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Executives

Paul Barbas - President and CEO

Fred Boyle - SVP, CFO and Treasurer

Analysts

Paul Ridzon - KeyBanc

Alex Kania - Banc of America

DPL, Inc. (DPL) Q3 2010 Earnings Call October 29, 2010 9:00 AM ET

Operator

Welcome to the Third Quarter 2010 DPL Inc., Earnings Conference Call. My name is Shantale and I will be your facilitator for today’s call. At this time all participants are in a listen-only mode. We will be facilitation a question-and-answer session towards the end of today’s conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

On today’s call we Mr. Paul Barbas, President and Chief Executive Officer and Mr. Frederick Boyle, Senior Vice President, Chief Financial Officer and Treasurer. Please proceed.

John Gillen

Good morning and welcome to DPL's third quarter 2010 earnings conference call. I'm Fred Boyle, Senior Vice President, Chief Financial Officer and Treasurer.

Before we begin today, I would like to remind everyone that all references to earnings per share are diluted, unless otherwise noted. And that this call may contain certain forward-looking statements regarding plans and expectations for the future.

Investors are cautioned that actual outcomes and results may vary materially from those projected due to various factors beyond DPL's control. Such matters are described in our 2009 Annual Report on Form 10-K and Form 10-Q for the third quarter of 2009.

With me today is Paul Barbas, DPL's President and Chief Executive Officer. Paul will provide an overview of DPL's performance during the third quarter and an update on key operating matters. Following Paul’s comments I will review the third quarter financial results, discuss our 2010 and 2011 earnings guidance and then open it for questions.

Now I would turn the presentation over to Paul Barbas.

Paul Barbas

Thanks Fred. Good morning everyone and thank you for joining us today. I am pleased to report that DPL had a solid quarter driven by the warmer than normal weather. Diluted earnings for the quarter was $0.74 per share compared to $0.59 per share for the same period in 2009. And we remain on track to achieve our 2010 year-end earnings range of $2.35 per share to $2.55 per share. For 2011 we are projecting earnings to be between $2.30 per share and $2.55 per share.

During his financial review Fred will discuss the components of third quarter earnings, our year-end 2010 earnings expectations and the key assumptions supporting our 2011 earnings guidance.

Before Fred provides his review, I would like to provide an update on key regulatory and operating matters.

First, we filed a motion with PUCO last week requesting to withdraw our AMI and Smart Grid filings. As you may recall, during August 2009 as agreed to in our ESP settlement agreement we filed an amended AMI and Smart Grid plan with PUCO.

Although the plan demonstrated positive benefits to defer the cost, various factors since that time have led us to the decision to withdraw the filings. These factors include challenging economic conditions, DP&L not being awarded federal stimulus dollars and concerns raised by interested parties over the implementation and value related to AMI’s programs.

We will continue to monitor the efforts of other utilities, pilot projects being implemented here in Ohio and across the country. If the outcomes of these pilots are successful, we anticipate deploying AMI and Smart Grid technologies at some point in the future. We expect the commission will rule on our motion to withdraw by the end of this year.

Now, that we have requested the withdrawal of our AMI and Smart Grid filings we are ready to move forward with cash deployment opportunities. Fred will discuss the details during his financial reviews.

On the regulatory front, we plan to file our next electric security plan during the first quarter of 2012. In regards to the fee process, there hasn’t been any activity with respect to DP&L, as this process doesn’t applied to us until 2013 looking back at 2012 earnings. We will continue to monitor the key proceeding of the other Ohio utilities all of which are ongoing.

Moving on to operating matters, we are continuing to experience retail competition within our service territory. As you can see on the slide, the annualized amount of DP&L’s retail load being supplied by CRES providers has increased from our previously reported estimate of 35% to nearly 40%.

However, similar to our previous updates, DPL Energy Resources which is our retail marketing subsidiary is supplying 95% of the switch load. The impact of retail switching on third quarter gross margin was approximately $6 million. And for the calendar year, 2010 we estimates the impact will be approximately $15 million.

