3/6/07 11:33:28 AM
The installation of fl ue gas desulfurization units, or
scrubbers, will be completed at Killen Station during
2007 and at various other units through 2009. The
scrubbers will produce cleaner air for the environment
and provide DPL with the potential to use lower
cost coal. Our team will continue to focus on keeping
this signifi cant project on track.
Effective Fuel Procurement: Each year, DPL burns
approximately 7.5 million tons of coal. Managing the cost
of this commodity is critically important to operating
successfully within our retail rate structure. A challenge
will be to determine the most cost-effective types of
coals we can burn after the new scrubber systems come
on-line at our Killen and Stuart Stations. The fuel strat-
egy going forward is to build in fl exibility while prudently
controlling the risk of coal price volatility.
Long-Term Opportunities
For the long term, DPL will continue to keep a sharp eye
on maintaining a healthy core business. In addition,
we will actively participate in the discussions beginning
to take shape in Ohio regarding the future of electric
choice. To date, state regulators have done an admirable
job of implementing a balanced approach, protecting
consumers from price volatility while allowing reasonable
cost recovery for fuel and environmental investments.
DPL is committed to being part of a solution that
works for all parties while helping to maintain Ohio’s
competitive position in the global economy.
As the future regulatory direction unfolds, we will also
explore and analyze opportunities for growth in areas
directly related to our utility business. We will only
act when the risks and returns are acceptable.
I look to the years ahead with great anticipation.
The future holds both opportunities and challenges.
With almost 100 years in business, adapting to change
is ingrained in our culture, and we are committed to
not just adapting but thriving as our industry
continues to evolve.
Paul M. Barbas
President and Chief Executive Officer
March 1, 2007
Annual Highlights
4% Dividend Increase, Stock Buyback
DPL is committed to delivering long-term value
and a competitive return to shareholders.
To this end, DPL increased its common dividend
4% in February of 2006 and again in February
of 2007. The Company also completed a
$400 million stock buyback program.
Debt Rating Upgrades
Moody’s, Standard & Poor’s and Fitch all
now rate DPL debt investment grade. This reflects
both the Company’s strengthened balance sheet,
including debt reduction of $450 million that
occurred in 2005, and its stable outlook.
Operational Performance
DPL continued to deliver quality customer
service to its more than 500,000 retail customers
by meeting and exceeding all reliability standards
established by the Public Utilities Commission
of Ohio. At the same time, our 2,500 megawatts of
base load generation produced the highest output
and achieved the second best effi ciency rating
in Company history.
Rate Stabilization Plan – Year 1
DPL’s five-year rate stabilization plan provides
customers and shareholders with a predictable
and phased-in recovery of fuel and environmental
expenses. The first phase of the plan was
implemented in 2006, allowing the Company to
recover approximately $65 million in additional net
revenue. Generation rates will increase another
5.4% for each of the next four years (2007–2010)
to recover environmental investments.
$151.2 Million from Peaking Plant Sales
After a thorough review of its generation portfolio,
DPL announced an agreement to sell two peak-
ing sites, Darby Station and Greenville Station, for
$151.2 million in cash. The transactions align our
generation capacity with our generation needs
while supplying cash for debt reduction and the
funding of environmental investments.
New Chairman & Chief Executive Officer
As the Company completed a number of positive
steps to sharpen its strategic focus, Robert Biggs
stepped down as Executive Chairman. Glenn
Harder, a Director since 2004, was elected Non-
Executive Chairman while Mr. Biggs remains on
the Board of Directors. To complete the transition,
Paul Barbas joined DPL as President and Chief
Executive Officer, bringing valuable operational and
strategic experience in both regulated and
unregulated businesses.
141586_NARR_R2.indd Sec1:3
141586_NARR_R2.indd Sec1:3
3
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3/6/07 11:33:32 AM
3/6/07 11:33:32 AM
Base Load Coal Heat Rate
(cid:153)(cid:93)(cid:110)(cid:110)(cid:123)
(Btu/kWh) (Lower is Better)
(cid:153)(cid:93)(cid:110)(cid:200)(cid:206)
(cid:153)(cid:93)(cid:110)(cid:120)(cid:163)
(cid:153)(cid:93)(cid:110)(cid:206)(cid:110)
(cid:153)(cid:93)(cid:110)(cid:206)(cid:120)
(cid:153)(cid:93)(cid:110)(cid:211)(cid:123)
(cid:153)(cid:93)(cid:110)(cid:211)(cid:163)
(cid:153)(cid:93)(cid:199)(cid:110)(cid:153)
(cid:153)(cid:93)(cid:199)(cid:200)(cid:123) (cid:153)(cid:93)(cid:199)(cid:200)(cid:120)
(cid:202)(cid:163)(cid:153)(cid:153)(cid:199)(cid:202)
(cid:163)(cid:153)(cid:153)(cid:110)(cid:202)
(cid:163)(cid:153)(cid:153)(cid:153)(cid:202)
(cid:211)(cid:228)(cid:228)(cid:228)(cid:202)
(cid:211)(cid:228)(cid:228)(cid:163)(cid:202)
(cid:211)(cid:228)(cid:228)(cid:211)(cid:202)
(cid:211)(cid:228)(cid:228)(cid:206)(cid:202)
(cid:211)(cid:228)(cid:228)(cid:123)(cid:202)
(cid:211)(cid:228)(cid:228)(cid:120)(cid:202)
(cid:211)(cid:228)(cid:228)(cid:200)
DPL base load coal plants achieved their second
best heat rate in the past 10 years. Heat rate, an
efficiency measure, tracks the amount of electricity
generated from fuel.
DPL installed a new distributed control system at
Killen Station to enhance the plant’s overall
efficiency. The investment paid off. Killen achieved
the third best efficiency rating in its history.
Here, Ernie Cravens and Janice Monahon train in
the new control room simulator.
4
141586_NARR_R2.indd Sec1:4
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3/6/07 11:33:32 AM
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Cost-Competitive Generation
DPL’s base load generation portfolio consists
of 2,500 megawatts of coal-fired generation.
It is the workhorse of the DPL system. Combined,
the seven plants produced 97% of 2006 total
output and turned in another strong operational year.
Notable base load achievements included:
The highest output in Company history.
The second best equivalent availability in
the past 10 years. In other words, the plants
had a good year by being available to run
when needed.
And, the second best efficiency rating in
the past 10 years.
These results were made possible by ongoing
investments in plant performance – both in terms
of equipment and people.
At the 600-megawatt Killen Station, DPL installed a
new distributed control system (DCS) to allow
its plant operators to strengthen both availability and
efficiency. As important as the new technology,
the Company also installed a DCS simulator to train
its operators on how best to use the new system to
maximize plant performance.
At Stuart Station, DPL equipped Unit #1 with a new
dense pack turbine. The design of the dense pack
allows the turbine to convert more steam into electricity,
increasing the unit’s efficiency and lowering fuel
costs. Now, all four units at the 2,400-megawatt station
have dense pack turbines, strengthening the plant’s
ability to remain cost competitive.
With the mild weather that occurred in 2006, DPL
sold its excess energy into the PJM wholesale market.
Compared to 2005, wholesale sales were up 34%
for the year, helping DPL hit the high end of its 2006
earnings targets.
Wendell Adkins (left) and Earl Bush are
part of the DPL team managing the
$500 million scrubber installation project.
The new 800-foot stack at Stuart Station
will contain four flues, one for each of the
four generating units at the plant.
141586_NARR_R2.indd Sec1:5
141586_NARR_R2.indd Sec1:5
Left: Work is progressing on DPL’s environmental
investment in flue gas desulfurization (FGD) equipment,
more commonly called scrubbers. The FGD system
will produce cleaner air while supporting our efforts to
meet environmental regulations.
5
5
3/6/07 11:33:45 AM
3/6/07 11:33:45 AM
Delivering Power
to 500,000 Customers
DDelivering reliable service to our customers and
providing shareholders with a steady stream of income
and cash fl ow is the touchstone of DPL’s regulated
transmission and distribution business (DP&L).
Sharply focused on reliability, DP&L once again met or
exceeded reliability standards set by the Public Utilities
Commission of Ohio (PUCO) and consistently complied
with regularly-scheduled PUCO audits. The Company
also earned a 100% reliability compliance rating in an
audit of its planning and operational standards performed
by ReliabilityFirst Corporation, the North American
Electric Reliability Council region for DP&L.
This steadfast performance is made possible by a
team committed to continuous improvement. During
2006, DP&L union and management employees
worked together to design and implement a new “all-call”
system to reward employees for prompt response
during severe weather emergencies. “All-call” results
have been outstanding.
In addition, the Company continuously invests in the
reliability of its more than 16,000 miles of transmission
and distribution lines. DP&L recently built three
new substations to strengthen reliability and serve
the growing areas of the Dayton region.
These types of efforts, combined with extensive
planning, paid off during the summer as the area was
hit with several intense heat waves. The system
performed exceptionally well even as it approached
peak loads for the second year in a row.
Beyond reliability, communication with customers
is a critical component of quality customer service. To
strengthen performance, DP&L restructured its call
center. Employees are now organized into teams, with
union employees taking an active leadership role.
We are also working to meet the needs of an increasingly
diverse customer base by adding several Spanish-
speaking customer service representatives.
Ongoing investment, continuous improvement and
adapting to customer needs – these are just a few of the
ways that DP&L employees are working around the
clock to deliver.
Dayton Power and Light (DP&L), a regulated electric
utility, serves more than 500,000 customers in West Central
Ohio and provides shareholders with a solid foundation
of income and cash fl ow.
6
Allison Coate (left) and Quintin Gaddis play a
valuable role in substation construction.
DP&L built three new substations during 2006
to strengthen reliability and supply power to the
region’s growing areas.
Employees pride themselves on delivering reliable
service, especially in severe weather.
Al Porter (left) and Barry Lucas are part of the team
that help make it happen.
Outage Frequency per customer per year
Outage Duration in minutes
PUCO Target: 0.99
PUCO Target: 98.38
2004
0.82
2005
0.97
2006
0.90
(cid:211)(cid:228)(cid:228)(cid:123)(cid:202)
(cid:110)(cid:199)(cid:176)(cid:228)(cid:199)
(cid:202)(cid:211)(cid:228)(cid:228)(cid:120)(cid:202)
(cid:153)(cid:206)(cid:176)(cid:120)(cid:206)
(cid:211)(cid:228)(cid:228)(cid:200)(cid:202)
(cid:153)(cid:123)(cid:176)(cid:153)(cid:120)
In 2006, DP&L’s operational performance once again met or exceeded all Public
Utilities Commission of Ohio (PUCO) reliability standards.*
* Calculations contain certain PUCO approved exclusions.
141586_NARR_R2.indd Sec1:7
141586_NARR_R2.indd Sec1:7
7
3/6/07 11:34:09 AM
3/6/07 11:34:09 AM
Supporting Our Community
As a business, DPL recognizes that its success is
directly tied to the success of West Central Ohio.
DPL and its 1,500 employees have a long-standing
tradition of supporting Dayton and the
surrounding communities, both through fi nancial
initiatives and volunteer activities.
In 1985, the Company established the Dayton
Power and Light Company Foundation as a means
to enhance the quality of life in the communities it
serves. In addition, DPL provides corporate sup-
port to a number of organizations, including those
that promote regional economic development.
Together, DPL and the DP&L Foundation annually
donate more than $1 million.
The efforts of the Company
and the Foundation were
honored by the Ohio Arts
Council with the 2007
Governor’s Award for
Business Support of the
Arts. Winners in six cat-
egories were selected from 63
organizations located throughout the state.
As one letter in support of DPL’s nomination stated:
“The Dayton Power and Light Company has
marked itself as a leader by spending the time and
making the commitment to be a real partner in the
ongoing conversation about the value of the arts in
empowering the community.”
8
8
Georgene Dawson, Manager of Real Estate Services
and local United Way board member, and Adrian Aldridge,
Electric Line Technician, were part of the union/management
campaign committee that increased employee contributions
to the United Way 37% over 2005. Georgene and
Adrian are at the Girl Scouts’ new activity center, made
possible in part by the ongoing support of the United Way,
the DP&L Foundation, and our employees.
For more than 15 years, our employees have actively participated
in the annual Miami Valley River Clean-Up.
Pictured are Scott Arentsen of the Company’s Environmental
Management team and an organizer of the event,
and employees Mary Mitchell (left) and JoAnne Rau (right).
141586_NARR_R2.indd Sec1:8
141586_NARR_R2.indd Sec1:8
3/6/07 11:34:19 AM
3/6/07 11:34:19 AM
DPL Inc. and Dayton Power and Light (DP&L) Combined Form 10-K
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, 2006
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
1-2385
Registrant, State of Incorporation,
Address and Telephone Number
DPL Inc.
(An Ohio Corporation)
1065 Woodman Drive, Dayton, Ohio 45432
937-224-6000
The Dayton Power and Light Company
(An Ohio Corporation)
1065 Woodman Drive, Dayton, Ohio 45432
937-224-6000
I.R.S. Employer
Identification No.
31-1163136
31-0258470
Each of the following classes or series of securities registered pursuant to Section 12 (b) of the
Act is registered on the New York Stock Exchange:
Registrant
DPL Inc.
Description
Common Stock, $0.01 par value and Preferred Share Purchase Rights
The Dayton Power
and Light Company
None
Securities registered pursuant to Section 12(g) of the Act: None
2
DPL Inc.
Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
DPL Inc.
The Dayton Power and Light Company
Yes __✔___
Yes _____
No _____
No __✔___
Indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Exchange Act.
DPL Inc.
The Dayton Power and Light Company
Yes _____
Yes _____
No __✔___
No __✔___
Indicate by check mark whether each 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
DPL Inc.
The Dayton Power and Light Company
Yes __✔___
Yes __✔___
No _____
No _____
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 each 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.
DPL Inc.
The Dayton Power and Light Company
__✔___
__✔___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
DPL Inc.
The Dayton Power and Light Company
Large accelerated filer
__✔___
_____
Accelerated filer
_____
_____
Non-accelerated filer
_____
__✔___
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
DPL Inc.
The Dayton Power and Light Company
Yes _____
Yes _____
No __✔___
No __✔___
The aggregate market value of DPL Inc.’s common stock held by non-affiliates of DPL Inc. as of June 30, 2006
was approximately $3.1 billion based on a closing sale price of $26.80 on that date as reported on the
New York Stock Exchange. All of the common stock of The Dayton Power and Light Company is owned by
DPL Inc. As of February 22, 2007, each registrant had the following shares of common stock outstanding:
Registrant
DPL Inc.
The Dayton Power
and Light Company
Description
Common Stock, $0.01 par value
and Preferred Share Purchase Rights
Shares Outstanding
113,101,211
Common Stock
41,172,173
This combined Form 10-K is separately filed by DPL Inc. and The Dayton Power and Light Company.
Information contained herein relating to any individual registrant is filed by such registrant on its own behalf.
Each registrant makes no representation as to information relating to a registrant other than itself.
Documents Incorporated by Reference
Portions of DPL’s definitive proxy statement for its 2007 Annual Meeting of Shareholders are incorporated
by reference in Part III of this Form 10-K.
DPL Inc.
3
Index to Annual Report on Form 10K DPL Inc. and The Dayton Power and Light Company
Fiscal Year Ended December 31, 2006
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Controls and Procedures
Other Information
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Signatures
Schedule II – Valuation and Qualifying Accounts
Subsidiaries of DPL Inc. and The Dayton Power and Light Company
Consent of Independent Registered Public Accounting Firm
Page No.
5
16
20
20
20
22
23
24
25
44
45
92
92
92
93
93
93
93
93
94
103
104
105
106
Part I
Item 1
Item 1a
Item 1b
Item 2
Item 3
Item 4
Part II
Item 5
Item 6
Item 7
Item 7a
Item 8
Item 9
Item 9a
Item 9b
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV
Item 15
Other
4
DPL Inc.
Part I
Item 1 Business
This report includes the combined filing of DPL Inc.
(DPL) and The Dayton Power and Light Company
(DP&L). DP&L is the principal subsidiary of DPL pro-
viding approximately 99% of DPL’s total consolidated
revenue and approximately 86% of DPL’s total con-
solidated asset base. Throughout this report the terms
we, us, our and ours are used to refer to both DPL and
DP&L, respectively and altogether, unless the context
indicates otherwise. Discussions or areas of this report
that apply only to DPL or DP&L will clearly be noted
in the section. Historically, DPL and DP&L have filed
separate SEC filings. Beginning with this report and in
the future, DPL Inc. and The Dayton Power and Light
Company will file combined SEC reports on an interim
and annual basis.
Website Access To Reports
DPL Inc. and The Dayton Power and Light Company
file current, annual and quarterly reports, proxy state-
ment and other information required by the Securities
Exchange Act of 1934, as amended, with the Securities
and Exchange Commission (SEC). You may read and
copy any document we file at the SEC’s public refer-
ence room located at 100 F Street N.E., Washington,
D.C. 20549, USA. Please call the SEC at (800) SEC-
0330 for further information on the public reference
rooms. Our SEC filings are also available to the public
from the SEC’s web site at http://www.sec.gov.
Our public internet site is http://www.dplinc.com.
We make available, free of charge, through our internet
site, our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and Forms
3, 4 and 5 filed on behalf of our directors and execu-
tive officers and amendments to those reports filed or
furnished pursuant to the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable
after we electronically file such material with, or furnish
it to, the SEC.
In addition, our public internet site includes
other items related to corporate governance matters,
including, among other things, our governance guide-
lines, charters of various committees of the Board of
Directors and our code of business conduct and ethics
applicable to all employees, officers and directors. You
may obtain copies of these documents, free of charge,
by sending a request, in writing, to DPL Investor
Relations, 1065 Woodman Drive, Dayton, Ohio 45432.
Organization
DPL Inc. (DPL) is a diversified regional energy com-
pany organized in 1985 under the laws of Ohio. Our
executive offices are located at 1065 Woodman Drive,
Dayton, Ohio 45432 – telephone (937) 224-6000.
DPL’s principal subsidiary is The Dayton Power
and Light Company (DP&L). DP&L is a public utility
incorporated in 1911 under the laws of Ohio. DP&L
sells electricity 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 primarily generated at eight
coal-fired power plants and is distributed to more than
500,000 retail customers. DP&L also purchases retail
peak load requirements from DPL Energy LLC (DPLE,
one of DPL’s wholly-owned subsidiaries). Principal
industries served include automotive, food process-
ing, paper, plastic manufacturing and defense. DP&L’s
sales reflect the general economic conditions and
seasonal weather patterns of the area. DP&L sells any
excess energy and capacity into the wholesale market.
DPL’s other significant subsidiaries (all of which
are wholly-owned) include DPLE, which engages in the
operation of peaking generating facilities; DPL Energy
Resources, Inc. (DPLER), which sells retail electric
energy under contract to major industrial and commer-
cial customers in West Central Ohio; MVE, Inc., which
was primarily responsible for the management of our
financial asset portfolio; and Miami Valley Insurance
Company (MVIC), which is our captive insurance com-
pany that provides insurance sources to us and our
subsidiaries.
DP&L has one significant subsidiary, DPL Finance
Company, Inc., which is wholly-owned and provides
financing to DPL, DP&L and other affiliated companies.
DPL and DP&L conduct their principal business in
one business segment – Electric.
Under the recently enacted Public Utility Holding
Company Act of 2005, the Federal Energy Regulatory
Commission (FERC) requires that utility holding compa-
nies comply with certain accounting, record retention
and filing requirements. DPL believes it is exempt from
these requirements because DP&L’s operations are
confined to a single state. On January 31, 2006, DPL
filed a FERC 65B Waiver Notification with the FERC,
requesting that the FERC approve DPL’s waiver and
avoid FERC regulation.
DPL Inc.
5
DPL, DP&L and its subsidiaries employed 1,452 persons as of January 31, 2007, of which 1,203 were
full-time employees and 249 were part-time employees.
Significant Developments
Credit Rating Upgrades
In early 2007 and during 2006, our rating agencies upgraded our corporate credit and debt ratings.
The following table outlines the rating of each company and the date of the upgrade:
Fitch Ratings
Moody’s Investors Service
Standard & Poor’s Corp.
DPL
BBB
Baa3
BBB-
DP&L
A
A3
BBB+
Date
April 2006
June 2006
February 2007
Peaking Unit Sales
Share Repurchase of DPL’s Common Stock
In connection with DPLE’s (subsidiary of DPL) decision
to sell the Greenville Station and Darby Station electric
peaking generation facilities, DPL concluded that an
impairment charge for the Greenville Station and Darby
Station assets was required. During the fourth quarter
of 2006, DPL recorded a $71.0 million impairment
charge to record the write-down of the assets to
fair market value and other associated costs related
to the sales.
On July 27, 2005, DPL’s Board authorized the repur-
chase of up to $400 million of common stock from time
to time in the open market or through private transac-
tions. DPL completed this share repurchase program
through a series of open market purchases on August
21, 2006. This resulted in 14.9 million shares being
repurchased at an average price of $26.91 per share
and a total cost of $400 million. These shares are
currently held as treasury shares at DPL Inc.
Pollution Control Bonds
Increase in Dividends on DPL’s Common Stock
On September 13, 2006, the Ohio Air Quality
Development Authority (OAQDA) issued $100 million
of 4.80% fixed interest rate OAQDA Revenue Bonds
2006 Series A due September 1, 2036. In turn, DP&L
then borrowed these funds from the OAQDA. DP&L
is using the proceeds from this borrowing to assist
in financing its portion of the costs of acquiring, con-
structing and installing certain solid waste disposal
and air quality facilities at Miami Fort, Killen and Stuart
Generating Stations.
On February 1, 2007, DPL’s Board of Directors
announced that it had raised the quarterly dividend
to $0.26 per share payable March 1, 2007 to common
shareholders of record on February 14, 2007. This
increase results in an annualized dividend rate of
$1.04 per share, or a 4% increase.
6
DPL Inc.
Electric Sales and Revenues
Electric Sales (millions of kWh)
Residential
Commercial
Industrial
Other retail
Total retail
Wholesale
Total
DPL Inc.
DP&L (a)
2006
2005
2004
2006
2005
2004
5,218
3,835
4,286
1,428
14,767
3,651
18,418
5,520
3,901
4,332
1,437
15,190
2,716
17,906
5,140
3,777
4,393
1,407
14,717
3,748
18,465
5,218
3,835
4,286
1,428
14,767
3,651
18,418
5,520
3,901
4,332
1,437
15,190
2,716
17,906
5,140
3,777
4,393
1,407
14,717
3,748
18,465
Operating Revenues ($ in thousands)
Residential
Commercial
Industrial
Other retail
Other miscellaneous revenues
$ 490,514 $ 478,226 $ 449,411
267,831
276,157
300,908
223,335
220,453
240,450
80,370
81,716
88,307
15,863
10,069
11,174
$ 490,514 $ 478,226 $ 449,411
239,952
247,912
278,082
128,059
126,506
130,119
80,623
81,877
88,203
15,914
10,317
11,215
Total retail
Wholesale
RTO ancillary revenues
Other revenues, net of fuel costs
1,131,353
174,114
77,231
10,821
1,066,621
133,283
74,419
10,586
1,036,810
135,129
17,905
10,054
998,133
309,885
77,231
–
944,838
257,632
74,419
–
913,959
260,341
17,905
–
Total
$ 1,393,519 $ 1,284,909 $ 1,199,988
$ 1,385,249 $ 1,276,889 $ 1,192,205
Electric Customers at End of Period
Residential
Commercial
Industrial
Other
Total
457,054
49,284
1,822
6,349
456,146
48,853
1,837
6,304
453,653
48,172
1,851
6,337
457,054
49,284
1,822
6,349
456,146
48,853
1,837
6,304
453,653
48,172
1,851
6,337
514,509
513,140
510,013
514,509
513,140
510,013
(a) DP&L sells power to DPLER (a subsidiary of DPL). These sales are classified as wholesale on DP&L’s financial statements and
retail sales for DPL. The kWh volumes contain all volumes distributed on the DP&L system which include the retail sales by DPLER.
The sales for resale volumes are omitted to avoid duplicate reporting.
Electric Operations and Fuel Supply
2006 Summer Generating Capacity
Amounts in MWs
DPL
DP&L
Coal Fired
2,860
2,860
Peaking
Units
1,549 (a)
435
Total
4,409
3,295
(a) Amounts include 630 MW of peaking capacity relating to the Darby and Greenville stations
that DPL entered into agreements to sell during the fourth quarter of 2006.
DPL’s present summer generating capacity, includ-
ing Peaking Units, is approximately 4,409 MW. Of this
capacity, approximately 2,860 MW or 65% is derived
from coal-fired steam generating stations and the
balance of approximately 1,549 MW or 35% consists
of combustion turbine and diesel peaking units.
DP&L’s present summer generating capacity,
including Peaking Units, is approximately 3,295 MW.
Of this capacity, approximately 2,860 MW or 87% is
derived from coal-fired steam generating stations
and the balance of approximately 435 MW or 13% con-
sists of combustion turbine and diesel peaking units.
Combustion turbine output is dependent on
ambient conditions and is higher in the winter than
in the summer. Our all-time net peak load was 3,243
MW, occurring July 25, 2005.
Approximately 87% of the existing steam generat-
ing capacity is provided by certain units owned as
tenants in common with (Duke Energy) The Cincinnati
Gas & Electric Company (CG&E) or its subsidiary,
Union Heat, Light & Power, and (AEP) Columbus
Southern Power Company (CSP). As tenants in com-
mon, each company owns a specified undivided share
of each of these units, is entitled to its share of capac-
DPL Inc.
7
ity and energy output, and has a capital and operating cost responsibility proportionate to its ownership share.
DP&L’s remaining steam generating capacity (approximately 365 MW) is derived from a generating station owned
solely by DP&L. Additionally, DP&L, CG&E and CSP own as tenants in common, 884 circuit miles of 345,000-volt
transmission lines. DP&L has several interconnections with other companies for the purchase, sale and inter-
change of electricity.
In 2006, we generated 99% of our electric output from coal-fired units and 1% from oil and natural gas-fired units.
The following table sets forth DP&L’s and DPLE’s generating stations and, where indicated, those stations which
DP&L owns as tenants in common.
Station
Ownership*
Operating Company
Location
DPL Portion
Total
Approximate Summer
MW Rating
Coal Units
Hutchings
Killen
Stuart
Conesville – Unit 4
Beckjord – Unit 6
Miami Fort – Units 7 & 8
East Bend – Unit 2
Zimmer
Combustion Turbines or Diesel
Hutchings
Yankee Street
Monument
Tait Diesels
Sidney
Tait Units 1-3
Killen
Stuart
Greenville Units 1-4 (a)
Darby Station Units 1-6 (a)
Montpelier Units 1-4
Tait Units 4-7
W
C
C
C
C
C
C
C
W
W
W
W
W
W
C
C
W
W
W
W
DP&L
DP&L
DP&L
CSP
CG&E
CG&E
CG&E
CG&E
DP&L
DP&L
DP&L
DP&L
DP&L
DP&L
DP&L
DP&L
DPLE
DPLE
DPLE
DPLE
Miamisburg, OH
Wrightsville, OH
Aberdeen, OH
Conesville, OH
New Richmond, OH
North Bend, OH
Rabbit Hash, KY
Moscow, OH
Miamisburg, OH
Centerville, OH
Dayton, OH
Dayton, OH
Sidney, OH
Moraine, OH
Wrightsville, OH
Aberdeen, OH
Greenville, OH
Darby, OH
Montpelier, IN
Moraine, OH
365
412
836
129
207
360
186
365
23
107
12
10
12
256
12
3
192
438
192
292
365
615
2,388
780
414
1,000
600
1,300
23
107
12
10
12
256
18
10
192
438
192
292
Total approximate summer generating capacity
4,409
9,024
* W = Wholly-Owned C = Commonly-Owned
(a) Amounts include 630 MW of peaking capacity relating to the Darby and Greenville stations that DPL entered
into agreements to sell during the fourth quarter of 2006.
We have substantially all of the total expected coal vol-
ume needed to meet our retail and firm wholesale sales
requirements for 2007 under contract. The majority of
our contracted coal is purchased at fixed prices. Some
contracts provide for periodic adjustments and some
are priced based on market indices. Substantially
all contracts have features that limit price escalations
in any given year. Our sulfur dioxide (SO2) allowance
consumption will be reduced in 2007 due to instal-
lation of emission control equipment at a portion of
the Companies’ SO2 generation facilities. We do not
expect to purchase SO2 allowances for 2007. The
exact consumption of SO2 allowances will depend on
market prices for power, availability of our generating
units, the timing of FGD (flu gas desulfurization) com-
pletion and the actual sulfur content of the coal burned.
We do not plan to purchase any nitrogen oxide (NOx)
allowances for 2007.
The average cost of fuel used per kilowatt-hour (kWh)
was as follows:
Average Cost of Fuel Used (¢/kWh)
DPL
DP&L
2006
2.00
1.94
2005
1.93
1.84
2004
1.56
1.53
8
DPL Inc.
Seasonality
The power generation and delivery business is sea-
sonal and weather patterns have a material impact on
operating performance. In the region served by our
subsidiaries, demand for electricity is generally greater
in the summer months associated with cooling and
in the winter months associated with heating as com-
pared to other times of the year. Historically, the power
generation and delivery operations of our subsidiar-
ies have generated less revenue and income when
weather conditions are warmer in the winter and cooler
in the summer.
Rate Regulation and Government Legislation
DP&L’s sales to retail customers are subject to rate
regulation by the Public Utilities Commission of Ohio
(PUCO). DP&L’s transmission and wholesale electric
rates to municipal corporations, rural electric co-opera-
tives and other distributors of electric energy are sub-
ject to regulation by the Federal Energy Regulatory
Commission (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 established the Office of the Ohio Consumers’
Counsel (OCC), which has the authority to represent
residential consumers in state and federal judicial and
administrative rate proceedings.
Ohio legislation extends the jurisdiction of the
PUCO to the records and accounts of certain public
utility holding company systems, including DPL. The
legislation extends the PUCO’s supervisory powers to
a holding company system’s general condition and
capitalization, among other matters, to the extent that
they relate to the costs associated with the provision
of public utility service. Based on existing PUCO and
FERC authorization, regulatory assets and liabilities are
recorded on the Consolidated Balance Sheets. See
Note 3 of Notes to Consolidated Financial Statements.
Competition and Regulation
Ohio Retail Rates
and charges associated with the market development
period that began January 2001.
In 2003, the PUCO approved a Stipulation exe-
cuted by DP&L and other parties that extended the
market development period through the end of 2005,
and included provisions that generation rates may
be modified as of January 1, 2006, by up to 11% of
generation rates to reflect increased costs associated
with fuel, environmental compliance, taxes, regulatory
changes, and security measures. In 2006, the Ohio
Supreme Court affirmed the PUCO’s Order approving
the Stipulation.
On April 4, 2005, DP&L filed a request at the
PUCO to implement a new rate stabilization surcharge
effective January 1, 2006 to recover cost increases
associated with environmental capital related opera-
tions and maintenance costs and fuel expenses. On
November 3, 2005, DP&L entered into a settlement
agreement that extended DP&L’s rate stabilization
period through December 31, 2010. During this time,
DP&L will continue to provide retail electric service at
fixed rates with the ability to recover increased fuel and
environmental costs through surcharges and riders.
Specifically, the agreement provides for:
A rate stabilization surcharge equal to 11% of gen-
eration rates beginning January 1, 2006 and continuing
through December 2010. Based on 2004 sales, this
rider is expected to result in approximately $65 million
in net revenues per year.
A new environmental investment rider to begin
January 1, 2007 equal to 5.4% of generation rates, with
incremental increases equal to 5.4% each year through
2010. Based on 2004 sales, this rider is expected to
result in approximately $35 million in annual net rev-
enues beginning January 2007, growing to approxi-
mately $140 million by 2010.
An increase to the residential generation discount
from January 1, 2006 through December 31, 2008,
which is expected to result in a revenue decrease
of approximately $7 million per year for three years,
based on 2004 sales. The residential discount is
accounted for in the $65 million net revenue stated
above and will expire on December 31, 2008.
Since January 2001, DP&L’s electric customers have
been permitted to choose their retail electric genera-
tion supplier. DP&L continues to have the exclusive
right to provide delivery service in its state certified
territory. The PUCO maintains jurisdiction over DP&L’s
delivery of electricity, the standard offer supply service
that customers receive if they do not choose an alter-
native retail electricity supplier, and over other rates
On December 28, 2005, the PUCO adopted the settle-
ment with certain modifications (RSS Stipulation).
The PUCO ruled that the environmental rider will be
bypassable by all customers who take service from
alternate generation suppliers. Thus, future additional
revenues are dependent upon actual sales and lev-
els of customer switching. Applications for rehearing
were denied and the case was appealed to the Ohio
DPL Inc.
9
■
■
■
Supreme Court by the Ohio Consumers’ Counsel on
April 21, 2006. The Company cannot predict whether
the Ohio Supreme Court will affirm the PUCO’s approv-
al of the RSS Stipulation, affirm it in part subject to
modifications, or reject it. An oral argument has been
set for April 17, 2007.
Consistent with the RSS Stipulation approved by
the PUCO and prior orders, DP&L made a tariff filing
to implement the environmental investment rider begin-
ning January 1, 2007, which was approved by the
PUCO in November 2006.
In 2005, DP&L made a tariff filing to recover previ-
ously deferred costs associated with administrative
fees charged to DP&L under PJM’s FERC-approved
tariffs. In January 2006, the PUCO approved the recov-
ery, effective February 1, 2006, which should result in
approximately $8.5 million in additional revenue per
year for three years and $6.0 million per year thereafter.
In March 2006, the PUCO approved the recovery
of costs and carrying costs associated with billing sys-
tem changes made to permit DP&L to provide billing
services to Competitive Retail Electric Service (CRES)
providers. These costs had previously been deferred
for later recovery under a settlement approved in 2004.
In separate orders issued in September and December
2006, the Ohio Supreme Court affirmed the PUCO
orders approving the settlement and approving the
recovery of costs. This will result in approximately $7
million in additional annual revenue beginning March
2006 through 2010.
On September 1, 2005, DP&L requested the
PUCO authority to recover distribution costs associ-
ated with storm restoration efforts for ice storms that
took place in December 2004 and January 2005. In
February 2006, DP&L filed updated schedules in sup-
port of its application. On July 12, 2006, the PUCO
approved DP&L’s filing, allowing the Company to
recover approximately $8.6 million in additional rev-
enues over a two-year period. See Note 3 of Notes to
Consolidated Financial Statements.
Ohio Competitive Considerations and Proceedings
As of December 31, 2006, four unaffiliated marketers
were registered as CRES providers in DP&L’s service
territory. While there has been some customer switch-
ing to date, it represents less than 0.15 percent of
sales in 2006. DPLER, an affiliated company, is also
a registered CRES provider and accounted for 99.8%
of the total kWh supplied by CRES providers within
DP&L’s service territory in 2006. In addition, several
communities in DP&L’s service area have passed ordi-
nances allowing the communities to become govern-
ment aggregators for the purpose of offering alternative
electric generation supplies to their citizens. To date,
none of these communities have aggregated their gen-
eration load.
DP&L agreed to implement a Voluntary Enrollment
Program (VEP) that would provide customers with an
option to choose a competitive supplier to provide their
retail generation service should switching not reach
20% in each customer class. The 20% threshold has
never been reached. In both 2005 and 2006, custom-
ers who elected to participate in the program were
grouped together and collectively bid out to CRES
providers. No bids were received in either year result-
ing in zero customer switching under the program.
DP&L is required to execute the same process again
in 2007. Future period effects cannot be determined at
this time.
In August of 2006, an electric supply contract with
Wright Patterson Air Force Base (WPAFB) expired.
WPAFB is DP&L’s single largest retail customer and
represents approximately 1% of its annual revenues.
In November 2006, WPAFB signed a long-term agree-
ment to allow DPLER to supply competitive generation
service to WPAFB through 2010.
On February 20, 2003, the PUCO requested com-
ments from interested stakeholders on the proposed
rules for the conduct of a competitive bidding process
that will take place at the end of the rate stabilization
period. DP&L submitted comments in March 2003. The
PUCO issued final rules on December 23, 2003. Under
DP&L’s RSS Stipulation discussed above, these rules
will not affect DP&L until January 1, 2011. However,
the PUCO retains the authority to, at any time, require
an Ohio electric utility to conduct a competitive bidding
process to measure the market price of competitive
retail generation.
Other State Regulatory Proceedings
On August 28, 2006, the Staff of the PUCO issued a
report relating to compliance with the Federal Energy
Policy of 2005. In that report the Staff makes recom-
mendations to the Commission to implement new rules
and procedures relating to net metering, customer
generator interconnection, stand by power, time-of-
use rates, and renewable energy portfolio standards.
DP&L, among others, filed comments on September
18, 2006, and reply comments on October 2, 2006. If
adopted by the Commission, the Staff’s recommenda-
tions may result in new regulatory requirements for
Ohio investor owned utilities related to renewable ener-
gy standards, fuel sources, automated meter infrastruc-
ture, and time differentiated rate options for customers.
10 DPL Inc.
DP&L cannot predict the outcome of this proceeding
nor the potential cost that may be associated with
any new regulations that may be adopted.
Federal Matters
Like other electric utilities and energy marketers, DP&L
and DPLE may sell or purchase electric products
on the wholesale market. DP&L and DPLE compete
with other generators, power marketers, privately and
municipally-owned electric utilities, and rural electric
cooperatives when selling electricity. The ability of
DP&L and DPLE to sell this electricity will depend on
how DP&L’s and DPLE’s price, terms and conditions
compare to those of other suppliers.
As part of Ohio’s electric deregulation law, all of
the state’s investor-owned utilities are required to join a
Regional Transmission Organization (RTO). In October
2004, DP&L successfully integrated its 1,000 miles of
high-voltage transmission into the PJM Interconnection,
L.L.C. (PJM) RTO. The role of the RTO is to administer
an electric marketplace and ensure reliability of the
transmission grid. PJM ensures the reliability of the
high-voltage electric power system serving 51 million
people in all or parts of Delaware, Illinois, Indiana,
Kentucky, Maryland, Michigan, New Jersey, North
Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West
Virginia and the District of Columbia. PJM coordinates
and directs the operation of the region’s transmission
grid, administers the world’s largest competitive whole-
sale electricity market and plans regional transmission
expansion improvements to maintain grid reliability
and relieve congestion.
As a member of PJM, DP&L is subject to charges
and costs associated with PJM operations as approved
by the FERC. As discussed above in connection with
the recovery of such costs in retail rates, these include
significant administrative charges. Additionally, PJM’s
role in administering the regional transmission grid and
planning regional transmission expansion improve-
ments results in periodic proposals by PJM and other
stakeholder members of PJM to the FERC to allocate
and charge costs associated with the transmission
system to various entities operating within PJM includ-
ing DP&L. DP&L and other interested parties have
the right to intervene and offer counter-proposals. The
FERC is currently considering how to allocate costs
associated with new planned transmission facilities.
None of these costs were allocated to DP&L under
PJM’s original filing in the case, but other parties have
proposed modified allocation methods that could result
in allocations to DP&L. The FERC is also considering
the justness and reasonableness of PJM’s transmission
rate design for existing facilities. DP&L, along with ten
other transmission owners, filed in support of PJM’s
existing rate design, but other participants have pro-
posed rate designs that would shift significant costs to
DP&L. Due to complexity of the issues and the number
of competing proposals under consideration, DP&L
cannot determine what effect the final outcome of this
proceeding may have on its costs or the extent to
which it may be able to recover such costs.
As a member of PJM, the value of DPL’s genera-
tion capacity will be affected by changes in the PJM
capacity construct. The new construct introduces a
new Reliability Pricing Model (RPM) that will change
the way generation capacity is priced and planned
for by PJM. In September 2006, DP&L, along with
most of the parties relating to the case, entered into a
settlement agreement that generally retains the RPM
concept as proposed by PJM, with certain modifica-
tions. The settlement was approved by the FERC on
December 21, 2006. The economic effects of the new
capacity market will vary depending on present and
projected market conditions.
In connection with DP&L and other utilities join-
ing PJM, the FERC ordered utilities to eliminate certain
charges to implement transitional payments, known
as Seams Elimination Charge Adjustment (SECA),
effective December 1, 2004 through March 31, 2006,
subject to refund. Through this proceeding, DP&L
was obligated to pay SECA charges to other utilities,
but received a net benefit from these transitional pay-
ments. Several parties have sought rehearing of the
FERC orders, which are still pending. The hearing was
held in May 2006 and an initial decision was issued
on August 10, 2006 that, if upheld by the Commission,
would reduce the amount of SECA charges DP&L and
other parties are permitted to recover. DP&L, among
others, have taken exception to the initial decision. A
final Commission order on this issue is still pending.
We have entered into a significant number of bi-lateral
settlement agreements with certain parties to resolve
the matter, which by design will be unaffected by
the Commission’s decision to affirm, modify or reject
the initial decision. DP&L management believes that
appropriate reserves have been established in the
event that SECA collections not resolved by settlement
are required to be refunded. The ultimate outcome of
the proceeding establishing SECA rates is uncertain at
this time. However, based on the amount of reserves
established for this item, the results of this proceeding
are not expected to have a material adverse effect on
DP&L’s results of operations.
On August 8, 2005, the Energy Policy Act of 2005
DPL Inc.
11
(the 2005 Act) was enacted. This new law encompass-
es several areas including, but not limited to: electric
reliability, repeal of the Public Utility Holding Company
Act of 1935, promotion of energy infrastructure, pres-
ervation of a diverse fuel supply for electricity genera-
tion and energy efficiency. Also in response to the
Energy Policy Act of 2005, the FERC issued a Notice
of Proposed Rulemaking to amend its regulations to
incorporate the criteria any entity must satisfy to qualify
to be an Electric Reliability Organization (ERO) that
will propose and enforce reliability standards subject
to FERC approval. The proposed rule also included
related matters on delegating ERO authority, the cre-
ation of advisory bodies and reporting requirements. In
October 2006, the FERC also approved new manda-
tory reliability standards to be effective mid-2007, with
requirements applying to certain assets and activities
of DP&L and DPL. The new regulations include poten-
tial penalties for failure to comply with these standards.
DPL is currently assessing the compliance plans in
place to comply with similar, but voluntary, reliability
standards administered by the North American Electric
Reliability Council and believes that it will be in full
compliance with the new mandatory standards when
they become effective.
DP&L provides transmission and wholesale elec-
tric service to twelve municipal customers in its service
territory, which in turn distribute electricity principally
within their incorporated limits. DP&L also maintains an
interconnection agreement with one municipality that
has the capability to generate a portion of its own ener-
gy requirements. Approximately 1% of total electricity
sales in 2006 represented sales to these municipalities.
Environmental Considerations
DPL, DP&L and our subsidiaries’ facilities and opera-
tions are subject to a wide range of environmental
regulations and laws. In the normal course of business,
we have investigatory and remedial activities underway
at these facilities to comply, or to determine compli-
ance, with such regulations. We record liabilities for
probable estimated loss in accordance with Statement
of Financial Accounting Standards No. 5 (SFAS 5),
“Accounting for Contingencies.” To the extent a proba-
ble loss can only be estimated by reference to a range
of equally probable outcomes, and no amount within
the range appears to be a better estimate than any
other amount, we accrue for the low end of the range.
Because of uncertainties related to these matters,
accruals are based on the best information available at
the time. DPL, through its captive insurance subsidiary,
MVIC, has an actuarial calculated reserve for envi-
ronmental matters. We evaluate the potential liability
related to probable losses quarterly and may revise our
estimates. Such revisions in the estimates of the poten-
tial liabilities could have a material effect on our results
of operations, financial position or cash flows.
DP&L’s coal-fired units are subject to the acid rain
provisions of the Clean Air Act and the NOx and Ozone
Transport rule. All of the SO2 and NOx emissions data
submitted to the United States Environmental Protection
Agency (USEPA) pursuant to these provisions for 2005
and the first quarter 2006 were recorded and reported
in compliance with USEPA regulations. Subsequently
DP&L detected a malfunction with its emission moni-
toring system at one of its generation stations and
ultimately determined its SO2 and NOx emissions data
were under reported. DP&L has petitioned the USEPA
to accept an alternative methodology for calculating
actual emissions for 2005 and the first quarter 2006.
DP&L has sufficient allowances in its general account
to cover the understatement and is working with the
USEPA to resolve the matter. Management does not
believe the ultimate resolution of this matter will have a
material impact on operating results or financial position.
Environmental Regulation and Litigation Related
to Air Quality
Regulation Proceedings – Air
In 1990 the federal government amended the Clean Air
Act (CAA) to further regulate air pollution. Under the
law, the USEPA sets limits on how much of a pollutant
can be in the air anywhere in the United States. The
CAA allows individual states to have stronger pollution
controls, but states are not allowed to have weaker pol-
lution controls than those set for the whole country. The
CAA has a material effect on our operations and such
effects are detailed below with respect to certain pro-
grams under the CAA.
