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DPL 10-Q 2010 Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2010
OR
For the transition period from to
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.
Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of October 26, 2010, each registrant had the following shares of common stock outstanding:
This combined Form 10-Q 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.
DPL Inc. and The Dayton Power and Light Company
The following select abbreviations or acronyms are used in this Form 10-Q:
DPL and DP&L file current, annual and quarterly reports, proxy statements (DPL only) and other information required by the Securities Exchange Act of 1934, as amended, with the SEC. You may read and copy any document we file at the SEC’s public reference 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 room. Our SEC filings are also available to the public from the SEC’s website 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 executive 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 guidelines, 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.
Forward-looking Statements: Certain statements contained in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Please see page 53 for more information about forward-looking statements contained in this report.
Part 1 — Financial Information
This report includes the combined filing of DPL and DP&L. DP&L is the principal subsidiary of DPL providing approximately 95% of DPL’s total consolidated revenue and approximately 94% 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.
Item 1 — Financial Statements
DPL INC. CONDENSED CONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS
See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited.
DPL INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited.
DPL INC. CONDENSED CONSOLIDATED BALANCE SHEETS
See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited.
DPL INC. CONDENSED CONSOLIDATED BALANCE SHEETS
See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited.
THE DAYTON POWER AND LIGHT COMPANY CONDENSED STATEMENTS OF RESULTS OF OPERATIONS
See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited.
THE DAYTON POWER AND LIGHT COMPANY CONDENSED STATEMENTS OF CASH FLOWS
See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited.
THE DAYTON POWER AND LIGHT COMPANY
See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited.
THE DAYTON POWER AND LIGHT COMPANY CONDENSED BALANCE SHEETS
See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited.
Notes to Condensed Consolidated Financial Statements (Unaudited)
This report includes the combined filing of DPL and DP&L. DP&L is the principal subsidiary of DPL providing approximately 95% of DPL’s total consolidated revenue and approximately 94% 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.
Some of the information within 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 financial information presented is segregated by registrant.
1. Overview and Summary of Significant Accounting Policies
Description of Business
DPL is a diversified regional energy company organized in 1985 under the laws of Ohio. DPL’s principal subsidiary is DP&L. DP&L is a public utility incorporated in 1911 under the laws of Ohio. DP&L is engaged in generation, transmission, distribution and the sale of 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. 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 other significant subsidiaries include DPLE, which owns and operates peaking generating facilities from which it makes wholesale sales of electricity; DPLER, which is a CRES provider selling retail electric energy and other energy services; and MVIC, our captive insurance company that provides insurance services to us and our subsidiaries. All of DPL’s subsidiaries are wholly-owned.
DPL also has a wholly-owned business trust, DPL Capital Trust II, formed for the purpose of issuing trust capital securities to investors.
DPL and DP&L conduct their principal business in one business segment — Electric.
DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators while its generation business is not subject to such regulation. Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates, and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs.
DPL and its subsidiaries have 1,499 employees as of September 30, 2010, 1,492 of which are employed by DP&L. Approximately 54% of the employees are under a collective bargaining agreement which expires in October 2011.
Financial Statement Presentation
We prepare Condensed Consolidated Financial Statements for DPL. DPL’s Condensed Consolidated Financial Statements include the accounts of DPL and its wholly-owned subsidiaries except for DPL Capital Trust II which is not consolidated, consistent with the provisions of GAAP relating to variable interest entities.
DP&L has undivided ownership interests in seven electric generating facilities and numerous transmission facilities. These undivided interests in jointly-owned facilities are accounted for on a pro rata basis in DP&L’s Condensed Financial Statements.
Certain immaterial amounts from prior periods have been reclassified to conform to the current reporting presentation.
All material intercompany accounts and transactions are eliminated in consolidation.
These financial statements have been prepared in accordance with GAAP for interim financial statements and with the instructions of Form 10-Q and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been omitted. Therefore, our interim financial statements in this report should be read along with the annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
In the opinion of our management, the financial statements presented in this report contain all adjustments necessary to fairly state our financial condition as of September 30, 2010; our results of operations for the three and nine months ended September 30, 2010; and our cash flows for the nine months ended September 30, 2010. Unless otherwise noted, all adjustments are normal and recurring in nature. Due to various factors, including but not limited to, seasonal weather variations, the timing of outages of electric generating units, changes in economic conditions involving commodity prices and competition, and other factors, interim results for the three and nine months ended September 30, 2010 may not be indicative of our results that will be realized for the full year ending December 31, 2010.
The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the revenues and expenses of the periods reported. Actual results could differ from these estimates. Significant items subject to such estimates and judgments include: the carrying value of Property, plant and equipment; unbilled revenues; the valuation of derivative instruments; the valuation of insurance and claims liabilities; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; the valuation of AROs; and assets and liabilities related to employee benefits.
Property, Plant and Equipment
We record our ownership share of our undivided interest in jointly-held plants as an asset in property, plant and equipment. Property, plant and equipment are stated at cost. For regulated transmission and distribution property, cost includes direct labor and material, allocable overhead expenses and an allowance for funds used during construction (AFUDC). AFUDC represents the cost of borrowed funds and equity used to finance regulated construction projects. Capitalization of AFUDC ceases at either project completion or at the date specified by regulators. AFUDC capitalized during the three and nine month periods ended September 30, 2010 and 2009 was not material.