On October 27, 2003, the USEPA published final
rules regarding the equipment replacement provision
(ERP) of the routine maintenance, repair and replace-
ment (RMRR) exclusion of the CAA. Subsequently,
on December 24, 2003, the United States Court of
Appeals for the D.C. Circuit stayed the effective date of
the rule pending its decision on the merits of the
lawsuits filed by numerous states and environmental
organizations challenging the final rules. As a result
of the stay, the Ohio Environmental Protection Agency
(Ohio EPA) delayed its previously announced intent to
adopt the RMRR rule. On October 20, 2005, USEPA
proposed to revise the emissions test for existing elec-
12 DPL Inc.
tric generating units. At this time, we are unable to
determine the impact of the ERP appeal or the
outcome of the proposed emissions test.
In a regulation proceeding relating to the same
issue pending before the U.S. Supreme Court in the
Duke Energy case, discussed below, the USEPA
issued a proposed rule in October 2005 concerning
the test for measuring whether modifications to
electric generating units should trigger application of
New Source Review (NSR) standards under the CAA.
The proposed rule seeks comments on two different
hourly emissions test options as well as the USEPA’s
current method of measuring previous actual emis-
sion levels to projected actual emission levels after
the modification. A third option that tests emissions
increase based upon emissions per unit of energy
output is also available for comment. We cannot pre-
dict the outcome of this rulemaking or its impact on
current environmental litigation.
On December 17, 2003, the USEPA proposed the
Interstate Air Quality Rule (IAQR) designed to reduce
and permanently cap SO2 and NOx emissions from
electric utilities. The proposed IAQR focused on states,
including Ohio, whose power plant emissions are
believed to be significantly contributing to fine particle
and ozone pollution in other downwind states in the
eastern United States. On June 10, 2004, the USEPA
issued a supplemental proposal to the IAQR, now
renamed as the Clean Air Interstate Rule (CAIR). The
final rules were signed on March 10, 2005 and were
published on May 12, 2005. On August 24, 2005, the
USEPA proposed additional revisions to the CAIR and
initiated reconsideration on one issue. Although we
cannot predict the outcome of the reconsideration pro-
ceedings, the petitions or the pending litigation, CAIR
has had and will have a material effect on our opera-
tions. Phase I of CAIR incentivizes the installation of
flue gas desulfurization (FGD) equipment and continual
operation of the currently installed Selective Catalytic
Reduction equipment. As a result, DP&L is proceeding
with the installation of FGD equipment at various
generating units.
On January 30, 2004, the USEPA published its
proposal to restrict mercury and other air toxics from
coal-fired and oil-fired utility plants. The final Clean Air
Mercury Rule (CAMR) was signed March 15, 2005
and was published on May 18, 2005. The final rules
will have a material effect on our operations. We antici-
pate that the FGD equipment being installed to meet
the requirements of CAIR may be adequate to meet
the Phase I requirements of CAMR effective January 1,
2010. We expect that additional controls will be
needed to meet the Phase II requirements of CAMR
that go into effect January 1, 2018. On March 29, 2005,
nine states sued USEPA, opposing the regulatory
approach taken by USEPA. On March 31, 2005, various
groups requested that USEPA stay implementation of
CAMR. On August 4, 2005, the United States Court of
Appeals for the District of Columbia denied the motion
for stay. USEPA is expected to initiate reconsideration
proceedings on one or more issues. We cannot predict
the outcome of the reconsideration proceedings or
pending litigation.
Under the CAIR and CAMR cap and trade pro-
grams for SO2, NOx and mercury, we estimate we will
spend more than $225 million from 2007 through 2009
to install the necessary pollution controls. If CAMR
litigation results in plant specific mercury controls, our
costs may be higher. Due to the ongoing uncertainties
associated with the litigation of the CAMR, we cannot
project the final costs at this time.
On July 15, 2003, the Ohio EPA submitted to the
USEPA its recommendations for eight-hour ozone
nonattainment boundaries for the metropolitan areas
within Ohio. On April 15, 2004, the USEPA issued
its list of ozone non-attainment designations. DP&L
owns and/or operates a number of facilities in counties
designated as non-attainment with the ozone national
ambient air quality standard. DP&L does not know at
this time what future regulations may be imposed
on its facilities and will closely monitor the regulatory
process. Ohio EPA will have until April 15, 2007 to
develop regulations to attain and maintain compliance
with the eight-hour ozone national ambient air qual-
ity standard. Numerous parties have filed petitions for
review. DP&L cannot predict the outcome of USEPA’s
reconsideration petitions.
On January 5, 2005, the USEPA published its final
non-attainment designations for the national ambient
air quality standard for Fine Particulate Matter 2.5 (PM
2.5). These designations included counties and partial
counties in which DP&L operates and/or owns gen-
erating facilities. On March 4, 2005, DP&L and other
Ohio electric utilities and electric generators filed a
petition for review in the D.C. Circuit Court of Appeals,
challenging the final rule creating these designations.
On November 30, 2005, the court ordered USEPA to
decide on all petitions for reconsideration by January
20, 2006. On January 20, 2006, USEPA denied the
petitions for reconsideration. The Ohio EPA will have
three years to develop regulations to attain and main-
tain compliance with the PM 2.5 national ambient air
DPL Inc.
13
quality standard. DP&L cannot determine the outcome
of the petition for review or the effect such Ohio EPA
regulations will have on its operations.
On May 5, 2004, the USEPA issued its proposed
regional haze rule, which addresses how states should
determine the best available retrofit technology (BART)
for sources covered under the regional haze rule. Final
rules were published July 6, 2005, providing states
with several options for determining whether sources
in the state should be subject to BART. In the final rule,
USEPA made the determination that CAIR achieves
greater progress than BART and may be used by
states as a BART substitute. Numerous units owned
and operated by us will be impacted by BART. We
cannot determine the extent of the impact until Ohio
determines how BART will be implemented.
Sierra Club Litigation
Pending before the U.S. Supreme Court is a proceed-
ing, Environmental Defense v. Duke Energy (Duke
Energy) that does not involve the Company as a party
but may have a significant effect on the outcome of
litigation described below that involves allegations of
violations of the CAA. A key issue in that litigation that
may be dispositive with respect to other pending cases
is what test to apply for measuring whether modifica-
tions to electric generating units should trigger appli-
cation of New Source Review (NSR) standards under
the CAA. In general terms, the dispute is whether to
measure pre- and post-modification emissions based
on the rate of emissions per hour of operation or based
on total emissions over time. The latter test, if applied,
could trigger NSR requirements for equipment replace-
ments that result in a plant running more often because
it is more economical or dependable, even if the emis-
sions rate per hour of operation does not change.
A ruling is expected in the first or second quarter of
2007. The Company cannot predict the outcome of
the Duke Energy case. Moreover, in each of the cases
identified below, there may be case-specific facts and
allegations that may cause a judge to find that the U.S.
Supreme Court’s ruling is based on different facts and
allegations and is therefore not controlling in the case
before the judge.
In September 2004, the Sierra Club filed a law-
suit against the Company and the other owners of the
Stuart Generating Station in the United States District
Court for the Southern District of Ohio for alleged viola-
tions of the CAA, including issues that may be decided
by the Supreme Court in the Duke Energy case and
other issues relating to alleged violations of opacity
limitations. DP&L, on behalf of all co-owners, is leading
the defense of this matter. A sizable amount of dis-
covery has taken place and expert reports are sched-
uled to be filed at various times from May through
September, 2007. Dispositive motions are to be filed in
January 2008. No trial date has been set yet.
Litigation Involving Co-Owned Plants
In March 2000, as amended in June 2004, the United
States Department of Justice filed a complaint in an
Indiana federal court against Cinergy Corporation (now
part of Duke Energy) and two subsidiaries for alleged
violations of the CAA at various generation units oper-
ated by PSI Energy, Inc. and CG&E, including genera-
tion units co-owned by DP&L (Beckjord 6 and Miami
Fort 7). In August 2006, the Seventh Circuit upheld the
district court’s 2005 ruling that an increase in annual
emissions could trigger the permitting requirements of
the CAA even if there were no increase in hourly emis-
sions per hour of operations.
In November 2004, the State of New York and
seven other states filed suit against the American
Electric Power Corporation (AEP) and various subsid-
iaries, alleging various CAA violations at a number of
AEP electric generating facilities, including Conesville
Unit 4 (co-owned by CG&E, DP&L and Columbus
Southern Power (CSP)). AEP, on behalf of all co-own-
ers, is leading the defense of this matter. During 2006,
a number of procedural and discovery-related disputes
were resolved by the Southern District Court of Ohio.
Discovery is ongoing.
In July 2004 and November 2004, various resi-
dents of the Village of Moscow, Ohio notified CG&E,
as the operator of Zimmer (co-owned by CG&E, DP&L
and CSP), of their intent to sue for alleged violations of
the CAA and air pollution nuisances. CG&E, on behalf
of all co-owners, is leading the defense of this matter.
One lawsuit was dismissed on procedural grounds.
Several counts of the remaining suit have been dis-
missed because they were based on activity outside
the statute of limitations.
In June 2000, the USEPA issued a Notice of
Violation (NOV) to DP&L operated Stuart Generating
Station (co-owned by DP&L, CG&E, and CSP)
for alleged violations of the CAA. The NOV contained
allegations consistent with NOVs and complaints
that the USEPA had recently brought against numerous
other coal-fired utilities in the Midwest. The NOV
indicated the USEPA may (1) issue an order
requiring compliance with the requirements of the
Ohio State Implementation Plan (SIP) or (2) bring a
civil action seeking injunctive relief and civil penalties
of up to $27,500 per day for each violation. To
14 DPL Inc.
date, neither action has been taken.
In November 1999, the USEPA filed civil com-
plaints and NOVs against operators and owners of
certain generation facilities for alleged violations of the
CAA. Generation units operated by CG&E (Beckjord 6)
and CSP (Conesville 4) and co-owned by DP&L
were referenced in these actions. Numerous northeast
states have filed complaints or have indicated that they
will be joining the USEPA’s action against CG&E and
CSP. DP&L was not identified in the NOVs, civil com-
plaints or state actions.
Environmental Regulation and Litigation
Related to Water Quality
On July 9, 2004 the USEPA issued final rules pursuant
to the Clean Water Act governing existing facilities that
have cooling water intake structures. The rules require
an assessment of impingement and/or entrainment of
organisms as a result of cooling water withdrawal. A
number of parties appealed the rules to the federal
Court of Appeals for the Second Circuit in New York
and the Court issued an opinion on January 25, 2007
remanding several aspects of the rule to USEPA for
reconsideration. We are is undertaking studies at two
facilities but cannot predict the impact such studies
may have on future operations or the outcome of the
remanded rulemaking.
In May 2004, the Ohio EPA issued a final National
Pollutant Discharge Elimination System permit for J.M.
Stuart Station that continued the station’s 316(a) vari-
ance which exempts DP&L from having to meet the
temperature Standards in the Ohio River. During the
three-year term of the permit, DP&L conducted a ther-
mal discharge study to evaluate the technical feasibility
and economic reasonableness of water cooling meth-
ods other than cooling towers. We cannot predict the
impact of this issue on future operations.
Environmental Regulation and Litigation Related to
Land Use and Solid Waste Disposal
DP&L has been identified, either by a government
agency or by a private party seeking contribution to
site clean-up costs, as a potentially responsible party
(PRP) at a site pursuant to state and federal laws.
In September 2002, DP&L and other parties
received a special notice that the USEPA considers us
to be PRPs for the clean-up of hazardous substances
at the South Dayton Dump landfill site. In August 2005,
DP&L and other parties received a general notice
regarding the performance of a Remedial Investigation
and Feasibility Study (RI/FS) under a Superfund
Alternative approach. In October 2005, DP&L received
a special notice letter inviting it to enter into negotia-
tions with USEPA to conduct the RI/FS. Although the
information available to DP&L does not demonstrate
that it contributed hazardous substances to the site,
DP&L will seek from USEPA a de minimis settlement at
the site. Should USEPA pursue a civil action, DP&L will
vigorously challenge it. In December 2003, DP&L and
other parties received a special notice that the USEPA
considers us to be PRPs for the clean-up of hazardous
substances at the Tremont City landfill site. Information
available to DP&L does not demonstrate that it contrib-
uted hazardous substances to the site.
In August 2006, Ohio EPA issued draft rules for
interested party comment related to the disposal of
industrial waste. DP&L, through the Ohio Electric
Utility Institute submitted comments on the draft rules.
We cannot predict the impact of the draft rules on
future operations.
Construction Additions
$ in million
DPL Inc.
DP&L
2006
$ 352
$ 349
Actual
2005
$ 180
$ 178
2004
$ 98
$ 93
2007
$ 310
$ 310
Projected
2008
$ 165
$ 165
2009
$ 130
$ 130
DPL’s construction additions were $352 million, $180 million and $98 million in 2006, 2005 and 2004, respectively,
and are expected to approximate $310 million in 2007.
DP&L’s construction additions were $349 million, $178 million and $93 million in 2006, 2005 and 2004, respec-
tively, and are expected to approximate $310 million in 2007. Planned construction additions for 2007 relate to
DP&L’s environmental compliance program, power plant equipment, and its transmission and distribution system.
Capital projects are subject to continuing review and are revised in light of changes in financial and economic
conditions, load forecasts, legislative and regulatory developments and changing environmental standards, among
other factors. Over the next three years, DPL, through its subsidiary DP&L, is projecting to spend an estimated
$605 million in capital projects, approximately 40% of which is to meet changing environmental standards. Our
DPL Inc.
15
ability to complete capital projects and the reliability of
future service will be affected by our financial condi-
tion, the availability of internal funds and the reason-
able cost of external funds. We expect to finance our
construction additions in 2007 with a combination of
cash on hand, short-term financing, tax-exempt debt
and cash flows from operations.
Item 1a Risk Factors
This annual report and other documents that we file
with the SEC and other regulatory agencies, as well as
other oral or written statements we may make from time
to time, contain information based on management’s
beliefs and include forward-looking statements (within
the meaning of the Private Securities Litigation Reform
Act of 1995) that involve a number of known and
unknown risks, uncertainties and assumptions. These
forward-looking statements are not guarantees of future
performance, and there are a number of factors includ-
ing, but not limited to, those listed below, which could
cause actual outcomes and results to differ materially
from the results contemplated by such forward-look-
ing statements. We do not undertake any obligation
to publicly update or revise any forward-looking state-
ments, whether as a result of new information, future
events or otherwise. These forward-looking state-
ments are identified by terms and phrases such as
“anticipate”, “believe”, “intend”, “estimate”, “expect”,
“continue”, “should”, “could”, “may”, “plan”, “project”,
“predict”, “will”, and similar expressions.
The following is a listing of risk factors that we
consider to be the most significant to your decision to
invest in our stock. If any of these events occurs, our
business, financial position or results of operation could
be materially affected.
The electric industry in Ohio is partially deregulated
Before 2001, electric utilities provided electric genera-
tion, transmission and distribution services as a single
product to retail customers at prices set by the PUCO.
In 1999, Ohio enacted legislation, effective January
1, 2001, that partially deregulated utility service, mak-
ing retail generation service a competitive service.
Customers may choose to take generation service from
CRES providers that register with the PUCO but are
otherwise unregulated. In connection with this deregu-
lation of the electric industry in Ohio, electric utilities
have had to restructure their service and their rates to
accommodate competition.
Many of the requirements of the Ohio deregula-
tion law were premised on the assumption that the
wholesale generation market and, in turn, the retail
generation market, would fully develop by the end of
2005, and that the price for generation for even those
customers who choose to continue to purchase the
service from the regulated utility would be set purely
by the market. That did not occur. As a result, the
Commission and the utilities, including DP&L, have
worked out plans to provide market-based pricing for
generation service, but also to stabilize those rates for
several years. What DP&L may propose and what the
PUCO will approve in the future regarding pricing and
cost recovery will depend on the degree to which the
wholesale and retail electric generation markets have
developed.
Moreover, the uncertainty of the future of the whole-
sale and retail markets could cause the Ohio General
Assembly to revisit the issue of competition and cus-
tomer choice.
Switching by DP&L’s customers to unaffiliated
CRES providers could occur in the future, despite
insignificant activity to date.
Although retail generation service has been a competi-
tive service since January 1, 2001, the competitive
generation market has not developed in DP&L’s ser-
vice territory to any significant degree. The following
are factors that could result in increased switching by
customers to CRES providers in the future:
Voluntary Enrollment Program
As part of a settlement in a PUCO proceeding, DP&L
initiated, in November 2004, a VEP to encourage cus-
tomers to change electric suppliers. Although the VEP
did not result in a significant increase in the number
of customers switching to CRES providers in 2005 or
2006, the VEP will be initiated again in 2007 and could
produce different results.
DP&L’s Standard Service Offer
The RSS Stipulation discussed above, permits custom-
ers that take service from a CRES provider to bypass
the environmental investment rider (EIR). Because this
charge increases each year, the price that a CRES
provider can offer to save customers money changes
each year. Depending on the development of the
wholesale market and the level of wholesale prices,
CRES providers could become more active in DP&L’s
service territory.
CRES Supplier Initiatives
Customers can elect to take generation service from
a CRES provider offering services to customers in
DP&L’s service territory. As of December 31, 2006, five
CRES providers have been certified by the PUCO to
16 DPL Inc.
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provide generation service to DP&L customers. One
of those five, DPL Energy Resources, Inc. (DPLER),
is an affiliate of DPL. Although DPLER supplied 99.8%
of the total kWh consumed by customers served by
CRES providers in DP&L’s service territory in 2006,
at the end of 2006 there was a slight increase in unaf-
filiated CRES provider activity. There has been zero
residential customer switching to date. Depending on
the development of the wholesale market and the level
of wholesale prices, CRES providers could become
more active in DP&L’s service territory and may begin
to offer prices lower than DP&L’s standard offer. This
could result in more switching by DP&L’s customers
and a further loss of revenues by DP&L.
Governmental Aggregation Programs
Another way in which DP&L could experience cus-
tomer switching is through “governmental aggrega-
tion.” Under this program, municipalities may contract
with a CRES provider to provide generation service to
the customers located within the municipal boundaries.
Several communities in DP&L’s service territory have
passed ordinances allowing them to become govern-
ment aggregators. Although none has yet implemented
an aggregation program, that too, could change pro-
vided CRES providers offer prices below DP&L’s stan-
dard offer.
DP&L has agreed to provide service at pre-determined
rates through December 31, 2010, which limits its
ability to pass through its costs to customers.
DP&L has provided service at rates governed by the
PUCO-approved transition, market development, and
rate stabilization plans. Those rates have included a
statutorily-required 5% rate reduction in the genera-
tion component of its residential rates, a further 2.5%
reduction to the residential generation rate through
2008, fixed generation rates through December 31,
2010, and frozen distribution rates through December
31, 2008. The protection afforded by retail fuel clause
recovery mechanisms was eliminated effective January
1, 2001 by the implementation of customer choice in
Ohio. Likewise, through the RSS Stipulation, DP&L
extended its commitment to maintain pre-determined
rates for generation through December 31, 2010, and
in exchange is permitted to charge two new rate rid-
ers to offset increases in fuel and environmental costs.
Beginning January 1, 2006 a new Rate Stabilization
Surcharge was implemented that recovered approxi-
mately $65 million additional revenue in 2006, net
of customer discounts and considering less than a full
twelve months recovery due to the timing of the PUCO
order. The new environmental investment rider could
result in approximately $35 million additional revenue
in 2007, net of customer discounts and assuming
insignificant levels of customer switching. The PUCO
ruled this rider will be bypassable by all customers
who take service from alternative generation suppliers.
Accordingly, the rates DP&L is allowed to charge
may or may not match its expenses at any given
time. Therefore, during this period (or possibly earlier
by order of the PUCO), while DP&L will be subject
to prevailing market prices for electricity, it would not
necessarily be able to charge rates that produce timely
or full recovery of its expenses. DP&L has historically
maintained its rates at consistent levels since 1994,
when the final phase of DP&L’s last traditional rate
case was implemented. However, as DP&L operates
under its PUCO-approved RSS Stipulation, there can
be no assurance that DP&L would be able to timely or
fully recover unanticipated levels of expenses, includ-
ing but not limited to those relating to fuel, coal and
purchased power, compliance with environmental regu-
lation, reliability initiatives, and capital expenditures
for the maintenance or repair of its plants or other
properties. Furthermore, the RSS Stipulation is currently
subject to an appeal to the Ohio Supreme Court, the
result of which cannot be determined.
There are uncertainties relating to the operation and
continued development of Regional Transmission
Organizations (RTOs). DP&L has turned over operation-
al control of its high voltage transmission functions to
PJM and much of its generation is subject to dispatch
by PJM and is therefore subject to PJM’s market rules.
On October 1, 2004, in compliance with Ohio law,
DP&L turned over control of its transmission func-
tions and fully integrated into PJM. The price at which
DP&L can sell its generation capacity and energy is
now more dependent upon the overall operation of
the PJM market. While DP&L can continue to make
bi-lateral transactions to sell its generation through a
willing-buyer and willing-seller relationship, any trans-
actions that are not pre-arranged are subject to market
conditions at PJM. The rules governing the various
regional power markets also change from time to time
which could affect DP&L’s cost and revenues. DP&L
incurs fees and costs to participate in the Regional
Transmission Organization (RTO). We may be limited
with respect to the price at which power may be sold
from certain generating units, and we may be required
to expand our transmission system according to
decisions made by the RTO rather than our internal
planning process. While RTO transmission rates were
initially designed to be revenue neutral, various propos-
als and proceedings currently taking place at FERC
DPL Inc.
17
■
may cause transmission rates to change from time to
time. In addition, developing rules associated with the
allocation and methodology of assigning costs associ-
ated with improved transmission reliability, reduced
transmission congestion and firm transmission rights
may have a financial impact on DP&L. Likewise, in
December 2006, FERC approved PJM’s new Reliability
Pricing Model (RPM). RPM will be effective in mid-
2007, and will provide forward and locational pricing
for generation capacity. The financial impact of RPM on
DP&L will depend on a variety of factors, including the
market behavior of various participants, and as such
is unknown at this time. Because the RTO market rules
are continuing to evolve, we cannot fully assess the
impact that these power markets or other ongoing RTO
developments may have on DPL.
We rely principally on coal as the fuel to operate
virtually all of the power plants that serve our
customers daily.
Some of our coal suppliers have not performed their
contracts as promised and have failed to timely deliver
all coal as specified under their contracts. Such failure
could significantly reduce DP&L’s inventory of coal and
may cause DP&L to purchase higher priced coal on
the spot market. When the failure is for a short period
of time, DP&L can absorb the irregularity due to exist-
ing inventory levels. If we are required to purchase coal
on the spot market, it may affect our cost of operations.
DP&L is a co-owner in certain generation facilities
where it is a non-operating partner. DP&L does not
procure the fuel for these facilities. Partner operated
facilities do not always have realized coal costs that
are equal to our co-owners’ projections.
Greenhouse Gas Emissions
Greenhouse gas (GHG) emissions, consisting primarily
of carbon dioxide emissions, are presently unregulated.
Numerous bills have been introduced in Congress
to regulate GHG emissions, but to date none have
passed. Future regulation of GHG emissions is uncer-
tain. However, such regulation would be expected to
impose costs on our operations. Such costs could
include measures as advanced by various constituen-
cies, including a carbon tax; investments in energy
efficiency; installation of CO2 emissions control tech-
nology, to the extent such technology exists; purchase
of emission allowances, should a trading mechanism
be developed; or the use of higher-cost, lower CO2
emitting fuels. We will continue to make prudent invest-
ments in energy efficiency that reduces our GHG
emissions intensity.
Flue Gas Desulfurization Project
We are currently constructing flue gas desulfurization
(FGD) facilities at five units located at our J. M. Stuart
and Killen Electric Generating Stations. Construction of
the FGD facilities at each unit is scheduled to be com-
pleted in phases commencing mid-year 2007 through
2009. We are also co-owners of electric generating
stations operated by other investor-owned utilities, who
are in various stages of constructing FGD facilities at
these stations. Significant construction delays could
adversely affect our ability to operate or may substan-
tially increase our cost to operate these electric gen-
erating stations under federal environmental laws and
regulations that become effective in 2010. For those
electric generating stations where we are co-owners
but do not operate, significant construction delays may
substantially increase our pro-rata share of the cost to
operate those facilities beginning in 2010.
PJM Infrastructure Risks
Annually, PJM, the regional transmission organization
that provides transmission services for a large por-
tion of the Midwest United States, performs a review
of the capital additions required to provide reliable
electric transmission services throughout its territory.
PJM allocates the costs of constructing these facili-
ties to the applicable entity that will benefit from the
new construction. FERC is authorized to provide rate
recovery to utilities for the costs they incur to construct
these transmission facilities. To date, we have not been
required to construct any new facilities nor have we
been assigned any costs as a result of PJM’s annual
review, but there is no guarantee that we will not be
assigned some costs or be required to construct facili-
ties in the future.
Our stock price may fluctuate
The market price of DPL’s common stock has fluctu-
ated over a wide range. In addition, the stock market
in recent years has experienced significant price and
volume variations that have often been unrelated to
our operating performance. Over the past three years,
the market price of our common stock has fluctuated
with a low of $17.21 and a high of $28.72. The market
price of our common stock may continue to fluctuate
in the future and may be affected adversely by factors
such as actual or anticipated changes in our operat-
ing results, acquisition activity, changes in financial
estimates by securities analysts, general market condi-
tions, rumors and other factors.
The following are additional factors, including, but not
limited to, regulation and competition, economic
18 DPL Inc.
conditions, reliance on third parties, operating results
fluctuations, regulatory uncertainties and litigation,
warrant exercise, internal controls and environmental
compliance, that may affect our future results.
Regulation and Competition
We operate in a rapidly changing industry with evolv-
ing industry standards and regulations. In recent years
a number of federal and state developments aimed at
promoting competition triggered industry restructuring.
Regulatory factors, such as changes in the policies
and procedures that set rates; changes in tax laws,
tax rates, and environmental laws and regulations;
changes in DP&L’s ability to recover expenditures for
environmental compliance, fuel and purchased power
costs and investments made under traditional regu-
lation through rates; and changes to the frequency
and timing of rate increases could affect our results
of operations and financial condition. Changes in our
customer base, including municipal customer aggrega-
tion, could lead to the entrance of competitors in our
marketplace, affecting our results of operations and
financial condition. Additionally, financial or regulatory
accounting principles or policies imposed by govern-
ing bodies can increase our operational and monitoring
costs affecting our results of operations and financial
condition.
Economic Conditions
Economic pressures, as well as changing market con-
ditions and other factors related to physical energy and
financial trading activities, which include price, credit,
liquidity, volatility, capacity, transmission and interest
rates can have a significant effect on our operations
and the operations of our retail, industrial and commer-
cial customers.
During the past few years, the merchant energy
industry in many parts of the United States has suf-
fered from oversupply of merchant generation and a
decline in trading and marketing activity. As a result of
these market conditions, we continue to evaluate the
carrying values of certain long-lived generation assets.
Reliance on Third Parties
We rely on many suppliers for the purchase and deliv-
ery of inventory, including coal and equipment compo-
nents to operate our energy production, transmission
and distribution functions. Unanticipated changes in
our purchasing processes, delays and supplier avail-
ability may affect our business and operating results. In
addition, we rely on others to provide professional ser-
vices, such as, but not limited to, actuarial calculations,
internal audit services, payroll processing and various
consulting services.
Operating Results Fluctuations
Future operating results are subject to fluctuations
based on a variety of factors, including but not limited
to: unusual weather conditions; catastrophic weather-
related damage; unscheduled generation outages;
unusual maintenance or repairs; changes in fuel and
purchased power costs, emissions allowance costs, or
availability constraints; environmental compliance; and
electric transmission system constraints.
Regulatory Uncertainties and Litigation
In the normal course of business, we are subject to
various lawsuits, actions, proceedings, claims and
other matters asserted under laws and regulations.
Additionally, we are subject to diverse and complex
laws and regulations, including those relating to corpo-
rate governance, public disclosure and reporting, and
taxation, which are rapidly changing and subject to
additional changes in the future. As further described
in Item 3 -“Legal Proceedings,” we are also currently
involved in various pieces of litigation in which the out-
come is uncertain. Compliance with these rapid chang-
es may substantially increase costs to our organization
and could affect our future operating results.
Warrant Exercise
DPL’s warrant holders could exercise their 31,560,000
warrants at their discretion until March 12, 2012.
As a result, DPL could be required to issue up to
31,560,000 common shares in exchange for the receipt
of the exercise price of $21.00 per share or pursuant
to a cashless exercise process. The exercise of all
warrants would have a dilutive effect on us and would
increase the number of common shares outstanding
and increase our common share of dividend costs,
affecting any existing guidance on EPS and affect our
cash flows.
Internal Controls
Our internal controls, accounting policies and prac-
tices, and internal information systems are designed
to enable us to capture and process transactions in
a timely and accurate manner in compliance with
generally accepted accounting principles (GAAP) in
the United States of America, laws and regulations,
taxation requirements, and federal securities laws and
regulations. We implemented corporate governance,
internal control and accounting rules issued in connec-
tion with the Sarbanes-Oxley Act of 2002. Our internal
controls and policies have been and continue to be
closely monitored by management and our Board of
Directors to ensure continued compliance with Section
404 of the Act. While we believe these controls, poli-
DPL Inc.
19
cies, practices and systems are adequate to verify
data integrity, unanticipated and unauthorized actions
of employees, temporary lapses in internal controls due
to shortfalls in oversight or resource constraints could
lead to improprieties and undetected errors that could
impact our financial condition, cash flows or results of
operations.
Environmental Compliance
Our facilities (both wholly-owned and co-owned with
others) are subject to continuing federal and state
environmental laws and regulations. We believe that we
currently comply with all existing federal and state envi-
ronmental laws and regulations. We own a non-con-
trolling, minority interest in several generating stations
operated by The Cincinnati Gas & Electric Company
(CG&E) or its affiliate, Union Heat, Light & Power, and
Columbus Southern Power Company (CSP). Either or
both of these parties are likely to take steps to ensure
that these stations remain in compliance with appli-
cable environmental laws and regulations. As a non-
controlling owner in these generating stations, we will
be responsible for our pro-rata share of these expendi-
tures based upon our ownership interest.
Climate Change
Recently we have seen a growing interest in consider-
ing legislation or regulation in response to greenhouse
gases generated by numerous sources, vehicles,
manufacturing and the electric utility industry. Although,
DPL, DP&L and its subsidiaries have operated facili-
ties in compliance with state and federal environmental
laws and regulations and is currently engaged in sig-
nificant capital improvements of five units at the Stuart
and Killen Generating Stations for the reduction of SO2,
Congress could approve legislation that in the long
term may impact operations of the units we and our
partners manage or increase the cost for us to do so.
Employees
Many of our employees are under a collective bargain-
ing agreement. If we are unable to negotiate future
collective bargaining agreements, we could experience
work stoppages which may affect its business and
operating results.
Item 1b Unresolved Staff Comments
None.
20 DPL Inc.
Item 2 Properties
Electric
Information relating to our properties is contained
in Item 1 – Construction Additions, and Electric
Operations and Fuel Supply, and Note 10 of Notes
to Consolidated Financial Statements.
Substantially all property and plant of DP&L is sub-
ject to the lien of the mortgage securing DP&L’s First
and Refunding Mortgage, dated as of October 1, 1935
with the Bank of New York, as Trustee (Mortgage).
Item 3 Legal Proceedings
In the normal course of business, we are subject to
various lawsuits, actions, proceedings, claims and
other matters asserted under laws and regulations.
We believe the amounts provided in our consolidated
financial statements, as prescribed by GAAP, for
these matters are adequate in light of the probable
and estimable contingencies. However, there can be
no assurances that the actual amounts required to
satisfy alleged liabilities from various legal proceed-
ings, claims, and other matters discussed below, and
to comply with applicable laws and regulations will
not exceed the amounts reflected in our Consolidated
Financial Statements. As such, costs, if any, that may
be incurred in excess of those amounts provided as of
December 31, 2006, cannot be reasonably determined.
Former Executive Litigation
On August 24, 2004, DPL, and its subsidiaries DP&L
and MVE, filed a Complaint (and subsequently, amend-
ed complaints) against Mr. Forster, Ms. Muhlenkamp
and Mr. Koziar (the Defendants) in the Court of
Common Pleas of Montgomery County, Ohio asserting
legal claims against them relating to the termination
of the Valley Partners Agreements, challenging the
validity of the purported amendments to the deferred
compensation plans and to the employment and con-
sulting agreements, including MVE incentives, with
the Defendants, and the propriety of the distributions
from the plans to the Defendants, and alleging that
the Defendants breached their fiduciary duties and
breached their consulting and employment contracts.
DPL, DP&L and MVE seek, among other things,
damages in excess of $25,000, disgorgement of all
amounts improperly withdrawn by the Defendants from
the plans and a court order declaring that DPL, DP&L
and MVE have no further obligations under the consult-
ing and employment contracts due to those breaches.
The Defendants have filed their answers (and sub-
sequently, amended answers) denying liability and filed
counterclaims (and subsequently, amended counter-
claims) against DPL, DP&L, MVE, various compensa-
tion plans (the Plans), and current and former employ-
ees and current and former members of our Board of
Directors. These counterclaims, as amended, allege
generally that DPL, DP&L, MVE, the Plans and the indi-
vidual defendants breached the terms of the employ-
ment and consulting contracts of the Defendants and
the terms of the Plans. They further allege theories of
breach of fiduciary duty, breach of contract, promissory
estoppel, tortious interference, conversion, replevin
and violations of ERISA under which they seek distribu-
tion of deferred compensation balances, conversion of
stock incentive units, exercise of options and payment
of amounts allegedly owed under the contracts and the
Plans. Defendants’ counterclaims also demand pay-
ment of attorneys’ fees.
On March 15, 2005, Mr. Forster and Ms.
Muhlenkamp filed a lawsuit in New York state court
against the purchasers of the private equity invest-
ments in the financial asset portfolio and against out-
side counsel to DPL and DP&L concerning purported
entitlements in connection with the purchase of those
investments. DPL, DP&L and MVE are not defendants
in that case; however, DPL, DP&L and MVE are par-
ties to an indemnification agreement with respect to the
purchaser defendants. On August 18, 2005, the Ohio
court issued a preliminary injunction against Mr. Forster
and Ms. Muhlenkamp that precludes them from pursu-
ing certain key issues raised by Mr. Forster and Ms.
Muhlenkamp in their New York lawsuit that are identical
to the issues raised in the pending Ohio lawsuit in the
New York court or any other forum other than the Ohio
litigation. In addition, the New York court has stayed
the New York litigation pending the outcome of the
Ohio litigation. Mr. Forster and Ms. Muhlenkamp have
appealed the preliminary injunction and the appeal is
pending at the Ohio Supreme Court.
The trial commencement date for this case is set
for April 30, 2007.
Cumulatively through December 31, 2006, we
have accrued for accounting purposes, obligations of
approximately $56 million to reflect claims regarding
deferred compensation, estimated MVE incentives and/
or legal fees that Defendants assert are payable per
contracts. We dispute Defendants’ entitlement to any of
those sums and any other sums the Defendants assert
are due to them and, as noted above, we are pursuing
litigation against them contesting all such claims.
On or about June 24, 2004, the SEC com-
menced a formal investigation into the issues raised
by the Memorandum (see Note 17 of the Notes to the
Consolidated Financial Statements). Although the SEC
has not taken any significant action in furtherance
of their investigation during 2006, we stand ready to
cooperate with their investigation.
On May 28, 2004, the U.S. Attorney’s Office for
the Southern District of Ohio, assisted by the Federal
Bureau of Investigation, notified us that it has initiated
an inquiry involving the subject matters covered by
our internal investigation. Although the U.S. Attorney’s
office and the FBI have not taken any significant action
in furtherance of their investigation during 2006, we
stand ready to cooperate with their investigation.
On June 24, 2004, the Internal Revenue Service
(IRS) began an audit of tax years 1998 through 2003
and issued a series of data requests to us including
issues raised in the Memorandum. The staff of the IRS
requested that we provide certain documents, includ-
ing but not limited to, matters concerning executive/
director deferred compensation plans, management
stock incentive plans and MVE financial statements.
On September 1, 2005, the IRS issued an audit report
for tax years 1998 through 2003 that showed proposed
changes to our federal income tax liability for each
of those years. The proposed changes resulted in a
total tax deficiency, penalties and interest of approxi-
mately $23.9 million as of December 31, 2005. On
November 4, 2005, we filed a written protest to one
of the proposed changes. On April 3, 2006, the IRS
conceded the proposed changes that we filed a writ-
ten protest to and issued a revised audit report for
tax years 1998 through 2003. The revised audit report
resulted in a total tax deficiency, penalties and interest
of approximately $1.2 million. We had previously made
a deposit with the IRS of approximately $1.3 million that
we requested on April 14, 2006 be applied to offset
the $1.2 million tax deficiency, penalties and interest
for tax years 1998 through 2003. The Joint Committee
on Taxation completed its review of the revised audit
report for tax years 1998 through 2003 and sent us a
letter dated June 16, 2006 stating that it took no excep-
tion to the revised audit report.
Insurance Recovery Claim
On January 13, 2006, we filed a claim against one
of our insurers, Associated Electric & Gas Insurance
Services (AEGIS), under a fiduciary liability policy
to recoup legal fees associated with our litigation
against three former executives. An arbitration of this
matter was held on August 4, 2006. The arbitration
panel ruled on or about September 12, 2006 that the
AEGIS policy does not require an advance of defense
expenses to us. Rather, the arbitration panel stated that
DPL Inc.
21
we are required to file a written undertaking as a condi-
tion precedent to repay expenses finally established
not to be insured. We have filed a written undertaking
with AEGIS and will continue to pursue resolution of the
claim through mediation and arbitration in 2007.
State Income Tax Audit
On February 13, 2006, we received correspondence
from the Ohio Department of Taxation (ODT) notify-
ing us that ODT has completed their examination
and review of our Ohio Corporation Franchise Tax
Returns for tax years 2002 through 2004 and that the
final proposed audit adjustments result in a balance
due of $90.8 million before interest and penalties. We
have reviewed the proposed audit adjustments and
are vigorously contesting the ODT findings and notice
of assessment through all administrative and judicial
means available. On March 29, 2006, we filed peti-
tions for reassessment with the ODT to protest each
assessment as well as request corrected assessments
for each tax year. On October 12, 2006, we signed
a Memorandum of Understanding with the ODT that
stated if the ODT’s positions are ultimately sustained
in judicial proceedings, the total additional tax liability
that we would be subject to for tax years 2002 through
2004 would be no more than $50.7 million before inter-
est as opposed to the $90.8 million stated in the ODT’s
correspondence of February 13, 2006. We believe we
have recorded adequate tax reserves related to the
proposed adjustments; however, we cannot predict
the outcome, which could be material to our results of
operations and cash flows.
We are also under audit review by various state
agencies for tax years 2002 through 2004. We have
also filed an appeal to the Ohio Board of Tax Appeals
for tax years 1998 through 2001. Depending upon the
outcome of these audits and the appeal, we may be
required to increase our tax provision if actual amounts
ultimately determined exceed recorded reserves. We
believe we have adequate reserves in each tax juris-
diction but cannot predict the outcome of these audits.
Labor Relations Unasserted Claim
In September 2006, we became aware of an unassert-
ed claim under the Fair Labor Standards Act concern-
ing the calculation of overtime rates for our unionized
workforce. By agreement of Local #175 and DP&L, we
jointly submitted the claim to a neutral third party who
ruled in favor of DP&L’s position. As a result of this
decision, Local #175 has decided not to pursue any
claim against DP&L.
Environmental
Pending before the U.S. Supreme Court is a proceed-
ing, Environmental Defense v. Duke Energy (Duke
Energy) that does not involve DP&L as a party but may
have a significant effect on the outcome of litigation
described below that involves allegations of violations
of the CAA. A key issue in that litigation that may be
dispositive with respect to other pending cases is what
test to apply for measuring whether modifications to
electric generating units should trigger application of
New Source Review (NSR) standards under the CAA.
In general terms, the dispute is whether to measure
pre- and post-modification emissions based on the rate
of emissions per hour of operation or based on total
emissions over time. The latter test, if applied, could
trigger NSR requirements for equipment replacements
that result in a plant running more often because it is
more economical or dependable, even if the emissions
rate per hour of operation does not change. A ruling is
expected in the first or second quarter of 2007. DP&L
cannot predict the outcome of the Duke Energy case.
Moreover, in each of the cases identified below, there
may be case-specific facts and allegations that may
cause a judge to find that the U.S. Supreme Court’s
ruling is based on different facts and allegations and is
therefore not controlling in the case before the judge.
In September 2004, the Sierra Club filed a law-
suit against DP&L and the other owners of the Stuart
Generating Station in the United States District Court
for the Southern District of Ohio for alleged violations
of the CAA, including issues that may be decided by
the Supreme Court in the Duke Energy case and other
issues relating to alleged violations of opacity limita-
tions. DP&L, on behalf of all co-owners, is leading the
defense of this matter. A sizable amount of discovery
has taken place and expert reports are scheduled to
be filed at various times from May through September,
2007. Dispositive motions are to be filed in January
2008. No trial date has been set yet.
Additional information relating to legal proceedings
involving DPL and DP&L is contained in Item 1 –
Environmental Considerations, Item 1 – Competition
and Regulation, and Item 8 – Note 15 of Notes to
Consolidated Financial Statements.
Item 4 Submission of Matters to a
Vote of Security Holders
None
22 DPL Inc.
Part II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
As of December 31, 2006, there were 24,434 holders of record of DPL common equity, excluding individual
participants in security position listings. The following table presents the high and low per share sales prices for
DPL common stock as reported by the New York Stock Exchange for each quarter of 2006 and 2005.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 27.58
$ 27.82
$ 27.93
$ 28.72
2006
2005
Low
High
$ 25.11
$ 26.25
$ 26.74
$ 27.16
$ 26.77
$ 27.67
$ 28.12
$ 28.01
Low
$ 24.27
$ 24.08
$ 26.70
$ 24.55
DP&L’s common stock is held solely by DPL and, as a
result, is not listed for trading on any stock exchange.
As long as DP&L 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 distribut-
ed 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 $1.2
million. As of year-end, all earnings reinvested in the
business of DP&L were available for DP&L common
stock dividends. We expect all 2006 earnings reinvest-
ed in the business of DP&L to be available for DP&L
common stock dividends, payable to DPL.
On February 1, 2006, our Board of Directors autho-
rized a 4% dividend increase on DPL’s common stock,
raising the annual dividend on common shares from
$0.96 per share to $1.00 per share. These dividends
were paid in each quarter of 2006.
On February 1, 2007, our Board of Directors autho-
rized a 4% dividend increase on DPL’s common stock,
raising the annual dividend on common shares from
$1.00 per share to $1.04 per share. These dividends
will be paid each quarter during 2007.
Additional information concerning dividends paid
on DPL common stock is set forth under Selected
Quarterly Information in Item 8 – Financial Statements
and Supplementary Data.
Information regarding our equity compensation
plans as of December 31, 2006, is disclosed in
Item 12 – Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters, which incorporates such information by
reference to our proxy statement for the 2007 Annual
Meeting of Shareholders.
Performance Comparison
Investment Returns Value of $1,000 Invested Dividends Reinvested
$ 2,000
1,800
1,600
1,400
1,200
1,000
800
$1,924 S&P Electric Utilities
$1,547 S&P Utilities
$1,436 DPL Inc.
$1,390 Dow Jones
Industrial Avg.
600
2001
2002
2003
2004
2005
2006
DPL Inc.
23
Item 6 Selected Financial Data
$ in millions except per share amounts or as indicated
2006
2005
2004
2003
2002
For years ended December 31,
DPL Inc.
Basic earnings (loss) per share of common stock:
Continuing operations (d)
Discontinued operations
Cumulative effect of accounting change (a)
Total basic earnings per common share
Diluted earnings (loss) per share of common stock:
Continuing operations (d)
Discontinued operations
Cumulative effect of accounting change (a)
Total diluted earnings per common share
Dividends paid per share
Dividend payout ratio
$
$
$
$
$
$
$
$
$
1.12
0.12
–
1.24
1.03
0.12
–
1.15
1.03
$
$
0.44
$ (0.03)
$
1.44
$
0.97
0.41
$
$ (0.03)
$
1.35
$
$
$
$
$
$
$
$
1.01
0.80
–
1.81
1.00
0.78
–
1.78
$
$
$
$
$
$
$
$
0.96
0.14
0.14
1.24
0.94
0.14
0.14
1.22
$
$
$
$
$
$
$
$
1.48
(0.72)
–
0.76
1.42
(0.69)
–
0.73
1.00
80.7%
$
0.96
66.7%
$
0.96
53.0%
$
0.94
75.8%
$
0.94
123.7%
Total Electric sales (millions of kWh)
18,418
17,906
18,465
19,345
19,247
Results of Operations:
$ 1,393.5
Revenues
Earnings from continuing operations, net of tax (d)
$ 125.6
14.0
Earnings (loss) from discontinued operations, net of tax $
–
Cumulative effect of accounting change, net of tax
$
$ 139.6
Net income
$ 1,199.9
$ 1,284.9
$ 121.5
$ 124.7
95.8
52.9
$
$
–
(3.2) $
$
$ 1,191.0
$ 114.9
16.6
$
17.0
$
$ 1,186.4
$ 177.6
(86.5)
$
–
$
$ 174.4
$ 217.3
$ 148.5
$
91.1
Financial Position items at December 31,:
Total Assets
Long-term Debt (b)
Trust preferred securities (b)
Total construction additions
Senior unsecured debt ratings at December 31,: (c)
Fitch Ratings
Moody’s Investors Service
Standard & Poor’s Corporation
$ 3,612.2
$ 1,551.8
–
$
$ 351.6
$ 3,791.7
$ 1,677.1
$
–
$ 179.7
$ 4,165.5
$ 2,117.3
–
$
98.0
$
$ 4,444.7
$ 1,954.7
$
–
$ 102.2
$ 4,277.7
$ 2,142.3
$ 292.6
$ 165.9
BBB
Baa3
BB
BBB-
Ba1
BB-
BB
Ba3
B+
BBB
Ba1
BB-
BBB
Baa2
BBB-
Number of Shareholders – Common Stock
24,434
26,601
28,079
30,366
31,856
The Dayton Power and Light Company
Total Electric sales (millions of kWh)
18,418
17,906
18,465
19,345
19,247
Results of Operations:
Revenues
Earnings on Common Stock (d)
Financial Position items at December 31,:
Total Assets
Long-term Debt (b)
Senior secured debt ratings at December 31,: (c)
Fitch Ratings
Moody’s Investors Service
Standard & Poor’s Corporation
$ 1,385.2
241.6
$
$ 1,276.9
210.9
$ 1,192.2
208.1
$ 1,183.4
$ 238.5
$ 1,175.8
244.7
$
$ 3,090.3
785.2
$
$ 2,738.6
$ 685.9
$ 2,641.4
686.6
$
$ 2,660.1
$ 687.3
$ 2,757.3
665.5
$
A
A3
BBB
A-
Baa1
BBB-
BBB
Baa3
BBB-
A
Baa1
BBB-
A
A2
BBB
426
Number of Shareholders – Preferred Stock
290
329
357
402
(a) In 2003, we recorded a cumulative effect of an accounting change related to the adoption of SFAS 143 “Accounting for Asset Retirement
Obligations”. In 2005, we recorded an additional obligation in response to FASB Interpretation Number (FIN) 47, “Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” See Item 7 – Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
(b) Excludes current maturities of long-term debt. Upon adoption of FASB Interpretation Number 46R “Consolidation of Variable Interest
Entities (Revised December 2003) an interpretation of ARB No. 51” at December 31, 2003, DPL deconsolidated the DPL Capital Trust II.
(c) During 2006, our rating agencies upgraded our corporate credit and debt ratings. In February 2007, S&P upgraded the corporate credit
rating and debt rating from BB to BBB- for DPL and from BBB to BBB+ for DP&L.
(d) In the fourth quarter of 2006, DPL entered into agreements to sell two of its peaking facilities resulting in a $44.2 million ($71 million pre-tax)
impairment charge. During 2006, DPL recorded a $37.3 million ($61.2 million pre-tax) charge for early redemption of debt. DP&L recorded
a $2.5 million ($4.1 million pre-tax) charge for early redemption of debt.
24 DPL Inc.
Item 7 Management’s Discussion
and Analysis of Financial Condition
and Results of Operations
Certain statements contained in this discussion are
“forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995.
Matters discussed in this report that relate to events
or developments that are expected to occur in the
future, including management’s expectations, strategic
objectives, business prospects, anticipated economic
performance and financial condition and other similar
matters constitute forward-looking statements. Forward-
looking statements are based on management’s
beliefs, assumptions and expectations of our future
economic performance, taking into account the infor-
mation currently available to management. These state-
ments are not statements of historical fact. Such for-
ward-looking statements are subject to risks and uncer-
tainties and investors are cautioned that outcomes and
results may vary materially from those projected due
to various factors beyond our control, including but not
limited to: abnormal or severe weather; unusual main-
tenance or repair requirements; changes in fuel costs
and purchased power, coal, environmental emissions,
gas and other commodity prices; increased competi-
tion; regulatory changes and decisions; changes in
accounting rules; financial market conditions; and gen-
eral economic conditions.
Forward-looking statements speak only as of the
date of the document in which they are made. These
forward-looking statements are identified by terms and
phrases such as “anticipate”, “believe”, “intend”, “esti-
mate”, “expect”, “continue”, “should”, “could”, “may”,
“plan”, “project”, “predict”, “will”, and similar expres-
sions. We disclaim any obligation or undertaking to
provide any updates or revisions to any forward-looking
statement to reflect any change in our expectations or
any change in events, conditions or circumstances on
which the forward-looking statement is based.
The following discussion should be read in con-
junction with the accompanying financials and related
footnotes included in Item 8 – Financial Statements and
Supplementary Data.
Business Overview
This report includes the combined filing of DPL Inc.
(DPL) and The Dayton Power and Light Company
(DP&L). DP&L is the principal subsidiary of DPL pro-
viding approximately 99% of DPL’s total consolidated
revenue and approximately 86% of DPL’s total con-
solidated asset base. Throughout this report the terms
we, us, our and ours are used to refer to both DPL and
DP&L, respectively and altogether, unless the context
indicates otherwise. Discussions or areas of this report
that apply only to DPL or DP&L will clearly be noted
in the section. Historically, DPL and DP&L have filed
separate SEC filings. Beginning with this report and in
the future, DPL Inc. and The Dayton Power and Light
Company will file combined SEC reports on an interim
and annual basis.
DPL is a regional electric energy and utility com-
pany and through its principal subsidiary, DP&L, is
primarily engaged in the generation, transmission and
distribution of electricity in West Central Ohio. DPL and
DP&L strive to achieve disciplined growth in energy
margins while limiting volatility in both cash flows and
earnings and to achieve stable, long-term growth
through efficient operations and strong customer and
regulatory relations. More specifically, DPL and DP&L’s
strategy is to match energy supply with load, or cus-
tomer demand, maximizing profits while effectively
managing exposure to movements in energy and fuel
prices and utilizing the transmission and distribution
assets that transfer electricity at the most efficient cost
while maintaining the highest level of customer service
and reliability.
We operate and manage generation assets and
are exposed to a number of risks through this manage-
ment. These risks include but are not limited to elec-
tricity wholesale price risk, fuel supply and price risk
and power plant performance. We attempt to manage
these risks through various means. For instance, we
operate a portfolio of wholly owned and jointly owned
generation assets that is diversified as to fuel source,
cost structure and operating characteristics. We are
focused on the operating efficiency of these power
plants and maintaining their availability.
We operate and manage transmission and distribu-
tion assets in a rate-regulated environment. Accordingly,
this subjects us to regulatory risk in terms of the costs
that they may recover and the investment returns that
they may collect in customer rates. We are focused on
delivering electricity and to maintain high standards of
customer service and reliability in a cost-effective manner.
We operate in a regulated and deregulated envi-
ronment. The electric utility industry has historically
operated in a regulated environment. However, in
recent years, there have been a number of federal
and state regulatory and legislative decisions aimed at
promoting competition and providing customer choice.
Market participants have therefore created new busi-
ness models to exploit opportunities. The marketplace
is now comprised of independent power producers,
energy marketers and traders, energy merchants,
transmission and distribution providers and retail
energy suppliers. There have also been new market
entrants and activity among the traditional partici-
DPL Inc.
25
pants, such as mergers, acquisitions, asset sales and
spin-offs of lines of business. In addition, transmission
systems are being operated by Regional Transmission
Organizations (RTOs).
As part of Ohio’s electric deregulation law, all of the
state’s investor-owned utilities were required to join an
RTO. DP&L successfully integrated its 1,000 miles of
high-voltage transmission into the PJM Interconnection,
L.L.C. (PJM) RTO in October 2004. As an RTO, PJM’s
role is to administer an electric marketplace and ensure
the reliability of the high-voltage electric power system
serving 51 million people in all or parts of Delaware,
Illinois, Indiana, Kentucky, Maryland, Michigan, New
Jersey, North Carolina, Ohio, Pennsylvania, Tennessee,
Virginia, West Virginia and the District of Columbia.
PJM coordinates and directs the operation of the
region’s transmission grid; administers the world’s larg-
est competitive wholesale electricity market and plans
regional transmission expansion improvements to main-
tain grid reliability and relieve congestion.
2006 Financial Overview
As more fully discussed in later sections of this
MD&A, the following were the significant themes
and events for 2006:
DPL’s revenues increased 8% over 2005 resulting
from the rate stabilization surcharge and other regu-
lated asset recovery riders improving gross margin and
profitability. DPL’s fuel, purchased power costs, and
operation and maintenance increased over 2005 by
4%, 19% and 21%, respectively. DPL’s cash flow from
operations of $308.7 million was in line with the cash
flow from operations of $314.7 million in 2005.
is using the proceeds from these borrowings to assist
in financing its portion of the costs of acquiring, con-
structing and installing certain solid waste disposal
and air quality facilities at Miami Fort, Killen and Stuart
Generating Stations.
On July 27, 2005, DPL’s Board authorized the repur-
chase of up to $400 million of common stock from
time to time in the open market or through private
transactions. DPL completed this share repurchase
program on August 21, 2006. These Board-authorized
repurchase transactions resulted in 14.9 million shares
being repurchased, or 11.7% of the outstanding stock
at December 31, 2005 at an average price of $26.91
per share. These shares are currently held as treasury
shares at DPL.
Results of Operations – DPL Inc.
DPL’s results of operations include the results of its
subsidiaries, including the consolidated results of
its principal subsidiary The Dayton Power and Light
Company (DP&L) and all of DP&L’s consolidated
subsidiaries. DP&L provides approximately 99% of
the total revenues of DPL. All material intercompany
accounts and transactions have been eliminated in
consolidation. A separate specific discussion of the
results of operations for DP&L is presented elsewhere
in this report.
Financial Highlights – DPL
$ in millions
2006
2005
2004
Revenues:
Retail
Wholesale
RTO ancillary
Other revenues,
$ 1,131.4 $ 1,066.6 $ 1,036.8
135.1
133.3
174.1
17.9
74.4
77.2
DP&L’s revenues increased 8% over 2005 resulting
net of fuel costs
10.8
10.6
10.1
from the rate stabilization surcharge and other regu-
lated asset recovery riders improving gross margin and
profitability. DP&L’s fuel, purchased power costs, and
operation and maintenance increased over 2005 by
5%, 17% and 17%, respectively. DP&L’s cash flow from
operations of $365.7 million was in line with the cash
flow from operations of $366.8 million in 2005.
In connection with DPLE’s decision to sell the
Greenville Station and Darby Station electric peaking
generation facilities, DPL concluded that an impair-
ment charge for the Greenville Station and Darby
Station assets was required. During the fourth quarter
of 2006, DPL recorded a $71.0 million impairment
charge to record the fair market write-down of the
assets and other associated costs related to the sale.
On September 13, 2006, the Ohio Air Quality
Development Authority (OAQDA) issued $100 million
of 4.80% fixed interest rate OAQDA Revenue Bonds
2006 Series A due September 1, 2036. In turn, DP&L
then borrowed these funds from the OAQDA. DP&L
Total Revenues
$ 1,393.5 $ 1,284.9 $ 1,199.9
Less: Fuel
Purchased power (a)
Gross margins (b)
349.1
159.0
336.9
133.3
263.1
113.1
$ 885.4 $ 814.7 $ 823.7
Gross Margins as a
percentage of revenues 63.5%
63.4%
68.6%
Operating Income
$ 281.0 $ 339.1 $ 336.5
Earnings per share:
Continuing Operations $
Discontinued Operations
Cumulative effect of
1.12 $
0.12
1.03 $
0.44
1.01
0.80
accounting change
–
(0.03)
–
Net Income
$
1.24 $
1.44 $
1.81
(a) Purchased power includes ancillary charges from PJM of
$49.4 million, $48.5 million and $12.3 million for 2006, 2005 and
2004 respectively.
(b) For purposes of discussing operating results, we present and
discuss gross margins. This format is useful to investors because it
allows analysis and comparability of operating trends and includes
the same information that is used by management to make decisions
regarding our financial performance.
26 DPL Inc.
■
■
■
■
■
DPL Inc. – 2006 Compared to 2005
For the year ended December 31, 2006, basic earn-
ings per share of $1.24 decreased $0.20 from the
same period in 2005. The decline was primarily
due to a $0.32 per share decrease in Earnings from
Discontinued Operations reflecting lower investment
income and lower gains on the sale of investments.
Most of the investments were sold during 2005. Basic
earnings per share for Earnings from Continuing
Operations were $0.09 higher in 2006 compared to
2005. This increase is the result of higher revenues
relating to the impact of the rate stabilization plan and
lower interest expense, partially offset by a $71.0 mil-
lion impairment charge for the peaking units, higher
fuel and purchased power costs and higher operation
and maintenance expenses.
DPL Inc. – 2005 Compared to 2004
For the year ended December 31, 2005, basic earn-
ings per share of $1.44 decreased $0.37 from the
same period in 2004. The decline was primarily
due to a $0.36 per share decrease in Earnings from
Discontinued Operations reflecting lower investment
income, partially offset by the gain on the sale of
investments (In February 2005, DPL agreed to sell its
respective interests in forty-six private equity funds).
Basic earnings per share for Earnings from Continuing
Operations were $0.02 higher in 2005 compared to
2004. This increase is the result of higher revenues
relating to higher retail sales volume and ancillary
revenues associated with the participation in PJM.
Also contributing to this increase were lower operation
and maintenance expenses driven by lower corporate
costs, higher investment income and lower interest
expense related to debt refinancing in 2004. These
increases were partially offset by higher fuel and pur-
chased power costs and a $61.2 million charge for the
early redemption of debt.
For 2005, basic earnings per share includes a
$0.03 after-tax charge related to the cumulative effect
of a change in accounting for asset retirement obliga-
tions at certain power generating stations.
DPL Inc. – Revenues
surcharge and other regulated asset recovery riders
resulting in a $93.0 million price variance, partially
offset by lower retail sales volume resulting in a $29.4
million volume variance. Sales volume declined 3% in
2006 from 2005 due to milder weather which resulted
in lower heating and cooling degree days. Heating
degree days declined 11% and cooling degree days
declined 20%. Wholesale revenue increased $40.8
million primarily related to a 34% increase in sales
volume (935 GWh) resulting in a $45.8 million volume
variance, partially offset by a decrease in wholesale
average rates resulting in a $5.0 million price variance.
For 2006, the RTO ancillary revenues increased $2.8
million or 4% to $77.2 million from $74.4 million in 2005.
RTO ancillary revenues primarily consist of compensa-
tion for use of DP&L’s transmission assets, regulation
services, reactive supply and operating reserves.
For the year ended December 31, 2005, revenues
of $1,284.9 million increased $85 million, or 7% from
$1,199.9 million for the same period in 2004. This
increase was primarily the result of increased retail
sales volume, higher average rates for wholesale
revenues, and ancillary revenues associated with
participation in PJM that was partially offset by lower
wholesale sales volume. Retail revenues increased
$29.8 million, primarily resulting from increased sales
volume of $32.8 million and $2.8 million in higher
average rates, partially offset by $5.8 million in lower
miscellaneous retail revenues reflecting transmis-
sion services provided in 2004 that are now provided
through PJM. Residential customers comprised the
bulk of the increase in sales volume reflecting greater
weather extremes experienced in 2005 compared to
2004 as cooling degree days were up 39% to 1,075
in 2005 compared to 771 in 2004 and heating degree
days were up 4% to 5,702 in 2005 compared to 5,500
in 2004. Wholesale revenue decreased $1.8 million,
primarily related to a $37.2 million decline in sales vol-
ume that was nearly offset by a $35.4 million increase
related to higher average market rates. For 2005, ancil-
lary revenues from RTOs were $74.4 million compared
to $17.9 million for 2004, as we did not participate in
PJM until October 2004.
For the year ended December 31, 2006, revenues
increased $108.6 million, or 8% to $1,393.5 from
$1,284.9 for the same period in the prior year. This
increase was primarily the result of higher average
retail rates and higher wholesale sales volume, partially
offset by lower retail sales volume and lower average
rates for wholesale revenues. Retail revenues increased
$64.8 million primarily resulting from an increase in
average rates related to the Rate Stabilization Plan
DPL Inc. – Margins, Fuel and Purchased Power
For 2006, gross margin of $885.4 million increased
$70.7 million, or 9%, from $814.7 million in 2005. As a
percentage of total revenues, gross margin remained
flat in 2006 at 63.5% compared to 63.4% in 2005. This
result reflects the favorable impact of the rate stabiliza-
tion plan on revenues offsetting the increasing fuel and
purchase power costs. In prior years, rising fuel and
purchase power costs had eroded gross margin. Fuel
DPL Inc.
27
costs, which include coal, gas, oil and emission allow-
ance costs, increased by $12.2 million, or 4%, in 2006
compared to the same period in 2005 primarily due
to increased fuel prices. Purchased power increased
$25.7 million, or 19% in 2006 compared to the same
period in 2005 primarily resulting from increased
charges of $30.8 million relating to higher purchased
power volume and an increase of $0.9 million in RTO
ancillary costs. These increases were partially offset
by lower average market rates reducing purchased
power costs by $6.0 million. The increase in purchase
power volume resulted from our decision to purchase
power at lower average market rates instead of running
our higher cost generating facilities. In addition, from
time to time, we purchased power when our generating
facilities were not available due to scheduled mainte-
nance and forced outages.
For 2005, gross margin of $814.7 million
decreased by $9.0 million from $823.7 million for
2004. As a percentage of total revenues, gross margin
decreased by 5.2 percentage points to 63.4% from
68.6%. This decline is primarily the result of increased
fuel and purchased power costs, partially offset by an
increase in revenues, principally from RTO ancillary
revenues and higher average wholesale rates. Fuel
costs, which include coal, gas, oil and emission allow-
ance costs, increased by $73.8 million or 28% for 2005
compared to the same period in 2004 primarily result-
ing from higher average fuel prices of $64.1 million as
well as increased generation of $9.7 million. Purchased
power costs increased by $20.2 million for 2005
compared to 2004 primarily resulting from increased
charges of $36.2 million associated with operating in
PJM (we did not participate in PJM until October 2004)
and $28.2 million related to higher average market
prices, partially offset by $44.2 million related to lower
purchased power volume.
DPL Inc. – Operation and Maintenance
$ in millions
2006 vs. 2005
Legal costs
Power production costs
RTO administrative fees
Low-Income Assistance Program
Lump sum bonus and retirement payments
Line clearance
Mark-to-market adjustments and forfeitures
of restricted stock units (RSUs)
Long-term incentive compensation
Pension and benefits
Directors’ & Officers’ liability insurance
Sarbanes-Oxley compliance fees
Other, net
$ 13.5
10.4
5.5
5.1
3.7
2.7
2.6
2.1
1.0
(3.2)
(1.1)
4.1
Total operation and maintenance expense
$ 46.4
For 2006, operation and maintenance expense
increased $46.4 million or 21% compared to 2005
year primarily resulting from a $13.5 million increase in
legal fees primarily related to the litigation with former
executives; a $10.4 million increase in power produc-
tion costs consisting of $4.1 million of coal brokering
credits received in 2005 that were not received in 2006
and increased operating and maintenance expenses of
$3.1 million which related to cost of removal and peak-
er engine repairs; $5.5 million in PJM administrative
fees, including $2.5 million deferred in 2005 by PUCO
authority (rate relief was granted in February 2006);
$5.1 million increase in the low-income assistance pro-
gram costs; $3.7 million of lump sum bonus and retire-
ment payments to former executives (not related to our
ongoing litigation with the three former executives);
$2.7 million of line clearance; a $2.6 million increase in
mark-to-market adjustments and forfeitures of restricted
stock units; $2.1 million in long-term incentive compen-
sation relating to performance and restricted shares
compensation; and a $1.0 million increase in pension
and benefits expenses. These increases were partially
offset by a $3.2 million decrease in Directors’ and
Officers’ liability insurance premiums and a $1.1 million
decrease in Sarbanes-Oxley compliance fees.
$ in millions
2005 vs. 2004
Directors’ & Officers’ liability insurance
Legal and special investigations
Executive and management compensation
Sarbanes-Oxley compliance and
external/internal audit fees
Low-Income Assistance Program
Pension and benefits
Electric production, transmission and
distribution costs
Other, net
$
(8.3)
(5.8)
(5.8)
(3.5)
(2.3)
(0.7)
4.5
3.8
Total operation and maintenance expense $ (18.1)
For 2005, operation and maintenance expense
decreased $18.1 million or 8% compared to 2004 as
a result of lower corporate costs that were partially
offset by increased electric production, transmission
and distribution expenses. Corporate costs declined
from the prior year primarily resulting from a decrease
of $8.3 million in Directors’ and Officers’ liability insur-
ance premiums; approximately $5.8 million related
to the decreased level of activity regarding various
internal and governmental investigations as well as
the securities litigation; $5.8 million in lower executive
and management compensation costs; $3.5 million in
reduced Sarbanes-Oxley 404 compliance costs and
external/internal audit fees; $2.3 million in decreased
Low Income Assistance Program costs; and $0.7 mil-
28 DPL Inc.
lion of lower benefits costs (a decrease of $2.8 million
for a 2004 adjustment in disability reserves was nearly
offset by an increase in pension costs of $2.1 million).
These decreases were partially offset by a $4.5 million
increase in electric production, transmission, and distri-
bution costs, primarily related to generation operations
costs for lime used for pollution control and electric
production boiler maintenance costs as well as higher
costs related to electric distribution operation and
maintenance.
DPL Inc. – Impairment of Peaking Stations
In connection with DPLE’s decision to sell the
Greenville Station and Darby Station electric peaking
generation facilities, DPL concluded that an impair-
ment charge for the Greenville Station and Darby
Station assets was required. Greenville Station consists
of four natural gas peaking units with a net book value
of approximately $66 million. Darby Station consists
of six natural gas peaking units with a net book value
of approximately $156 million. DPLE plans to sell the
Greenville and Darby Station assets for $49 million and
$102 million, respectively. These sales are expected to
take place during the first half of 2007.
During the fourth quarter of 2006, DPL recorded
a $71.0 million impairment charge to record the fair
market write-down of the assets and other associated
costs related to the sale. These assets are now held for
sale and are no longer being depreciated these assets.
There was no such activity in 2005. See Note 14 of the
Notes to the Consolidated Financial Statements.
DPL Inc. – Depreciation and Amortization
For 2006, depreciation and amortization expense
increased $4.5 million from 2005 relating to completed
projects in both the distribution and production areas
increasing our overall plant base.
Depreciation and amortization expense was $3.2
million higher in 2005 as compared to 2004 primar-
ily as a result of completed projects in the distribution
area (including new services, line transformers, poles,
station equipment and overhead and underground
conductor) and in the production area (mainly due to
the SCRs for Stuart, Killen and Zimmer) that were put
into service in the second quarter of 2004.
DPL Inc. – Amortization of Regulatory Assets
For 2006, amortization of regulatory assets increased
$5.6 million to $7.6 million compared to the same
period in 2005. The increase in amortization of regula-
tory assets reflects $2.6 million for the amortization of
costs incurred to accommodate unbundled rates and
electric choice bills in the customer billing system; $1.3
million for the amortization of PJM administrative fees
deferred for the period October 2004 through January
2006; $1.2 million for the amortization of incremental
2004/2005 severe storm costs; $0.3 million for the
amortization of costs incurred to integrate DP&L into
the PJM system; and $0.2 million for the amortization of
the Rate Stabilization Surcharge rate case expenses.
For 2005, amortization of regulatory assets
increased $1.3 million to $2.0 million compared to the
same period in 2004 primarily resulting from PJM start-
up costs amortization of $1.1 million and PJM integra-
tion costs amortization of $0.2 million reflecting DP&L’s
entrance into the PJM market on October 1, 2004.
DPL Inc. – Investment Income
For 2006, investment income decreased $33.1 million
to $17.8 million from $50.9 million for the same period
in 2005. This decrease was primarily the result of a
$23.4 million decrease in gains on public and income
investments realized in 2005, a $4.6 million in foreign
currency translation gains realized in 2005 for the liq-
uidation of investments denominated in Euros, and a
$4.8 million decrease in interest income resulting from
lower cash balances in 2006 compared to 2005.
For 2005, investment income increased by $43.0
million compared to 2004 primarily resulting from a
net gain on the disposal of public equity and income
investments of $23.5 million and from $18.5 million in
interest income, principally from new short-term invest-
ments relating to a cash surplus from the sale of the
private equity portfolio.
DPL Inc. – Interest Expense
For 2006, interest expense decreased $35.5 million,
or 26%, compared to the same period in 2005
resulting from the debt reduction that occurred in
2004 and 2005 and a higher capitalized interest of
$10.9 million in 2006 compared to 2005 associated
with our major construction projects.
For 2005, interest expense decreased $22.5
million, or 14%, compared to 2004 due to the debt
reduction of $462.6 million and a full year impact of
the $500 million debt retirement completed in 2004
(partially financed with a $175 million note).
DPL Inc. – Charge for Early Redemption of Debt
In 2005, DPL recorded $61.2 million in charges
resulting from premiums paid for the early redemption
of debt, including write-offs of unamortized debt
expense and debt discounts.
DPL Inc. – Other Income (deductions)
For 2006, other income (deductions) was $14.7
million less than the same period in 2005 primarily
due to gains of $12.3 million realized in 2005 from
DPL Inc.
29
the sale of pollution control emission allowances.
There were no sales of pollution control emission
allowances during 2006.
For 2005, other income was $9.7 million greater
than 2004 primarily reflecting $3.5 million of additional
gains realized in 2005 over 2004 resulting from sales
of pollution control emission allowances; $1.6 million
of lower fees resulting from the 2004 cancellation and
replacement of DP&L’s revolving credit facility and
our term loan termination and $1.5 million from the
2004 write-off of the remaining term loan debt expense
resulting from our term loan termination.
DPL Inc. – Income Tax Expense
For 2006, income taxes from continuing operations
decreased $10.1 million, or 13%, compared to 2005
due to a decrease in pre-tax book income, a decrease
in the effective tax rate primarily reflecting the phase-
out of the Ohio Franchise Tax and adjustments record-
ed in 2005 and 2006 to true-up book tax expense to
the tax return.
For 2005, income tax expense from continuing
operations increased $13.4 million compared to 2004
resulting from higher income, increased accrual for
open tax years and lower state tax coal credits.
On June 30, 2005, Governor Taft signed House Bill
66 into law which significantly changed the tax struc-
ture in Ohio. The major provisions of the bill included
phasing-out the Ohio Franchise Tax, phasing-out the
Ohio Personal Property Tax for non-utility taxpayers
and phasing-in a Commercial Activities Tax. The Ohio
Franchise Tax phase-out required second quarter 2005
adjustments to income tax expense. Income taxes
from continuing operations were reduced by $1.5 mil-
lion while income taxes from discontinued operations
were increased by $1.3 million as a result of the tax law
change. Other applicable provisions of House Bill 66
have been reflected in the consolidated financial
statements.
DPL Inc. – Discontinued Operations, Net of Tax
On February 13, 2005, our subsidiaries, MVE and
MVIC, entered into an agreement to sell their
respective interests in forty-six private equity funds
to AlpInvest/Lexington 2005, LLC, a joint venture of
AlpInvest Partners and Lexington Partners, Inc.
Sales proceeds and any related gains or losses were
recognized as the sale of each fund closed. Among
other closing conditions, each fund required the
transaction to be approved by the respective general
partner of each fund. During 2005, MVE and MVIC
completed the sale of their interests in forty-three and
a portion of one of those private equity funds resulting
in a $46.6 million pre-tax gain ($53.1 million less $6.5
million professional fees) from discontinued operations
and provided approximately $796 million in net
proceeds, including approximately $52 million in net
distributions from funds while held for sale. As part
of this pre-tax gain, DPL realized $30 million that was
previously recorded as an unrealized gain as part of
other comprehensive income.
During 2005, MVE entered into alternative clos-
ing arrangements with AlpInvest/Lexington 2005, LLC
for funds where legal title to said funds could not be
transferred until a later time. Pursuant to these arrange-
ments, MVE transferred the economic aspects of the
remaining private equity funds, consisting of two funds
and a portion of another fund, to AlpInvest/Lexington
2005, LLC without a change in ownership of the inter-
ests. The terms of the alternative arrangements do not
meet the criteria for recording a sale. We are obligated
to remit to AlpInvest/Lexington 2005, LLC any distribu-
tions MVE receives from these funds, and AlpInvest/
Lexington 2005, LLC is obligated to provide funds to us
to pay any contribution notice, capital call or other pay-
ment notice or bill for which MVE receives notice with
respect to such funds. The alternative arrangements
resulted in a deferred gain of $27.1 million until such
terms of a sale can be completed (contingent upon
receipt of general partner approvals of the transfer)
and in 2005 provided approximately $72 million in net
proceeds on these funds. DPL recorded an impairment
loss of $5.6 million in the second quarter of 2005 to
write down assets transferred pursuant to the alterna-
tive arrangements to estimated fair value. Ownership of
these funds transfer after the general partners of each
of the separate funds consent to the transfer.
On March 31, 2006, MVE completed the sale of the
remaining portion of one private equity fund, for which
MVE had previously entered into an alternative closing
arrangement resulting in the recognition of $13.2 million
of the deferred gain. On August 31, 2006, MVE com-
pleted the sale of a portion of one of the two remaining
private equity funds, resulting in recognition of $5.7
million of the deferred gain. The sale of the residual
portion of this private equity fund will be completed
during the first quarter of 2007, resulting in the recogni-
tion of approximately $8.2 million of the deferred gain.
The transfer of the remaining fund is expected to be
completed in 2008.
30 DPL Inc.
$ in millions
Earnings from discontinued operations:
Investment income
Investment expenses
Income from discontinued operations
Gain realized from sale
Broker fees and other expenses
Loss recorded
Net gain on sale
Earnings before income taxes
Income tax expense
Earnings from discontinued operations, net
Cash Flow:
Net proceeds from sale of portfolio
Net proceeds from transfer
Net distributions from funds
Total cash flow from discontinued operations
For the years ended December 31,
2006
2005
2004
$
–
(1.3)
(1.3)
18.9
–
–
18.9
17.6
(3.6)
$ 14.0
$
$
–
–
–
–
$ 41.3
(9.5)
31.8
53.1
(6.5)
(5.6)
41.0
72.8
(19.9)
$ 52.9
$ 744.2
72.3
51.9
$ 868.4
$ 178.5
(23.6)
154.9
–
–
–
–
154.9
(59.1)
$ 95.8
$
–
–
203.9
$ 203.9
There was no investment income from discontinued
operations during 2006, however there was $1.3 mil-
lion of legal costs associated with the ongoing litiga-
tion (see Note 11 of Notes to Consolidated Financial
Statements). Income from discontinued operations
(pre-tax) for the year ended December 31, 2005 of
$31.8 million is comprised of $41.3 million of invest-
ment income less $9.5 million of associated manage-
ment fees and other expenses.
For the year ended December 31, 2006, we rec-
ognized $18.9 million of the deferred gain from the
sale of the remaining private equity funds described
above. For the year ended December 31, 2005, we
recognized a $46.6 million pre-tax gain ($53.1 million
less $6.5 million of professional fees), recorded a $5.6
million impairment loss, deferred gains of $27.1 million
on transferred funds from discontinued operations, and
provided approximately $868 million in net proceeds,
including approximately $52 million in net distributions
from funds held for sale. We will continue to incur minor
amounts of fees in the near term.
DPL Inc. – Cumulative Effect of Accounting
Change, Net of Tax
In 2005, the cumulative effect of an accounting
change resulted in a charge of $3.2 million related to
the adoption of the provisions of FASB Interpretation
No. 47, “Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement No.
143” (FIN 47). (See Note 1 of Notes to Consolidated
Financial Statements.)
Results of Operations –
The Dayton Power and Light Company (DP&L)
Income Statement Highlights – DP&L
$ in millions
2006
2005
2004
Revenues:
Retail
Wholesale
RTO ancillary
Total Revenues
$ 998.1 $ 944.9 $ 914.0
260.3
257.6
309.9
17.9
74.4
77.2
$ 1,385.2 $ 1,276.9 $ 1,192.2
Less: Fuel
Purchased power (a)
Gross margins (b)
335.2
171.9
317.9
147.1
257.0
116.4
$ 878.1 $ 811.9 $ 818.8
Gross margins as a
percentage of revenues 63.4%
63.6%
68.7%
Operating Income
$ 402.5 $ 382.6 $ 369.4
(a) Purchased power includes ancillary charges from PJM of
$49.4 million, $48.5 million and $12.3 million for 2006, 2005 and
2004 respectively.
(b) For purposes of discussing operating results, we present and
discuss gross margins. This format is useful to investors because it
allows analysis and comparability of operating trends and includes
the same information that is used by management to make decisions
regarding our financial performance.
DP&L – Revenues
For 2006, revenues increased 8% to $1,385.2 million
compared to $1,276.9 million in 2005, reflecting an
increase of $108.3 million. This increase was primar-
ily the result of higher average rates for retail sales,
greater wholesale sales volume and increased ancil-
lary revenues associated with participation in a RTO.
DPL Inc.
31
These increases were partially offset by lower retail
sales volume and lower average rates for wholesale
sales. Retail revenues increased $53.2 million, primarily
resulting from a $78.3 million increase relating to higher
average rates and increased miscellaneous revenues
of $0.9 million, partially offset by decreased sales
volume of $26.0 million resulting from milder weather
experienced in 2006 compared to 2005. The higher
average rates were primarily the result of the rate sta-
bilization plan surcharge, and regulated asset recov-
ery riders implemented throughout 2006. Wholesale
revenues increased $52.3 million, primarily related
to a $88.6 million increase in sales volume, partially
offset by a $36.3 million decrease in average market
rates. During 2006, RTO ancillary revenues increased
$2.8 million to $77.2 million from $74.4 million in 2005.
Heating degree-days were down 11% to 5,076 in
2006 compared to 5,702 in 2005. In addition, cooling
degree-days were down 20% to 855 in 2006 compared
to 1,075 in 2005.
For 2005, revenues increased 7% to $1,276.9 mil-
lion compared to $1,192.2 million in 2004, reflecting
an increase of $84.7 million. This increase was primar-
ily the result of increased retail sales volume, higher
average rates for wholesale and retail revenues, and
ancillary revenues associated with participation in PJM
that was partially offset by lower wholesale sales vol-
ume. Retail revenues increased $30.9 million, primarily
resulting from increased sales volume of $28.9 million
and $7.6 million in higher average rates, partially offset
by $5.6 million in lower miscellaneous retail revenues
reflecting transmission services provided in 2004 that
are now provided through PJM. Residential custom-
ers comprised the bulk of the increase in sales volume
reflecting greater weather extremes experienced in
2005 compared to 2004 as cooling degree days were
up 39% to 1,075 in 2005 compared to 771 in 2004
and heating degree days were up 4% to 5,702 in
2005 compared to 5,500 in 2004. Wholesale revenue
decreased $2.7 million, primarily related to a $71.6 mil-
lion decline in sales volume that was nearly offset by a
$68.9 million increase related to higher average market
rates. For 2005, ancillary revenues from RTOs were
$74.4 million compared to $17.9 million for 2004, as
we did not participate in PJM until October 2004. RTO
ancillary revenues primarily consist of compensation
for use of our transmission assets, regulation services,
reactive supply and operating reserves.
DP&L - Margins, Fuel and Purchased Power
For 2006, gross margin increased $66.2 million to
$878.1 million from $811.9 million in 2005. As a per-
centage of total revenues, gross margin remained
relatively flat in 2006 at 63.4% compared to 63.6%
in 2005. This result reflects the favorable impact of
the rate stabilization plan on revenues offsetting the
increasing fuel and purchased power costs. In prior
years, rising fuel and purchased power costs had
eroded gross margin. Fuel costs, which include coal,
gas, oil and emission allowance costs, increased by
$17.3 million or 5% in 2006 as a result of higher market
prices. Purchased power costs increased by $24.8
million or 17% in 2006 compared to 2005 primarily
resulting from higher volumes of power purchased. The
increase in purchased power volume resulted from our
decision to purchase power at lower average market
rates instead of running our higher cost generating
facilities. In addition, from time to time, we had to pur-
chase power to source power sales when our generat-
ing facilities were not available due to scheduled main-
tenance and forced outages.
For 2005, gross margin decreased by $6.9 mil-
lion to $811.9 million from $818.8 million in 2004. As a
percentage of total revenues, gross margin decreased
by 5.1 percentage points to 63.6% from 68.7%. This
decline is primarily the result of a $91.6 million increase
in fuel and purchased power costs, offset by an $84.7
million increase in revenues (see discussion of revenue
variance above). Fuel costs increased by $60.9 million
for 2005 compared to the same period in 2004 primar-
ily resulting from higher average fuel prices as well as
an increased volume of electric generation. Purchased
power costs increased by $30.7 million for 2005 com-
pared to the same period in 2004 primarily resulting
from increased ancillary charges of $36.2 million asso-
ciated with moving power across PJM (we did not par-
ticipate in PJM until October 2004) as well as increases
related to higher average market prices, partially offset
by lower purchased power volume.
DP&L – Operation and Maintenance
$ in millions
2006 vs. 2005
Power production costs
Low-Income Assistance Program
RTO administration fees
Lump sum bonus and retirement payments
Line clearance
Long-term incentive compensation
Reserves for insurance,
injuries/damages/environmental
Pension and benefits
Mark-to-market adjustments and
forfeitures of restricted stock units (RSUs)
Directors’ and Officers’ liability insurance
Sarbanes-Oxley compliance fees
Other, net
$ 10.4
5.6
5.5
3.7
2.7
1.9
1.9
0.9
0.9
(1.2)
(1.1)
2.2
Total operation and maintenance expense
$ 33.4
32 DPL Inc.
For 2006, operation and maintenance expense
increased $33.4 million or 17% compared to 2005
primarily resulting from a $10.4 million increase in
power production costs consisting of $4.1 million of
coal brokering credits received in 2005 that were not
received in 2006 and increased operating and main-
tenance expenses of $3.1 million which related to cost
of removal and peaker engine repairs; a $5.6 million
increase in the Low-Income Assistance Program costs;
$5.5 million in PJM administrative fees, including $2.5
million deferred in 2005 by PUCO authority (rate relief
was granted in February 2006); $3.7 million of lump
sum bonus and retirement payments for former execu-
tives (not related to our ongoing litigation with the three
former executives); $2.7 million related to line clear-
ance; $1.9 million increase in long-term incentive costs;
a $1.9 million increase in reserves for insurance, inju-
ries and damages; a $0.9 million increase in pension
and benefits expenses; and a $0.9 million increase in
mark-to-market adjustments and forfeitures of restricted
stock units. These increases were partially offset by a
$1.2 million decrease in Directors’ and Officers’ liability
insurance premiums and a $1.1 million decrease in
Sarbanes-Oxley compliance fees.
$ in millions
2005 vs. 2004
Directors’ and Officers’ liability insurance
Executive and management compensation
Sarbanes-Oxley compliance and
external/ internal audit fees
RTO administration fees
Reduction in capitalized insurance and
claims costs
Pension and benefits
Electric production, transmission
and distribution costs
Other, net
(14.8)
(10.2)
(3.5)
(1.6)
(0.3)
0.6
$ 4.1
(0.4)
Total operation and maintenance expense $ (26.1)
For 2005, operation and maintenance expense
decreased $26.1 million or 12% compared to same
period in 2004 as a result of lower corporate costs that
were partially offset by increased electric production,
transmission and distribution expenses. Corporate
costs declined from the prior year primarily result-
ing from a decrease of $14.8 million in Directors’ and
Officers’ liability insurance premiums; $10.2 million in
lower executive and management compensation costs;
$3.5 million in reduced Sarbanes-Oxley 404 compli-
ance costs and external / internal audit fees; and $1.6
million in lower PJM administrative fees resulting from
a PUCO order to defer these costs until they can be
recovered through rates starting in February 2006.
These decreases were partially offset by a $4.1 million
increase in electric production, transmission, and distri-
bution costs, primarily related to generation operations
costs for lime used for pollution control and electric
production boiler maintenance costs as well as higher
costs related to electric distribution operation and
maintenance. In addition, pension and benefits costs
rose by $0.6 million reflecting an increase in pension
costs of $2.0 million that was nearly offset by a $1.4
million decrease for other post employment benefits,
principally a 2004 adjustment in disability reserves.
DP&L – Depreciation and Amortization
Depreciation and amortization increased $6.1 million
in 2006 compared to 2005 primarily reflecting a higher
plant base.
Depreciation and amortization increased $2.8 mil-
lion in 2005 as compared to 2004 primarily as a result
of completed projects in the distribution area (including
new services, line transformers, poles, station equip-
ment, and overhead and underground conductor) and
in the production area (mainly due to the SCRs for
Stuart, Killen and Zimmer) that were put into service in
the second quarter of 2004.
DP&L – Amortization of Regulatory Assets
For 2006, amortization of regulatory assets increased
$5.6 million to $7.6 million compared to the same
period in 2005. The increase in amortization of regula-
tory assets reflects $2.6 million for the amortization of
costs incurred to accommodate unbundled rates and
electric choice bills in the customer billing system; $1.3
million for the amortization of PJM administrative fees
deferred for the period October 2004 through January
2006; $1.2 million for the amortization of incremental
2004/2005 severe storm costs; $0.3 million for the
amortization of costs incurred to integrate DP&L into
the PJM system; and $0.2 million for the amortization of
the Rate Stabilization Surcharge rate case expenses.
For 2005, amortization of regulatory assets
increased $1.3 million to $2.0 million compared to the
same period in 2004 primarily resulting from PJM start-
up costs amortization of $1.1 million and PJM integra-
tion costs amortization of $0.2 million reflecting DP&L’s
entrance into the PJM market on October 1, 2004.
DP&L – Interest Expense
Interest expense decreased $14.7 million or 39% in
2006 compared to 2005, primarily relating to $10.9
million of increased capitalized interest resulting from
higher pollution control capital expenditures at the
generating plants and $5.3 million of lower interest
expense reflecting the refinancing of pollution control
DPL Inc.
33
bonds at reduced interest rates in 2005, lower debt
service charges associated with DPL’s early retire-
ment of ESOP debt, and the elimination of the interest
penalty resulting from the delayed exchange offer of
the $470 million 5.125% Series First Mortgage Bonds.
These decreases were slightly offset by $1.4 million
of interest expense associated with DP&L’s new $100
million 4.8% Series pollution control bonds issued
September 13, 2006.
Interest expense decreased $5.4 million or 12% in
2005 compared to 2004, primarily from $2.6 million of
lower debt service charges associated with our early
retirement of ESOP debt; lower amortization of $1.1 mil-
lion associated with reacquired debt; $1.0 million from
the elimination of the interest penalty on the $470 mil-
lion 5.125% Series First Mortgage Bonds resulting from
the delayed exchange offer registration of those securi-
ties; and $0.2 million of greater capitalized interest in
2005 as compared to 2004.
DP&L – Charge for Early Redemption of Debt
In 2005, DP&L recorded $4.1 million in charges result-
ing from premiums paid for the early redemption of
debt, including write-offs of unamortized debt expense
and debt discounts.
DP&L – Other Income
For 2006, other income (deductions) decreased $7.8
million compared to the same period in 2005. This
decrease is primarily attributable to $12.3 million in
gains recognized on the sale of pollution control emis-
sion allowances during 2005, partially offset by $7.0
million in reduced investment management fees.
For 2005, other income was $7.7 million greater
than 2004 primarily reflecting $3.5 million of additional
gains in 2005 over 2004 from sales of pollution control
emission allowance.
DP&L – Income Tax Expense
For 2006, income tax expense increased $4.1 million
compared to the same period in 2006 primarily result-
ing from higher income.
For 2005, income tax expense increased $17.3
million compared to the same period in 2004 resulting
from higher income, increased accrual for open tax
years and lower state coal tax credits.
On June 30, 2005, Governor Taft signed House Bill
66 into law which significantly changed the tax struc-
ture in Ohio. The major provisions of the bill include
phasing-out the Ohio Franchise Tax, phasing-out the
Personal Property Tax for non-utility taxpayers and
phasing-in a Commercial Activities Tax. As a result of
House Bill 66, income taxes were reduced by $1.6 mil-
34 DPL Inc.
lion. Other applicable provisions of House Bill 66 have
been reflected in the consolidated financial statements.
DP&L – Cumulative Effect of Accounting
Change, Net of Tax
In 2005, the cumulative effect of an accounting
change resulted in a charge of $3.2 million related to
the adoption of the provisions of FASB Interpretation
No. 47, “Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement No.
143” (FIN 47). See Note 1 of Notes to Consolidated
Financial Statements.