For unregulated generation property, cost includes direct labor and material, allocable overhead expenses and interest capitalized during construction using the provisions of GAAP relating to the accounting for capitalized interest.
For substantially all depreciable property, when a unit of property is retired, the original cost of that property less any salvage value is charged to Accumulated depreciation and amortization consistent with the composite method of depreciation.
Property is evaluated for impairment when events or changes in circumstances indicate that its carrying amount may not be recoverable.
At September 30, 2010, neither DPL nor DP&L had any material plant acquisition adjustments or other plant-related adjustments.
Depreciation Study — Change in Estimate
Depreciation expense is calculated using the straight-line method, which allocates the cost of property over its estimated useful life. For DPL’s generation, transmission and distribution assets, straight-line depreciation is applied monthly on an average composite basis using group rates. In July 2010, DPL completed a depreciation rate study for non-regulated generation property based on its property, plant and equipment balances at December 31, 2009, with certain adjustments for subsequent property additions. The results of the depreciation study concluded that many of DPL’s composite depreciation rates should be reduced due to projected useful asset lives which are longer than those previously estimated. DPL adjusted the depreciation rates for its non-regulated generation property effective July 1, 2010, resulting in a net reduction of depreciation expense. For the three months ended September 30, 2010, the net reduction in depreciation expense amounted to $2.4 million ($1.6 million net of tax) and increased diluted EPS by approximately $0.01 per share. Each future quarter is expected to be equally impacted such that on an annualized basis, the net reduction in depreciation expense is projected to increase operating income by approximately $9.6 million ($6.4 million net of tax) or approximately $0.06 per diluted share.
Short-Term Investments
DPL utilizes VRDNs as part of its short-term investment strategy. The VRDNs are of high credit quality and are secured by irrevocable letters of credit from major financial institutions. VRDN investments have variable rates tied to short-term interest rates. Interest rates are reset every seven days and these VRDNs can be tendered for sale back to the financial institution upon notice. Although DPL’s VRDN investments have original maturities over one year, they are frequently re-priced and trade at par. We account for these VRDNs as available-for-sale securities and record them as short-term investments at fair value, which approximates cost, since they are highly liquid and are readily available to support DPL’s current operating needs.
DPL also holds investment-grade fixed income corporate securities in its short-term investment portfolio. These securities are accounted for as held-to-maturity investments.
Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities
DP&L collects certain excise taxes levied by state or local governments from its customers. DP&L’s excise taxes are accounted for on a gross basis and recorded as revenues and general taxes in the accompanying Statements of Results of Operations as follows:
Related Party Transactions
In the normal course of business, DP&L enters into transactions with other subsidiaries of DPL. All material intercompany accounts and transactions are eliminated in DPL’s Condensed Consolidated Financial Statements. The following table provides a summary of amounts transacted by DP&L with its related parties:
(a) DP&L sells power to DPLER to satisfy the electric requirements of DPLER’s retail customers. The revenues associated with sales to DPLER are recorded as wholesale sales in DP&L’s Condensed Financial Statements. The increase in DP&L’s sales to DPLER during the three and nine months ended September 30, 2010 compared to the same period in 2009 is primarily due to customers electing to switch their generation service from DP&L to DPLER. (b) MVIC, a wholly-owned captive insurance subsidiary of DPL, provides insurance coverage to DP&L and other DPL subsidiaries for workers’ compensation, general liability, property damages and directors’ and officers’ liability. These amounts represent insurance premiums paid by DP&L to MVIC. (c) In the normal course of business DP&L incurs and records expenses on behalf of DPLER. Such expenses include but are not limited to employee-related expenses, accounting, information technology, payroll, legal and other administration expenses. DP&L subsequently charges these expenses to DPLER at DP&L’s cost and credits the expense in which they were initially recorded.
Recently Adopted Accounting Standards
Variable Interest Entities
We adopted ASU 2009-02 “Omnibus Update” (formerly SFAS No. 167, a revision to FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities”) (ASU 2009-02), on January 1, 2010. This standard updates FASC Topic 810 “Consolidation.” ASU 2009-02 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar) rights should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. ASU 2009-02 did not have a material impact on our overall results of operations, financial position or cash flows.
Fair Value Disclosures
We adopted ASU 2010-06 “Fair Value Measurements and Disclosures” (ASU 2010-06) effective for annual reporting periods beginning after December 15, 2009. This standard updates FASC Topic 820 “Fair Value Measurements and Disclosures.” ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements are presented separately. ASU 2010-06 did not have a material impact on our overall results of operations, financial position or cash flows. See Note 8 of Notes to Condensed Consolidated Financial Statements.
2. Supplemental Financial Information and Comprehensive Income
DPL Inc.
DP&L
Supplemental Financial Information and Comprehensive Income (continued)
Comprehensive income for the three months ended September 30, 2010 and 2009 was as follows:
DPL Inc.
DP&L
Comprehensive income for the nine months ended September 30, 2010 and 2009 was as follows:
DPL Inc.
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