Financial Condition, Liquidity and
Capital Requirements
DPL’s financial condition, liquidity and capital require-
ments, includes the consolidated results of its principal
subsidiary The Dayton Power and Light Company and
all of DP&L’s consolidated subsidiaries. All material
intercompany accounts and transactions have been
eliminated in consolidation.
On July 27, 2005, DPL’s Board authorized the
repurchase of up to $400 million of common stock
from time to time in the open market or through private
transactions. DPL completed this share repurchase
program through a series of open market purchases
on August 21, 2006. This resulted in 14.9 million shares
being repurchased at an average price of $26.91 per
share and a total cost of $400 million. These shares are
currently held as treasury shares at DPL Inc.
The following details the repurchase activity and
options exercised during 2006 affecting treasury
shares:
Number of
Settlement
Treasury Dollar Amount
($ in millions)
Shares Held
Balance at December 31, 2005 36,197,807
Activity:
January
February
March
April
May
June
July
August
Total repurchased at
December 31, 2006
Options exercised
406,000
564,000
4,765,700
214,700
2,163,000
4,848,300
417,400
1,483,332
$ 10.6
15.2
129.5
5.9
57.9
129.1
11.1
40.7
14,862,432
$ 400.0
first quarter of 2006
(10,000)
Options exercised
fourth quarter of 2006
Net activity
(345,000)
14,507,432
Balance at December 31, 2006 50,705,239
DPL’s Cash Position
DPL’s cash and cash equivalents totaled $262.2 mil-
lion at December 31, 2006, compared to $595.8 million
at December 31, 2005, a decrease of $333.6 million.
In addition, DPL had no short-term investments avail-
able for sale at December 31, 2006 in comparison to
$125.8 million at December 31, 2005. The decrease in
cash and cash equivalents and short-term investments
available for sale was primarily attributed to $357.5
million in capital expenditures, $400.0 million used for
the purchase of treasury shares and $112.4 million in
dividends paid on common stock, partially offset by
$308.7 million in cash generated from operating activi-
ties and $89.9 million restricted fund draws to fund
pollution control capital expenditures. At December
31, 2006, DPL had $10.1 million restricted funds held
in trust relating to the issuance of the $100 million pol-
lution control bonds. These funds will be used to fund
the pollution control capital expenditures.
In 2005, DPL began investing in Auction Rate
Securities (ARS). ARS are variable rate state and
municipal bonds that trade at par value. Interest rates
on ARS are reset every seven, twenty-eight or thirty-five
days through a modified Dutch auction. DPL had the
option to hold at market, re-bid or sell each ARS on
the interest reset date. Although ARS are issued and
rated as long-term bonds, they are priced and traded
as short-term securities available for resale because of
the market liquidity provided through the interest rate
reset mechanism. Each ARS purchased by DPL was
tax-exempt, AAA rated and insured by a third-party
insurance company. As of June 30, 2006, all of DPL’s
ARS were sold.
DP&L’s Cash Position
DP&L’s cash and cash equivalents totaled $46.1
million at December 31, 2006, remained relatively
unchanged when compared to $46.2 million at
December 31, 2005. At December 31, 2006, DP&L
had $10.1 million restricted funds held in trust
relating to the issuance of the $100 million pollution
control bonds. These funds will be used to fund the
pollution control capital expenditures.
Operating Activities
For the years ended December 31, 2006, 2005 and
2004, cash flows from operations were as follows:
The tariff-based revenue from our energy business
continues to be the principal source of cash from
operating activities. Management believes that the
diversified retail customer mix of residential, commer-
cial, and industrial classes coupled with the rate relief
approved by the PUCO for 2006 and beyond provides
us with a reasonably predictable gross cash flow
from operations.
DPL’s Cash provided by Operating Activities
DPL generated net cash from operating activities of
$308.7 million, $314.1 million and $132.7 million in
2006, 2005 and 2004, respectively. The net cash pro-
vided by operating activities in 2006 was primarily the
result of operating profitability, partially offset by an
increase in cash used for working capital, specifically
payments for taxes and inventories. The net cash pro-
vided by operating activities for 2005 was primarily the
result of operating profitability, partially offset by cash
used for working capital, specifically accounts payable
and inventories. The net cash provided by operating
activities in 2004 was primarily the result of operating
profitability, partially offset by cash used for the share-
holder litigation settlement and cash used for working
capital, specifically payments for taxes and inventories.
DP&L’s Cash provided by Operating Activities
DP&L generated net cash from operating activities
of $365.7 million, $366.8 million and $381.2 million in
2006, 2005 and 2004, respectively. The net cash pro-
vided by operating activities for 2006 was primarily the
result of operating profitability, partially offset by cash
used for working capital, specifically for accounts pay-
able and inventories. The net cash provided by operat-
ing activities for 2005 was primarily the result of operat-
ing profitability, partially offset by cash used for working
capital, specifically for accounts payable, inventories
and the timing of tax payments. The net cash provided
by operating activities in 2004 was primarily the result
of operating profitability, and cash provided from work-
ing capital, specifically the timing of tax payments, off-
set by the rising cost of coal inventories.
Investing Activities
For the years ended December 31, 2006, 2005
and 2004, cash flows from investing activities were
as follows:
Net Cash provided by Operating Activities
Net Cash (used for) / provided by Investing Activities
DPL
DP&L
2006
2005
2004
$ 308.7 $ 314.1 $ 132.7
$ 365.7 $ 366.8 $ 381.2
DPL
DP&L
2006
2005
2004
$ (229.5) $ 689.6 $ 182.3
$ (354.8) $ (178.4) $ (79.9)
DPL Inc.
35
DPL’s Cash (used for ) / provided by Investing Activities
DPL’s net cash used for investing activities was $229.5
million in 2006 compared to DPL’s net cash flows
provided by investing activities of $689.6 million and
$182.3 million in 2005 and 2004, respectively. Net cash
flows used for investing activities in 2006 were related
to capital expenditures and the purchases of short-
term investments and securities, partially offset by the
sale of short-term investments and securities. Net cash
flows provided by investing activities for 2005 were
related to the proceeds from the sale of the private
equity securities which are classified as discontinued
operations and the sale of short-term investments and
public securities unrelated to discontinued operations,
partially offset by capital expenditures and purchases
of short-term investments and securities. Net cash
flows provided by investing activities for 2004 were
related to the proceeds from the sale of the private
equity securities which are classified as discontinued
operations, proceeds from the sale of property and
the sale of short-term investments and public securi-
ties unrelated to discontinued operations. These cash
inflows were partially offset by capital expenditures and
purchases of short-term investments and securities.
DP&L’s Cash (used for) Investing Activities
DP&L’s net cash flows used for investing activities were
$354.8 million, $178.4 million and $79.9 million in 2006,
2005 and 2004, respectively. Net cash flows used for
investing activities for 2006 and 2005 were due to
capital expenditures. Net cash flows used for investing
activities for 2004 were due to capital expenditures, off-
set by the proceeds from the sale of property.
Financing Activities
For the years ended December 31, 2006, 2005
and 2004, cash flows from financing activities were
as follows:
Net Cash (used for) Financing Activities
DPL
DP&L
2006
2005
2004
$ (412.8) $ (610.0) $ (450.5)
$ (11.0) $ (159.4) $ (301.3)
DPL’s Cash (used for) Financing Activities
DPL’s net cash flows used for financing activities were
$412.8 million, $610.0 million and $450.5 million in
2006, 2005 and 2004, respectively. Net cash flows
used for financing activities in 2006 were the result of
cash used to repurchase $400.0 million of common
stock and pay dividends to common stockholders of
$112.4 million. These uses of cash were partially offset
by $89.9 million of withdrawals from the trust set up
as a result of issuing the pollution control bonds and
cash received relating to the exercise of stock options
of $7.8 million. Net cash flows used for financing activi-
ties for 2005 were primarily the result of cash used to
retire $462.6 million of long-term debt, pay premiums
on the early redemption of debt of $54.7 million and
pay dividends to common stockholders of $115.3 mil-
lion. These uses of cash were partially offset by cash
received relating to the exercise of stock options of
$22.7 million. Net cash flows used for financing activi-
ties for 2004 were primarily the result of funds used
for the retirement of $500 million of the 6.82% Series
Senior Notes and dividends paid to common stock-
holders, partially offset by the issuance of $175 million
unsecured 8% Series Senior Notes used to provide
partial funding for the retirement of the $500 million
6.82% Series Senior Notes. Annual dividends declared
increased to $0.96 per share in 2004 from $0.94 per
share in 2003.
On February 1, 2006, our Board of Directors
announced that it had raised the quarterly dividend
to $0.25 per share payable March 1, 2006 to DPL’s
common shareholders of record on February 14, 2006.
This increase resulted in an annualized dividend rate
of $1.00 per share, or a 4% increase during 2006. On
February 1, 2007, our Board of Directors announced
that it had raised the quarterly dividend to $0.26 per
share payable March 1, 2007 to common shareholders
of record on February 14, 2007. This increase results
in an annualized dividend rate of $1.04 per share, or a
4% increase that will be paid during 2007.
DP&L’s Cash (used for) Financing Activities
DP&L’s net cash flows used for financing activities
were $11.0 million, $159.4 million and $301.3 million
in 2006, 2005 and 2004, respectively. Net cash flows
used for financing activities for 2006 were the result of
cash used to pay common stock dividends to DPL of
$100.0 million, partially offset by $89.9 million of with-
drawals from the trust set up as a result of issuing the
pollution control bonds. Net cash flows used for financ-
ing activities for 2005 were primarily the result of cash
used to retire $218.9 million of long-term debt and
pay common stock dividends to DPL of $150.0 mil-
lion. These uses of cash were partially offset by the net
cash received from the issuance of long-term debt. Net
cash flows used for financing activities for 2004 were
for the payment of common and preferred dividends
and the retirement of long-term debt.
DPL and DP&L have obligations to make future
payments for capital expenditures, debt agreements,
lease agreements and other long-term purchase obli-
36 DPL Inc.
gations, and have certain contingent commitments such as guarantees. We believe our cash flows from operations,
the credit facilities (existing or future arrangements), the senior notes, and other short- and long-term debt financ-
ing, will be sufficient to satisfy our future working capital, capital expenditures and other financing requirements
for the foreseeable future. Our ability to generate positive cash flows from operations is dependent on general
economic conditions, competitive pressures, and other business and risk factors described in Item 1a of this Form
10-K. If we are unable to generate sufficient cash flows from operations, or otherwise comply with the terms of our
credit facilities and the senior notes, we may be required to refinance all or a portion of our existing debt or seek
additional financing alternatives. A discussion of each of our critical liquidity commitments is outlined below.
Capital Requirements
Construction Additions
$ in million
DPL Inc.
DP&L
2006
$ 352
$ 349
Actual
2005
$ 180
$ 178
2004
$ 98
$ 93
2007
$ 310
$ 310
Projected
2008
$ 165
$ 165
2009
$ 130
$ 130
DPL’s construction additions were $352 million,
$180 million and $98 million in 2006, 2005 and 2004,
respectively, and are expected to approximate $310
million in 2007.
DP&L’s construction additions were $349 million,
$178 million and $93 million in 2006, 2005 and 2004,
respectively, and are expected to approximate $310
million in 2007. Planned construction additions for 2007
relate to DP&L’s environmental compliance program,
power plant equipment, and its transmission and distri-
bution system.
Capital projects are subject to continuing review
and are revised in light of changes in financial and
economic conditions, load forecasts, legislative and
regulatory developments and changing environmental
standards, among other factors. Over the next three
years, DPL, through its subsidiary DP&L, is projecting
to spend an estimated $605 million in capital proj-
ects, approximately 40% of which is to meet chang-
ing environmental standards. Our ability to complete
capital projects and the reliability of future service will
be affected by our financial condition, the availability
of internal funds and the reasonable cost of external
funds. We expect to finance our construction additions
in 2007 with a combination of cash on hand, short-
term financing, tax-exempt debt and cash flows from
operations.
Debt and Debt Covenants
On March 25, 2004, DPL completed a $175 million
private placement of unsecured 8% Series Senior
Notes due March 2009. The Senior Notes will not be
redeemable prior to maturity except that DPL has the
right to redeem the notes for a make-whole payment at
the adjusted treasury rate plus 0.25%. The 8% Series
Senior Notes were issued pursuant to its indenture
dated as of March 1, 2000, and pursuant to author-
ity granted in the Board resolutions dated March 25,
2004. The notes impose a limitation on the incurrence
of liens on the capital stock of any of DPL’s significant
subsidiaries and require DPL and its subsidiaries to
meet a consolidated coverage ratio of 2 to 1 prior to
incurring additional indebtedness. The limitation on
the incurrence of additional indebtedness does not
apply to (i) indebtedness incurred to refinance exist-
ing indebtedness, (ii) subordinated indebtedness
and (iii) up to $150 million of additional indebtedness.
In addition to the events of default specified in the
indenture, an event of default under the notes includes
a payment default or acceleration of indebtedness
under any other indebtedness of DPL or any of its
subsidiaries which aggregates $25 million or more.
The purchasers were granted registration rights in con-
nection with the private placement under an Exchange
and Registration Rights Agreement. Pursuant to this
agreement, DPL was obligated to file an exchange
offer registration statement by July 22, 2004, have the
registration statement declared effective by September
20, 2004 and consummate the exchange offer by
October 20, 2004. DPL failed (1) to have a registration
statement declared effective and (2) to complete the
exchange offer according to this timeline. As a result,
DPL had been accruing additional interest at a rate of
0.5% per year for each of these two violations, up to
an additional interest rate not to exceed in the aggre-
gate 1.0% per year. As each violation was cured, the
additional interest rate decreased by 0.5% per annum.
DPL’s exchange offer registration statement for these
securities was declared effective by the SEC on June
27, 2006. As a result, on June 27, 2006, DPL ceased
DPL Inc.
37
accruing 0.5% of the additional interest. On July 31,
2006, DPL ceased accruing the other 0.5% of addi-
tional interest when the exchange of registered notes
for the unregistered notes was completed. By complet-
ing the exchange, DPL reduced the annual interest
expense by $1.8 million.
During the first quarter 2006, the Ohio Department
of Development (ODOD) awarded DP&L the ability to
issue over the next three years up to $200 million of
qualified tax-exempt financing from the ODOD’s 2005
volume cap carryforward. The financing is to be used
to partially fund the ongoing flue gas desulfurization
capital projects. The PUCO approved DP&L’s applica-
tion for this additional financing on July 26, 2006.
On September 13, 2006, the Ohio Air Quality
Development Authority (OAQDA) issued $100 million
of 4.80% fixed interest rate OAQDA Revenue bonds
2006 Series A due September 1, 2036. In turn, DP&L
borrowed these funds from the OAQDA. The payment
of principal and interest on the Bonds when due is
insured by an insurance policy issued by Financial
Guaranty Insurance Company. DP&L is using the
proceeds from these borrowings to assist in financing
its portion of the costs of acquiring, constructing and
installing certain solid waste disposal and air quality
facilities at Miami Fort, Killen and Stuart Generating
Stations. These facilities are currently under construc-
tion and the proceeds from the borrowing have been
placed in escrow with the trustee (the Bank
of New York) and are being drawn upon only as facili-
ties are built and qualified costs are incurred. In the
event any of the proceeds are not drawn, DP&L would
eventually be required to return the unused proceeds
to bondholders. DP&L expects to draw down the
remaining available funds from this borrowing during
the first quarter of 2007.
DP&L expects to use the remaining $100
million of volume cap carryforward prior to the end
of 2008. DP&L is planning to issue in conjunction
with the OAQDA this $100 million of tax-exempt
bonds to finance the remaining solid waste disposal
facilities at Miami Fort, Killen, Stuart and Conesville
Generating Stations.
On November 21, 2006, DP&L entered into a new
$220 million unsecured revolving credit agreement
replacing its $100 million facility. This new agree-
ment has a five year term that expires on November
21, 2011 and that provides DP&L with the ability to
increase the size of the facility by an additional $50
million at any time. The facility contains one financial
covenant: DP&L’s total debt to total capitalization ratio
is not to exceed 0.65 to 1.00. This covenant is currently
met. DP&L had no outstanding borrowings under this
credit facility at December 31, 2006. Fees associated
with this credit facility are approximately $0.2 million
per year. Changes in credit ratings, however, may
affect fees and the applicable interest. This revolving
credit agreement also contains a $50 million letter of
credit sublimit. As of December 31, 2006, DP&L had
no outstanding letters of credit against the facility.
On February 24, 2005, DP&L entered into an
amendment to extend the term of its Master Letter of
Credit Agreement with a financial lending institution for
one year and to reduce the maximum dollar volume
of letters of credit to $10 million. On February 17, 2006,
DP&L renewed its $10 million agreement for one year.
This agreement supports performance assurance
needs in the ordinary course of business. This agree-
ment was not renewed in 2007. DP&L has certain
contractual agreements for the sale and purchase of
power, fuel and related energy services that contain
credit rating related clauses allowing the counter par-
ties to seek additional surety under certain conditions.
As of December 31, 2006, DP&L had two outstanding
letters of credit for a total of $2.2 million.
Issuance of additional amounts of first mortgage
bonds by DP&L is limited by the provisions of its
mortgage; however, management believes that DP&L
continues to have sufficient capacity to issue first
mortgage bonds to satisfy its requirements in con-
nection with its current refinancing and construction
programs. The amounts and timing of future financings
will depend upon market and other conditions, rate
increases, levels of sales and construction plans.
There are no inter-company debt collateralizations
or debt guarantees between DPL and its subsidiaries.
None of the debt obligations of DPL or DP&L are guar-
anteed or secured by affiliates and no cross-collateral-
ization exists between any subsidiaries.
38 DPL Inc.
Credit Ratings
Currently, DPL’s senior unsecured and DP&L’s senior secured debt credit ratings are as follows:
Fitch Ratings
Moody’s Investors Service
Standard & Poor’s Corp.
Off-Balance Sheet Arrangements
DPL Inc.
DP&L
BBB
Baa3
BBB-
A
A3
BBB+
Outlook
Stable
Positive
Stable
Effective
April 2006
June 2006
February 2007
DPL and DP&L do not have any off-balance sheet arrangements that have or are reasonably likely to have
a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.
Contractual Obligations and Commercial Commitments
We enter into various contractual obligations and other commercial commitments that may affect the liquidity
of our operations. At December 31, 2006, these include:
Contractual Obligations
Payment Year
$ in millions
Total
Less than 1 Year
2 -3 Years
4 -5 Years
More than 5 Years
DPL Inc.
Long-term debt
Interest payments
Pension and postretirement payments
Capital leases
Operating leases
Coal contracts (a)
Limestone contracts
Other contractual obligations
Total contractual obligations
DP&L
Long-term debt
Interest payments
Pension and postretirement payments
Capital leases
Operating leases
Coal contracts (a)
Limestone contracts
Other contractual obligations
Total contractual obligations
(a) DP&L-operated units
$ 1,774.8
1,101.8
235.6
2.9
0.7
554.6
58.7
391.7
$ 4,120.8
$ 783.2
571.9
235.6
2.9
0.7
554.6
58.7
391.5
$ 2,599.1
$ 225.0
98.8
22.0
0.9
0.3
324.4
1.7
328.5
$ 1,001.6
$
–
39.1
22.0
0.9
0.3
324.4
1.7
328.4
$ 716.8
$ 275.0
171.2
45.2
1.4
0.3
118.4
9.5
53.7
$ 674.7
$
–
78.3
45.2
1.4
0.3
118.4
9.5
53.6
$ 306.7
$ 297.4
144.0
46.5
0.6
0.1
111.8
10.8
9.5
$ 620.7
$
–
78.3
46.5
0.6
0.1
111.8
10.8
9.5
$ 257.6
$ 977.4
687.8
121.9
–
–
–
36.7
–
$ 1,823.8
$ 783.2
376.2
121.9
–
–
–
36.7
–
$ 1,318.0
Long-term debt:
DPL’s long-term debt as of December 31, 2006, consists
of DP&L’s first mortgage bonds, tax-exempt pollution
control bonds, DPL unsecured notes and includes current
maturities and unamortized debt discounts. During
2006, DP&L entered into $100 million of long-term tax-
exempt debt.
DP&L’s long-term debt as of December 31, 2006,
consists of first mortgage bonds, tax-exempt pollution
control bonds and includes an unamortized debt discount.
See Note 8 of Notes to Consolidated Financial
Statements.
Interest payments:
Interest payments associated with the Long-term debt
described above.
Pension and postretirement payments:
As of December 31, 2006, DP&L had estimated future
benefit payments as outlined in Note 5 of Notes to
Consolidated Financial Statements. These estimated
future benefit payments are projected through 2015.
Capital leases:
As of December 31, 2006, DP&L had two capital leases
that expire in November 2007 and September 2010.
Operating leases:
As of December 31, 2006, DPL and DP&L had several
operating leases with various terms and expiration dates.
Not included in this total is approximately $88,000 per
year related to right of way agreements that are assumed
to have no definite expiration dates.
DPL Inc.
39
Coal contracts:
DP&L has entered into various long-term coal contracts to supply portions of its coal requirements for its
generating plants. Contract prices are subject to periodic adjustment and have features that limit price escalation
in any given year.
Limestone contracts:
DP&L has entered into various limestone contracts to supply limestone for its generating facilities.
Other contractual obligations:
As of December 31, 2006, DPL and DP&L had various other contractual obligations including non-cancelable
contracts to purchase goods and services with various terms and expiration dates.
We enter into various commercial commitments, which may affect the liquidity of our operations.
At December 31, 2006, these include:
Credit facilities:
In November 2006, DP&L replaced its previous $100 million revolving credit agreement with a $220 million five year
facility that expires on November 21, 2011. At December 31, 2006, there were no borrowings outstanding under this
credit agreement. DP&L has the ability to increase the size of the facility by an additional $50 million at any time.
Guarantees:
DP&L owns a 4.9% equity ownership interest in an electric generation company. As of December 31, 2006, DP&L
could be responsible for the repayment of 4.9%, or $21.8 million, of a $445 million debt obligation that matures in 2026.
In two separate transactions in November and December 2006, DPL agreed to be a guarantor of the obligations
of its wholly-owned subsidiary, DPL Energy, LLC (DPLE) regarding the pending sale of the Darby Electric Peaking
Station to American Electric Power and the sale of the Greenville Electric Peaking Station to Buckeye Electric Power, Inc.
In both cases, DPL has agreed to guarantee the obligations of DPLE over a multiple year period as follows:
$ in millions
Darby
Greenville
Market Risk
As a result of its operating, investing and financing
activities, we are subject to certain market risks includ-
ing changes in commodity prices for electricity, coal,
environmental emissions and gas and fluctuations in
interest rates. Commodity pricing exposure includes
the impacts of weather, market demand, increased
competition and other economic conditions. For pur-
poses of potential risk analysis, we use sensitivity
analysis to quantify potential impacts of market rate
changes on the results of operations. The sensitivity
analysis represents hypothetical changes in market val-
ues that may or may not occur in the future.
Commodity Pricing Risk
Approximately 12.5% of DPL’s and 22% of DP&L’s
2006 electric revenues were from sales of excess
energy and capacity in the wholesale market. Energy
and capacity in excess of the needs of existing retail
customers are sold in the wholesale market when we
can identify opportunities with positive margins. As
of December 31, 2006, a hypothetical increase or
2007
$ 30.6
$ 14.8
2008
$ 23.0
$ 11.1
2009
$ 15.3
$ 7.4
2010
$ 7.7
$ 3.7
decrease of 10% in DPL’s annual wholesale revenues
could result in approximately an $11 million increase
or decrease to net income, assuming no increases in
fuel and purchased power costs. As of December 31,
2006, a hypothetical increase or decrease of 10% in
DP&L’s annual wholesale revenues could result
in approximately a $20 million increase or decrease
to net income, assuming no increases in fuel and pur-
chased power costs.
DPL’s fuel (including coal, gas, oil and emission
allowances) and purchased power costs as a percent
of total operating costs in 2006 and 2005 were 46%
and 50%, respectively. DP&L’s fuel (including coal,
gas, oil and emission allowances) and purchased
power costs as a percent of total operating costs was
52% in both 2006 and 2005. We have substantially all
of the total expected coal volume needed to meet our
retail and firm wholesale sales requirements for 2007
under contract. The majority of our contracted coal
is purchased at fixed prices. Some contracts provide
for periodic adjustment and some are priced based
on market indices. Substantially all contracts have
40 DPL Inc.
features that limit price escalations in any given year.
Our consumption of SO2 allowances should decline in
2007 due to planned emission control upgrades. We
do not expect to purchase SO2 allowances for 2007.
The exact consumption of SO2 allowances will depend
on market prices for power, availability of our genera-
tion units, the timing of emission control equipment
upgrade completion, and the actual sulfur content of
the coal burned. DP&L does not plan to purchase
NOx allowances for 2007. Fuel costs are impacted
by changes in volume and price and are driven by a
number of variables including weather, reliability of coal
deliveries, scheduled outages and generation plant
mix. Based on weather normalized sales and our co-
owners’ projections, fuel costs are forecasted to be flat
in 2007 compared to 2006.
Purchased power costs depend, in part, upon the
timing and extent of planned and unplanned outages
of our generating capacity. We will purchase power on
a discretionary basis when wholesale market condi-
tions provide opportunities to obtain power at a cost
below our internal production costs. As of December
31, 2006, a hypothetical increase or decrease of 10%
in DPL’s annual fuel and purchased power costs
could result in approximately a $30 million increase or
decrease to net income. As of December 31, 2006, a
hypothetical increase or decrease of 10% in DP&L’s
annual fuel and purchased power costs could result in
approximately a $29 million increase or decrease to
net income.
Interest Rate Risk
As a result of our normal borrowing and leasing activi-
ties, our results are exposed to fluctuations in interest
rates, which we manage through our regular financ-
ing activities. We maintain both cash on deposit and
investments in cash equivalents that may be affected
by adverse interest rate fluctuations. Our long-term
debt represents publicly and privately held secured
and unsecured notes and debentures with fixed
interest rates. At December 31, 2006, we had no short-
term borrowings.
The carrying value of DPL’s debt was $1,777.7 mil-
lion at December 31, 2006, consisting of DP&L’s first
mortgage bonds, DP&L’s tax-exempt pollution con-
trol bonds, our unsecured notes and DP&L’s capital
leases. The fair value of this debt was $1,798.5 million,
based on current market prices or discounted cash
flows using current rates for similar issues with similar
terms and remaining maturities. The principal cash
repayments and related weighted average interest
rates by maturity date for long-term, fixed-rate debt at
December 31, 2006, are as follows:
Expected Maturity Date
DPL’s Long-Term Debt
Amount
($ in millions)
Average
Rate
2007
2008
2009
2010
2011
Thereafter
Total
Fair Value
$ 225.9
100.7
175.7
0.6
297.4
977.4
$ 1,777.7
$ 1,798.5
8.2%
6.3%
8.0%
6.9%
6.9%
5.6%
6.4%
The carrying value of DP&L’s debt was $786.1 million
at December 31, 2006, consisting of our first mortgage
bonds, our tax-exempt pollution control bonds, and our
capital leases. The fair value of this debt was $785.8
million, based on current market prices or discounted
cash flows using current rates for similar issues with
similar terms and remaining maturities. The principal
cash repayments and related weighted average inter-
est rates by maturity date for long-term, fixed-rate debt
at December 31, 2006, are as follows:
Expected Maturity Date
DP&L’s Long-Term Debt
Amount
($ in millions)
Average
Rate
2007
2008
2009
2010
2011
Thereafter
Total
Fair Value
$
0.9
0.7
0.7
0.6
–
783.2
$ 786.1
$ 785.8
6.2%
6.9%
6.9%
6.9%
–
5.0%
5.0%
Debt maturities for DPL and DP&L in 2007 are expect-
ed to be financed with a combination of tax-exempt
pollution control bonds and internal funds.
Debt retirements occurring in 2006 are discussed
under Financial Condition, Liquidity and Capital
Requirements.
Critical Accounting Estimates
DPL’s and DP&L’s consolidated financial statements
are prepared in accordance with GAAP. In connection
with the preparation of these financial statements, our
management is required to make assumptions, esti-
mates and judgments that affect the reported amounts
of assets, liabilities, revenues, expenses and the relat-
DPL Inc.
41
ed disclosure of contingent liabilities. These assump-
tions, estimates and judgments are based on our his-
torical experience and assumptions that we believed
to be reasonable at the time. However, because future
events and their effects cannot be determined with
certainty, the determination of estimates requires the
exercise of judgment. Our critical accounting estimates
are those which require assumptions to be made about
matters that are highly uncertain.
Different estimates could have a material effect
on our financial results. Judgments and uncertainties
affecting the application of these policies and esti-
mates may result in materially different amounts being
reported under different conditions or circumstances.
Significant items subject to such judgments include:
the carrying value of property, plant and equipment;
unbilled revenues; the valuation of insurance and
claims costs; valuation allowances for receivables and
deferred income taxes; the valuation of reserves relat-
ed to current litigation; and assets and liabilities related
to employee benefits.
Long-Lived Assets: In accordance with Statement of
Financial Accounting Standards No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets”
(SFAS 144), long-lived assets to be held and used are
reviewed for impairment whenever events or circum-
stances indicate that the carrying amount may not be
recoverable. When required, impairment losses on
assets to be held and used are recognized based on
the fair value of the asset. We determine the fair value
of these assets based upon estimates of future cash
flows, market value of similar assets, if available or
independent appraisals, if required. In analyzing the
fair value and recoverability using future cash flows,
we make projections based on a number of assump-
tions and estimates of growth rates, future economic
conditions, assignment of discount rates and estimates
of terminal values. An impairment loss is recognized,
if the carrying amount of the long-lived asset is not
recoverable from its undiscounted cash flows. The
measurement of impairment loss is the difference
between the carrying amount and fair value of the
asset. Long-lived assets to be disposed of and/or held
for sale are reported at the lower of carrying amount or
fair value less cost to sell. We determine the fair value
of these assets in the same manner as described for
assets held and used.
Revenue Recognition (including Unbilled Revenue):
We consider revenue realized, or realizable, and
earned when persuasive evidence of an arrangement
exists, the products or services have been provided
to the customer, the sales price is fixed or determin-
able, and collectibility is reasonably assured. We
record electric revenues when delivered to customers.
Customers are billed throughout the month as electric
meters are read. We recognize revenues using an
accrual method for retail and other energy sales that
have not yet been billed, but where electricity has been
consumed. This is termed “unbilled revenues” and is a
widely recognized and accepted practice for utilities.
Our estimates of unbilled revenues use systems that
consider various factors to calculate retail customer
consumption at the end of each month. These esti-
mates are based on the volume of energy delivered,
historical usage and growth by customer class, and the
effect of weather variations on usage patterns. Given
the use of these systems and the fact that customers
are billed monthly, we believe it is unlikely that materi-
ally different results will occur in future periods when
these amounts are subsequently billed.
Additionally, DP&L is subject to regulatory orders
addressing the justness and reasonableness of the
PJM and Midwest Independent Transmission System
Operator (MISO) rates and related revenue distribu-
tion protocols. DP&L’s management is required to
make assumptions, estimates and judgments relating
to the possibility of refund of these revenues. These
assumptions, estimates and judgments are based on
management’s experience and are believed to be rea-
sonable at the time. As a result of these assumptions,
estimates and judgments, DP&L is deferring a portion
of these revenues for which management believes is
subject to refund. The deferred amount recorded was
$18.7 million and $20.5 million at December 31, 2006
and December 31, 2005, respectively. The above
amount collected under the Seams Elimination Charge
Adjustment (SECA) rates are subject to refund, and the
ultimate outcome of the proceeding establishing SECA
rates is uncertain at this time. However, based on the
amount of reserves established for this item, the results
of this proceeding are not expected to have a mate-
rial adverse effect on our financial condition, results of
operations or cash flows.
Income Taxes: We apply the provisions of FASB
Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes” (SFAS 109). SFAS 109
requires an asset and liability approach for financial
accounting and reporting of income taxes with tax
42 DPL Inc.
effects of differences, based on currently enacted
income tax rates between the financial reporting and
tax basis of accounting reported as Deferred Taxes in
the Consolidated Balance Sheets. Deferred Tax Assets
are recognized for deductible temporary differences.
Valuation reserves are provided unless it is more likely
than not that the asset will be realized.
Investment tax credits, which have been used
to reduce federal income taxes payable, have been
deferred for financial reporting purposes. These
deferred investment tax credits are amortized over the
useful lives of the property to which they are related.
For rate-regulated operations, 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.
We file a consolidated U.S. federal income tax
return in conjunction with our subsidiaries. The con-
solidated tax liability is allocated to each subsidiary as
specified in our tax allocation agreement which pro-
vides a consistent, systematic and rational approach.
See Note 4 of Notes to Consolidated Financial
Statements.
Regulatory Assets and Liabilities: Application of FASB
Statement of Financial Accounting Standards
No. 71, “Accounting for the Effects of Certain Types of
Regulation” (SFAS 71) depends on our ability to col-
lect cost-based rates from customers. The recognition
of regulatory assets requires a continued assessment
of the recovery of the costs based on actions of the
regulators. We capitalize incurred costs as deferred
regulatory assets when there is a probable expectation
that the costs incurred will be recovered in future rev-
enues as a result of the regulatory process. Regulatory
liabilities represent current recovery of expected future
costs. When applicable we apply judgment in the use
of these principles and these estimates are based
on expected usage by a customer class over the
designated recovery period. See Note 3 of Notes to
Consolidated Financial Statements for further disclo-
sure of regulatory amounts.
Asset Retirement Obligations: In accordance with
FASB Statement of Financial Accounting Standards
No. 143, “Accounting for Asset Retirement Obligations”
(SFAS 143) and FASB Interpretation No. 47 (FIN No.
47), “Accounting for Conditional Asset Retirement
Obligations, an interpretation of FASB Statement No.
143,” legal obligations associated with the retirement of
long-lived assets are required to be recognized at their
fair value at the time those obligations are incurred.
Upon initial recognition of a legal liability, costs are
capitalized as part of the related long-lived asset and
allocated to expense over the useful life of the asset.
SFAS 143 also requires that components of previously
recorded depreciation related to the cost of removal of
assets upon retirement, whether legal asset retirement
obligations or not, must be removed from a company’s
accumulated depreciation reserve. We make assump-
tions, estimates and judgments that affect the reported
amounts of assets, liabilities and expenses as they
relate to asset retirement obligations. These assumptions
and estimates are based on historical experience and
assumptions that we believe to be reasonable at the time.
Insurance and Claims Costs: In addition to insurance
provided through third-party providers, wholly-owned
captive subsidiary (MVIC) provides insurance cover-
age solely to us and to our subsidiaries. Insurance
and Claims Costs on the Consolidated Balance
Sheets includes insurance reserves of approximately
$22 million and $24 million for 2006 and 2005, respec-
tively, based on actuarial methods and loss experience
data. Such reserves are actuarially determined,
in the aggregate, based on a reasonable estimation
of insured events occurring. There is uncertainty asso-
ciated with the loss estimates, and actual results may
differ from the estimates. Modification of these loss
estimates based on experience and changed circum-
stances is reflected in the period in which the estimate
is re-evaluated.
Pension and Postretirement Benefits
We account and disclose pension and postretire-
ment benefits in accordance with the provisions of
Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pensions
and other Postretirement Plans, an amendment to
FASB Statements 87, 88, 106 and 132R.” This Standard
requires the use of assumptions, such as the discount
rate and long-term rate of return on assets, in determin-
ing the obligations, annual cost and funding require-
ments of the plans.
In 2007, we are maintaining our long-term rate of
return assumptions of 8.50% for pension and 6.75%
for other postretirement benefits assets that reflect the
effect of recent trends on our long-term view. We are
also maintaining our assumed discount rate of 5.75%
DPL Inc.
43
for pension and postretirement benefits expense to
reflect current interest rate conditions. Changes in
other components used in the determination of pen-
sion and postretirement benefits costs will result in
approximately the same level of expense in 2007 as in
2006 ($5.5 million), excluding any special adjustments
required under SFAS 88. We do not anticipate any spe-
cial adjustments to expense in 2007.
In future periods, differences in the actual return on
pension plan assets and assumed return, or changes
in the discount rate, will affect the timing of contribu-
tions to the pension plan, if any. We provide postretire-
ment healthcare benefits to employees who retired
prior to 1987. A one percentage point change in the
assumed healthcare trend rate would affect postretire-
ment benefit costs by approximately $0.1 million.
Legal and Other Matters
by reference in this Management’s Discussion
and Analysis of Financial Condition and Results
of Operations and made a part hereof.
Recently Issued Accounting Pronouncements
A discussion of recently issued accounting
pronouncements is described in Note 1 of Notes to
Consolidated Financial Statements and such
discussion is incorporated by reference in this
Management’s Discussion and Analysis of Financial
Condition and Results of Operations and made
a part hereof.
Item 7a Quantitative and Qualitative
Disclosures about Market Risk
A discussion of Legal And Other Matters is
described in Note 15 of Notes to Consolidated
Financial Statements and in Item 3 - Legal
Proceedings. Such discussions are incorporated
The information required by this item of Form 10-K is
set forth in the Market Risk section under Item 7 –
Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
44 DPL Inc.
Item 8 Financial Statements and Supplementary Data
This report includes the combined filing of DPL Inc. (DPL) and The Dayton Power and Light Company (DP&L).
DP&L is the principal subsidiary of DPL providing approximately 99% of DPL’s total consolidated revenue and
approximately 86% of DPL’s total consolidated asset base. Throughout this report the terms we, us, our and
ours are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise.
Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.
Historically, DPL and DP&L have filed separate SEC filings. Beginning with this report and in the future, DPL Inc.
and The Dayton Power and Light Company will file combined SEC reports on an interim and annual basis.
DPL Inc.
Consolidated Statements of Results of Operations
$ in millions except per share amounts
2006
2005
2004
For the years ended December 31,
$ 1,393.5
$ 1,284.9
$ 1,199.9
Revenues
Cost of revenues:
Fuel
Purchased power
Total cost of revenues
Gross margin
Operating expenses:
Operation and maintenance
Impairment of peaking stations
Depreciation and amortization
General taxes
Amortization of regulatory assets
Total operating expenses
Operating income
Investment income
Interest expense
Charge for early redemption of debt
Other income (deductions)
Earnings from continuing operations before income taxes
Income tax expense
Earnings from continuing operations
Earnings from discontinued operations, net of tax
Cumulative effect of accounting change, net of tax
349.1
159.0
508.1
885.4
265.4
71.0
151.8
108.6
7.6
604.4
281.0
17.8
(102.2)
–
(1.2)
195.4
69.8
125.6
14.0
–
336.9
133.3
470.2
814.7
219.0
–
147.3
107.3
2.0
475.6
339.1
50.9
(137.7)
(61.2)
13.5
204.6
79.9
124.7
52.9
(3.2)
$ 174.4
263.1
113.1
376.2
823.7
237.1
–
144.1
105.3
0.7
487.2
336.5
7.9
(160.2)
–
3.8
188.0
66.5
121.5
95.8
–
$ 217.3
Net Income
$ 139.6
Average number of common shares outstanding (millions)
Basic
Diluted
112.3
121.9
121.0
129.1
120.1
122.1
Earnings per share of common stock
Basic:
Earnings from continuing operations
Earnings from discontinued operations
Cumulative effect of accounting change
Total Basic
Diluted:
Earnings from continuing operations
Earnings from discontinued operations
Cumulative effect of accounting change
Total Diluted
$
1.12
0.12
–
$
1.03
0.44
(0.03)
$
1.01
0.80
–
$
1.24
$
1.44
$
1.81
$
1.03
0.12
–
$
1.15
$
0.97
0.41
(0.03)
$
1.35
$
1.00
0.78
–
$
1.78
Dividends paid per share of common stock
$
1.00
$
0.96
$
0.96
See Notes to Consolidated Financial Statements.
DPL Inc.
45
Net cash provided by operating activities
308.7
314.1
DPL Inc.
Consolidated Statements of Cash Flows
$ in millions
Cash flows from operating activities:
Net income
Less: income from discontinued operations
Income from continuing operations
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Impairment of peaking stations
Amortization of regulatory assets
Charge for early redemption of debt
Cumulative effect of accounting change, net of tax
Shareholder litigation
Deferred income taxes
Captive insurance provision
Gain on sale of other investments
Gain on sale of property
Changes in certain assets and liabilities:
Accounts receivable
Accounts payable
Accrued taxes payable
Accrued interest payable
Prepayments
Inventories
Deferred compensation assets
Deferred compensation obligations
Other
Cash flows from investing activities:
Capital expenditures
Purchases of short-term investments and securities
Sales of short-term investments and securities
Proceeds from the sale of property
Cash flow from discontinued operations
Net cash (used for) / provided by investing activities
Cash flows from financing activities:
Issuance of long-term debt, net
Exercise of stock options
Tax impact related to exercise of stock options
Retirement of long-term debt
Premiums paid for early redemption of debt
Retirement of preferred securities
Issuance of pollution control bonds
Pollution control bond proceeds held in trust
Withdrawal of restricted funds held in trust
Dividends paid on common stock
Purchase of Company’s common stock
Net cash (used for) financing activities
Cash and cash equivalents:
Net change
Balance at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Interest paid, net of amounts capitalized
Income taxes paid, net
Non-cash financing and investing activities:
Restricted funds held in trust (see Note 8 of Notes to
Consolidated Financial Statements)
See Notes to Consolidated Financial Statements.
46 DPL Inc.
For the years ended December 31,
2006
2005
2004
$ 139.6
(14.0)
125.6
$ 174.4
(52.9)
121.5
$ 21 7.3
(95.8)
121.5
151.8
71.0
7.6
–
–
–
(32.7)
(2.4)
(2.2)
–
(36.4)
41.8
(12.7)
4.9
5.4
(5.2)
0.4
2.3
(10.5)
147.3
–
2.0
61.2
3.2
–
(7.1)
(0.6)
(28.8)
–
(12.5)
(11.7)
15.0
(13.2)
2.2
(8.0)
4.4
7.4
31.8
(357.5)
(856.0)
984.0
–
–
(229.5)
–
7.8
1.9
–
–
–
100.0
(100.0)
89.9
(112.4)
(400.0)
(412.8)
(180.1)
(641.2)
642.5
–
868.4
689.6
211.2
22.7
–
(673.8)
(54.7)
(0.1)
–
–
–
(115.3)
–
(610.0)
144.1
–
0.7
–
–
(70.0)
22.2
(1.1)
(3.3)
(1.8)
7.1
(12.9)
(62.8)
(8.0)
0.4
(20.0)
12.6
5.2
(1.2)
132.7
(87.7)
(26.1)
89.9
2.3
203.9
182.3
17 4.7
–
–
(510.4)
–
–
–
–
–
(114.8)
–
(450.5)
(333.6)
595.8
$ 262.2
393.7
202.1
$ 595.8
(135.5)
337.6
$ 202.1
91.4
$
$ 113.6
$ 146.1
71.2
$
$ 162.1
$ 107.9
$
10.1
$
–
$
–
DPL Inc.
Consolidated Balance Sheets
$ in millions
Assets
Current assets:
Cash and cash equivalents
Short-term investments available for sale
Restricted funds held in trust
Accounts receivable, less provision for uncollectible
accounts of $1.4 and $1.0, respectively
Inventories, at average cost
Taxes applicable to subsequent years
Other current assets
Total current assets
Property:
Held and used:
Property, plant and equipment
Less: Accumulated depreciation and amortization
Total net property held and used
Assets held for sale (Note 14):
Property, plant and equipment
Less: Accumulated depreciation and amortization
Total net property held for sale
Other noncurrent assets:
Regulatory assets (Note 3)
Other assets
Total other noncurrent assets
Total Assets
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion – long-term debt
Accounts payable
Accrued taxes
Accrued interest
Other current liabilities
Total current liabilities
Noncurrent liabilities:
Long-term debt
Deferred taxes
Unamortized investment tax credit
Insurance and claims costs
Other deferred credits
Total noncurrent liabilities
At December 31,
2006
2005
$
262.2
–
10.1
225.0
85.4
48.0
37.7
668.4
$
595.8
125.8
–
194.9
80.2
45.9
20.2
1,062.8
4,718.5
(2,159.2)
2,559.3
4,667.7
(2,094.8)
2,572.9
283.5
(132.3)
151.2
148.6
84.7
233.3
–
–
–
83.8
72.2
156.0
$ 3,612.2
$ 3,791.7
$
225.9
169.4
155.2
35.2
38.3
624.0
1,551.8
355.2
43.6
21.9
280.7
2,253.2
$
0.9
130.2
178.5
28.9
31.1
369.6
1,677.1
327.0
46.4
24.3
286.3
2,361.1
Cumulative preferred stock not subject to mandatory redemption
22.9
22.9
Commitments and contingencies (Note 15)
Common shareholders’ equity:
Common stock, at par value of $0.01 per share:
Shares authorized
Shares issued
Shares outstanding
December 2006 December 2005
250,000,000
163,724,211
127,526,404
250,000,000
163,724,211
113,018,972
Other paid-in capital, net of treasury stock
Warrants
Common stock held by employee plans
Accumulated other comprehensive loss
Retained earnings
Total common shareholders’ equity
1.1
–
50.0
(69.0)
(6.5)
736.5
712.1
1.3
25.1
50.0
(86.1)
(14.2)
1,062.0
1,038.1
Total Liabilities and Shareholders’ Equity
$ 3,612.2
$ 3,791.7
See Notes to Consolidated Financial Statements.
DPL Inc.
47
DPL Inc.
Consolidated Statements of Shareholders’ Equity
$ in millions
Beginning balance
2004
Net income
Net change in unrealized gains
on financial instruments, net of
reclassification adjustments
Net change in unrealized gains on foreign
currency translation adjustments
Net change in deferred gains on
cash flow hedges
Minimum pension liability
Deferred income taxes related to
unrealized gains (losses)
Total comprehensive income
Common stock dividends (b)
Employee / Director stock plans
Other
Common Stock
(a)
Outstanding
Shares Amount
Other
Paid-in
Capital Warrants
Common
Stock Held
by Employee
Plans
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Total
126,501,404
$ 1.3
$ 12.0
$ 50.0
$ (84.4)
$ 57.7 $ 865.7 $ 902.3
217.3
9.3
6.2
(1.5)
(0.4)
(5.8)
4.1
(0.3)
(1.3)
(86.2 )
0.4
(0.1)
225.1
(86.2 )
3.2
(0.4)
Ending balance
1 26,501,404
$ 1.3
$ 15.8
$ 50.0
$ (85.7)
$ 65.5 $ 997.1 $ 1,044.0
2005
Net income
Net change in unrealized (losses)
on financial instruments, net of
reclassification adjustments
Net change in unrealized (losses)
on foreign currency translation
adjustments
Net change in deferred gains on
cash flow hedges
Minimum pension liability
Deferred income taxes related to
unrealized gains (losses)
Total comprehensive income
Common stock dividends (b)
Treasury shares purchased (c)
Treasury stock reissued
Employee / Director stock plans
Other
174.4
(15.3)
(46.3)
(3.4)
(63.0)
48.2
–
1,025,000
(10.6)
16.9
3.0
(115.3)
–
5.8
94.6
(115.3)
(10.6)
22.7
2.6
0.1
(0.4)
0.1
Ending balance
127,526,404
$ 1.3
$ 25.1
$ 50.0
$ (86.1)
$ (14.2) $ 1,062.0 $ 1,038.1
2006
Net income
Net change in unrealized gains
on financial instruments, net of
reclassification adjustments
Net change in deferred gains on
cash flow hedges
Minimum pension liability
Deferred income taxes related to
unrealized gains (losses)
Total comprehensive income
Common stock dividends (b)
Treasury shares purchased (c)
Treasury stock reissued
Tax effects to equity
Employee / Director stock plans
Other
FAS 158 adjustment
139.6
1.6
0.7
11.8
(29.9)
(14,862,432)
355,000
(0.1)
(0.1)
(389.3)
360.4
1.8
1.8
0.2
(112.4)
(352.6)
(0.1)
123.8
(112.4)
(389.4)
7.8
1.8
18.8
0.1
23.5
17.1
23.5
Ending balance
113,018,972
$ 1.1
$ (0.0) $ 50.0
$ (69.0)
$
(6.5) $ 736.5 $ 712.1
(a) $0.01 par value, 250,000,000 shares authorized.
(b) Common stock dividends were $0.96 per share in 2004 and 2005, respectively, and $1.00 in 2006.
(c) Number of shares outstanding at December 31, 2005 were not affected by the December 30, 2005 transaction to purchase 406,000 shares
as the share repurchase was settled in early January 2006. DPL completed the share repurchase program in August 2006.
See Notes to Consolidated Financial Statements.
48 DPL Inc.
The Dayton Power and Light Company
Consolidated Statements of Results of Operations
$ in millions
Revenues
Cost of revenues:
Fuel
Purchased power
Total cost of revenues
Gross margin
Operating expenses:
Operation and maintenance
Depreciation and amortization
General taxes
Amortization of regulatory assets
Total operating expenses
Operating income
Investment income
Interest expense
Charge for early redemption of debt
Other income (deductions)
For the years ended December 31,
2006
2005
2004
$ 1,385.2
$ 1,276.9
$ 1,192.2
335.2
171.9
507.1
878.1
231.7
130.0
106.3
7.6
475.6
402.5
6.7
(23.4)
–
(1.2)
317.9
147.1
465.0
257.0
116.4
373.4
811.9
818.8
198.3
123.9
105.1
2.0
429.3
224.4
121.1
103.2
0.7
449.4
382.6
369.4
6.1
(38.1)
(4.1)
6.6
353.1
138.1
215.0
(3.2)
5.0
(43.5)
–
(1.1)
329.8
120.8
209.0
–
Earnings before Income Tax and Cumulative Effect of Accounting Change
384.6
Income tax expense
Earnings before Cumulative Effect of Accounting Change
Cumulative effect of accounting change, net of tax
142.2
242.4
–
Net Income
Preferred dividends
Earnings on common stock
See Notes to Consolidated Financial Statements.
$ 242.4
$ 211.8
$ 209.0
0.8
0.9
0.9
$ 241.6
$ 210.9
$ 208.1
DPL Inc.
49
The Dayton Power and Light Company
Consolidated Statements of Cash Flows
$ in millions
Cash flows from operating activities:
Net income
Adjustments:
Depreciation and amortization
Amortization of regulatory assets
Deferred income taxes
Charge for early redemption of debt
Cumulative effect of accounting change, net of tax
Gain on sale of property
Changes in certain assets and liabilities:
Accounts receivable
Accounts payable
Net intercompany receivables from parent
Accrued taxes payable
Accrued interest payable
Prepayments
Inventories
Deferred compensation assets
Deferred compensation obligations
Other
For the years ended December 31,
2006
2005
2004
$ 242.4
$ 211.8
$ 209.0
130.0
7.6
(16.3)
–
–
–
(29.0)
43.3
0.5
0.5
1.3
5.5
(5.2)
2.5
0.1
(17.5)
123.9
2.0
(13.3)
4.1
3.2
–
(17.1)
6.5
(0.1)
31.5
(0.9)
2.3
(7.9)
0.7
6.7
13.4
121.1
0.7
(16.2)
–
–
(1.8)
6.6
11.5
(0.2)
58.4
0.5
0.6
(20.2)
8.8
5.2
(2.8)
Net cash provided by operating activities
365.7
366.8
381.2
Cash flows from investing activities:
Capital expenditures
Proceeds from the sale of property
Net cash (used for) investing activities
Cash flows from financing activities:
Issuance of long-term debt, net
Issuance of pollution control bonds
Pollution control bond proceeds held in trust
Withdrawal of restricted funds held in trust
Retirement of long-term debt
Dividends paid on preferred stock
Dividends paid on common stock
Net cash (used for) financing activities
Cash and cash equivalents:
Net change
Balance at beginning of period
(354.8)
–
(354.8)
–
100.0
(100.0)
89.9
–
(0.9)
(100.0)
(11.0)
(0.1)
46.2
Cash and cash equivalents at end of period
$
46.1
$
(178.4)
–
(178.4)
210.4
–
–
–
(218.9)
(0.9)
(150.0)
(159.4)
29.0
17.2
46.2
(82.2)
2.3
(79.9)
–
–
–
–
(0.4)
(0.9)
(300.0)
(301.3)
–
17.2
$ 17.2
$ 39.5
$ 79.9
$
36.5
$ 119.0
–
–
Supplemental cash flow information:
Interest paid, net of amounts capitalized
Income taxes paid, net
Non-cash financing and investing activities:
Restricted funds held in trust
See Notes to Consolidated Financial Statements.
77.9
$
$ 158.1
$
10.1
50 DPL Inc.
The Dayton Power and Light Company
Consolidated Balance Sheets
$ in millions
Assets
Current assets:
Cash and cash equivalents
Restricted funds held in trust
Accounts receivable, less provision for uncollectible
accounts of $1.4 and $1.0, respectively
Inventories, at average cost
Taxes applicable to subsequent years
Other current assets
Total current assets
Property:
Property, plant and equipment
Less: Accumulated depreciation and amortization
Net property
Other noncurrent assets:
Regulatory assets
Other assets
Total other noncurrent assets
Total Assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
Accrued taxes
Accrued interest
Other current liabilities
Total current liabilities
Noncurrent liabilities:
Long-term debt
Deferred taxes
Unamortized investment tax credit
Other deferred credits
Total noncurrent liabilities
At December 31,
2006
2005
$
46.1
10.1
$
46.2
–
205.6
83.0
48.0
38.2
431.0
182.7
77.7
45.9
19.3
371.8
4,450.6
(2,079.0)
2,371.6
4,118.0
(1,973.3)
2,144.7
148.6
139.1
287.7
83.8
138.3
222.1
$ 3,090.3
$ 2,738.6
166.2
159.6
12.6
36.3
374.7
785.2
360.2
43.6
272.5
116.2
167.7
9.8
28.4
322.1
685.9
323.2
46.4
258.7
1,461.5
1,314.2
Cumulative preferred stock not subject to mandatory redemption
22.9
22.9
Commitments and contingencies (Note 15)
Common shareholders’ equity:
Common stock, at par value of $0.01 per share:
Other paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total common shareholders’ equity
Total Liabilities and Shareholders’ Equity
See Notes to Consolidated Financial Statements.
0.4
783.7
15.1
432.0
0.4
783.4
5.1
290.5
1,231.2
1,079.4
$ 3,090.3
$ 2,738.6
DPL Inc.
51
The Dayton Power and Light Company
Consolidated Statements of Shareholders’ Equity
$ in millions
Beginning balance
2004
Net income
Net change in unrealized gains
(losses) on financial instruments,
net of reclassification adjustments
Net change in deferred gains on
cash flow hedges
Minimum pension liability
Deferred income taxes related
unrealized gains (losses)
Total comprehensive income
Common stock dividends
Preferred stock dividend
Employee / Director stock plans
Other
Common Stock (a)
Outstanding
Shares
Amount
Other
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Total
41,172,173
$ 0.4
$ 780.5
$ 38.2
$ 321.7
$ 1,140.8
209.0
12.6
(1.5)
(0.4)
(5.8)
2.3
0.1
(300.0)
(0.9)
( 0.1)
213.9
(300.0)
(0.9)
2.3
–
Ending balance
41,172,173
$ 0.4
$ 782.9
$ 43.1
$ 229.7
$ 1,056.1
2005
Net income
Net change in unrealized gains
(losses) on financial instruments,
net of reclassification adjustments
Net change in deferred gains on
cash flow hedges
Minimum pension liability
Deferred income taxes related
unrealized gains (losses)
Total comprehensive income
Common stock dividends
Preferred stock dividend
Employee / Director stock plans
Other
211.8
1.9
(3.4)
(63.0)
26.4
(150.0)
(0.9)
0.1
(0.1)
173.7
(150.0)
(0.9)
0.5
–
0.5
Ending balance
41,172,173
$ 0.4
$ 783.4
$ 5.1
$ 290.5
$ 1,079.4
2006
Net income
Net change in unrealized gains
(losses) on financial instruments,
net of reclassification adjustments
Net change in deferred gains on
cash flow hedges
Minimum pension liability
Deferred income taxes related
unrealized gains (losses)
Total comprehensive income
Common stock dividends
Preferred stock dividends
Tax effects to equity
Employee / Director stock plans
Other
FAS 158 adjustment
3.9
0.7
11.8
(30.2)
23.8
1.8
(1.6)
0.1
242.4
(100.0)
(0.8)
(0.1)
228.6
(100.0)
(0.8)
1.8
(1.6)
–
23.8
Ending balance
41,172,173
$ 0.4
$ 783.7
$ 15.1
$ 432.0
$ 1,231.2
(a) 50,000,000 shares authorized.
See Notes to Consolidated Financial Statements.
52 DPL Inc.
Notes to Consolidated Financial Statements
This report includes the combined filing of DPL Inc.
(DPL) and The Dayton Power and Light Company
(DP&L). DP&L is the principal subsidiary of DPL pro-
viding approximately 99% of DPL’s total consolidated
revenue and approximately 86% of DPL’s total con-
solidated asset base. Throughout this report the terms
we, us, our and ours are used to refer to both DPL and
DP&L, respectively and altogether, unless the context
indicates otherwise. Discussions or areas of this report
that apply only to DPL or DP&L will clearly be noted
in the section. Historically, DPL and DP&L have filed
separate SEC filings. Beginning with this report and in
the future, DPL Inc. and The Dayton Power and Light
Company will file combined SEC reports on an interim
and annual basis.
DPL’s results of operations, financial position and
cash flows, includes the consolidated results of its
subsidiaries, including its subsidiary DP&L and all of
its consolidated subsidiaries. All material intercompany
accounts and transactions have been eliminated in
consolidation. Some of the Notes presented in this
report are only applicable to DPL or DP&L as indicated.
The other Notes apply to both registrants and the finan-
cial information presented is segregated by registrant.
1 Summary of Significant Accounting
Policies and Overview
Description of Business
DPL is a diversified regional energy company orga-
nized in 1985 under the laws of Ohio. DPL’s principal
subsidiary is The Dayton Power and Light Company
(DP&L). DP&L is a public utility incorporated in 1911
under the laws of Ohio. DP&L sells electricity to
residential, commercial, industrial and governmen-
tal customers in a 6,000 square mile area of West
Central Ohio. Electricity for DP&L’s 24 county service
area is primarily generated at eight coal-fired power
plants and is distributed to more than 500,000 retail
customers. DP&L also purchases retail peak load
requirements from DPL Energy LLC (DPLE, one of our
wholly-owned subsidiaries). Principal industries served
include automotive, food processing, paper, plastic
manufacturing, and defense. DP&L’s sales reflect the
general economic conditions and seasonal weather
patterns of the area. DP&L sells any excess energy
and capacity into the wholesale market.
DPL’s significant subsidiaries (all of which
are wholly-owned) include DPLE, which engages in
the operation of peaking generating facilities; DPL
Energy Resources, Inc. (DPLER), which sells retail
electric energy under contract to major industrial and
commercial customers in West Central Ohio; MVE, Inc.,
which was primarily responsible for the manage-
ment of our financial asset portfolio; and Miami Valley
Insurance Company (MVIC), our captive insurance
company that provides insurance sources to us and
our subsidiaries. DP&L has one significant subsidiary,
DPL Finance Company, Inc., which is wholly-owned
and provides financing to DPL, DP&L and other
affiliated companies.
DPL and DP&L conduct their principal business
in one business segment – Electric.
Basis of Consolidation
We prepare consolidated financial statements in accor-
dance with generally accepted accounting principles
(GAAP) in the United States of America. The consoli-
dated financial statements include the accounts of
DPL and DP&L and their majority-owned subsidiaries.
Investments that are not majority owned are accounted
for using the equity method when our investment allows
us the ability to exert significant influence, as defined
by GAAP. Undivided interests in jointly-owned genera-
tion facilities are consolidated on a pro-rata basis. All
material intercompany accounts and transactions are
eliminated in consolidation.
Estimates, Judgments and Reclassifications
The preparation of financial statements in conformity
with GAAP requires us to make estimates and judg-
ments that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and
the revenue and expenses of the period reported.
Different estimates could have a material effect on our
financial results. Judgments and uncertainties affect-
ing the application of these policies and estimates may
result in materially different amounts being reported
under different conditions or circumstances. Significant
items subject to such estimates and judgments include
the carrying value of property, plant and equipment;
unbilled revenues; the valuation of derivative instru-
ments; the valuation of insurance and claims costs; val-
uation allowances for receivables and deferred income
taxes; regulatory assets and liabilities; reserves record-
ed for income tax exposures; litigation; and assets and
liabilities related to employee benefits. Actual results
may differ from those estimates. Certain amounts from
prior periods have been reclassified to conform to
the current reporting presentation. In 2005, DPL has
separately disclosed the earnings from discontinued
operations, net of income taxes, which in prior periods
were reported with elements of continued operations.
In 2005, DPL also separately disclosed the investing
portions of the cash flows attributable to its discontin-
DPL Inc.
53
ued operations (there was no impact on the operating
or investing portions of the cash flows), which in
prior periods were reported on a combined basis as
a single amount.
Revenues
We record revenue for services provided but not yet
billed to more closely match revenues with expenses.
Accounts receivable on DPL’s Consolidated Balance
Sheets include unbilled revenue of $68.7 million and
$63.6 million in 2006 and 2005, respectively. Accounts
receivable on DP&L’s Consolidated Balance Sheets
include unbilled revenue of $61.0 million and $57.5
million in 2006 and 2005, respectively. Also included in
revenues are amounts charged to customers through
a surcharge for recovery of uncollected amounts from
certain eligible low-income households. These charges
for both DPL and DP&L were $11.9 million for 2006,
$6.2 million for 2005, and $8.3 million for 2004.
Allowance for Uncollectible Accounts
We establish provisions for uncollectible accounts
using both historical average credit loss percentages
of accounts receivable balances to project future loss-
es and specific provisions for known credit issues.
Property, Plant and Equipment
We record our ownership share of our undivided inter-
est in jointly-held plants as an asset in property, plant
and equipment. Property, plant and equipment are stat-
ed at cost. For regulated property, cost includes direct
labor and material, allocable overhead costs and an
allowance for funds used during construction (AFUDC).
AFUDC represents the cost of borrowed funds and
equity used to finance regulated construction proj-
ects. Capitalization of AFUDC ceases at either project
completion or as of the date specified by regulators.
AFUDC capitalized related to borrowed funds was $50
thousand in 2006, and zero in 2005 and 2004. AFUDC
capitalized for equity funds was $0.4 million in 2006,
zero in 2005, and $0.5 million in 2004.
For unregulated property, cost includes direct
labor, material and overhead costs and interest capi-
talized during construction using FASB Statement of
Accounting Standard No. 34, Capitalization of Interest
Cost. Capitalized interest was $12.9 million in 2006,
$2.6 million in 2005 and $1.8 million in 2004.
For substantially all depreciable property, when a
unit of property is retired, the original cost of that prop-
erty less any salvage value is charged to Accumulated
Depreciation and Amortization.
Property is evaluated for impairment when events
or changes in circumstances indicate that its carrying
amount may not be recoverable.
Depreciation
Depreciation expense is calculated using the straight-
line method, which depreciates the cost of property
over its estimated useful life. For DPL’s generation,
transmission, and distribution assets, straight-line
depreciation is applied on an average annual compos-
ite basis using group rates that approximated 3.3% in
2006, 3.3% in 2005 and 3.4% in 2004. DPL’s deprecia-
tion expense was $151.8 million in 2006, $147.3 million
in 2005 and $144.1 million in 2004.
The following is a summary of DPL’s property, plant
and equipment with corresponding composite depre-
ciation rates at December 31, 2006 and 2005:
DPL
$ in millions
Regulated:
Transmission
Distribution
General
Non-depreciable
Total regulated
Unregulated:
Production (a)
Other
Non-depreciable
Total unregulated
Total property in service
Construction work in process
Total property, plant and equipment
2006
Composite Rate
2005
Composite Rate
$ 343.5
1,050.8
66.0
54.2
$ 1,514.5
$ 3,048.0
44.9
18.6
$ 3,111.5
$ 4,626.0
376.0
$ 5,002.0
2.4%
3.8%
7.5%
0.0%
3.2%
7.0%
0.0%
3.3%
0.0%
$ 341.8
968.9
63.1
54.0
$ 1,427.8
$ 3,008.3
45.2
18.4
$ 3,071.9
$ 4,499.7
168.0
$ 4,667.7
2.6%
3.4%
9.5%
0.0%
3.2%
7.6%
0.0%
3.3%
0.0%
(a) During 2006, DPL entered into agreements to sell 630 MW of its peaking capacity relating to the Darby and Greenville stations
of which $283.5 million of the assets presented in this table are held for sale at December 31, 2006.
54 DPL Inc.
For DP&L’s generation, transmission, and distribution assets, straight-line depreciation is applied on an aver-
age annual composite basis using group rates that approximated 3.2% in 2006, 3.2% in 2005, and 3.3% in 2004.
DP&L’s depreciation expense was $130.0 million in 2006, $123.9 million in 2005, and $121.1 million in 2004.
The following is a summary of DP&L’s property, plant and equipment with corresponding composite depreciation
rates at December 31, 2006 and 2005:
DP&L
$ in millions
Regulated:
Transmission
Distribution
General
Non-depreciable
Total regulated
Unregulated:
Production
Non-depreciable
Total unregulated
Total property in service
Construction work in process
Total property, plant and equipment
2006
Composite Rate
2005
Composite Rate
$ 343.5
1,050.8
66.0
54.2
$ 1,514.5
$ 2,545.6
15.3
$ 2,560.9
$ 4,075.4
375.2
$ 4,450.6
2.4%
3.8%
7.5%
0.0%
3.0%
0.0%
3.2%
0.0%
$ 341.8
968.9
63.1
54.0
$ 1,427.8
$ 2,509.8
15.3
$ 2,525.1
$ 3,952.9
165.1
$ 4,118.0
2.6%
3.4%
9.5%
0.0%
3.0%
0.0%
3.2%
0.0%
Asset Retirement Obligations
We adopted the provisions of the Financial Accounting
Standards Board (FASB) Statement of Financial
Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations” (SFAS 143) during 2003. SFAS
143 requires legal obligations associated with the
retirement of long-lived assets to be recognized at their
fair value at the time those obligations are incurred.
Upon initial recognition of a legal liability, costs are
capitalized as part of the related long-lived asset and
allocated to expense over the useful life of the asset.
SFAS 143 also requires that components of previously
recorded depreciation related to the cost of removal of
assets upon retirement, whether legal asset retirement
obligations or not, must be removed from a company’s
accumulated depreciation reserve. Our legal obliga-
tions associated with the retirement of our long-lived
assets under SFAS 143 consisted primarily of river
intake and discharge structures, coal unloading facili-
ties, loading docks, ice breakers and ash disposal
facilities. Estimating the amount and timing of future
expenditures of this type requires significant judgment.
Management routinely updates this estimating as addi-
tional information becomes available.
In March of 2005, the FASB issued FASB
Interpretation No. 47 (FIN No. 47), “Accounting for
Conditional Asset Retirement Obligations, an interpreta-
tion of FASB Statement No. 143.” We implemented FIN
No. 47 in the fourth quarter of 2005 effective January 1,
2005 for certain asset retirement obligations, primarily
the removal of asbestos, at some of our generation sta-
tions. Application of FIN No. 47 resulted in an increase
in our net property, plant and equipment of $1.8 million
and an increase in our asset retirement obligation of
$7.2 million. The difference of $5.3 million represents
the before tax ($3.2 million after tax) cumulative effect
of the adoption of FIN No. 47, as of January 1, 2005.
The before tax impact on 2005 net income was $0.9
million ($0.5 million after tax) which consisted of $0.6
million of accretion expense and $0.3 million deprecia-
tion expense.
If FIN No. 47 had been applied as of January
1, 2003, our asset retirement obligation would have
increased by $9.4 million and $10.3 million at January
1, 2004 and December 31, 2004, respectively. Our
asset retirement obligation was $13.2 million at
December 31, 2005, which consisted of $5.4 million
related to the adoption of SFAS 143 in 2003 and $7.8
million related to the adoption of FIN No. 47 in 2005.
Our asset retirement obligation was $11.7 million at
December 31, 2006, which consisted of $5.4 million
related to the adoption of SFAS 143 in 2003 and $7.8
million related to the adoption of FIN No. 47 in 2005.
Changes in the Liability for Asset Obligations
$ in millions
Balance at December 31, 2005
Accretion expense
Additions
Settlements
Estimated cashflow revisions
2006
2005
$ 13.2 $ 5.1
0.9
7.2
–
–
0.3
–
(0.4)
(1.4)
Balance at December 31, 2006
$ 11.7 $ 13.2
DPL Inc.
55
We continue to record cost of removal for our regu-
lated transmission and distribution assets through our
depreciation rates and recover those amounts in rates
charged to our customers. There are no known legal
asset retirement obligations associated with these
assets. We have recorded $86.2 million and $81.7 mil-
lion in estimated costs of removal at December 31,
2006 and 2005, respectively as regulatory liabilities for
our transmission and distribution property. See Note 3
of Notes to Consolidated Financial Statements.
include miscellaneous accounts receivables such as
refundable Franchise taxes. The amount is presented
net of a provision for uncollectible accounts on the
accompanying consolidated balance sheets.
Inventory
Inventories, carried at average cost, include coal,
emission allowances, limestone, oil and gas used for
electric generation, and materials and supplies for
utility operations.
Changes in the Liability for Asset Obligations
Emission Allowances
$ in millions
Balance at December 31, 2005
Accretion expense
Additions
Settlements
Estimated cashflow revisions
2006
2005
$ 81.7
–
7.8
(3.3)
–
$ 77.5
–
6.9
–
2.7
Balance at December 31, 2006
$ (86.2)
$ (81.7)
Regulatory Accounting
We apply the provisions of FASB Statement of Financial
Accounting Standards No. 71, (SFAS 71) “Accounting
for the Effects of Certain Types of Regulation” to the
transmission and distribution portion of our business. In
accordance with SFAS 71, regulatory assets and liabili-
ties are recorded in the Consolidated Balance Sheets.
Regulatory assets are the deferral of costs expected
to be recovered in future customer rates and regulatory
liabilities represent current recovery of expected
future costs.
We evaluate our regulatory assets each period
and believe recovery of these assets is probable. We
have received or requested a return on certain regula-
tory assets for which we are currently recovering or
seeking recovery through rates. See Note 3 of Notes
to Consolidated Financial Statements.
We evaluate our regulatory assets each period
and believe recovery of these is probable. We have
received or requested a return on certain regulatory
assets for which we are currently recovering or
seeking recovery through rates. If we were required to
terminate application of SFAS 71 for all of our regulated
operations, we would have to record the amounts of
all regulatory assets and liabilities in the Consolidated
Statement of Results of Operations at that time. See
Note 3 of Notes to Consolidated Financial Statements.
We account for our emission allowances as inventory,
and record emission allowance inventory at histori-
cal cost. We calculate the weighted average cost by
each vintage (year) for which emission allowances can
be used, and charge to fuel costs the weighted aver-
age cost of emission allowances used each quarter.
Emission allowances are added to inventory when the
EPA issues us emission allowances at no cost or when
we purchase emission allowances. Purchased emission
allowances are recorded in inventory at the purchase
price, including any related transaction fees. Emission
allowances are deducted from inventory when used
in the production of electricity or when we sell excess
emission allowances. Emission allowances used during
the production of electricity are charged to fuel costs at
the weighted average cost for that vintage. The excess/
(shortfall) of the sales price over the weighted average
cost for any emission allowances sold, less related
fees, is recorded as a gain / (loss) in other income
(deductions). Emission allowances received as part of
an exchange of emission allowances are recorded at
the carrying cost of the emission allowances given up,
with no gain or loss recorded.
Repairs and Maintenance
Costs associated with all planned work and mainte-
nance activities, primarily power plant outages, are
recognized at the time the work is performed. These
costs, which include labor, materials and supplies, and
outside services required to maintain equipment and
facilities, are either capitalized or expensed based on
defined units of property as required by the Federal
Energy Regulatory Commission (FERC).
Income Taxes
Accounts Receivable
Our accounts receivable includes utility customer
receivables, amounts due from our partners for jointly-
owned property, wholesale and subsidiary customer
receivables, and electric unbilled revenue. We also
We apply the provisions of FASB Statement of Financial
Accounting Standards No. 109, “Accounting for Income
Taxes” (SFAS 109). SFAS 109 requires an asset and
liability approach for financial accounting and reporting
of income taxes with tax effects of differences, based
56 DPL Inc.
on currently enacted income tax rates between the
financial reporting and tax basis of accounting reported
as Deferred Taxes in the Consolidated Balance Sheets.
Deferred tax assets are recognized for deductible
temporary differences. Valuation reserves are pro–
vided unless it is more likely than not that the asset
will be realized.
are recognized currently in earnings. Financial instru-
ments classified as held-to-maturity are carried at
amortized cost. The valuation of public equity security
investments is based upon market quotations.
The cost basis for public equity security and fixed
maturity investments is average cost and amortized
cost, respectively.
Investment tax credits, which have been used
to reduce federal income taxes payable, have been
deferred for financial reporting purposes. These
deferred investment tax credits are amortized over the
useful lives of the property to which they are related.
For rate-regulated operations, 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.
We file a consolidated U.S. federal income
tax return in conjunction with our subsidiaries.
The consolidated tax liability is allocated to each
subsidiary as specified in our tax allocation
agreement which provides a consistent, systematic
and rational approach. See Note 4 of Notes to
Consolidated Financial Statements.
Captive Insurance Subsidiary
In addition to insurance provided through third-party
providers, a wholly-owned captive subsidiary of DPL
provides insurance coverage solely to us and to our
subsidiaries. Insurance and Claims Costs on the
Consolidated Balance Sheets includes insurance
reserves of approximately $22 million and $24 million
for 2006 and 2005, respectively, based on actuarial
methods and loss experience data. Such reserves are
actuarially determined, in the aggregate, based on
a reasonable estimation of insured events occurring.
There is uncertainty associated with the loss estimates,
and actual results may differ from the estimates.
Modification of these loss estimates based on experi-
ence and changed circumstances is reflected in the
period in which the estimate is re-evaluated.
Cash and Cash Equivalents
Financial Derivatives
Cash and cash equivalents are stated at cost, which
approximates fair value. All highly liquid short-term
investments with original maturities of three months
or less are considered cash equivalents. DPL’s cash
and cash equivalents were $262.2 million at December
31, 2006 and $595.8 million at December 31, 2005.
DP&L’s cash and cash equivalents were $46.1 million
at December 31, 2006 and $46.2 million at December
31, 2005. At December 31, 2006, we had $10.1 million
restricted funds held in trust relating to the issuance
of the $100 million pollution control bonds. These
funds will be used to fund the pollution control capital
expenditures.
Financial Instruments
We apply the provision of FASB Statement of Financial
Accounting Standards No. 115, “Accounting for Certain
Investments in Debt and Equity Securities” (SFAS 115),
for our investments in debt and equity financial instru-
ments of publicly traded entities and classify the
securities into different categories: held-to-maturity
and available-for-sale. Available-for-sale securities are
carried at fair value and unrealized gains and losses
on those securities, net of deferred income taxes,
are presented as a separate component of sharehold-
ers’ equity. Other-than-temporary declines in value
We follow FASB Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activity” (SFAS 133), as
amended. SFAS 133 requires that all derivatives
be recognized as either assets or liabilities in the
Consolidated Balance Sheets and be measured at fair
value, and changes in the fair value be recorded in
earnings, unless they are designated as a cash
flow hedge of a forecasted transaction or qualify for
the normal purchases and sales exception as dis-
cussed below.
The FASB issued Statement of Financial
Accounting Standards No. 149, “Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities” (SFAS 149). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instru-
ments, including those embedded in other contracts,
and for hedging activities and is effective for contracts
entered into or modified after June 30, 2003.
We use forward contracts and options to reduce
our exposure to changes in energy and commodity
prices and as a hedge against the risk of changes in
cash flows associated with expected electricity pur-
chases. These purchases are required to meet full load
requirements during times of peak demand or during
planned and unplanned generation facility outages. We
DPL Inc.
57
also hold forward sales contracts that hedge against
the risk of changes in cash flows associated with
power sales during periods of projected generation
facility availability. The FASB concluded that electric
utilities could apply the normal purchases and sales
exception for option-type contracts and forward con-
tracts in electricity subject to specific criteria for the
power buyers and sellers under capacity contracts.
Accordingly, we apply the normal purchases and sales
exception as defined in SFAS 133 and account for
these contracts upon settlement.
Pension and Postretirement Benefits
We account and disclose pension and postretire-
ment benefits in accordance with the provisions of
Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pensions
and other Postretirement Plans, an amendment to
FASB Statements 87, 88, 106 and 132R.” This Standard
requires the use of assumptions, such as the
discount rate and long-term rate of return on assets,
in determining the obligations, annual cost and
funding requirements of the plans.
Legal, Environmental and Regulatory
Contingencies
In the normal course of business, we are subject
to various lawsuits, actions, proceedings, claims
and other matters asserted under laws and regula-
tions. We believe the amounts provided in our con-
solidated financial statements, as prescribed by
GAAP, adequately reflect probable and estimable
contingencies. We record liabilities for probable esti-
mated loss in accordance with Statement of Financial
Accounting Standards No. 5 (SFAS 5), “Accounting
for Contingencies.” To the extent a probable loss can
only be estimated by reference to a range of equally
probable outcomes, and no amount within the range
appears to be a better estimate than any other amount,
we accrue for the low end of the range. However, there
can be no assurances that the actual amounts required
to satisfy alleged liabilities from various legal proceed-
ings, claims, and other matters, and to comply with
applicable laws and regulations, will not exceed the
amounts reflected in our consolidated financial state-
ments or will not have a material adverse effect on
our consolidated results of operations, financial condi-
tion or cash flows. As such, costs, if any, that may be
incurred in excess of those amounts provided as of
December 31, 2006, cannot currently be reasonably
determined.
Recently Issued Accounting Standards
Stock-Based Compensation
In December 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standard No. 123 (revised 2004), “Share-Based
Payment” (SFAS 123R). SFAS 123R replaces SFAS
123, “Accounting for Stock-Based Compensation,”
and supersedes Accounting Principles Board (APB)
Opinion No. 25 (Opinion 25), “Accounting for Stock
Issued to Employees.” SFAS 123R requires a pub-
lic entity to measure the cost of employee services
received and paid with equity instruments to be based
on the fair-value of such equity on the grant date. This
cost is recognized in results of operations over the
period in which employees are required to provide
service. Liabilities initially incurred are based on the
fair-value of equity instruments and are to be re-mea-
sured at each subsequent reporting date until the
liability is ultimately settled. The fair-value for employee
share options and other similar instruments at the grant
date are estimated using option-pricing models and
any excess tax benefits are recognized as an addi-
tion to paid-in capital. Cash retained from the excess
tax benefits is presented in the statement of cash
flows as financing cash inflows. The provisions of this
Statement became effective as of January 1, 2006.
Our December 31, 2006 year-to-date pre-tax results of
operations were increased by approximately $0.7 mil-
lion as a result of the adoption of SFAS 123R. See Note
9 of Notes to Consolidated Financial Statements.
How Taxes Collected from Customers and
Remitted to Governmental Authorities Should be
Presented in the Income Statement
In June 2006, the FASB ratified the consensus of
Emerging Issues Task Force (EITF) Issue No. 06-3,
“How Taxes Collected from Customers and Remitted
to Governmental Authorities Should be Presented
in the Income Statement (That Is, Gross versus Net
Presentation)” (EITF 06-3). EITF 06-3 indicates that the
income statement presentation on either a gross basis
or a net basis of the taxes within the scope of the issue
is an accounting policy decision. The consensus is this
issue should be applied to interim and annual reporting
periods beginning after December 15, 2006. We are
in the process of evaluating EITF 06-3 and have not
determined the impact to our overall results of opera-
tions, financial position or cash flows.
Accounting for Uncertainty in Income Taxes
In July 2006, the FASB issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (FIN 48),
58 DPL Inc.
effective for fiscal years beginning after December 15,
2006. FIN 48 requires a two-step approach to deter-
mine how to recognize tax benefits in the financial
statements where recognition and measurement of a
tax benefit must be evaluated separately. A tax benefit
will be recognized only if it meets a “more-likely-than-
not” recognition threshold. For tax positions that meet
this threshold, the tax benefit recognized is based on
the largest amount of tax benefit that is greater than
50 percent likely of being realized upon ultimate settle-
ment with the taxing authority. We have evaluated the
requirements of FIN 48 and the adoption of this inter-
pretation and we do not believe at this time that the
impact will be significant to our overall results of opera-
tions, cash flows or financial position.
Accounting for Fair Value Measurements
In September 2006, the FASB issued Statement of
Financial Accounting Standards No. 157, “Fair Value
Measurements,” (SFAS 157) effective for fiscal years
beginning after November 15, 2007. This Standard
applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. The
Standard clarifies the principle that fair value should be
based on the assumptions market participants would
use when pricing the asset or liability. In support of this
principle, the Standard establishes a fair value hier-
archy that prioritizes the information used to develop
those standards. The fair value hierarchy gives the
highest priority to quoted prices in active markets and
the lowest priority to unobservable data, for example,
the reporting entity’s own data. Under the Standard, fair
value measurements would be separately disclosed
by level within the fair value hierarchy. The Standard
does not expand the use of fair value in any new cir-
cumstances. We are currently evaluating the impact of
adopting SFAS 157, and have not yet determined the
significance of this new rule to our overall results of
operations, financial position or cash flows.
Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans
In September 2006, the FASB issued Financial
Accounting Standards No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88,
106 and 132(R)” (SFAS 158). This Statement requires
an employer that is a business entity and sponsors
one or more single-employer defined benefit plans to:
a.) recognize the funded status of a benefit plan;
b.) recognize as a component of other comprehensive
income, net of tax, the gains or losses and prior service
costs or credits that arise during the period but are not
recognized as components of net periodic benefit cost;
c.) measure defined benefit plan assets and obliga-
tions as of the date of the employer’s fiscal year-end
statement of financial position; d.) disclose in the notes
to financial statements additional information about
certain effects on net periodic benefit cost for the next
fiscal year that arise from delayed recognition of the
gains or losses, prior service costs or credits, and tran-
sition asset or obligation. This Statement is effective for
fiscal years ending after December 15, 2006 except
for the measuring of plan assets at the employer’s
fiscal year end which is effective for fiscal years end-
ing after December 15, 2008. We have adopted FAS
158 effective December 31, 2006. See Note 5 of the
Consolidated Financial Statements.
Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements
in Current Year Financial Statements
In September 2006, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin
No. 108 (Topic 1N): “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements” (SAB 108). The
SEC believes that a registrant should quantify a current
year misstatement using both the iron curtain approach
and the rollover approach. If the over/understatement
of current year expense is material to the current year,
after all of the relevant quantitative and qualitative fac-
tors are considered, the prior year financial statements
should be corrected. Correcting prior year financial
statements for immaterial errors would not require
previously filed reports to be amended. We have evalu-
ated our accounts and determined that SAB 108 does
not impact our reported results.
Accounting for Planned Major Maintenance Activity
In September 2006, the FASB posted Financial
Statement of Position AUG AIR -1 – “Accounting for
Planned Major Maintenance Activity” (FSP AUG AIR-
1). Previous guidance for planned major maintenance,
such as repairing or replacing a boiler, allowed four
different methods for accruing for these major repairs.
These included direct expense, built-in overhaul, defer-
ral and accrue-in-advance. The FASB has decided
that the accrue-in-advance method is no longer valid
because it allows a liability to accrue for future charg-
es that may or may not happen. We use the direct
expense method for major planned maintenance which
calls for expensing the charges as incurred. Since we
do not use the accrue-in-advance method, this FSP
will have no effect on our overall results of operations,
financial position or cash flows.
DPL Inc.
59
2 Supplemental Financial Information
DPL Inc.
$ in millions
Accounts receivable, net:
Unbilled revenue
Retail customers
Partners in commonly-owned plants
Wholesale and subsidiary customers
PJM including financial transmission rights
Other
Refundable franchise tax
Provision for uncollectible accounts
Total accounts receivable, net
Inventories, at average cost:
Fuel and emission allowances
Plant materials and supplies
Other
Total inventories, at average cost
Other current assets:
Deposits and other advances
Prepayments
Derivatives
Current deferred income taxes
Other
Total other current assets
Property, plant and equipment:
Construction work in process
Property, plant and equipment
Total property, plant and equipment (a)
Other deferred assets:
Master Trust assets
Unamortized loss on reacquired debt
Unamortized debt expense
Commercial activities tax benefit
Investments
Other
Total other deferred assets
Accounts payable:
Trade payables
Fuel accruals
Other
Total accounts payable
Other current liabilities:
Customer security deposits
Pension and retiree benefits payable
Financial transmission rights - future proceeds
Payroll taxes payable
Other
Total other current liabilities
Other deferred credits:
Asset retirement obligations – regulated property
Trust obligations
Pension liabilities
Retiree health and life benefits
SECA net revenue subject to refund
Asset retirement obligations – generation property
Deferred gain on sale of portfolio
Legal reserves
Environmental reserves
Other
Total other deferred credits
(a) $283.5 of the assets presented in this table are held for sale.
60 DPL Inc.
At December 31,
2006
2005
$
68.7
65.0
51.5
15.8
13.1
7.1
5.2
(1.4)
$ 225.0
$
$
$
$
52.4
32.6
0.4
85.4
17.8
13.3
3.2
2.0
1.4
37.7
$ 376.0
4,626.0
$ 5,002.0
$
$
39.4
20.4
10.6
6.8
7.0
0.5
84.7
$
75.7
37.3
56.4
$ 169.4
$
$
19.4
5.8
2.7
0.1
10.3
38.3
$
86.3
76.2
37.7
28.5
18.7
11.7
8.2
3.4
0.1
9.9
$ 280.7
$
63.6
60.8
37.7
6.0
11.0
2.5
14.3
(1.0)
$
194.9
$
$
48.6
31.4
0.2
80.2
9.2
5.1
–
5.4
0.5
$
20.2
$168.0
4,499.7
$ 4,667.7
$
$
$
32.0
22.0
10.2
–
7.2
0.8
72.2
26.1
39.5
64.6
$
130.2
$
$
$
19.2
–
–
2.3
9.6
31.1
81.7
74.5
23.7
32.9
20.5
13.2
27.1
3.0
0.1
9.6
$
286.3
DP&L
$ in millions
Accounts receivable, net:
Retail customers
Partners in commonly-owned plants
Unbilled revenue
PJM including financial transmission rights
Wholesale and subsidiary customers
Refundable franchise tax
Other
Provision for uncollectible accounts
Total accounts receivable, net
Inventories, at average cost:
Fuel and emission allowances
Plant materials and supplies
Other
Total inventories, at average cost
Other current assets:
Deposits and other advances
Prepayments
Derivatives
Current deferred income taxes
Other
Total other current assets
Property, plant and equipment:
Construction work in process
Property, plant and equipment
Total property, plant and equipment
Other deferred assets:
Master Trust assets
Unamortized loss on reacquired debt
Unamortized debt expense
Investments
Other
Total other deferred assets
Accounts payable:
Trade payables
Fuel accruals
Other
Total accounts payable
Other current liabilities:
Customer security deposits
Financial transmission rights - future proceeds
Current portion long-term debt
Payroll taxes payable
Pension and retiree benefits payable
Other
Total other current liabilities
Other deferred credits:
Asset retirement obligations – regulated property
Trust obligations
Retiree health and life benefits
Pension liabilities
SECA net revenue subject to refund
Asset retirement obligations – generation property
Legal reserves
Environmental reserves
Other
Total other deferred credits
At December 31,
2006
$
65.0
51.5
61.0
13.9
8.3
3.1
4.2
(1.4)
$ 205.6
$
$
$
52.4
30.2
0.4
83.0
17.0
15.8
3.2
0.7
1.5
38.2
$ 375.2
4,075.4
$ 4,450.6
109.0
20.4
8.6
0.6
0.5
$ 139.1
$
74.7
36.7
54.8
$ 166.2
$
$
19.4
2.7
0.9
0.2
5.8
7.3
36.3
$
86.3
76.2
28.5
37.7
18.7
11.7
3.4
0.1
9.9
$ 272.5
$
2005
60.7
37.7
57.5
11.0
2.7
11.8
2.3
(1.0)
$
182.7
$
$
$
48.6
29.0
0.1
77.7
5.8
7.7
–
4.9
0.9
$
19.3
165.1
$
3,952.9
$ 4,118.0
107.7
22.0
7.4
0.6
0.6
$
138.3
$
25.6
38.1
52.5
$
116.2
$
$
$
19.2
–
0.9
2.3
–
6.0
28.4
81.7
74.5
32.9
23.7
20.5
13.2
3.0
0.1
9.1
$
258.7
DPL Inc.
61
DPL Inc.
$ in millions
Cash flows – Other:
Payroll taxes payable
Deferred management fees
Deposits and other advances
Deferred storm costs
FERC transitional payment deferral
Other
Total cash flows – Other
DP&L
$ in millions
Cash flows – Other:
Payroll taxes payable
Deposits and other advances
Deferred storm costs
FERC transitional payment deferral
Other
Total cash flows – Other
3 Regulatory Matters
For the years ended
2006
2005
$
(2.1)
–
(8.5)
(0.1)
(1.8)
2.0
$ (10.5)
$ 2.3
7.9
(0.9)
(5.5)
20.5
7.5
$ 31.8
For the years ended
2006
2005
$
(2.1)
(11.0)
(0.1)
(1.8)
(2.5)
$ 2.3
(2.1)
(5.5)
20.5
(1.8)
$ (17.5)
$ 13.4
We apply the provisions of SFAS 71 to our regulated operations. This accounting standard defines regulatory
assets as the deferral of costs expected to be recovered in future customer rates and regulatory liabilities as
current cost recovery of expected future expenditures.
Regulatory liabilities are reflected on the Consolidated Balance Sheets under the caption entitled “Other
Deferred Credits”. Regulatory assets and liabilities on the Consolidated Balance Sheets include:
Type of
Recovery (a)
Amortization
Through
At December 31,
2006
2005
C/ B
C
F
C
C
F
C
F
Ongoing
Ongoing
2010
2014
2008
2009
Ongoing
2010
F
2015
$ 53.1
47.1
13.5
11.4
5.4
4.6
4.5
3.5
3.1
1.4
1.0
$ 148.6
$ 86.3
7.6
18.7
$ 112.6
$ 28.8
–
16.7
12.9
6.5
5.6
3.8
3.5
3.1
1.9
1.0
$ 83.8
$ 81.7
–
20.5
$ 102.2
$ in millions
Regulatory Assets:
Deferred recoverable income taxes
Pension and postretirement benefits
Electric Choice systems costs
Regional transmission organization costs
Deferred storm costs
PJM administrative costs
Power plant emission fees
Rate case expenses
Retail settlement system costs
PJM integration costs
Other costs
Total regulatory assets
Regulatory Liabilities:
Asset retirement obligations – regulated property
Postretirement benefits
SECA net revenue subject to refund
Total regulatory liabilities
(a) F – Recovery of incurred costs plus rate of return.
C – Recovery of incurred costs only.
B – Balance has an offsetting liability resulting in no impact on rate base.
62 DPL Inc.
Regulatory Assets
We evaluate our regulatory assets each period and
believe recovery of these assets is probable. We have
received or requested a return on certain regulatory
assets for which we are currently recovering or seeking
recovery through rates.
Deferred recoverable income taxes represent deferred
income tax assets recognized from the normalization of
flow-through items as the result of amounts previously pro-
vided to customers. Since currently existing temporary dif-
ferences between the financial statements and the related
tax basis of assets will reverse in subsequent periods,
deferred recoverable income taxes are amortized.
Pension and postretirement benefits represent the unfund-
ed benefit obligation related to the transmission and distri-
bution areas of our electric business. We have historically
recorded these costs on the accrual basis and this is
how these costs have been historically recovered through
rates. This factor, combined with the historical precedents
from the PUCO and the FERC, make these costs probable
of future rate recovery.
Electric Choice systems costs represent costs incurred to
modify the customer billing system for unbundled rates
and electric choice bills relative to other generation sup-
pliers and information reports provided to the state admin-
istrator of the low-income electric program. In February
2005, the PUCO approved a stipulation allowing us to
recover certain costs incurred for modifications to its bill-
ing system from all customers in its service territory. We
filed a subsequent case to implement the PUCO’s order to
begin charging customers for billing costs. On March 1,
2006, the PUCO issued an order that approved our tariff
as filed. We began collecting this rider immediately, and
expect to recover all costs over five years.
Regional transmission organization costs represent costs
incurred to join a Regional Transmission Organization that
controls the receipts and delivery of bulk power within
the service area. These costs are being amortized over a
10-year period that commenced in October 2004.
Deferred storm costs include costs incurred by us to
repair damage from December 2004 and January 2005
ice storms. We filed to recover these costs from retail
ratepayers over a two year period. On July 12, 2006, the
PUCO approved our tariff as proposed and we began
recovering these deferred costs over a two-year period
beginning August 1, 2006.
PJM administrative costs contain the administra-
tive fees billed by PJM to us as a member of the PJM
Interconnection, LLC Regional Transmission Organization
(RTO). Pursuant to a PUCO order issued on January 25,
2006, these deferred costs will be recovered over a 3-year
period from retail ratepayers beginning February 2006.
Power plant emission fees represent costs paid to the
State of Ohio for environmental monitoring that are or will
be recovered over various periods under a PUCO rate
rider from customers.
Retail settlement system costs represent costs to imple-
ment a retail settlement system that reconciles the amount
of energy a competitive retail electric service (CRES)
supplier delivers to its customers and what its customers
actually use. Based on case precedent in other utilities’
cases, the cost of this system is recoverable through
DP&L’s next transmission rate case that will be filed at the
FERC. The timing of this case is uncertain at this time.
PJM integration costs include infrastructure costs and
other related expenses incurred by PJM and reimbursed
by DP&L to integrate us into the RTO. Pursuant to a FERC
order, the costs are being recovered over a 10-year period
beginning May 2005 from wholesale customers within PJM.
Rate case expenses represent costs incurred in con-
nection with the Rate Stabilization Surcharge that was
approved by the PUCO and implemented in January 2006.
These costs are being amortized over a five-year period.
Other costs include consumer education advertising
regarding electric deregulation and costs pertaining to a
recent rate case and are or will be recovered over various
periods.
Regulatory Liabilities
Asset retirement obligations – regulated property
reflect an estimate of amounts recovered in rates that are
expected to be expended to remove existing transmission
and distribution property from service upon retirement.
Postretirement benefits reflect a regulatory liability that
was recorded for the portion of the unrealized gain on our
postretirement trust assets related to the transmission and
distribution areas of our electric business. The company
has historically recorded these transactions on the accrual
basis and this is how these costs have historically been
recovered through rates. This factor, combined with the
historical precedents from the PUCO and the FERC, make it
probable that these amounts will be reflected in future rates.
SECA (Seams Elimination Charge Adjustment) net
revenue subject to refund represents our estimate of prob-
able refunds for net revenue collected in 2005 and 2006.
SECA revenue and expenses represent FERC-ordered
transitional payments for the use of transmission lines
within PJM. A hearing was held in early 2006 to determine
if these transitional payments are subject to refund, but no
ruling has been issued. We began receiving and paying
these transitional payments in May 2005.
DPL Inc.
63
4 Income Taxes
For the years ended December 31, 2006, 2005 and 2004, DPL’s components of income tax were as follows:
DPL Inc.
$ in millions
Computation of Tax Expense
Federal income tax (a)
Increases (decreases) in tax resulting from –
State income taxes, net of federal effect (b)
Depreciation
Investment tax credit amortized
Non-deductible compensation
Section 199 – domestic production deduction
Accrual for open tax years (c)
Other, net
Total tax expense (d)
Components of Tax Expense
Taxes currently payable (b)
Deferred taxes –
Depreciation and amortization
Shareholder litigation
Other
Deferred investment tax credit, net
Total tax expense (d)
Components of Deferred Tax Assets and Liabilities
$ in millions
Net Non-Current Assets (Liabilities)
Depreciation / property basis
Income taxes recoverable
Regulatory assets
Investment tax credit
Investment loss
Compensation and employee benefits
Insurance
Other (e)
Net non-current (liabilities)
Net Current Asset
Other
Net current assets
For the years ended December 31,
2006
2005
2004
$ 68.7
$ 71.9
$
66.3
(4.0)
(3.1)
(2.9)
0.2
(0.8)
5.1
6.6
1.2
(1.3)
(2.9)
0.2
(1.6)
11.2
1.2
1.2
(4.0)
(2.9)
–
–
5.3
0.6
$ 69.8
$ 79.9
$
66.5
$ 109.3
$ 85.0
$
44.3
(37.9)
–
1.3
(2.9)
(11.7)
–
9.5
(2.9)
(3.3)
23.2
5.2
(2.9)
$ 69.8
$ 79.9
$
66.5
At December 31,
2006
2005
$ (380.3)
(18.6)
(9.7)
15.2
2.9
39.2
1.6
(5.5)
$ (355.2)
$ (402.2)
(10.1)
(9.4)
16.3
9.6
38.7
1.8
28.3
$ (327.0)
$
$
2.0
2.0
$
$
5.4
5.4
(a) The statutory tax rate of 35% was applied to pre-tax income from continuing operations before preferred dividends.
(b) We have recorded $10.4 million, ($2.1) million and $11.7 million in 2006, 2005 and 2004, respectively, for state tax credits available
related to the consumption of coal mined in Ohio.
(c) We have recorded $5.1 million, $11.2 million and $5.3 million in 2006, 2005 and 2004, respectively, of tax provision for tax deduction or
income positions taken in prior tax returns that we believe were properly treated on such tax returns but for which it is possible that these
positions may be contested.
(d) Excludes ($2.1) million in 2005 of income taxed reported as cumulative effect of accounting change, net of income taxes. Also excludes
$3.6 million in 2006, $19.9 million in 2005 and $59.1 million in 2004 of income taxes reported as discontinued operations.
(e) The Other non-current liabilities caption includes deferred tax assets related to state tax net operating loss carryforwards, net of related
valuation allowances of $10.1 million in 2006 and $6.8 million in 2005. The majority of these net operating losses are Ohio franchise tax loss
carryforwards that expire after the phase-out of the Ohio franchise tax is completed in 2008. Remaining Ohio franchise tax loss carryforwards
after 2008 can be used to offset the Ohio Commercial Activity Tax liability and do not expire until after 2029.
64 DPL Inc.
For the years ended December 31, 2006, 2005 and 2004, DP&L’s components of income tax were as follows:
DP&L
$ in millions
Computation of Tax Expense
Federal income tax (a)
Increases (decreases) in tax resulting from –
State income taxes, net of federal effect (b)
Depreciation
Investment tax credit amortized
Non-deductible compensation
Section 199 – domestic production deduction
Accrual for open tax years (c)
Other, net
Total tax expense (d)
Components of Tax Expense
Taxes currently payable (b)
Deferred taxes –
Depreciation and amortization
Other
Deferred investment tax credit, net
Total tax expense (d)
Components of Deferred Tax Assets and Liabilities
$ in millions
Net Non-Current Assets (Liabilities)
Depreciation / property basis
Income taxes recoverable
Regulatory assets
Investment tax credit
Compensation and employee benefits
Other (e)
Net non-current (liabilities)
Net Current Asset
Other
Net current assets
For the years ended December 31,
2006
2005
2004
$ 134.6
$ 123.6
$ 115.4
2.4
(3.1)
(2.9)
0.1
(0.8)
5.1
6.8
7.4
(1.3)
(2.9)
0.2
(1.6)
11.2
1.5
7.0
(3.9)
(2.9)
–
–
5.3
(0.1)
$ 142.2
$ 138.1
$ 120.8
$ 158.5
$ 149.4
$ 136.8
(17.1)
3.7
(2.9)
(16.4)
8.0
(2.9)
(10.0)
(3.1)
(2.9)
$ 142.2
$ 138.1
$ 120.8
At December 31,
2006
2005
$ (368.1)
(18.6)
(9.7)
15.3
39.2
(18.3)
$ (360.2)
$ (367.6)
(10.1)
(9.4)
16.3
38.7
8.9
$ (323.2)
$
$
0.7
0.7
$
$
4.9
4.9
(a) The statutory tax rate of 35% was applied to pre-tax income from continuing operations before preferred dividends.
(b) We have recorded $10.4 million, ($2.1) million and $11.7 million in 2006, 2005 and 2004, respectively, for state tax credits available
related to the consumption of coal mined in Ohio.
(c) We have recorded $5.1 million, $11.2 million and $5.3 million in 2006, 2005 and 2004, respectively, of tax provision for tax deduction
or income positions taken in prior tax returns that we believe were properly treated on such tax returns but for which it is possible that these
positions may be contested.
(d) Excludes ($2.1) million in 2005 of income taxed reported as cumulative effect of accounting change, net of income taxes.
(e) The Other non-current liabilities caption includes deferred tax assets related to state tax net operating loss carryforwards, net of related
valuation allowances of $0.3 million in 2006 and zero in 2005. The majority of these net operating losses are Ohio franchise tax loss
carryforwards that expire after the phase-out of the Ohio franchise tax is completed in 2008. Remaining Ohio franchise tax loss carryforwards
after 2008 can be used to offset the Ohio Commercial Activity Tax liability and do not expire until after 2029.
DPL Inc.
65
5 Pension and Postretirement Benefits
We sponsor a defined benefit plan for substantially
all employees. For collective bargaining employees,
the defined benefits are based on a specific dollar
amount per year of service. For all other employees,
the defined benefit plan is based primarily on com-
pensation and years of service. We fund pension plan
benefits as accrued in accordance with the minimum
funding requirements of the Employee Retirement
Income Security Act of 1974 (ERISA). In addition, we
have a Supplemental Executive Retirement Plan (SERP)
for certain active and retired key executives. Benefits
under this SERP have been frozen and no additional
benefits can be earned. We also have unfunded liabili-
ties related to retirement benefits for certain active,
terminated and retired key executives (not related to
our ongoing litigation with three former executives).
These liabilities totaled approximately $0.5 million at
December 31, 2006.
On February 23, 2006, DPL’s Board of Directors
approved a new compensation and benefits program
that includes The DPL Inc. Supplemental Executive
Defined Contribution Retirement Plan (New SERP)
which replaces the Company’s Supplemental Executive
Retirement Plan (SERP) that was terminated as to new
participations in 2000. The Compensation Committee
of the Board of Directors will designate the eligible
employees. Pursuant to the New SERP, we will provide
a supplemental retirement benefit to participants by
crediting an account established for each participant
in accordance with the Plan requirements. We shall
designate as hypothetical investment funds under the
New SERP one or more of the investment funds pro-
vided under The Dayton Power and Light Company
Employee Savings Plan. Each participant may change
his or her hypothetical investment fund selection at
specified times. If a participant does not elect a hypo-
thetical investment fund(s), then we shall select the
hypothetical investment fund(s) for such participant.
A participant shall become 100% vested in all
amounts credited to his or her account upon the com-
pletion of five vesting years, as defined in The Dayton
Power and Light Company Retirement Income Plan, or
upon a change of control or the participant’s death or
disability. If a participant’s employment is terminated,
other than by death or disability, prior to such partici-
pant becoming 100% vested in his or her account, the
account shall be forfeited as of the date of termination.
Qualified employees who retired prior to 1987 and
their dependents are eligible for health care and life
insurance benefits. We have funded the union-eligible
health benefit using a Voluntary Employee Beneficiary
Association Trust.
We adopted SFAS 158 “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88,
106 and 132(R)” for the year ended December 31,
2006. Certain disclosures in regard to prior service
costs, transition costs and net gains/losses are not
available for 2006 because SFAS 158 was adopted on
a prospective basis. The incremental effects of adopt-
ing FAS 158 are set out in the following table:
Incremental Effect of Applying FASB Statement No. 158 on Individual Line Items in the
Consolidated Balance Sheet for Pension and Postretirement Benefits
December 31, 2006
Before Application
of Statement 158
Adjustments
After Application
of Statement 158
December 31, 2006
Pension Post-Retirement
December 31, 2006
–
(32.3)
8.0
–
–
–
–
(0.4)
(25.9)
12.5
47.0
(16.4)
–
–
(20.6)
7.2
(13.4)
(0.5)
10.8
(3.6)
0.1
(0.1)
(7.6)
2.7
(2.9)
1.0
(1.9)
(0.9)
(47.4)
16.9
47.1
(16.5)
(7.6)
2.7
31.6
(11.1)
20.5
debit/(credit) in millions
Other current liabilities
Other deferred credits
Deferred income taxes
Regulatory asset
Deferred income taxes
Regulatory liability – Other deferred credits
Deferred income taxes
Accumulated other comprehensive (gain)/ loss (before tax)
Deferred income taxes
Accumulated other comprehensive (gain)/ loss (after tax)
55.1
(19.3)
35.8
66 DPL Inc.
A regulatory asset was recorded for the portion of the
unfunded obligation related to the transmission and
distribution areas of our electric business. We have his-
torically recorded these costs on the accrual basis and
this is how these costs have been historically recov-
ered. This factor, combined with the historical prec-
edents from the PUCO and FERC, make these costs
probable of future rate recovery.
The following tables set forth our pension and postre-
tirement benefit plans obligations, assets and amounts
recorded on the Consolidated Balance Sheets as of
December 31. The amounts presented in the following
tables for pension include both the defined ben-
efit pension plan and the Supplemental Executive
Retirement Plan in the aggregate.
$ in millions
2006
2005
2006
2005
Pension
Postretirement
Change in Benefit Obligation During Year
Benefit obligation at January 1
Service cost
Interest cost
Plan amendments
Actuarial (gain) loss
Benefits paid
Benefit obligation at December 31
Change in Plan Assets During Year
Fair value of plan assets at January 1
Actual return on plan assets
Contributions to plan assets
Benefits paid
Fair value of plan assets at December 31
$ 299.1
4.2
16.7
–
0.3
(25.8)
$ 294.5
$ 260.0
26.8
5.4
(25.8)
$ 266.4
$ 280.5
3.9
15.7
9.3
8.2
(18.5)
$ 299.1
$ 265.9
12.2
0.4
(18.5)
$ 260.0
$ 31.1
–
1.5
–
(2.6)
(2.9)
$ 27.1
$
7.9
0.2
1.8
(2.9)
$
7.0
$ 32.0
–
1.8
–
0.4
(3.1)
$ 31.1
$ 8.9
0.1
2.0
(3.1)
$ 7.9
Funded Status of the Plan
$ (28.1)
$ (39.1)
$ (20.1)
$ (23.2)
Amounts Recognized in the Consolidated
Balance Sheets at December 31 (a)
Current liabilities
Non-current liabilities
Net asset/(liability) at December 31
Amounts Recognized in Accumulated Other
Comprehensive Income, Regulatory Assets and
Regulatory Liabilities (a)
Net transition obligation (asset)
Prior service cost (credit)
Net actuarial loss (gain)
Accumulated other comprehensive income,
$
(0.4)
(27.7)
$ (28.1)
$
–
14.6
66.8
regulatory assets and regulatory liabilities, pre-tax
$ 81.4
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$
(0.4)
(19.7)
$ (20.1)
$
0.2
–
(10.6)
$ (10.4)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(a) The requirements of SFAS 158 are not applied retrospectively and do not apply to disclosures for 2005.
The accumulated benefit obligation for our defined benefit pension plans was $282.7 million and $287.6 million
at December 31, 2006 and 2005, respectively.
DPL Inc.
67
The net periodic benefit cost (income) of the pension and postretirement benefit plans at December 31 were:
Net Periodic Benefit Cost (Income)
Pension
Postretirement
$ in millions
2006
2005
2004
2006
2005
2004
Service cost
Interest cost
Expected return on assets (a)
Amortization of unrecognized:
Actuarial (gain) loss
Prior service cost
Transition obligation (asset)
Net benefit cost (income) before adjustments
Settlement costs (b)
Special termination benefit cost (c)
Curtailment cost (d)
Net benefit cost (income) after adjustments
$
4.2
$
16.6
(21.7)
$
3.9
15.7
(21.5)
$
3.5
16.0
(21.7)
–
$
1.5
(0.5)
$
3.9
2.6
–
5.6
2.6
0.3
–
8.5
3.8
2.3
–
4.2
–
0.2
0.1
4.5
$
2.0
2.7
–
2.5
–
–
–
(1.3)
–
0.2
(0.1)
–
–
–
–
1.8
(0.5)
(0.8)
–
0.2
0.7
–
–
–
$
–
1.9
(0.6)
(1.1)
–
0.2
0.4
–
–
–
$
2.5
$ (0.1)
$ 0.7
$
0.4
(a) The market-related value of assets is equal to the fair value of assets at implementation with subsequent asset gains and losses
recognized in the market-related value systematically over a three-year period.
(b) The settlement cost relates to a former officer (not related to our ongoing litigation with three former executives) who has elected to
receive a lump sum distribution in 2007 from the Supplemental Executive Retirement Plan.
(c) In 2006 and 2005, special termination benefit costs were recognized as a result of 32 employees who participated in a voluntary
early retirement program. 16 employees retired at various dates during 2005 and 16 additional employees retired at various dates during
2006; this program was completed as of April 1, 2006.
(d) In 2005, a curtailment cost was recognized as a result of a freeze in benefits for the remaining active employee participating in the
Supplemental Executive Retirement Plan.
DP&L’s pension and postretirement plan assets were comprised of the following asset categories at December 31:
Asset Category
Equity securities
Debt securities
Real estate
Other
Total
Pension
Postretirement
2006
2005
2006
2005
59%
38%
0%
3%
100%
51%
48%
0%
1%
100%
0%
100%
0%
0%
100%
0%
100%
0%
0%
100%
Plan assets are invested using a total return investment approach whereby a mix of equity securities, debt
securities and other investments are used to preserve asset values, diversify risk and achieve our target investment
return benchmark. Investment strategies and asset allocations are based on careful consideration of plan liabilities,
the plan’s funded status and our financial condition. Investment performance and asset allocation are measured
and monitored on an ongoing basis. At December 31, 2006, there were no shares of DPL common stock held
as plan assets.
Our expected return on plan asset assumptions, used to determine benefit obligations, are based on
historical long-term rates of return on investment, which use the widely accepted capital market principle that
assets with higher volatility generate a greater return over the long run. Current market factors, such as inflation
and interest rates, as well as asset diversification and portfolio rebalancing, are evaluated when long-term
capital market assumptions are determined. Peer data and historical returns are reviewed to verify reasonability
and appropriateness.
Our overall expected long-term rate of return on assets is approximately 8.50% for pension plan assets and
approximately 6.75% for retiree welfare plan assets. This expected return is based exclusively on historical
returns, without adjustments. There can be no assurance of our ability to generate that rate of return in the future.
Our overall discount rate was evaluated in relation to the December 31, 2006 Hewitt Yield Curve. The Hewitt
Yield Curve represents a portfolio of top-quartile AA-rated bonds used to settle pension obligations and supported
68 DPL Inc.
a weighted average discount rate of 5.75% at December 31, 2006. Peer data and historical returns were
also reviewed to verify the reasonability and appropriateness of our discount rate used in the calculation of
benefit obligations and expense.
The weighted average assumptions used to determine benefit obligations for the years ended
December 31 were:
Benefit Obligation Assumptions
Discount rate for obligations
Rate of compensation increases
Pension
2006
2005
5.75%
4.00%
5.75%
4.00%
Postretirement
2006
2005
5.75%
N/A
5.75%
N/A
The weighted-average assumptions used to determine net periodic benefit cost (income) for the years
ended December 31 were:
Net Periodic Benefit Cost (Income) Assumptions
Discount rate
Expected rate of return on plan assets
Rate of compensation increases
2006
5.75%
8.50%
4.00%
Pension
2005
5.75%
8.50%
4.00%
Postretirement
2004
2006
2005
6.25%
8.50%
4.00%
5.75%
6.75%
N/A
5.75%
6.75%
N/A
2004
6.25%
6.75%
N/A
The assumed health care cost trend rates at December 31 are as follows:
Health Care Cost Assumptions
Current health care cost trend rate
Ultimate health care cost trend rate
Ultimate health care cost trend rate – year
Expense
2006
2005
10.00%
5.00%
2011
10.00%
5.00%
2010
Benefit Obligations
2006
2005
10.00%
5.00%
2012
10.00%
5.00%
2011
The assumed health care cost trend rates have a significant effect on the amounts reported for the health
care plans. A one-percentage point change in assumed health care cost trend rates would have the following
effects on the net periodic postretirement benefit cost and the accumulated postretirement benefit obligation:
Effect of Change in Health Care Cost Trend Rate
$ in millions
Service cost plus interest cost
Benefit obligation
Increase 1%
Decrease 1%
$
$
0.1
1.5
$ (0.1)
$ (1.3)
The following benefit payments, which reflect future service, are expected to be paid as follows:
Estimated Future Benefit Payments
$ in millions
2007
2008
2009
2010
2011
2012 – 2016
Pension
$ 19.4
$ 19.8
$ 20.2
$ 20.7
$ 20.9
$ 111.9
Postretirement
2.6
$
2.6
$
2.6
$
2.5
$
$
2.4
$ 10.0
We expect to contribute $0.4 million to its pension plan and $2.6 million to its other postretirement
benefit plan in 2007.
DPL Inc.
69
6 Common Shareholder’s Equity
DPL has 250,000,000 authorized common shares,
of which 113,018,972 are outstanding at December
31, 2006. DPL had 902,490 authorized but unissued
shares reserved for its dividend reinvestment plan
at December 31, 2005. The plan provides that either
original issue shares or shares purchased on the open
market may be used to satisfy plan requirements.
On July 27, 2005, DPL’s Board authorized the
repurchase of up to $400 million of common stock
from time to time in the open market or through private
transactions. DPL completed this share repurchase
program on August 21, 2006. In total, 14.9 million
shares were repurchased at a cost of $400.0 mil-
lion. These Board-authorized repurchase transactions
resulted in an 11.7% reduction of the outstanding stock
of December 31, 2005 at an average price of $26.91
per share. These shares are currently held as treasury
shares. There were no other repurchases during 2006
and 2005.
In September 2001, DPL’s Board of Directors
renewed its Shareholder Rights Plan, attaching one
right to each common share outstanding at the close of
business on December 13, 2001. The rights separate
from the common shares and become exercisable at
the exercise price of $130 per right in the event of cer-
tain attempted business combinations. The renewed
plan expires on December 31, 2011.
In February 2000, DPL entered into a series of
recapitalization transactions including the issuance of
$550 million of a combination of voting preferred and
trust preferred securities and warrants to an affiliate of
investment company Kohlberg Kravis Roberts & Co.
(KKR). As part of this recapitalization transaction, 31.6
million warrants were issued. These warrants were sold
for an aggregate purchase price of $50 million. The
warrants are exercisable, in whole or in part, for com-
mon shares at any time during the twelve-year period
commencing on March 13, 2000. Each warrant is exer-
cisable for one common share, subject to anti-dilution
adjustments (i.e., stock split, stock dividend). The exer-
cise price of the warrants is $21.00 per common share,
subject to anti-dilution adjustments.
In addition, in the event of a declaration, issuance
or consummation of any dividend, spin-off or other
distribution or similar transaction by DPL of the capital
stock of any of its subsidiaries, additional warrants of
such subsidiary will be issued to the warrant holder so
that after the transaction, the warrant holder will have
the same interest in the fully diluted number of com-
mon shares of such subsidiary the warrant holder had
in DPL immediately prior to such transaction.
Pursuant to the warrant agreement, DPL has
reserved authorized common shares sufficient to pro-
vide for the exercise in full of all outstanding warrants.
During December 2004 and January 2005, Dayton
Ventures, LLC requested that we transfer all of Dayton
Ventures, LLC’s warrants to Lehman Brothers, Inc.
(Lehman) in four transactions. Lehman has subse-
quently transferred a large number of these warrants
to unaffiliated third parties. During one of these trans-
actions in 2005, Dayton Ventures, LLC agreed to sell
back to DPL at par all of the outstanding 6,600,000
voting preferred shares. As a result of the reduction
of Dayton Ventures, Inc.’s warrant ownership below
12,640,000, Dayton Ventures, LLC was no longer eli-
gible to receive an annual $1 million management, con-
sulting and financial services fee and it no longer had
the right to designate one person to serve as a director
of the DPL and DP&L and no longer had the right to
designate one person to serve as a non-voting observ-
er of DPL and DP&L. Currently, Dayton Ventures, LLC
does not have any ownership interest in DPL or DP&L.
DPL has a leveraged Employee Stock Ownership
Plan (ESOP) to fund matching contributions to DP&L’s
401(k) retirement savings plan and certain other pay-
ments to full-time employees. Common shareholders’
equity is reduced for the cost of 3.8 million unallocated
shares held by the trust and for 2.7 million shares
related to other employee plans, of which a total of 6.5
million shares reduce the number of common shares
used in the calculation of earnings per share.
Dividends received by the ESOP for unallocated
shares were used to repay the principal and interest on
an ESOP loan to DPL. As debt service payments were
made on the loan, shares are released on a pro-rata
basis. Dividends on the allocated shares are charged
to retained earnings.
ESOP cumulative shares allocated to employees
and outstanding for the calculation of earnings per
share were 3.4 million in 2006, 3.2 million in 2005, and
3.0 million in 2004. Compensation expense associated
with the ESOP, which is based on the fair value of the
shares allocated, amounted to $3.7 million in 2006,
$3.1 million in 2005, and $2.5 million in 2004.
In April 2006, DPL’s Shareholders approved
The DPL Inc. Equity and Performance Incentive Plan
(the EPIP) which became immediately effective and
will remain in effect for a term of ten years, unless
sooner terminated in accordance with its terms. The
Compensation Committee of the Board of Directors will
designate the employees and directors eligible to par-
ticipate in the EPIP and the times and types of awards
to be granted. Under the EPIP, the Compensation
Committee may grant equity-based compensation in
the form of stock options, stock appreciation rights,
restricted stock, restricted stock units, performance
70 DPL Inc.
shares and units, and other stock-based awards. Awards may be subject to the achievement of certain
management objectives. In addition, the EPIP provides, upon recommendation of the Chief Executive Officer
and Chairman of the Board, for a grant of a special equity award to recognize outstanding performance.
A total of 4,500,000 shares of the Company’s common stock were reserved for issuance under the EPIP.
7 Preferred Stock
DPL
Series B, no par value, 8,000,000 shares authorized; no shares outstanding as of December 31, 2006
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.
Preferred Stock
DPL Series B (a)
DP&L Series A
DP&L Series B
DP&L Series C
Total
Rate
0.00%
3.75%
3.75%
3.90%
Current
Redemption
Price
$
0.01
$ 102.50
$ 103.00
$ 101.00
Current Shares
Outstanding at
December 31, 2006
Par Value at
December 31, 2006
($ in millions)
Par Value at
December 31, 2005
($ in millions)
–
93,280
69,398
65,830
228,508
$
–
9.3
7.0
6.6
$
–
9.3
7.0
6.6
$ 22.9
$ 22.9
(a) DPL purchased all of its outstanding Series B shares during 2005.
In February 2000, DPL entered into a series of recapi-
talization transactions including the issuance of $550
million of a combination of voting preferred and trust
preferred securities and warrants to an affiliate of
investment company KKR. As part of DPL’s 2000
recapitalization transaction, trust preferred securities
sold to KKR had an aggregate face amount of $550
million, and were issued at an initial discounted aggre-
gate price of $500 million, with a maturity of 30 years
(subject to acceleration six months after the exercise of
the warrants), and distributions at a rate of 8.5% of the
aggregate face amount per year. DPL recognized the
entire trust preferred securities original issue discount
of $50 million upon issuance.
In August 2001, DPL issued $300 million of trust
preferred securities to institutional investors at 8.125%
and $400 million of senior unsecured notes at 6.875%.
The August 2001 trust preferred securities have a term
of 30 years and the senior unsecured notes have a
term of 10 years. In the fourth quarter of 2003, DPL
adopted FIN46R and deconsolidated the DPL Capital
Trust II, which resulted in transferring the August 2001
trust preferred securities to the DPL Capital Trust II
and establishing a note to Capital Trust II for $300
million at 8.125%. In August 2005, DPL redeemed
$105 million of these Capital Securities, leaving $195
million outstanding.
The voting preferred shares (DPL Series B) were
not redeemable, except at the option of the holder.
DPL agreed to redeem such number so that at no time
would the holder and its affiliates maintain an owner-
ship interest of greater than 4.9% of the voting rights
of DPL. DPL’s Series B preferred shares may only be
transferred or otherwise disposed of together with a
corresponding number of warrants, unless the holder
and its affiliates hold a greater number of warrants than
DPL’s Series B preferred shares, in which case the
holder may transfer any such excess warrants without
transferring DPL’s Series B preferred shares. If the
holder of a warrant wishes to exercise warrants that are
not excess warrants, DPL will redeem simultaneously
with the exercise of such warrants an equal number
of DPL’s Series B preferred shares held by such hold-
er. DPL repurchased 6,600,000 DPL Series B preferred
shares on January 12, 2005 at par for an aggregate
purchase price of $66,000. There are currently no
Series B preferred shares outstanding.
The DP&L preferred stock may be redeemed at
DPL’s option at the per-share prices indicated, plus
cumulative accrued dividends.
As long as any DP&L preferred stock is outstand-
ing, 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
DPL Inc.
71
the net income of DP&L available for dividends on its Common Stock subsequent to December 31, 1946, plus
$1.2 million. As of year-end, all earnings reinvested in the business of DP&L were available for Common Stock
dividends. DPL records dividends on preferred stock of DP&L as part of interest expense. We expect all 2006
earnings reinvested in the business of DP&L to be available for DP&L common stock dividends, payable to DPL.
8 Long-term Debt
DPL Inc.
$ in millions
DP&L – First mortgage bonds maturing 2013 – 5.125%
DP&L – Pollution control series maturing 2036 – 4.80%
DP&L – Pollution control series maturing through 2034 – 4.78% (a)
DPL Inc. – Note to Capital Trust II 8.125% due 2031
DPL Inc. – Senior Notes 6.875% Series due 2011
DPL Inc. – Senior Notes 6.25% Series due 2008
DPL Inc. – Senior Notes 8.25% Series due 2007
DPL Inc. – Senior Notes 8.00% Series due 2009
DP&L – Obligations for capital leases
Unamortized debt discount (b)
Total
(a) Weighted average interest rate for 2006 and 2005.
At December 31,
2006
$ 470.0
100.0
214.4
784.4
195.0
297.4
100.0
–
175.0
2.0
(2.0)
2005
$ 470.0
–
214.4
684.4
195.0
297.4
100.0
225.0
175.0
3.0
(2.7)
$ 1,551.8
$ 1,677.1
(b) DP&L’s unamortized debt discount was $(1.2) million and $(1.5) million for December 31, 2006 and 2005, respectively.
DP&L
$ in millions
First mortgage bonds maturing 2013 – 5.125%
Pollution control series maturing 2036 – 4.80%
Pollution control series maturing through 2034 – 4.78% (a)
Obligations for capital leases
Unamortized debt discount
Total
(a) Weighted average interest rate for 2006 and 2005.
At December 31, 2006, DPL’s scheduled maturities
of long-term debt, including capital lease obligations,
over the next five years are $225.9 million in 2007,
$100.7 million in 2008, $175.7 million in 2009, $0.6 mil-
lion in 2010 and $297.4 million in 2011.
At December 31, 2006, DP&L’s scheduled maturi-
ties of long-term debt, including capital lease obliga-
tions, over the next five years are $0.9 million in 2007,
$0.7 million in 2008, $0.7 million in 2009, $0.6 million
in 2010 and none in 2011. Substantially all property of
DP&L is subject to the mortgage lien securing the first
mortgage bonds.
On March 25, 2004, DPL completed a $175 mil-
lion private placement of unsecured 8% Series Senior
Notes due March 2009. The Senior Notes will not be
At December 31,
2006
$ 470.0
100.0
214.4
784.4
2.0
(1.2)
2005
$ 470.0
–
214.4
684.4
3.0
(1.5)
$ 785.2
$ 685.9
redeemable prior to maturity except that DPL has the
right to redeem the notes for a make-whole payment at
the adjusted treasury rate plus 0.25%. The 8% Series
Senior Notes were issued pursuant to its indenture
dated as of March 1, 2000, and pursuant to authority
granted in Board resolutions dated March 25, 2004.
The notes impose a limitation on the incurrence of
liens on the capital stock of any of DPL’s significant
subsidiaries and require DPL and its subsidiaries to
meet a consolidated coverage ratio of 2 to 1 prior to
incurring additional indebtedness. The limitation on
the incurrence of additional indebtedness does not
apply to (i) indebtedness incurred to refinance exist-
ing indebtedness, (ii) subordinated indebtedness
and (iii) up to $150 million of additional indebtedness.
72 DPL Inc.
In addition to the events of default specified in the
indenture, an event of default under the notes includes
a payment default or acceleration of indebtedness
under any other indebtedness of DPL or any of its
subsidiaries which aggregates $25 million or more.
The purchasers were granted registration rights in con-
nection with the private placement under an Exchange
and Registration Rights Agreement. Pursuant to this
agreement, DPL was obligated to file an exchange
offer registration statement by July 22, 2004, have the
registration statement declared effective by September
20, 2004 and consummate the exchange offer by
October 20, 2004. DPL failed (1) to have a registration
statement declared effective and (2) to complete the
exchange offer according to this timeline. As a result,
DPL had been accruing additional interest at a rate of
0.5% per year for each of these two violations, up to
an additional interest rate not to exceed in the aggre-
gate 1.0% per year. As each violation was cured, the
additional interest rate decreased by 0.5% per annum.
DPL’s exchange offer registration statement for these
securities was declared effective by the SEC on June
27, 2006. As a result, on June 27, 2006, DPL ceased
accruing 0.5% of the additional interest. On July 31,
2006, DPL ceased accruing the other 0.5% of addi-
tional interest when the exchange of registered notes
for the unregistered notes was completed. By complet-
ing the exchange, DPL reduced the annual interest
expense by $1.8 million.
During the first quarter of 2006, the Ohio
Department of Development (ODOD) awarded DP&L
the ability to issue over the next three years up to
$200 million of qualified tax-exempt financing from the
ODOD’s 2005 volume cap carryforward. The financ-
ing is to be used to partially fund the ongoing flue
gas desulfurization (FGD) capital projects. The PUCO
approved DP&L’s application for this additional financ-
ing on July 26, 2006.
On September 13, 2006, the Ohio Air Quality
Development Authority (OAQDA) issued $100 million
of 4.80% fixed interest rate OAQDA Revenue Bonds
2006 Series A due September 1, 2036. In turn, DP&L
borrowed these funds from the OAQDA. The payment
of principal and interest on the Bonds when due is
insured by an insurance policy issued by Financial
Guaranty Insurance Company. DP&L is using the
proceeds from these borrowings to assist in financing
its portion of the costs of acquiring, constructing and
installing certain solid waste disposal and air quality
facilities at Miami Fort, Killen and Stuart Generating
Stations. These facilities are currently under construc-
tion and the proceeds from the borrowing have been
placed in escrow with a trustee (the Bank of New York)
and are being drawn upon only as facilities are built
and qualified costs are incurred. In the event any of
the proceeds are not drawn, DP&L would eventually
be required to return the unused proceeds to bond-
holders. DP&L expects to draw down the remaining
available funds from this borrowing by the end of the
second quarter 2007.
DP&L expects to use the remaining $100 million
of volume cap carryforward prior to the end of 2008.
DP&L is planning to issue in conjunction with the
OAQDA another $100 million of tax-exempt bonds to
finance the remaining solid waste disposal facilities at
Miami Fort, Killen, Stuart and Conesville Generating
Stations.
On November 21, 2006, DP&L entered into a new
$220 million unsecured revolving credit agreement
replacing its $100 million facility. This new agreement
has a five-year term that expires November 21, 2011
and provides DP&L with the ability to increase the size
of the facility by an additional $50 million at any time.
The facility contains one financial covenant: DP&L’s
total debt to total capitalization ratio is not to exceed
0.65 to 1.00. This covenant is currently met. DP&L
had no outstanding borrowings under this credit facil-
ity at December 31, 2006. Fees associated with this
credit facility are approximately $0.2 million per year.
Changes in credit ratings, however, may affect fees
and the applicable interest rate. This revolving credit
agreement also contains a $50 million letter of credit
sublimit. As of December 31, 2006, DP&L had no out-
standing letters of credit against the facility.
On February 24, 2005, DP&L entered into an
amendment to extend the term of its Master Letter of
Credit Agreement with a financial lending institution for
one year and to reduce the maximum dollar volume of
letters of credit to $10 million. On February 17, 2006,
DP&L renewed its $10 million agreement for one year.
This agreement supports performance assurance
needs in the ordinary course of business. This agree-
ment was not renewed in 2007. DP&L has certain
contractual agreements for the sale and purchase of
power, fuel and related energy services that contain
credit rating related clauses allowing the counter par-
ties to seek additional surety under certain conditions.
As of December 31, 2006, DP&L had two outstanding
letters of credit for a total of $2.2 million.
There are no inter-company debt collateralizations
or debt guarantees between DPL, DP&L and their sub-
sidiaries. None of the debt obligations of DPL or DP&L
are guaranteed or secured by affiliates and no cross-
collateralization exists between any subsidiaries.
DPL Inc.
73
9 Stock-Based Compensation
We adopted SFAS 123R on January 1, 2006 using the modified prospective approach for stock options and restrict-
ed stock units (RSUs). As a result of the adoption of SFAS 123R, we recognized $0.7 million less compensation
expense for the year ended December 31, 2006, as compared to what we would have recognized under SFAS 123.
In 2000, DPL’s Board of Directors adopted and DPL’s shareholders approved The DPL Inc. Stock Option Plan.
The plan provides that “no single Participant shall receive Options with respect to more than 2,500,000 shares.”
Options granted in 2000, 2001 and 2002 were fully vested as of December 31, 2005 and expire ten years from the
grant date. In 2003, 100,000 options were granted which vest equitably over five years and expire ten years from
the grant date. In 2004, 200,000 options were granted that vested over nineteen months and expire approximately
6.5 years from the grant date; 100,000 of these options vested in May 2005 and the remaining 100,000 vested in
May 2006. Another 20,000 options were granted in 2004 that vested in five months and expire ten years from the
grant date. In December 2004, 30,000 options were granted that vest equitably over three years and expire ten
years from the grant date. In 2005, 350,000 options were granted that vested in June 2006 and expire three years
from the grant date. At December 31, 2006, there were 1,528,500 options available for grant. On April 26, 2006,
DPL’s shareholders approved The DPL Inc. 2006 Equity and Performance Incentive Plan (EPIP). With the approval
of EPIP, no new awards will be granted under The DPL Inc. Stock Option Plan, but shares relating to awards that
are forfeited or terminated under The DPL Inc. Stock Option Plan may be granted.
The schedule of option activity for the twelve months ended December 31, 2006 was as follows:
$ in millions
Non-vested at January 1, 2006
Granted in 2006
Vested in 2006
Forfeited in 2006
Non-vested at December 31, 2006
Summarized stock option activity was as follows:
Options:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at year-end (a)
Exercisable at year-end
Weighted average option prices per share:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at year-end
Exercisable at year-end
Number of Options
Weighted-Average
Grant Date Fair Value
510,000
–
(460,000)
(40,000)
10,000
$
$
$
$
$
2.2
–
(2.0)
(0.1)
0.1
For the years ended December 31,
2006
2005
5,486,500
–
(355,000)
(40,000)
5,091,500
5,081,500
$
$
$
$
$
$
21.86
–
21.00
15.88
21.95
21.94
6,165,500
350,000
(1,025,000)
(4,000)
5,486,500
4,100,000
$ 21.39
$ 26.82
$ 21.18
$ 29.63
$ 21.86
$ 20.98
(a) In dispute with certain former executives, among other things, are approximately 1 million forfeited options not included above and
3.6 million outstanding options that are included above. See Note 15 of Notes to Consolidated Financial Statements.
No stock options were granted in 2006. The weighted-average fair value of options granted was $3.80 per
share in 2005. The fair values of the options were estimated as of the dates of grant using a Black-Scholes option
pricing model.
There were 355,000 stock options exercised during 2006. The market value of options that were vested
at December 31, 2006 was approximately $32 million. Shares issued upon share option exercise are issued from
treasury stock. DPL has sufficient treasury stock to satisfy outstanding options.
74 DPL Inc.
The following table reflects information about stock options outstanding at December 31, 2006:
Range of
Exercise Prices
$ 14.95 – $ 21.00
$ 21.01 – $ 29.63
Outstanding
4,305,000
786,500
Options Outstanding
Options Exercisable
Weighted-Average
Contractual Life
Weighted-Average
Exercise Price
Exercisable
Weighted-Average
Exercise Price
3.5 years
2.7 years
$ 20.42
$ 28.01
4,305,000
776,000
$ 20.42
$ 28.05
As of December 31, 2006, there was $0.1 million of total unrecognized compensation cost related to non-vested
stock options granted under the Plan. We expect to recognize $0.1 million of this cost in 2007.
In addition, RSUs were granted to certain key employees prior to 2001. There were 1.3 million RSUs outstand-
ing as of December 31, 2006, of which 1.3 million were vested. Substantially all of the vested RSUs are in dispute
as part of our ongoing litigation with Peter H. Forster, formerly DPL’s Chairman; Caroline E. Muhlenkamp, formerly
DPL’s Group Vice President and Interim Chief Financial Officer; and Stephen F. Koziar, formerly DPL’s Chief
Executive Officer and President. The remaining 0.1 million non-vested RSUs will be paid in cash upon vesting and
will vest as follows: 20,097 in 2007; 14,688 in 2008; 10,205 in 2009; and 5,008 in 2010. Vested RSUs are marked
to market each quarter and any adjustment to compensation expense is recognized at that time. Non-vested RSUs
are valued quarterly at fair value using the Black-Scholes model to determine the amount of compensation expense
to be recognized. Non-vested RSUs do not earn dividends.
The following management assumptions were used in the Black-Scholes model to calculate the fair value
of the non-vested stock options and RSUs:
Volatility
Expected life (years)
Dividend yield rate
Risk-free interest rate
9.5 - 26.1%
0.6 - 3.6
3.7 - 4.7%
4.3 - 4.9%
At the 2006 Annual Shareholder’s Meeting, DPL’s shareholders approved The DPL Inc. 2006 Equity and
Performance Incentive Plan. Under the EPIP, the Board adopted a Long-Term Incentive Plan (LTIP) under which
DPL will award a targeted number of performance shares of common stock to executives. Awards under the LTIP
will be awarded based on a Total Shareholder Return Relative to Peers performance. No performance shares will
be earned in a performance period if the three-year Total Shareholder Return Relative to Peers is below the thresh-
old of the 40th percentile. Further, the LTIP awards will be capped at 200% of the target number of performance
shares, if the Total Shareholder Return Relative to Peers is at or above the threshold of the 90th percentile. The
Total Shareholder Return Relative to Peers is considered a performance condition under FAS 123R. The requisite
performance period for each tranche of the Performance Shares is:
Tranche 1
Tranche 2
Tranche 3
January 1, 2004 to December 31, 2006
January 1, 2005 to December 31, 2007
January 1, 2006 to December 31, 2008
The schedule of non-vested performance share activity for the twelve months ended December 31, 2006 follows:
$ in millions
Non-vested at January 1, 2006
Granted in 2006
Vested in 2006
Forfeited in 2006
Non-vested at December 31, 2006
Number of
Performance Shares
Weighted-Average
Grant Date Fair Value
–
244,423
(44,045)
(89,655)
110,723
$
$
$
$
$
–
6.3
(1.2)
(2.4)
2.7
table continues on page 76
DPL Inc.
75
table continued from page 75
Performance Shares:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of period
Exercisable at end of period
December 31, 2006
–
244,423
–
(89,655)
154,768
44,045
Performance shares do not have an exercise price.
As of December 31, 2006, there was $1.9 million of total unrecognized compensation cost related to
non-vested performance shares granted under the LTIP. We expect to recognize $1.5 million of this cost in 2007
and $0.4 million in 2008. A forfeiture rate of 20% was estimated in calculating the compensation expense.
Shares issued upon achievement of the required performance condition will be issued from treasury stock.
DPL believes it has sufficient treasury stock to satisfy outstanding performance shares.
The following management assumptions were used in the Monte Carlo simulation calculated by an actuarial
consultant to estimate the fair value of the performance shares:
Volatility
Expected life (years)
Dividend yield rate
Risk-free interest rate
17.9% - 20.3%
3.0
3.7%
4.6% - 4.7%
On October 2, 2006, Paul M. Barbas (President and Chief Executive Officer) was granted 19,000 shares of DPL
Inc. Restricted Stock (Restricted Shares), granted under the 2006 Equity and Performance Incentive Plan.
The Restricted Shares are to be registered in Mr. Barbas’ name, receive dividends as declared and paid on all
DPL common stock and will vest in two tranches. A total of 9,000 Restricted Shares shall become non-forfeitable
on December 31, 2009 if Mr. Barbas remains in the continuous employ of the Company until such date. The
remaining 10,000 Restricted Shares will become non-forfeitable on December 31, 2011 if Mr. Barbas remains a
Company employee.
$ in millions
Non-vested at January 1, 2006
Granted in 2006
Vested in 2006
Forfeited in 2006
Non-vested at December 31, 2006
Restricted Shares:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of period
Exercisable at end of period
Number of
Performance Shares
Weighted-Average
Grant Date Fair Value
–
19,000
–
–
19,000
$
$
$
$
$
–
0.5
–
–
0.5
December 31, 2006
–
19,000
–
–
19,000
–
Restricted shares do not have an exercise price.
As of December 31, 2006, there was $0.5 million of total unrecognized compensation cost related to
non-vested restricted shares granted under the EPIP. We expect to recognize $0.1 million of this cost annually
over the next five years.
76 DPL Inc.
Restricted shares will be issued from treasury stock. DPL believes it has sufficient treasury stock to
satisfy outstanding restricted shares.
For the quarter ended December 31, 2006, total compensation expense was $1.7 million with an associated
tax benefit of $0.7 million. Compensation expense for the year ended December 31, 2006 was $5.8 million
for all share-based compensation (stock options, RSUs, restricted shares and performance shares) and the tax
benefit associated with these expenses was $2.1 million.
For the year ended December 31, 2006, operating income was $0.7 million higher under SFAS 123R than
under SFAS 123, while the impact to net income was $0.5 million due to a decrease in the tax benefit of $0.2
million. There was no impact on basic or diluted earnings per share.
10 Ownership of Facilities
We and other Ohio utilities have undivided ownership interests in seven electric generating facilities and numerous
transmission facilities. Certain expenses, primarily fuel costs for the generating units, are allocated to the owners
based on their energy usage. The remaining expenses, as well as investments in fuel inventory, plant materials
and operating supplies, and capital additions, are allocated to the owners in accordance with their respective
ownership interests. As of December 31, 2006, we had $359 million of construction in progress at such facilities.
Our share of the operating cost of such facilities is included in the Consolidated Statement of Results of
Operations, and its share of the investment in the facilities is included in the Consolidated Balance Sheets.
Our undivided ownership interest in such facilities at December 31, 2006, is as follows:
DP&L Share
Ownership (%)
Production
Capacity (MW)
DP&L Investment
Gross Plant In Service
($ in millions)
Production Units:
Beckjord Unit 6
Conesville Unit 4
East Bend Station
Killen Station
Miami Fort Units 7&8
Stuart Station
Zimmer Station
Transmission (at varying percentages)
50.0
16.5
31.0
67.0
36.0
35.0
28.1
210
129
186
428
360
839
365
$
62
34
198
427
195
383
1,045
89
11 Discontinued Operations
$ in millions
Investment income
Investment expenses
Income from discontinued operations
Gain realized from sale
Broker fees and other expenses
Loss recorded
Net gain on sale
Earnings before income taxes
Income tax expense
Earnings from discontinued operations, net
$
2006
–
(1.3)
(1.3)
18.9
–
–
18.9
17.6
(3.6)
$ 14.0
For the years ended December 31,
2005
2004
$ 41.3
(9.5)
31.8
53.1
(6.5)
(5.6)
41.0
72.8
(19.9)
$ 52.9
$ 178.5
(23.6)
154.9
–
–
–
–
154.9
(59.1)
$ 95.8
DPL Inc.
77
On February 13, 2005, DPL’s subsidiaries, MVE
and MVIC, entered into an agreement to sell their
respective interests in forty-six private equity funds
to AlpInvest/Lexington 2005, LLC, a joint venture of
AlpInvest Partners and Lexington Partners, Inc. Sales
proceeds and any related gains or losses were recog-
nized as the sale of each fund closed. Among other
closing conditions, each fund required the transaction
to be approved by the respective general partner of
each fund. During 2005, MVE and MVIC completed the
sale of their interests in forty-three and a portion of one
of those private equity funds resulting in a $46.6 mil-
lion pre-tax gain ($53.1 million less $6.5 million profes-
sional fees) from discontinued operations and provided
approximately $796 million in net proceeds, including
approximately $52 million in net distributions from
funds while held for sale. As part of this pre-tax gain,
we realized $30 million that was previously recorded as
an unrealized gain in other comprehensive income.
During 2005, MVE entered into alternative clos-
ing arrangements with AlpInvest/Lexington 2005, LLC
for funds where legal title to said funds could not be
transferred until a later time. Pursuant to these arrange-
ments, MVE transferred the economic aspects of the
remaining private equity funds, consisting of two funds
and a portion of one fund, to AlpInvest/Lexington 2005,
LLC without a change in ownership of the interests. The
terms of the alternative arrangements do not meet the
criteria for recording a sale. DPL is obligated to remit
to AlpInvest/Lexington 2005, LLC any distributions MVE
receives from these funds, and AlpInvest/Lexington
2005, LLC is obligated to provide funds to DPL to
pay any contribution notice, capital call or other pay-
ment notice or bill for which MVE receives notice with
respect to such funds. The alternative arrangements
resulted in a 2005 deferred gain of $27.1 million until
such terms of a sale can be completed (contingent
upon receipt of general partner approvals of the trans-
fer) and in 2005 provided approximately $72 million in
net proceeds on these funds. We recorded an impair-
ment loss of $5.6 million in the second quarter of 2005
to write down assets transferred pursuant to the alter-
native arrangements to estimated fair value. Ownership
of these funds will transfer after the general partners of
each of the separate funds consent to the transfer.
On March 31, 2006, MVE completed the sale of the
remaining portion of one private equity fund, for which
MVE had previously entered into an alternative closing
arrangement resulting in the recognition of $13.2 million
of the deferred gain. On August 31, 2006, MVE com-
pleted the sale of a portion of one of the two remaining
private equity funds, resulting in recognition of $5.7
million of the deferred gain. The sale of the residual
portion of this private equity fund was completed dur-
ing the first quarter of 2007, resulting in the recognition
of approximately $8.2 million of the deferred gain. The
transfer of the one remaining fund is expected to be
completed in 2008.
DPL did not have any income from discontinued
operations in 2006 due to the sale of the portfolio, but
there were $1.3 million in legal fees directly relating
to the ongoing litigation related to the asset portfolio.
DPL’s income from discontinued operations (pre-tax)
for the year ended December 31, 2005 of $31.8 million
is comprised of $41.3 million of investment income less
$9.5 million of associated management fees and other
expenses. Income from discontinued operations (pre-
tax) for the year ended December 31, 2004 of $154.9
million is comprised of $178.5 million of investment
income less $23.6 million of associated management
fees and other expenses.
For the year ended December 31, 2006, DPL rec-
ognized $18.9 million of the gain deferred in 2005 from
the sale of the portfolio. For the year ended December
31, 2005, DPL recognized a $41.0 million pre-tax gain
($53.1 million less $6.5 million of professional fees and
$5.6 million impairment loss), deferred gains of $27.1
million on transferred funds from discontinued opera-
tions, and provided approximately $868.4 million in net
proceeds, including approximately $52 million in net
distributions from funds held for sale. DPL will continue
to incur minor amounts of fees in the near term.
In 2006 and 2005, DPL has separately disclosed
the earnings from discontinued operations, net of
income taxes, which in prior periods were reported
with elements of continued operations. Also in 2006
and 2005, we have separately disclosed the investing
portions of the cash flows attributable to its discontin-
ued operations (there was no impact on the operating
or investing portions of the cash flows), which in
prior periods were reported on a combined basis as
a single amount.
78 DPL Inc.
12 Financial Instruments
The fair value of financial instruments is based on current public market prices, discounted cash flows using cur-
rent rates for similar issues with similar terms and remaining maturities or independent party valuations, which are
believed to approximate market. The basis on which the cost of a security sold or the amount reclassified out of
accumulated other comprehensive income was determined by specific identification. The table below presents the
fair value, unrealized gains and losses, and cost of these instruments at December 31, 2006 and 2005.
At December 31,
2006
Gross Unrealized
Losses
2005
Gross Unrealized
Losses
more
than 12
Fair Value Gains months months
less
than 12
more
than 12
Fair Value Gains months months
less
than 12
Cost
Cost
$
39.9 $ 5.5 $ (0.7) $ (3.1) $
38.2
$
24.8 $ 3.5 $ (0.2) $ (2.9) $
24.4
$ in millions
DPL Inc.
Assets
Public Securities
Available-for-sale
Securities
Hold-to-maturity
Debt securities (a)
Derivatives
–
3.2
–
3.2
–
–
–
–
–
–
7.9
–
–
(0.2)
–
8.1
–
Total assets
$
43.1 $ 8.7 $ (0.7) $ (3.1) $
38.2
$
32.7 $ 3.5 $ (0.4) $ (2.9) $
32.5
Liabilities
Long-term debt (b)
Capitalization
Unallocated shares
$ 1,798.5
$ 1,777.7
$ 1,717.5
$ 1,678.0
in ESOP
$ 101.1
$
44.1
$ 100.1
$
49.3
DP&L
Assets
Public Securities
Available-for-sale
Securities
Hold-to-maturity
$ 109.5 $ 41.1 $ (0.7) $ (3.1) $
72.2 $ 100.4 $ 36.7 $ (0.2) $ (2.9) $
66.8
Debt securities (a)
Derivatives
3.2
3.2
–
–
–
7.9
–
–
–
(0.2)
–
–
–
8.1
–
Total assets
$ 112.7 $ 44.3 $ (0.7) $ (3.1) $
72.2 $ 108.3 $ 36.7 $ (0.4) $ (2.9) $
74.9
Liabilities
Long-term debt (b)
$ 785.8
$ 786.1
$ 685.2
$ 686.8
(a) Maturities range from 2006 to 2035.
(b) Includes current maturities.
In the normal course of business, we enter into various financial instruments, including derivative financial
instruments. These instruments consist of forward contracts that are used to reduce our exposure to changes in
energy and commodity prices. These financial instruments are designated at inception as highly effective
cash-flow hedges and are measured for effectiveness both at inception and on an ongoing basis, with gains or
losses deferred in Accumulated Other Comprehensive Income until the underlying hedged transaction is realized,
canceled or otherwise terminated. The forward contracts generally mature within twelve months.
DPL Inc.
79
13 Earnings per Share
Basic earnings per share (EPS) are based on the weighted-average number of DPL common shares outstanding
during the year. Diluted earnings per share are based on the weighted-average number of DPL common and
common equivalent shares outstanding during the year, except in periods where the inclusion of such common
equivalent shares is anti-dilutive. Excluded from outstanding shares for this weighted-average computation are
shares held by DP&L’s Master Trust Plan for deferred compensation and by the ESOP.
For the years 2006, 2005, and 2004, respectively, approximately 0.4 million, 0.5 million, and 28.0 million
warrants and stock options were excluded from the computation of diluted earnings per share because they were
anti-dilutive. These warrants and stock options could be dilutive in the future.
The following illustrates the reconciliation of the numerators and denominators of the basic and diluted earn-
ings per share computations for income after discontinued operations and cumulative effect of accounting change:
$ in millions
except per share amounts
2006
Income(a) Shares Per Share
2005
Income(a) Shares Per Share
2004
Income(a)
Shares Per Share
Basic EPS
$ 139.6
112.3
$ 1.24
$ 174.4
121.0
$ 1.44
$ 217.3
120.1
$ 1.81
Effect of Dilutive Securities:
Stock Incentive Units
Warrants
Stock options, performance
and restricted shares
1.3
7.1
1.2
1.2
6.1
0.8
1.2
0.6
0.2
Diluted EPS
$ 139.6
1 21.9
$ 1.15
$ 174.4
129.1
$ 1.35
$ 217.3
122.1
$ 1.78
(a) Income after discontinued operations and cumulative effect of accounting change.
14 Assets Held for Sale
In connection with DPLE’s (significant subsidiary of DPL) decision to sell the Greenville Station and Darby Station
electric peaking generation facilities, DPL concluded that an impairment charge for the Greenville Station and
Darby Station assets was required. Greenville Station consists of four natural gas peaking units with a net book
value of approximately $66 million. Darby Station consists of six natural gas peaking units with a net book value of
approximately $156 million. DPLE plans to sell the Greenville Station and Darby Station assets for $49 million
and $102 million, respectively, in two separate transactions. These sales are expected to take place during the
first half of 2007.
During the fourth quarter of 2006, DPL recorded a $71.0 million impairment charge to record the fair market
write-down of the assets and other associated costs related to the sale.
These assets are no longer being depreciated. The assets and liabilities held for sale in the Consolidated
Balance Sheet are as follows:
$ in millions
Current Assets:
Inventories
Property:
Property, plant and equipment
Less: Accumulated depreciation and amortization
Net Property, plant and equipment
Current Liabilities:
Accounts payable and accrued expenses
80 DPL Inc.
$
0.2
$ 283.5
(132.3)
$ 151.2
$
0.2
15 Contractual Obligations, Commercial Commitments and Contingencies
Contractual Obligations and Commercial Commitments
We enter into various contractual obligations and other commercial commitments that may affect the liquidity
of our operations. At December 31, 2006, these include:
Contractual Obligations
Payment Year
$ in millions
Total
Less than 1 Year
2 -3 Years
4 -5 Years
More than 5 Years
DPL
Long-term debt
Interest payments
Pension and postretirement payments
Capital leases
Operating leases
Coal contracts (a)
Limestone contracts
Other contractual obligations
Total contractual obligations
$ 1,774.8
1,101.8
235.6
2.9
0.7
554.6
58.7
391.7
$ 4,120.8
DP&L
Long-term debt
Interest payments
Pension and postretirement payments
Capital leases
Operating leases
Coal contracts (a)
Limestone contracts
Other contractual obligations
Total contractual obligations
$ 783.2
571.9
235.6
2.9
0.7
554.6
58.7
391.5
$ 2,599.1
(a) DP&L-operated units
Long-term debt:
DPL’s long-term debt as of December 31, 2006, consists
of DP&L’s first mortgage bonds, tax-exempt pollution
control bonds, DPL unsecured notes and includes
current maturities and unamortized debt discounts. During
2006, DP&L entered into $100 million of long-term tax-
exempt debt.
DP&L’s long-term debt as of December 31, 2006,
consists of first mortgage bonds, tax-exempt pollution
control bonds and includes an unamortized debt discount.
See Note 8 of Notes to Consolidated Financial
Statements.
Interest payments:
Interest payments associated with the Long-term debt
described above.
Pension and postretirement payments:
As of December 31, 2006, DP&L had estimated future
benefit payments as outlined in Note 5 of Notes to
Consolidated Financial Statements. These estimated future
benefit payments are projected through 2015.
$ 225.0
98.8
22.0
0.9
0.3
324.4
1.7
328.5
$ 275.0
171.2
45.2
1.4
0.3
118.4
9.5
53.7
$ 1,001.6
$ 674.7
$
–
39.1
22.0
0.9
0.3
324.4
1.7
328.4
$
–
78.3
45.2
1.4
0.3
118.4
9.5
53.6
$ 297.4
144.0
46.5
0.6
0.1
111.8
10.8
9.5
$ 620.7
$
–
78.3
46.5
0.6
0.1
111.8
10.8
9.5
$ 716.8
$ 306.7
$ 257.6
$ 977.4
687.8
121.9
–
–
–
36.7
–
$ 1,823.8
$ 783.2
376.2
121.9
–
–
–
36.7
–
$ 1,318.0
Capital leases:
As of December 31, 2006, DP&L had two capital leases
that expire in November 2007 and September 2010.
Operating leases:
As of December 31, 2006, DPL and DP&L had several
operating leases with various terms and expiration
dates. Not included in this total is approximately $88,000
per year related to right of way agreements that are
assumed to have no definite expiration dates.
Coal contracts:
DP&L has entered into various long-term coal contracts
to supply portions of its coal requirements for its generat-
ing plants. Contract prices are subject to periodic
adjustments and have features that limit price escalation
in any given year.
Limestone contracts:
DP&L has entered into various limestone contracts to
supply limestone for its generating facilities.
Other contractual obligations:
As of December 31, 2006, DPL and DP&L had various
other contractual obligations including non-cancelable
contracts to purchase goods and services with various
terms and expiration dates.
DPL Inc.
81
We enter into various commercial commitments, which may affect the liquidity of our operations.
At December 31, 2006, these include:
Credit facilities:
In November 2006, DP&L replaced its previous $100 million revolving credit agreement with a $220 million five year
facility that expires on November 21, 2011. At December 31, 2006, there were no borrowings outstanding under this
credit agreement. DP&L has the ability to increase the size of the facility by an additional $50 million at any time.
Guarantees:
DP&L owns a 4.9% equity ownership interest in an electric generation company. As of December 31, 2006, DP&L could
be responsible for the repayment of 4.9%, or $21.8 million, of a $445 million debt obligation that matures in 2026.
In two separate transactions in November and December 2006, DPL agreed to be a guarantor of the obligations of
its wholly-owned subsidiary, DPL Energy, LLC (DPLE) regarding the pending sale of the Darby Electric Peaking Station
to American Electric Power and the sale of the Greenville Electric Peaking Station to Buckeye Electric Power, Inc. In both
cases, DPL has agreed to guarantee the obligations of DPLE over a multiple year period as follows:
$ in millions
Darby
Greenville
Contingencies
In the normal course of business, we are subject to
various lawsuits, actions, proceedings, claims and
other matters asserted under laws and regulations.
We believe the amounts provided in our consolidated
financial statements, as prescribed by GAAP, are ade-
quate in light of the probable and estimable contingen-
cies. (See Note 1 of Notes to Consolidated Financial
Statements.) However, there can be no assurances
that the actual amounts required to satisfy alleged
liabilities from various legal proceedings, claims, tax
examinations and other matters discussed below, and
to comply with applicable laws and regulations, will
not exceed the amounts reflected in our Consolidated
Financial Statements. As such, costs, if any, that may
be incurred in excess of those amounts provided as of
December 31, 2006, cannot be reasonably determined.
Environmental Matters
DPL, DP&L and our subsidiaries’ facilities and opera-
tions are subject to a wide range of environmental
regulations and law. In the normal course of business,
we have investigatory and remedial activities underway
at these facilities to comply, or to determine compli-
ance, with such regulations. We have been identi-
fied, either by a government agency or by a private
party seeking contribution to site clean-up costs, as a
potentially responsible party (PRP) at two sites pursu-
ant to state and federal laws. We record liabilities for
probable estimated loss in accordance with Statement
of Financial Accounting Standards No. 5 (SFAS 5),
“Accounting for Contingencies.” To the extent a proba-
ble loss can only be estimated by reference to a range
of equally probable outcomes, and no amount within
the range appears to be a better estimate than any
2007
$ 30.6
$ 14.8
2008
$ 23.0
$ 11.1
2009
$ 15.3
$ 7.4
2010
$ 7.7
$ 3.7
other amount, we accrue for the low end of the range.
Because of uncertainties related to these matters
accruals are based on the best information available
at the time. We evaluate the potential liability related to
probable losses quarterly and may revise its estimates.
Such revisions in the estimates of the potential liabilities
could have a material effect on our results of opera-
tions and financial position.
Legal Matters
Former Executive Litigation
On August 24, 2004, DPL, and its subsidiaries
DP&L and MVE, filed a Complaint (and subsequently,
amended complaints) against Mr. Forster, Ms.
Muhlenkamp and Mr. Koziar (the Defendants) in the
Court of Common Pleas of Montgomery County, Ohio
asserting legal claims against them relating to the
termination of the Valley Partners Agreements, chal-
lenging the validity of the purported amendments to
the deferred compensation plans and to the employ-
ment and consulting agreements with the Defendants,
and the propriety of the distributions from the plans
to the Defendants, and alleging that the Defendants
breached their fiduciary duties and breached their
consulting and employment contracts. DPL, DP&L and
MVE seek, among other things, damages in excess of
$25,000, disgorgement of all amounts improperly with-
drawn by the Defendants from the plans and a court
order declaring that DPL, DP&L and MVE have no fur-
ther obligations under the consulting and employment
contracts due to those breaches.
The Defendants have filed their answers (and sub-
sequently, amended answers) denying liability and filed
counterclaims (and subsequently, amended counter-
claims) against DPL, DP&L, MVE, various compensa-
82 DPL Inc.
tion plans (the Plans), and current and former employ-
ees and current and former members of our Board of
Directors. These counterclaims, as amended, allege
generally that DPL, DP&L, MVE, the Plans and the indi-
vidual defendants breached the terms of the employ-
ment and consulting contracts of the Defendants, and
the terms of the Plans. They further allege theories of
breach of fiduciary duty, breach of contract, promissory
estoppel, tortious interference, conversion, replevin
and violations of ERISA under which they seek distribu-
tion of deferred compensation balances, conversion of
stock incentive units, exercise of options and payment
of amounts allegedly owed under the contracts and the
Plans. Defendants’ counterclaims also demand pay-
ment of attorneys’ fees.
On March 15, 2005, Mr. Forster and Ms.
Muhlenkamp filed a lawsuit in New York state court
against the purchasers of the private equity invest-
ments in the financial asset portfolio and against out-
side counsel to DPL and DP&L concerning purported
entitlements in connection with the purchase of those
investments. DPL, DP&L and MVE are not defendants
in that case; however, the three of us are parties to
an indemnification agreement with respect to the
purchaser defendants. On August 18, 2005, the Ohio
court issued a preliminary injunction against Mr. Forster
and Ms. Muhlenkamp that precludes them from pursu-
ing certain key issues raised by Mr. Forster and Ms.
Muhlenkamp in their New York lawsuit that are identical
to the issues raised in the pending Ohio lawsuit in the
New York court or any other forum other than the Ohio
litigation. In addition, the New York court has stayed
the New York litigation pending the outcome of the
Ohio litigation. Mr. Forster and Ms. Muhlenkamp have
appealed the preliminary injunction and the appeal is
pending at the Ohio Supreme Court.
The trial commencement date for this case is set
for April 30, 2007.
Cumulatively through December 31, 2006, we
have accrued for accounting purposes, obligations of
approximately $56 million to reflect claims regarding
deferred compensation, estimated MVE incentives and/
or legal fees that Defendants assert are payable per
contracts. We dispute Defendants’ entitlement to any
of those sums and, as noted above, are pursuing litiga-
tion against them contesting all such claims.
On or about June 24, 2004, the SEC com-
menced a formal investigation into the issues raised
by the Memorandum (see Note 17 of the Notes to the
Consolidated Financial Statements). Although the SEC
has not taken any significant action in furtherance
of their investigation during 2006, we stand ready to
cooperate with their investigation.
On May 28, 2004, the U.S. Attorney’s Office for
the Southern District of Ohio, assisted by the Federal
Bureau of Investigation, notified us that it has initiated
an inquiry involving the subject matters covered by
our internal investigation. Although the U.S. Attorney’s
office and the FBI have not taken any significant action
in furtherance of their investigation during 2006, we
stand ready to cooperate with their investigation.
On June 24, 2004, the Internal Revenue Service
(IRS) began an audit of tax years 1998 through 2003
and issued a series of data requests to us including
issues raised in the Memorandum. The staff of the IRS
requested that we provide certain documents, includ-
ing but not limited to, matters concerning executive/
director deferred compensation plans, management
stock incentive plans and MVE financial statements.
On September 1, 2005, the IRS issued an audit report
for tax years 1998 through 2003 that showed proposed
changes to our federal income tax liability for each
of those years. The proposed changes resulted in a
total tax deficiency, penalties and interest of approxi-
mately $23.9 million as of December 31, 2005. On
November 4, 2005, we filed a written protest to one
of the proposed changes. On April 3, 2006, the IRS
conceded the proposed changes that we filed a writ-
ten protest to and issued a revised audit report for
tax years 1998 through 2003. The revised audit report
resulted in a total tax deficiency, penalties and interest
of approximately $1.2 million. We had previously made
a deposit with the IRS of approximately $1.3 million that
we requested on April 14, 2006 be applied to offset
the $1.2 million tax deficiency, penalties and interest
for tax years 1998 through 2003. The Joint Committee
on Taxation completed its review of the revised audit
report for tax years 1998 through 2003 and sent us a
letter dated June 16, 2006 stating that it took no excep-
tion to the revised audit report.
Insurance Recovery Claim
On January 13, 2006, we filed a claim against one
of our insurers, Associated Electric & Gas Insurance
Services (AEGIS), under a fiduciary liability policy
to recoup legal fees associated with our litigation
against three former executives. An arbitration of this
matter was held on August 4, 2006. The arbitration
panel ruled on or about September 12, 2006 that the
AEGIS policy does not require an advance of defense
expenses to us. Rather, the arbitration panel stated that
we are required to file a written undertaking as a condi-
tion precedent to repay expenses finally established
not to be insured. We have filed a written undertaking
with AEGIS and will continue to pursue resolution of the
claim through mediation and arbitration in 2007.
DPL Inc.
83
State Income Tax Audit
On February 13, 2006, we received correspondence
from the Ohio Department of Taxation (ODT) notify-
ing us that ODT has completed their examination
and review of our Ohio Corporation Franchise Tax
Returns for tax years 2002 through 2004 and that the
final proposed audit adjustments result in a balance
due of $90.8 million before interest and penalties. We
have reviewed the proposed audit adjustments and
are vigorously contesting the ODT findings and notice
of assessment through all administrative and judicial
means available. On March 29, 2006, we filed peti-
tions for reassessment with the ODT to protest each
assessment as well as request corrected assessments
for each tax year. On October 12, 2006, we signed
a Memorandum of Understanding with the ODT that
stated if the ODT’s positions are ultimately sustained
in judicial proceedings, the total additional tax liability
that we would be subject to for tax years 2002 through
2004 would be no more than $50.7 million before inter-
est as opposed to the $90.8 million stated in the ODT’s
correspondence of February 13, 2006. We believe we
have recorded adequate tax reserves related to the
proposed adjustments; however, we cannot predict
the outcome, which could be material to our results of
operations and cash flows.
We are also under audit review by various state
agencies for tax years 2002 through 2004. We have
also filed an appeal to the Ohio Board of Tax Appeals
for tax years 1998 through 2001. Depending upon the
outcome of these audits and the appeal, we may be
required to increase our tax provision if actual amounts
ultimately determined exceed recorded reserves. We
believe we have adequate reserves in each tax juris-
diction but cannot predict the outcome of these audits.
Labor Relations Unasserted Claim
In September 2006, DP&L became aware of an
unasserted claim under the Fair Labor Standards Act
concerning the calculation of overtime rates for its
unionized workforce. By agreement of Local #175 and
DP&L, we jointly submitted the claim to a neutral third
party who ruled in favor of DP&L’s position. As a result
of this decision, Local #175 has decided not to pursue
any claim against DP&L.
Environmental
Pending before the U.S. Supreme Court is a proceed-
ing, Environmental Defense v. Duke Energy that does
not involve DP&L as a party but may have a significant
effect on the outcome of litigation described below
that involves allegations of violations of the CAA. A
key issue in that litigation that may be dispositive with
respect to other pending cases is what test to apply for
measuring whether modifications to electric generating
units should trigger application of New Source Review
(NSR) standards under the CAA. In general terms, the
dispute is whether to measure pre- and post-modifica-
tion emissions based on the rate of emissions per hour
of operation or based on total emissions over time.
The latter test, if applied, could trigger NSR require-
ments for equipment replacements that result in a plant
running more often because it is more economical or
dependable, even if the emissions rate per hour of
operation does not change. A ruling is expected in the
first or second quarter of 2007. DP&L cannot predict
the outcome of the Duke Energy case. Moreover, in
each of the cases identified below, there may be case-
specific facts and allegations that may cause a judge
to find that the U.S. Supreme Court’s ruling is based on
different facts and allegations and is therefore not con-
trolling in the case before the judge.
In September 2004, the Sierra Club filed a law-
suit against DP&L and the other owners of the Stuart
Generating Station in the United States District Court
for the Southern District of Ohio for alleged violations
of the CAA, including issues that may be decided by
the Supreme Court in the Duke Energy case and other
issues relating to alleged violations of opacity limita-
tions. DP&L, on behalf of all co-owners, is leading the
defense of this matter. A sizable amount of discovery
has taken place and expert reports are scheduled to
be filed at various times from May through September,
2007. Dispositive motions are to be filed in January
2008. No trial date has been set yet.
16 Certain Relationships and
Related Transactions
On March 13, 2000, Dayton Ventures, Inc. and Dayton
Ventures, LLC, affiliates of Kohlberg Kravis Roberts &
Co. LLC (KKR), purchased a combination of trust pre-
ferred securities issued by a trust established by DPL,
DPL voting preferred shares and warrants to purchase
DPL’s common shares for an aggregate of $550 mil-
lion. The trust preferred securities were redeemed at
par in 2001 with proceeds of a new issuance of trust
preferred securities and DPL’s Senior Notes. The 6.6
million Series B voting preferred shares had voting
power not exceeding 4.9% of the total outstanding vot-
ing power of our voting securities and were purchased
by Dayton Ventures, LLC for an aggregate purchase
price of $68 thousand. The warrants to purchase
approximately 31.6 million common shares (represent-
84 DPL Inc.
ing approximately 19.9% of the common shares then
outstanding) have a term of 12 years, an exercise
price of $21 per share, and were purchased by Dayton
Ventures, LLC for an aggregate purchase price of $50
million. In connection with the March 13, 2000 transac-
tion, DPL and KKR also entered into an agreement
under which we paid KKR an annual management,
consulting and financial services fee of $1.0 million.
The agreement also stated that we would provide KKR
with an opportunity to provide investment banking ser-
vices on such terms as the parties may agree and at
such time as any such services may be required. We
also agreed to reimburse KKR and their affiliates for all
reasonable expenses incurred in connection with the
services provided under this agreement, including trav-
el expenses and expenses of its counsel. We and KKR
terminated this agreement on January 12, 2005. During
December 2004 through January 2005, KKR initiated
a series of agreements to transfer all of the warrants to
an unaffiliated third party. This transferee subsequently
transferred a large portion of the warrants to multiple
unrelated third parties. In January 2005, as part of
one of these transfers, KKR sold back to us all of the
outstanding Series B voting preferred shares at par of
$0.01 per share for $66 thousand.
Under the Securityholders and Registration Rights
Agreement among DPL Inc., DPL Capital Trust I,
Dayton Ventures, LLC and Dayton Ventures, Inc., KKR
had the right to designate one person for election to,
and one person to attend as a non-voting observer at
all meetings of, the DPL and DP&L Boards of Directors
for as long as Dayton Ventures, LLC and its affiliates
continue to beneficially own at least 12.64 million of
our common shares, including shares issuable upon
exercise of warrants. Scott M. Stuart, a director dur-
ing fiscal 2003, and George R. Roberts, a non-voting
observer, were the KKR designees in 2003 pursuant
to this agreement. Mr. Stuart resigned from the Board
and Mr. Roberts ceased to be a non-voting observer of
the Board as of April 2004. As a result of the transfer of
warrants from KKR to an unaffiliated third party during
December 2004 through January 2005, KKR no longer
owned any warrants or common stock. Accordingly,
KKR no longer had the right to appoint one member
and one observer to both DPL and DP&L Boards of
Directors and the Securityholders and Registration
Rights Agreement was amended to delete these, and
other, rights.
In 1996, DPL entered into a consulting contract
pursuant to which Peter H. Forster agreed to (i) serve,
in a non-employee capacity, as Chairman of the Board
of Directors of DPL, DP&L and MVE, and as Chairman
of the Executive Committee of our Board of Directors
and (ii) provide advisory and strategic planning con-
sulting services. That contract became the subject of
litigation after Mr. Forster resigned on May 16, 2004.
(See Note 15 of Notes to Consolidated Financial
Statements.)
In June 2001, DPL’s subsidiaries, MVE, of which
Mr. Forster was Chairman, Miami Valley Development
Company (MVDC) and Miami Valley Insurance
Company (MVIC), each entered into a management
services agreement (the MSAs) with Valley Partners,
Inc. (Valley) for the provision of ongoing oversight and
management of each subsidiary’s financial asset hold-
ings following a change of control of DPL or sale of the
financial assets portfolio to an unaffiliated third party.
Valley was a Florida corporation the sole stockholders,
directors and officers of which were Mr. Forster and
Ms. Muhlenkamp.
In October 2001, we entered into an Administrative
Services Agreement (the ASA) with Valley and the indi-
vidual trustees of certain master trusts which hold the
assets of various executive and director compensation
plans. The ASA engaged Valley to provide adminis-
trative and recordkeeping functions on behalf of the
master trusts upon a change of control of DPL, as well
as the provision of investment advice, in exchange for
an administration fee in addition to the annual manage-
ment fee payable to Valley.
In October 2001, DPL and DP&L also entered
into a Trustee Fee Agreement (the TFA) with Richard
Chernesky, Richard Broock and Frederick Caspar,
attorneys at Chernesky, Heyman & Kress P.L.L. Upon a
change of control of DPL or DP&L, Messrs. Chernesky,
Broock and Caspar would become the sole trustees
of the master trusts for an annual fee of $500,000 and
would succeed to all of the duties of our Compensation
Committee under the compensation plans funded
through the master trusts.
The MSAs, ASA and TFA (Valley Partners
Agreements) were terminated by an agreement execut-
ed in January 2004, but effective as of December 15,
2003. The financial assets were not sold or transferred
prior to such termination and therefore the agreements
never became effective and no compensation was ever
paid under them. Copies of the Valley Partners Agree–
ments were filed as exhibits to our 2003 Form 10-K.
On April 26, 2004, DPL entered into a New Trustee
Fee Agreement (New TFA) with Messrs. Chernesky,
Broock and Caspar that would have become effec-
tive upon a change of control of DPL or DP&L. If the
New TFA became effective, it provided that Messrs.
Chernesky, Broock and Caspar would serve as the sole
trustees of the master trusts in exchange for an annual
fee of $250,000 during the New TFA’s term. A copy of
DPL Inc.
85
the New TFA was filed as an exhibit to our 2003 Form
10-K. On October 14, 2004, at the request of DPL and
DP&L, Messrs. Chernesky, Broock and Caspar submit-
ted their resignations to us and DP&L.
On February 2 and 3, 2004, Mr. Koziar sent let-
ters to Mr. Forster and Ms. Muhlenkamp purporting to
amend their consulting and employment agreements
to provide change of control protections regarding
their MVE payments. In addition, on February 2, 2004,
Mr. Koziar sent Mr. Forster a letter purporting to amend
his consulting agreement to provide additional terms
and to increase his compensation. However, none
of those purported amendments had been approved
by our Compensation Committee. Mr. Forster and
Ms. Muhlenkamp resigned and Mr. Koziar retired on
May 16, 2004.
We have initiated legal proceedings asserting
breach of fiduciary duty and breach of contract by
Messrs. Forster and Koziar and Ms. Muhlenkamp, and
challenging the propriety and/or validity of certain con-
tract terminations, purported amendments and agree-
ments. (See Note 15 of Notes to Consolidated Financial
Statements.)
17 Other Matters
Audit Committee Investigation and
Related Matters
On March 10, 2004, DPL’s and DP&L’s Corporate
Controller, sent a memorandum (the Memorandum)
to the Chairman of the Audit Committee of our Board
of Directors (the Audit Committee). The Memorandum
expressed the Corporate Controller’s “concerns,
perspectives and viewpoints” regarding financial
reporting and governance issues within the Company.
On March 15, 2004, our Audit Committee
retained the law firm of Taft, Stettinius & Hollister LLP
(TS&H) to represent the Audit Committee in an
independent review of each of the matters raised
by the Memorandum. TS&H subsequently retained an
accounting firm as a forensic accountant to assist
in this review. On April 27, 2004, TS&H submitted a
written report of its findings to the members of the
Audit Committee (the Report). A copy of the Report
was filed as an exhibit to our 2003 Form 10-K. While
TS&H stated that it did not uncover and no person had
indicated to it any uncorrected material inaccuracies
in our books and records, it did, however, recommend
further follow-up by the Audit Committee and improve-
ments relating to disclosures, communication, access
to information, internal controls and the culture of
the Company in certain areas. Based upon informa-
tion received after issuing the Report, TS&H revised
its analysis and prepared a supplement to the Report,
dated May 25, 2004 (the Supplement). A copy of
the Supplement was filed as an exhibit to our 2003
Form 10-K.
Our Audit Committee considered the Report and
Supplement at a meeting held on May 16, 2004. After
its review and consideration, the Audit Committee
recommended that the full Board of Directors accept
the Report and the Supplement. At a meeting held on
May 16, 2004, our Board of Directors accepted the
Report and Supplement, including the findings and
recommendations set forth therein. Mr. Forster and Ms.
Muhlenkamp resigned and Mr. Koziar retired on May
16, 2004, and subsequently DPL and DP&L have been
involved in litigation with them (see Note 15 of Notes
to Consolidated Financial Statements). In addition, in
2004 corrective action was taken with regard to internal
controls, process issues and tone at the top as identi-
fied in the Report.
Governmental and Regulatory Inquiries
On May 20, 2004, the staff of the SEC notified DPL
that it was conducting an inquiry covering our exempt
status under the Public Utility Holding Company Act
of 1935 (the ’35 Act). The staff of the SEC requested
DPL provide certain documents and information on a
voluntary basis. On October 8, 2004, DPL received
a notice from the SEC that a question existed as to
whether such exemption from the Public Utility Holding
Company Act was detrimental to the public interest or
the interests of investors or consumers. On November
5, 2004, DPL filed a good faith application seeking an
order of exemption from the SEC. In light of the repeal
of the ’35 Act, effective February 8, 2006, and based
upon the information previously provided to the staff of
the SEC, this inquiry is moot.
On May 28, 2004, the U.S. Attorney’s Office for
the Southern District of Ohio, assisted by the Federal
Bureau of Investigation, notified DPL and DP&L that it
had initiated an inquiry involving matters connected to
our internal investigation. We are cooperating with this
investigation.
On or about June 24, 2004, the SEC commenced
a formal investigation into the issues raised by the
Memorandum. DPL and DP&L are cooperating with
the investigation.
86 DPL Inc.
Report of Independent Registered Public Accounting Firm
The Board of Directors
DPL Inc.:
We have audited the accompanying consolidated balance sheets of DPL Inc. and subsidiaries (the Company)
as of December 31, 2006 and 2005, and the related consolidated statement of results of operations, shareholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2006. In connection
with our audits of the consolidated financial statements, we have audited the consolidated financial statement
schedule, “Schedule II - Valuation and Qualifying Accounts” for each of the years in the three-year period ended
December 31, 2006. These consolidated financial statements and the financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of the Company as of December 31, 2006 and 2005, and the consolidated results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in
conformity with United States generally accepted accounting principles. Also, in our opinion, the related financial
statement schedules when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly in all materials respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company
adopted FASB Statement of Financial Accounting Standard No. 123 (Revised), Share-Based Payment. Also dis-
cussed in Note 1 to the consolidated financial statements effective December 31, 2006 the Company adopted
FASB Statement of Financial Accounting Standard No. 158, Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal controls over financial reporting as of December
31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2007
expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
KPMG LLP
Kansas City, Missouri
February 22, 2007
DPL Inc.
87
Report of Independent Registered Public Accounting Firm on Internal Controls
The Board of Directors
DPL Inc.:
We have audited management’s assessment, included in the Management’s Report on Internal Control Over
Financial Reporting appearing under Item 9A, that DPL Inc. and subsidiaries (the Company) maintained effective
internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to
express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing such other proce-
dures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal
controls over financial reporting as of December 31, 2006, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of the Company as of December 31, 2006 and 2005, and the
related consolidated statements of results of operations, shareholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2006, and our report dated February 22, 2007, expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
Kansas City, Missouri
February 22, 2007
88 DPL Inc.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholder of
The Dayton Power and Light Company:
We have audited the accompanying consolidated balance sheets of The Dayton Power and Light Company
(DP&L) and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of results of
operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December
31, 2006. In connection with our audits of the consolidated financial statements, we have audited the consoli-
dated financial statement schedule, “Schedule II - Valuation and Qualifying Accounts” for each of the years in the
three-year period ended December 31, 2006. These consolidated financial statements and the financial statement
schedules are the responsibility of DP&L’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards 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. An audit also includes assess-
ing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of DP&L as of December 31, 2006 and 2005, and the consolidated results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity
with United States generally accepted accounting principles. Also, in our opinion, the related financial statement
schedules when considered in relation to the basic consolidated financial statements taken as a whole, present
fairly in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006 the Company
adopted FASB Statement of Financial Accounting Standard No. 123 (Revised), Share-Based Payment. Also dis-
cussed in Note 1 to the consolidated financial statements effective December 31, 2006 the Company adopted
FASB Statement of Financial Accounting Standard No. 158, Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal controls over financial reporting as of December
31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2007
expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
KPMG LLP
Kansas City, Missouri
February 22, 2007
DPL Inc.
89
Report of Independent Registered Public Accounting Firm on Internal Controls
The Board of Directors and Shareholder of
The Dayton Power and Light Company:
We have audited management’s assessment, included in the Management’s Report on Internal Control Over
Financial Reporting appearing under Item 9A, that The Dayton Power and Light Company (DP&L) and subsidiaries
maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). DP&L’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on management’s assessment and an opinion on the effectiveness of DP&L’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing such other proce-
dures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management’s assessment that DP&L maintained effective internal control over financial report-
ing as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, DP&L maintained, in all material respects, effective internal controls over financial
reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of DP&L as of December 31, 2006 and 2005, and the
related consolidated statements of results of operations, shareholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2006, and our report dated February 22, 2007, expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
Kansas City, Missouri
February 22, 2007
90 DPL Inc.
DPL Inc. – Selected Quarterly Information (Unaudited)
$ in millions
Revenues
Operating Income
Earnings from
continuing operations
Earnings from discontinued
operations, net of taxes
Cumulative effect of accounting
change, net of taxes
Net income
Basic earnings per share of
For the three months ended
March 31,
June 30,
September 30,
December 31,
2006
2005
2006
2005
2006
2005 (a)
2006 (b)
2005
$ 341.1 $ 307.1
81.9
103.2
$ 309.0 $ 293.4 $ 392.5 $ 357.4
99.6
62.3
98.5
55.9
$ 350.9
23.4
$ 327.0
95.3
51.3
36.1
22.6
16.7
47.4
25.7
4.3
46.2
7.6
37.6
–
5.2
3.4
0.2
3.0
9.9
–
–
$ 58.9 $ 73.7
–
–
$ 22.6 $ 21.9 $ 50.8 $ 25.9
–
–
–
(3.2)
$
7.3 $ 52.9
common stock:
Continuing operations
Discontinued operations
Cumulative effect of accounting change
$ 0.43 $ 0.30
0.31
–
0.06
–
$ 0.20 $ 0.14 $ 0.44
0.03
–
0.04
–
–
–
$ 0.21
–
–
$ 0.04 $ 0.38
0.09
(0.03)
0.03
–
Total basic earnings per
common share
$ 0.49 $ 0.61
$ 0.20 $ 0.18 $ 0.47
$ 0.21
$ 0.07 $ 0.44
Diluted earnings per share of
common stock:
Continuing operations
Discontinued operations
Cumulative effect of accounting change
$ 0.40 $ 0.28
0.30
0.06
–
–
$ 0.18 $ 0.13 $ 0.40
0.03
–
0.04
–
–
–
$ 0.20
–
–
$ 0.04 $ 0.36
0.08
(0.03)
0.02
–
Total diluted earnings per
common share
$ 0.46 $ 0.58
$ 0.18 $ 0.17 $ 0.43
$ 0.20
$ 0.06 $ 0.41
Dividends paid per share
$ 0.25 $ 0.24
$ 0.25 $ 0.24 $ 0.25
$ 0.24
$ 0.25 $ 0.24
Common stock market price
- High
- Low
$ 27.58 $ 26.77
$ 25.11 $ 24.27
$ 27.82 $ 27.67 $ 27.93
$ 26.25 $ 24.08 $ 26.74
$ 28.12
$ 26.70
$ 28.72 $ 28.01
$ 27.16 $ 24.55
(a) Earnings from continuing operations in the second and third quarters of 2005 include charges of $2.1 million and $59.1 million,
respectively, for the early redemption of debt.
(b) Earnings from continuing operations in the fourth quarter of 2006 included a $44.2 million ($71 million pre-tax) impairment charge
resulting from DPL’s decision to sell two of its peaking stations. See Note 14 of the Notes to the Consolidated Financial Statements.
DP&L – Selected Quarterly Information (Unaudited)
$ in millions
2006
2005
2006
2005
2006
2005
2006
2005
March 31,
June 30,
September 30,
December 31,
For the three months ended
Revenues
Operating Income
Income before income taxes
and cumulative effect of
accounting change
Income before cumulative effect
of accounting change
Net Income
Earnings on comon stock
Cash dividends paid
$ 339.1 $ 305.1
91.4
115.5
$ 306.7 $ 291.4 $ 390.3
107.1
72.7
76.0
$ 355.5
112.1
$ 349.1 $ 324.9
103.1
107.2
110.2
87.9
69.5
65.1
103.0
100.8
101.9
99.3
66.9
66.9
66.7
–
53.3
53.3
53.1
$ 75.0
$
44.0
44.0
43.8
–
$
35.9
35.9
35.7
–
64.0
64.0
63.8
–
$
$
63.1
63.1
62.9
–
$
67.5
67.5
67.3
$ 100.0
62.7
59.5
59.2
$ 75.0
DPL Inc.
91
Item 9 Changes in and Disagreements
with Accountants on Accounting and
Financial Disclosure
fiscal period that has materially affected, or is
reasonably likely to materially affect, internal control
over reporting.
None.
Item 9a Controls and Procedures
Disclosure Controls and Procedures
Our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO) are responsible for establishing and
maintaining our disclosure controls and procedures.
These controls and procedures were designed to
ensure that material information relating to us and our
subsidiaries are communicated to the CEO and CFO.
We evaluated these disclosure controls and proce-
dures as of the end of the period covered by this report
with the participation of our CEO and CFO. Based on
this evaluation, our CEO and CFO concluded that our
disclosure controls and procedures are effective: (i) to
ensure that information required to be disclosed by us
in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and
forms and (ii) to ensure that information required to be
disclosed by us in the reports that we submit under the
Exchange Act is accumulated and communicated to
our management, including our principal executive and
principal financial officers, or persons performing simi-
lar functions, as appropriate, to allow timely decisions
regarding required disclosure.
The following report is our report on internal control
over financial reporting as of December 31, 2006.
Management’s Report on Internal Control
Over Financial Reporting
We are responsible for establishing and maintaining
adequate internal control over financial reporting,
as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the partici-
pation of management, including the CEO and CFO,
we conducted an evaluation of the effectiveness
of our internal control over financial reporting based
on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on
an evaluation under the framework in Internal Control -
Integrated Framework, we concluded that our
internal control over financial reporting was effective
as of December 31, 2006.
Our assessment of the effectiveness of our internal
control over financial reporting as of December 31,
2006, has been audited by KPMG LLP, the indepen-
dent registered public accounting firm that audited
the financial statements contained herein, as stated in
their report which is included herein.
Item 9b Other Information
There was no change in our internal control over
None.
financial reporting during the most recently completed
92 DPL Inc.
Part III
Item 10 Directors and Executive Officers
of DPL Inc.
Item 14 Principal Accountant Fees
and Services
The information required to be furnished pursuant to
this item for DPL Inc. will be set forth under the caption
“Audit and Non-Audit Fees” in the Proxy Statement and
is incorporated herein by reference.
DP&L Accountant Fees and Services
The following table presents the aggregate fees billed
for professional services rendered to us by KPMG LLP
and PricewaterhouseCoopers LLP for 2006 and 2005.
Other than as set forth below, no professional services
were rendered or fees billed by KPMG LLP during
2006 and 2005.
KPMG LLP
Fees Invoiced 2006
Fees Invoiced 2005
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Total
$ 1,762,728
147,030
–
–
$ 1,909,758
PricewaterhouseCoopers LLP
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Total
$
$
–
–
–
1,500
1,500
$ 2,511,912
55,712
2,435
–
$ 2,570,059
$
96,350
14,400
–
–
$ 110,750
(1) Audit fees relate to professional services rendered for the audit
of our annual financial statements and the reviews of our quarterly
financial statements.
(2) Audit-related fees relate to services rendered to us for assurance
and related services.
(3) Tax fees relate to services rendered to us for tax compliance,
tax planning and advice.
(4) Other services performed include certain advisory services in
connection with accounting research and do not include any fees for
financial information systems design and implementation.
The information required to be furnished pursuant to
this item with respect to Directors of DPL Inc. will be
set forth under captioned “Election of Directors” in DPL
Inc.’s proxy statement (the Proxy Statement) to be fur-
nished to shareholders in connection with the solicita-
tion of proxies by our Board of Directors for use at the
2007 Annual Meeting of Shareholders to be held on
April 27, 2007 and is incorporated herein by reference.
The information required to be furnished pursuant
to this item for DPL Inc. with respect to the identifi-
cation of the Audit Committee, the Audit Committee
financial expert and the registrant’s code of ethics will
be set forth under the caption “Corporate Governance”
in the Proxy Statement and is incorporated herein by
reference.
Item 11 Executive Compensation
The information required to be furnished pursuant to
this item for DPL Inc. will be set forth under the caption
“Executive Compensation” in the Proxy Statement and
is incorporated herein by reference.
Item 12 Security Ownership of Certain
Beneficial Owners and Management and
Related Shareholder Matters
The information required to be furnished pursuant
to this item for DPL Inc. will be set forth under
the captions “Security Ownership of Certain Beneficial
Owners,” “Security Ownership of Management” and
“Equity Compensation Plan Information” in the Proxy
Statement and is incorporated herein by reference.
Item 13 Certain Relationships and
Related Transactions
The information required to be furnished pursuant to
this item for DPL Inc. will be set forth under the caption
“Certain Relationships and Related Transactions”
in the Proxy Statement and is incorporated herein by
reference.
DPL Inc.
93
Part IV
Item 15 Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Financial Statements
Page No.
DPL Inc. – Consolidated Statements of Results of Operations
for each of the three years in the period ended December 31, 2006
DPL Inc. – Consolidated Statements of Cash Flows
for each of the three years in the period ended December 31, 2006
DPL Inc. – Consolidated Balance Sheets at December 31, 2006 and 2005
DPL Inc. – Consolidated Statements of Shareholders’ Equity
for each of the three years in the period ended December 31, 2006
DP&L – Consolidated Statements of Results of Operations
for each of the three years in the period ended December 31, 2006
DP&L – Consolidated Statements of Cash Flows
for each of the three years in the period ended December 31, 2006
DP&L – Consolidated Balance Sheets at December 31, 2006 and 2005
DP&L – Consolidated Statements of Shareholders’ Equity
for each of the three years in the period ended December 31, 2006
Notes to Consolidated Financial Statements
DPL Inc. – Report of Independent Registered Public Accounting Firm
DPL Inc. – Report of Independent Registered Public Accounting Firm on Internal Controls
DP&L – Report of Independent Registered Public Accounting Firm
DP&L – Report of Independent Registered Public Accounting Firm on Internal Controls
2. Financial Statement Schedule
For each of the three years in the period ended December 31, 2006:
Schedule II – Valuation and Qualifying Accounts
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.
45
46
47
48
49
50
51
52
53
87
88
89
90
104
94 DPL Inc.
3. Exhibits
DPL and DP&L exhibits are incorporated by reference as described unless otherwise filed as set forth herein.
The exhibits filed as part of DPL’s and DP&L’s Annual Report on Form 10-K, respectively, are:
DPL Inc. DP&L
✔
Exhibit
Number
2(a)
Exhibit
Copy of Asset Purchase Agreement, dated
December 14, 1999, between The Dayton Power
and Light Company, Indiana Energy, Inc., and
Number-3CHK, Inc.
3(a)
Copy of Amended Articles of Incorporation of DPL Inc.
dated September 25, 2001
3(b)
Regulations of DPL Inc.
3(c)
Copy of Amended Articles of Incorporation of
The Dayton Power and Light Company
dated January 4, 1991
3(d)
Regulations of The Dayton Power and Light Company
4(a)
Copy of Composite Indenture dated as of
October 1, 1935, between DP&L and The Bank of
New York, Trustee with all amendments through the
Twenty-Ninth Supplemental Indenture
✔
4(b)
Copy of Forty-First Supplemental Indenture dated
as of February 1, 1999, between DP&L and The Bank
of New York, Trustee
4(c)
4(d)
Copy of Forty-Second Supplemental Indenture
dated as of September 1, 2003, between DP&L and
The Bank of New York, Trustee
Copy of Forty-Third Supplemental Indenture dated
as of August 1, 2005, between DP&L and The Bank
of New York, Trustee
4(e)
Copy of Rights Agreement between DPL Inc. and
Equiserve Trust Company, N.A.
4(f)
Copy of Securities Purchase Agreement dated
as of February 1, 2000 by and among DPL Inc. and
DPL Capital Trust I, Dayton Ventures LLC and
Dayton Ventures Inc. and certain exhibits thereto
Location (1)
Exhibit 2 to Report on
Form 10-Q for the quarter
ended September 30, 2000
(File No. 1-9052)
Exhibit 3 to Report on
Form 10-K/A for the year
ended December 31, 2001
(File No. 1-2385)
Exhibit 3(b) to Form 8-K
filed on May 3, 2004
(File No. 1-9052)
Exhibit 3(b) to Report on
Form 10-K/A for the year
ended December 31, 1991
(File No. 1-2385)
Exhibit 3(a) to Report on
Form 8-K filed on
April 30, 2004
(File No. 1-2385)
Exhibit 4(a) to Report on
Form 10-K for the year
ended December 31, 1985
(File No. 1-2385)
Exhibit 4(m) to Report on
Form 10-K for the year
ended December 31, 1998
(File No. 1-2385)
Exhibit 4(r) to Report on
Form 10-K for the year
ended December 31, 2003
(File No. 1-2385)
Exhibit 4.4 to Report on
Form 8-K filed on
August 24, 2005
(File No. 1-2385)
Exhibit 4 to Report on
Form 8-K dated
September 25, 2001
(File No. 1-9052)
Exhibit 99(b) to
Schedule TO-I dated
February 4, 2000
(File No. 1-9052)
DPL Inc.
95
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✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
DPL Inc. DP&L
✔
Exhibit
Number
4(g)
Exhibit
Amendment to Securities Purchase Agreement dated
as of February 24, 2000 among DPL Inc., DPL Capital
Trust I, Dayton Ventures LLC and Dayton Ventures, Inc.
4(h)
Copy of Warrant Form initially issued as of
February 1, 2000
Location (1)
Exhibit 4(g) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 4(h) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 4(i) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 4(j) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 4(k) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 4(j) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 4(ee) to Report on
Form 10-K for the year
ended December 31, 2003
(File No. 1-2385)
Exhibit 10.1 to Form 8-K
filed on June 28, 2005
(File No. 1-9052)
Securityholders and Registration Rights Agreement
dated as of February 1, 2000 among DPL Inc.,
DPL Capital Trust I, Dayton Ventures LLC and
Dayton Ventures, Inc.
Amendment to Securityholders and Registration
Rights Agreement, dated August 24, 2001 among
DPL Inc., DPL Capital Trust I, Dayton Ventures LLC
and Dayton Ventures, Inc.
Amendment to Securityholders and Registration
Rights Agreement, dated December 6, 2004 among
DPL Inc., DPL Capital Trust I, Dayton Ventures LLC
and Dayton Ventures, Inc.
Amendment to Securityholders and Registration
Rights Agreement, dated January 12, 2005 among
DPL Inc., DPL Capital Trust I, Dayton Ventures LLC
and Dayton Ventures, Inc.
Copy of Credit Agreement dated as of June 1, 2004
between The Dayton Power and Light Company,
KeyBank National Association (as administrative agent
and lead arranger) and the lending institutions
named therein
Copy of Credit Agreement dated as of May 31, 2005,
between The Dayton Power and Light Company,
KeyBank National Association (as administrative agent
and lead arranger) and the lending institutions
named therein
Officer’s Certificate of DPL Inc. establishing $175 million Exhibit 4.1 to Form 8-K,
filed on March 29, 2004
Senior Note due 2009, dated March 25, 2004
(File No. 1-9052)
Exchange and Registration Rights Agreement dated
March 25, 2004 between DPL Inc. and the purchasers
Exhibit 4.2 to Form 8-K,
filed on March 29, 2004
(File No. 1-9052)
Indenture dated as of March 1, 2000 between DPL Inc.
and Bank One Trust Company, National Association
Exhibit 4(b) to Registration
Statement No. 333-37972
Officer’s Certificate of DPL Inc. establishing exchange
notes, dated March 1, 2000
Exhibit 4(c) to Registration
Statement No. 333-37972
4(i)
4(j)
4(k)
4(l)
4(m)
4(n)
4(o)
4(p)
4(q)
4(r)
96 DPL Inc.
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
DPL Inc. DP&L
Exhibit
Number
4(s)
Exhibit
Exchange and Registration Rights Agreement
dated as of August 24, 2001 between DPL Inc.,
Morgan Stanley & Co., Incorporated, Bank One
Capital Markets, Inc., Fleet Securities, Inc. and
NatCity Investments, Inc.
Location (1)
Exhibit 4(a) to Registration
Statement No. 333-74568
4(t)
4(u)
4(v)
4(w)
4(x)
4(y)
Officer’s Certificate of DPL Inc. establishing exchange
notes, dated August 31, 2001
Exhibit 4(c) to Registration
Statement No. 333-74568
Indenture dated as of August 31, 2001 between
DPL Inc. and The Bank of New York, Trustee
Exhibit 4(a) to Registration
Statement No. 333-74630
First Supplemental Indenture dated as of
August 31, 2001 relating to the subordinated debentures Statement No. 333-74630
between DPL Inc. and The Bank of New York
Exhibit 4(b) to Registration
Amended and Restated Trust Agreement dated as of
August 31, 2001 relating to DPL Capital Trust II, the
Capital Securities and the Common Securities among
DPL Inc., the depositor, The Bank of New York, as
property trustee, The Bank of New York (Delaware)
Exhibit 4(c) to Registration
Statement No. 333-74630
Forty Fourth Supplemental Indenture to the First
and Refunding Mortgage, dated as of
September 1, 2006 between the Bank of New York, as
trustee and The Dayton Power and Light Company
Exhibit 4.2 to Form 8-K
filed on September 19, 2006
(File No. 1-2385)
Exchange and Registration Rights Agreement dated
as of August 24, 2001 among DPL Inc., DPL Capital
Trust II and Morgan Stanley & Co., Incorporated
Exhibit 4(d) to Registration
Statement No. 333-74630
10(a)*
Copy of Directors’ Deferred Stock Compensation Plan
amended December 31, 2000
10(b)*
Copy of Directors’ 1991 Amended Deferred
Compensation Plan as amended through
December 31, 2000
10(c)*
Amendment No. 1 to Directors’ 1991 Amended
Deferred Compensation Plan as amended through
December 31, 2000 and dated as of December 7, 2004
10(d)*
Copy of Management Stock Incentive Plan amended
December 31, 2000
10(e)*
Amendment No. 1 to Management Stock Incentive
Plan amended December 31, 2000 and dated as of
December 7, 2004
Exhibit 10(a) to Report on
Form 10-K for the year
ended December 31, 2000
(File No. 1-9052)
Exhibit 10(b) to Report on
Form 10-K for the year
ended December 31, 2000
(File No. 1-9052)
Exhibit 10(c) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 10(c) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 10(e) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
DPL Inc.
97
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
DPL Inc. DP&L
✔
Exhibit
Number
10(f)*
Exhibit
Copy of Key Employees Deferred Compensation
Plan amended December 31, 2000
10(g)*
Amendment No. 1 to Key Employees Deferred
Compensation Plan amended December 31, 2000
and dated as of December 7, 2004
10(h)*
Copy of Supplemental Executive Retirement Plan
amended February 1, 2000
10(i)*
Amendment No. 1 to Supplemental Executive
Retirement Plan amended February 1, 2000 and
dated as of December 7, 2004
10(j)*
Copy of Stock Option Plan
10(k)*
2003 Long-Term Incentive Plan of DPL Inc. dated
as of January 20, 2003
10(l)*
Summary of Executive Life Insurance Plan
10(m)*
Summary of Executive Medical Insurance Plan
10(n)*
DPL Inc. Executive Incentive Compensation Plan
10(o)*
DPL Inc. Executive Incentive Compensation Plan and
Schedule A as amended September 5, 2006
10(p)*
DPL Inc. 2006 Equity and Performance Incentive Plan
10(q)*
Form of the Long-Term Incentive Plan –
Performance Shares Agreement
10(r)*
DPL Inc. Severance Pay and Change of Control Plan
Location (1)
Exhibit 10(d) to Report on
Form 10-K for the year
ended December 31, 2000
(File No. 1-9052)
Exhibit 10(g) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 10(e) to Report on
Form 10-K for the year
ended December 31, 2003
(File No. 1-2385)
Exhibit 10(i) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 10(f) to Report on
Form 10-K for the year
ended December 31, 2000
(File No. 1-9052)
Exhibit 10(aa) to Report on
Form 10-K for the year
ended December 31, 2003
(File No. 1-9052)
Exhibit 10(l) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 10(m) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 10.1 to Form 8-K/A
filed on March 2, 2006
(File No. 1-9052)
Exhibit 10.3 to Form 8-K
filed on September 8, 2006
(File No. 1-9052)
Exhibit 10.2 to Form 8-K/A
filed on March 2, 2006
(File No. 1-9052)
Exhibit 10.3 to Form 8-K/A
filed on March 2, 2006
(File No. 1-9052)
Exhibit 10.4 to Form 8-K/A
filed on March 2, 2006
(File No. 1-9052)
98 DPL Inc.
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DPL Inc. DP&L
Exhibit
Number
10(s)*
Exhibit
DPL Inc. Supplemental Executive Defined Contribution
Retirement Plan
10(t)*
DPL Inc. 2006 Deferred Compensation Plan
For Executives
10(u)*
DPL Inc. Pension Restoration Plan
Location (1)
Exhibit 10.5 to Form 8-K/A
filed on March 2, 2006
(File No. 1-9052)
Exhibit 10.2 to Form 8-K
filed on September 25, 2006
(File No. 1-9052)
Exhibit 10.3 to Form 8-K
filed on September 25, 2006
(File No. 1-9052)
10(v)*
10(w)*
Letter Agreement dated as of September 20, 2004
and Management Stock Option Agreement, as
amended, dated as of October 5, 2004, between
DPL Inc. and Robert D. Biggs
Exhibits 10.2 and 10.3 to
Report on Form 8-K filed
on October 8, 2004
(File No. 1-9052)
Amended and Restated Employment Agreement
Dated as of August 31, 2005 effective as of
January 1, 2005 between DPL Inc., The Dayton Power
and Light Company and Robert D. Biggs
Exhibit 10.1 to Report on
Form 8-K filed on
September 2, 2005
(File No. 1-9052)
10(x)*
Management Stock Option Agreement dated
as of August 31, 2005 between DPL Inc. and
Robert D. Biggs
10 (y)*
Employment agreement dated as of January 3, 2003,
between DPL Inc., The Dayton Power and Light
Company and James V. Mahoney
10(z)*
Change of Control Agreement dated as of
January 3, 2003, between DPL Inc., The Dayton
Power and Light Company and James V. Mahoney
and Management Stock Option Agreement
dated January 3, 2003 between DPL Inc. and
James V. Mahoney
Exhibit 10.2 to Report on
Form 8-K filed on
September 2, 2005
(File No. 1-9052)
Exhibit 10(j) to Report on
Form 10-K for the year
ended December 31, 2003
(File No. 1-9052)
Exhibit 10(o) to Report on
Form 10-K for the year
ended December 31, 2003
(File No. 1-9052)
10(aa)* Employment agreement dated as of
December 21, 2004 between DPL Inc., The Dayton
Power and Light Company and James V. Mahoney
Exhibit 10.1 to Form 8-K
filed on December 28, 2004
(File No. 1-9052)
10(bb)* Participation Agreement and Waiver among
DPL Inc., The Dayton Power and Light Company
and James V. Mahoney, dated March 7, 2006
10(cc)* Employment Agreement dated as of May 18, 2006
among DPL Inc., The Dayton Power and Light
Company and James V. Mahoney
10(dd)* Amendment of Employment Agreement dated as of
July 31, 2006 between James V. Mahoney, DPL Inc.
and The Dayton Power and Light Company
Exhibit 10.1 to Form 8-K
filed on March 10, 2006
(File No. 1-9052)
Exhibit 10.1 to Form 8-K
filed on May 24, 2006
(File No. 1-9052)
Exhibit 10.5 to
Report on Form 10-Q
filed August 1, 2006
(File No. 1-9052)
DPL Inc.
99
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DPL Inc. DP&L
Exhibit
Number
Exhibit
10(ee)* Employment agreement dated as of
December 14, 2004 between DPL Inc., The Dayton
Power and Light Company and John J. Gillen
10(ff)* Management Stock Option Agreement dated
as of December 29, 2004 between DPL Inc. and
John J. Gillen
10(gg)* Participation Agreement and Waiver dated
June 29, 2006 between DPL Inc., The Dayton
Power and Light Company and John J. Gillen
10(hh)* Employment agreement dated as of
September 17, 2003, between DPL Inc. and
W. Steven Wolff
10(ii)*
Change of Control Agreement dated as of
September 10, 2004, between DPL Inc., The Dayton
Power and Light Company and W. Steven Wolff
Location (1)
Exhibit 10.2 to Form 8-K
filed on December 28, 2004
(File No. 1-9052)
Exhibit 10(u) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
Exhibit 10.2 to Form 8-K
filed on July 3, 2006
(File No. 1-9052)
Exhibit 10(k) to Report on
Form 10-K for the year
ended December 31, 2003
(File No. 1-9052)
Exhibit 10(dd) to Report on
Form 8-K filed
September 23, 2004
(File No. 1-9052)
10(jj)*
Participation Agreement and Waiver among
DPL Inc., The Dayton Power and Light Company
and W. Steven Wolff, dated February 24, 2006
Exhibit 10.7 to Form 8-K
filed on March 2, 2006
(File No. 1-9052)
10(kk)* Employment Agreement dated as of
December 17, 2003 between DPL Inc and
Patricia K. Swanke
10(ll) * Change of Control Agreement dated as of July 1, 2004
between DPL Inc., The Dayton Power and Light
Company and Patricia K. Swanke and Management
Stock Option Agreement dated as of January 1, 2001
between DPL Inc. and Patricia K. Swanke
10(mm)* Participation Agreement and Waiver among
DPL Inc., The Dayton Power and Light Company and
Patricia K. Swanke, dated February 28, 2006
10(nn)* Employment Agreement and Change of Control
Agreement dated as of September 17, 2004 between
DPL Inc., The Dayton Power and Light Company
and Gary Stephenson
Exhibit 10(l) to Report on
Form 10-K for the year
ended December 31, 2003
(File No. 1-9052)
Exhibit 10(s) to Report on
Form 10-K for the year
ended December 31, 2004
(File No. 1-9052)
Exhibit 10.6 to Form 8-K
filed on March 2, 2006
(File No. 1-9052)
Exhibit 10(ee) to Report on
Form 8-K filed on
September 23, 2004
(File No. 1-9052)
10(oo)* Employment agreement dated as of June 9, 2003,
Exhibit 10(gg) to Report on
as amended by attached letter dated October 18, 2004, Form 10-K for the year
between DPL Inc., The Dayton Power and Light
Company and Miggie E. Cramblit
ended December 31, 2003
(File No. 1-9052)
10(pp)* Change of Control Agreement dated as of
December 15, 2000 between DPL Inc., The Dayton
Power and Light Company and Arthur G. Meyer
Exhibit 10(bb) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
100 DPL Inc.
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DPL Inc. DP&L
Exhibit
Number
Exhibit
10(qq)* Management Stock Option Agreement dated as of
January 1, 2001 between DPL Inc. and Arthur G. Meyer
Location (1)
Exhibit 10(cc) to Report on
Form 10-K for the year
ended December 31, 2005
(File No. 1-9052)
10(rr)*
Participation Agreement and Waiver among
DPL Inc., The Dayton Power and Light Company and
Arthur G. Meyer, dated March 6, 2006
Exhibit 10.2 to Form 8-K
filed on March 10, 2006
(File No. 1-9052)
10(ss)* Participation Agreement dated September 8, 2006
between DPL Inc., The Dayton Power and Light
Company and Paul M. Barbas
Exhibit 10.2 to Form 8-K
filed on September 8, 2006
(File No. 1-9052)
10(tt)*
Participation Agreement dated June 30, 2006
between DPL Inc., The Dayton Power and Light
Company and Frederick J. Boyle
10(uu)* Letter Agreement between DPL Inc.
and Glenn E. Harder dated June 20, 2006
Exhibit 10.1 to Form 8-K
filed on July 3, 2006
(File No. 1-9052)
Exhibit 10.1 to Form 8-K
filed on June 20, 2006
(File No. 1-9052)
10(vv)
Purchase and Sale Agreement dated as of
February 13, 2005 between MVE, Inc., Miami Valley
Insurance Company and AlpInvest/Lexington 2005, LLC
Exhibit 10.1 to Form 8-K
filed on February 18, 2005
(File No. 1-9052)
10(xx)
10(yy)
10(zz)
18
10(ww) Asset Purchase Agreement dated as of
December 21, 2006 between DPL Energy, LLC and
Buckeye Power, Inc.
Asset Purchase Agreement dated as of
November 28, 2006 between DPL Energy, LLC and
Columbus Southern Power Company
Filed herewith as
Exhibit 10(ww)
Filed herewith as
Exhibit 10(xx)
Revolving Credit Agreement, dated as of
November 21, 2006 between KeyBank N.A., JPMorgan
Chase, N.A., Fifth Third Bank and The Dayton Power
and Light Company
Exhibit 10.1 to Form 8-K
filed on November 28, 2006
(File No. 1-2385)
Form of the Long-Term Incentive Plan –
Performance Shares Agreement as amended
February 20, 2007
Filed herewith as
Exhibit 10(zz)
Copy of preferability letter relating to change
in accounting for unbilled revenues from
Price Waterhouse LLP
Exhibit 10.1 to Form 8-K
filed on February 18, 2005
(File No. 1-9052)
21
List of Subsidiaries of DPL Inc.
Filed herewith as Exhibit 21
23(a)
Consent of KPMG LLP
31(a)
31(b)
Certifi cation of Chief Executive Offi cer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certifi cation of Chief Financial Offi cer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith as
Exhibit 23(a)
Filed herewith as
Exhibit 31(a)
Filed herewith as
Exhibit 31(b)
DPL Inc. 101
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DPL Inc. DP&L
Exhibit
Number
32(a)
32(b)
99(a)
Exhibit
Certifi cation of Chief Executive Offi cer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certifi cation of Chief Financial Offi cer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Report of Taft, Stettinius & Hollister LLP,
dated April 26, 2004
99(b)
Supplement to the April 26, 2004 Report of
Taft, Stettinius & Hollister LLP, dated May 15, 2004
99(c)
Complaint fi led in Montgomery County Court of
Common Pleas, Montgomery County, Ohio – DPL Inc.,
The Dayton Power and Light Company and
MVE, Inc. v. Peter H. Forster, Caroline E. Muhlenkamp
and Stephen F. Koziar, Jr.
Location (1)
Filed herewith as
Exhibit 32(a)
Filed herewith as
Exhibit 32(b)
Exhibit 99(a) to Report on
Form 10-K for the year
ended December 31, 2003
(File No. 1-9052)
Exhibit 99(b) to Report on
Form 10-K for the year
ended December 31, 2003
(File No. 1-9052)
Exhibit 99(d) to Report
on Form 10-K for the year
ended December 31, 2003
(File No. 1-9052)
*Management contract or compensatory plan
(1) Exhibits referencing File No. 1-9052 have been filed by DPL Inc. and those referencing File No. 1-2385 have been
filed by The Dayton Power and Light Company
Pursuant to paragraph (b) (4) (iii) (A) of Item 601 of Regulation S-K, we have 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 us and our subsidiaries on a consolidated basis,
but we hereby agree to furnish to the SEC on request any such instruments.
102 DPL Inc.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
DPL Inc. and The Dayton Power and Light Company has duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized.
February 22, 2007
By:
/s/ Paul M. Barbas
DPL Inc.
Paul M. Barbas
President and Chief Executive Officer
(principal executive officer)
The Dayton Power and Light Company
February 22, 2007
By:
/s/ Paul M. Barbas
Paul M. Barbas
President and Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of DPL Inc. and The Dayton Power and Light Company and
in the capacities and on the dates indicated.
/s/ R. D. Biggs
(R. D. Biggs)
/s/ P. R. Bishop
(P. R. Bishop)
/s/ B. S. Graham
(B. S. Graham)
/s/ E. Green
(E. Green)
/s/ G. E. Harder
(G. E. Harder)
/s/ W A. Hillenbrand
(W A. Hillenbrand)
/s/ L. L. Lyles
(L. L. Lyles)
/s/ P. M. Barbas
(P. M. Barbas)
/s/ N. J. Sifferlen
(N. J. Sifferlen)
/s/ J. J. Gillen
(J. J. Gillen)
/s/ F. J. Boyle
(F. J. Boyle)
Director
Director
Director
Director
February 22, 2007
February 22, 2007
February 22, 2007
February 22, 2007
Director and Non-Executive Chairman
February 22, 2007
Director and Vice-Chairman
February 22, 2007
Director
February 22, 2007
Director, President and Chief Executive Officer
February 22, 2007
(principal executive officer)
Director
February 22, 2007
Senior Vice President and Chief Financial Officer
February 22, 2007
(principal financial and principal accounting officer)
Corporate Controller and Chief Accounting Officer
February 22, 2007
DPL Inc. 103
Schedule II Valuation and Qualifying Accounts
DPL Inc.
For the years ended December 31, 2004-2006
$ in thousands
Description
2006:
Deducted from accounts receivable –
Provision for uncollectible accounts
2005:
Deducted from accounts receivable –
Provision for uncollectible accounts
2004:
Deducted from accounts receivable –
Provision for uncollectible accounts
Balance at
Beginning of Period
Additions
Deductions (1)
Balance at
End of Period
$ 1,044
$ 4,835
$ 4,449
$ 1,430
$ 1,085
$ 3,582
$ 3,623
$ 1,044
$ 6,003
$ 3,371
$ 8,289
$ 1,085
(1) Amounts written off, net of recoveries of accounts previously written off.
The Dayton Power and Light Company
For the years ended December 31, 2004-2006
$ in thousands
Description
2006:
Deducted from accounts receivable –
Provision for uncollectible accounts
2005:
Deducted from accounts receivable –
Provision for uncollectible accounts
2004:
Deducted from accounts receivable –
Provision for uncollectible accounts
Balance at
Beginning of Period
Additions
Deductions (1)
Balance at
End of Period
$ 1,044
$ 4,835
$ 4,449
$ 1,430
$ 1,085
$ 3,582
$ 3,623
$ 1,044
$ 3,617
$
885
$ 3,417
$ 1,085
(1) Amounts written off, net of recoveries of accounts previously written off.
104 DPL Inc.
Exhibit 21 Subsidiaries of DPL Inc.
DPL Inc. had the following subsidiaries on December 31, 2006:
The Dayton Power and Light Company
Miami Valley Insurance Company
DPL Energy, LLC
MVE, Inc.
DPL Finance Company, Inc.
DPL Energy Resources, Inc.
Subsidiaries of The Dayton Power and Light Company
The Dayton Power and Light Company had the following subsidiaries on December 31, 2006:
DPL Finance Company, Inc.
State of Incorporation
Ohio
Vermont
Ohio
Ohio
Delaware
Ohio
State of Incorporation
Delaware
DPL Inc. 105
Exhibit 23a Consent of Independent Registered Public Accounting Firm
The Board of Directors
DPL Inc.:
We consent to the incorporation by reference in the Registration Statement (No. 333-44370) on Form S-3, and
Registration Statement (No. 333-39982) on Form S-8 and Registration Statement (No. 333-139348) on
Form S-8 of DPL Inc. and Subsidiaries (the Company) of our reports dated February 22, 2007, with respect to
the consolidated balance sheets of the Company as of December 31, 2006 and 2005, and the related consolidated
statements of results of operations, shareholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2006, and all related financial statement schedules, management’s assessment
of the effectiveness of internal control over financial reporting as of December 31, 2006 and the effectiveness of
internal control over financial reporting as of December 31, 2006, which reports appear in the December 31, 2006
annual report on Form 10-K of the Company. Our report refers to a change in the method of accounting for
share-based payments and pension and other postretirement benefit obligations in 2006.
/s/ KPMG LLP
KPMG LLP
Kansas City, Missouri
February 22, 2007
106 DPL Inc.
Exhibit 31a Certifications
I, Paul M. Barbas, certify that:
1. I have reviewed this annual report on Form 10-K of DPL Inc. and The Dayton Power and Light Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 22, 2007
/s/ Paul M. Barbas
Paul M. Barbas
President and Chief Executive Officer
DPL Inc. 107
Exhibit 31b Certifications
I, John J. Gillen, certify that:
1. I have reviewed this annual report on Form 10-K of DPL Inc. and The Dayton Power and Light Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or cause such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 22, 2007
/s/ John J. Gillen
John J. Gillen
Senior Vice President and Chief Financial Officer
108 DPL Inc.
Exhibit 32a Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
DPL Inc. and The Dayton Power and Light Company
The undersigned officers of DPL Inc. and The Dayton Power and Light Company (the “Issuers”) hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that the Issuers’ Annual Report on Form 10-K for the period ended December 31, 2006, which this certificate
accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition
and results of operations of the Issuers as of the dates and for the periods expressed therein.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002, or
other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this statement required by Section 906 of the Sarbanes-Oxley Act of 2002, has
been provided to the Issuer and will be retained by the Issuers and furnished to the Securities and Exchange
Commission or its staff upon request.
Signed:
/s/ Paul M. Barbas
Paul M. Barbas
President and Chief Executive Officer
Date: February 22, 2007
The foregoing certificate is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed
as part of the Issuer’s Annual Report or as a separate disclosure document.
DPL Inc. 109
Exhibit 32b Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
DPL Inc. and The Dayton Power and Light Company
The undersigned officers of DPL Inc. and The Dayton Power and Light Company (the “Issuers”) hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that the Issuers’ Annual Report on Form 10-K for the period ended December 31, 2006, which this certificate
accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition
and results of operations of the Issuers as of the dates and for the periods expressed therein.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002, or
other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this statement required by Section 906 of the Sarbanes-Oxley Act of 2002, has
been provided to the Issuer and will be retained by the Issuers and furnished to the Securities and Exchange
Commission or its staff upon request.
Signed:
/s/ John J. Gillen
John J. Gillen
Senior Vice President and Chief Financial Officer
Date: February 22, 2007
The foregoing certificate is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed
as part of the Issuer’s Annual Report or as a separate disclosure document.
110 DPL Inc.
Corporate Information
Shareholder Information – www.dplinc.com
Shareholder information is available at www.dplinc.com, including
access to fi nancial conference calls and presentations, Securities
and Exchange Commission (SEC) fi lings, and historical stock
and dividend data. Interested parties may also receive automated
e-mail alerts to DPL news releases and SEC fi lings.
Online Shareholder Account Management –
www.computershare.com
Shareholders may manage their DPL Inc. common stock
account online at www.computershare.com. Computershare is
the transfer agent for DPL common stock. Services available
online include reinvesting dividends, enrolling in electronic
dividend deposit, changing an address, selling shares, and
downloading forms.
Transfer Agent Contact Information
By Mail:
Computershare Investor Services
P.O. Box 43078
Providence, Rl 02940-3078
By Overnight Delivery:
Computershare Investor Services
250 Royall Street
Canton, MA 02021
Phone: 800-736-3001
781-575-3605
Fax:
E-mail: shareholders@computershare.com
www.computershare.com
Trustee
DP&L First Mortgage Bonds
The Bank of New York
Corporate Trust Administration
101 Barclay Street
New York, New York 10286
Also interest paying agent
Securities Listing
The New York Stock Exchange is the only national
securities exchange on which DPL Inc. common stock
is listed. The trading symbol is DPL.
2006 Dividends
Ex-Dividend Date
2/10/06
5/11/06
8/11/06
11/13/06
Record Date
2/14/06
5/15/06
8/15/06
11/15/06
Payable Date
3/1/06
6/1/06
9/1/06
12/1/06
Amount
$ 0.25
$ 0.25
$ 0.25
$ 0.25
$ 1.00
Federal Income Tax Status of 2006 Dividend Payments
Dividends paid in 2006 on common and preferred stock are
fully taxable as dividend income.
Dividend Reinvestment
DPL offers shareholders a simple and cost-effective way
to invest in the Company through its dividend reinvestment
program. Shareholders may elect to have their cash dividends
automatically reinvested in DPL common stock. In addition,
shareholders have the option of making cash contributions
of at least $25 and up to $1,000 each quarter. This program
is offered to existing shareholders only. To enroll, contact
Computershare Investor Services at 800-736-3001, visit
www.computershare.com, or call DPL Shareholder Services
at 800-322-9244.
Dividend Direct Deposit
Shareholders who are not reinvesting their dividends in
DPL may choose to have their dividend payments deposited
directly into a savings or checking account. This free service
ensures that payments will be available on the payment
date, eliminating potential for mail delays and lost checks.
To enroll, contact Computershare Investor Services at
800-736-3001, visit www.computershare.com, or call DPL
Shareholder Services at 800-322-9244.
Annual Meeting
The Annual Meeting of Shareholders will be held at the
Schuster Center, One West Second Street, Dayton, Ohio
45402, on Friday, April 27, 2007 at 10:00 a.m. Eastern Time.
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 is available at www.dplinc.com
and will be supplied upon request. Please direct inquiries to
DPL Shareholder Services.
Certifi cations
The Company has fi led as exhibits to its Annual Report
on Form 10-K for the fi scal year ended Dec. 31, 2006, the
certifi cations of its President and Chief Executive Offi cer and
its Senior Vice President and Chief Financial Offi cer required
by Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934. The Company submitted to the New York Stock
Exchange during 2006 the Annual CEO Certifi cation required
by Section 303A.12 of the New York Stock Exchange Listed
Company Manual.
DPL Inc.
1065 Woodman Drive
Dayton, Ohio 45432
937-224-6000
www.dplinc.com
DPL Shareholder Services
937-259-7150
800-322-9244
Highlights
Officers
Board of Directors
Market value per share at December 31
Earnings (millions)
Earnings per share of common stock – Basic:
From continuing operations
From discontinued operations
From cumulative effect of accounting change
Total
Earnings per share of common stock – Diluted:
From continuing operations
From discontinued operations
From cumulative effect of accounting change
Total
Average shares outstanding (millions)
Basic
Diluted
Cash provided by operating activities (millions)
Long term debt including current portion (millions)
Interest expense (millions)
Total capital additions (millions)
Environmental capital additions (millions)
Dividends paid per share
$
$
$
$
$
$
$
$
$
$
2006
27.78
139.6
1.12
0.12
–
1.24
1.03
0.12
–
1.15
112.3
121.9
308.7
$
$ 1,777.7
102.2
$
358
245
1.00
$
$
$
System peak load – MW (calendar year)
Average retail price per kWh (calendar year) (cents/kWh)
3,240
7.59
$
$
$
$
$
$
$
$
$
$
2005
26.01
174.4
1.03
0.44
(0.03)
1.44
0.97
0.41
(0.03)
1.35
121.0
129.1
$
$
$
$
$
$
$
$
$
$
2004
25.11
217.3
1.01
0.80
–
1.81
1.00
0.78
–
1.78
120.1
122.1
$
314.1
$ 1,678.0
$
132.7
$ 2,130.8
$
$
$
$
137.7
180
90
0.96
3,243
6.96
$
$
$
$
160.2
88
18
0.96
2,896
6.94
Corporate Profile
DPL Generating Units & Service Area
DPL Inc. (NYSE: DPL) is a regional electric energy and utility
company. DPL’s principal subsidiaries include The Dayton
Power and Light Company (DP&L); DPL Energy, LLC (DPLE);
and DPL Energy Resources, Inc. (DPLER). DP&L, a regulated
electric utility, provides service to over 500,000 retail custom-
ers in West Central Ohio; DPLE engages in the operation
of peaking generation facilities; and DPLER is a competitive
retail electric supplier in Ohio, selling to major industrial
and commercial customers. DPL, through its subsidiaries,
owns approximately 4,400* megawatts of generation capacity,
of which 2,800 megawatts are low cost coal-fired units and
1,600* megawatts are natural gas and diesel peaking units.
Further information can be found at www.dplinc.com.
*DPL expects to close on the sale of two peaking plants in 2007, which will result in
total capacity of 3,750 megawatts and peaking capacity of 950 megawatts.
About the Cover
M i c h i g a n
L a k e E r
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Cleveland
O H I O
Columbus
Conesville
W e s t
V i
r g i n i a
Montpelier
Hutchings
Tait
Dayton
a
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n
I
Miami Fort
Cincinnati
Beckjord
Zimmer
Stuart
East Bend
Killen
K e n t u c k y
n DP&L Service Area
Pictured is downtown Dayton’s Riverscape area which hosts a
l Natural Gas Peaking Generation Units
number of cultural and family events. Riverscape’s renovation was
l Wholly & Commonly Owned Coal-Fired Generating Plants
made possible, in part, by support from DPL.
Paul M. Barbas
President and
Chief Executive Officer
DPL Inc. and DP&L
Joseph R. Boni III
Treasurer
DPL Inc. and DP&L
Frederick J. Boyle
Controller and
Chief Accounting Officer
DPL Inc. and DP&L
Miggie E. Cramblit
Vice President,
General Counsel and
Corporate Secretary
DPL Inc. and DP&L
John J. Gillen
Senior Vice President and
Chief Financial Officer
DPL Inc. and DP&L
Arthur G. Meyer
Vice President
DPL Inc. and DP&L
Gary G. Stephenson
Vice President
Commercial Operations
DPL Inc. and DP&L
Patricia K. Swanke
Vice President, Operations
DP&L Inc. and DP&L
W. Steven Wolff
President, Power Production
DPL Inc. and DP&L
Glenn E. Harder
Non-Executive Chairman
DPL Inc. and DP&L
President, GEH Advisory Services
Former Executive Vice President and
Chief Financial Officer
Carolina Power and Light
Raleigh, North Carolina
Ernie Green
President and Chief Executive Officer
Ernie Green Industries
Dayton, Ohio
Paul M. Barbas
President and Chief Executive Officer
DPL Inc. and DP&L
Dayton, Ohio
W August Hillenbrand
Non-Executive Vice-Chairman
DPL Inc. and DP&L
Principal
Hillenbrand Capital Partners
Retired President and
Chief Executive Officer
Hillenbrand Industries
Batesville, Indiana
Robert D. Biggs
Former Executive Chairman
DPL Inc. and DP&L
Retired Managing Partner
PricewaterhouseCoopers
Lester L. Lyles
Retired General, U.S. Air Force
Former Commander of the
Air Force Materiel Command
Dayton, Ohio
Paul R. Bishop
Chairman and Chief Executive Officer
H-P Products, Inc.
Louisville, Ohio
Dr. Ned J. Sifferlen
President Emeritus
Sinclair Community College
Dayton, Ohio
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Barbara S. Graham
Former Senior Vice President
Pepco Holdings
Washington, D.C.
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DPL Inc. 1065 Woodman Drive, Dayton, Ohio 45432 www.dplinc.com
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Annual Report
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