As we look forward to 2011, we anticipate to reduce gross margin from retail switching to be approximately $20 million to $25 million.

Concerning our sales volumes, we continue to see evidence of the economy stabilizing. Through year-to-date September, you can see that our total retail sales volumes are up three tenths of a percent on a weather adjusted basis and 7% overall compared to 2009.

This positive trend on weather adjusted sales has been driven by strong industrial sales which are up almost 8% for the year. The increase has been spread across multiple industries continuing what we had seen through the second quarter.

Residential commercial sales while up significantly on an actual basis, are still below 2009 on a weather adjusted basis. We had anticipated more improvement in these classes and will continue to monitor them closely. We now expect full year 2010 weather normalized sales to be 0.5% to 1% above 2009.

Turning to plant operations, our generation plate has seen an improvement in E4 in total output on a year-to-date basis. However, during the quarter there were forced outages for both DPL and partner operative facilities that resulted in a 5% reduction in generation output compared to 2009. We estimate a gross margin impact due to the forced outages for approximately $6 million.

We continued to focus on improved plan performance and O&M cost control as we finish 2010 and look to 2011. This has been evidenced by the ongoing success of our scrubber operations at Killen and Stuart Stations. Because of the scrubbers we continue to successfully burn Illinois basin coal at each station.

On the O&M front, aside from expenses we are able to recover on a one-for-one basis in revenues and the impact of an early retirement and disability program we managed to keep O&M flat for the quarter.

With that I will turn the presentation over the Fred for a review of the quarterly financial results.

Fred Boyle

Thank you, Paul. As Paul mentioned we have a strong quarter at DPL realizing diluted earnings of $0.74 per share for the three months ended September 30, 2010 compared to $0.59 per share for the same period in 2009. On a year-to-date basis diluted earnings were $1.88 per share compared to a $1.58 per share for 2009.

The key drivers of increased earnings for the third quarter of 2010 compared to the third quarter of 2009 were higher retail revenues of $0.46 per share primarily associated with the 15% increase in retail sales volumes and the recovery of fuel, capacity, transmission and environmental costs.

The increase in retail sales was due mostly to weather as total cooling degree days were 33% above normal. Offsetting the increase in retail revenues were lower gains from coal sales of $0.05 per share; higher fuel costs of $0.05 per share due to higher average fuel prices, partially offset by lower generation output; increased purchase power expenses of $0.11 per share; RTO expenses of $0.05 per share, and higher O&M cost of $0.05 per share.

The O&M increase mainly results from a $4 million increase in health insurance and disability cost primarily due to a number of employees filing for long-term disability during the quarter, and a $5 million increase in energy efficiency and low income assistance cost both of which were funded through retail rate riders and therefore have an offset in revenues. As you maybe aware of significant percentage of the increased fuel purchase power and RTO expenses are recovered in revenues.

Moving to other third quarter income statement items; depreciation expense decreased $4 million compared to the third quarter of 2009 due to lower depreciation rates on generation property, which were implemented during the third quarter of 2010.

General taxes increased $2 million compared to the third quarter of 2009 due primarily to higher kilowatt hour taxes associated with the increased sales volumes.

Interest expense decreased approximately $2 million due to the retirement of $52 million of long-term debt during December 2009. And lastly income tax has increased $12 million mainly due to the increase in pretax income.

Turning to liquidity and cash-flow; DPL's cash and cash equivalents totaled $139 million at September 30, 2010 compared to $75 million at December 31, 2009. In addition, DPL had $48 million in short-term investments at the end of the quarter.

The increase in cash and cash equivalents was primarily attributable to a $332 million of cash generated from operating activities partially offset by a $114 million of capital expenditures, $105 million of dividends paid on common stock and a $48 million used to invest in short-term securities.

DP&L had a combined $420 million in revolving credit facilities at September 30. We currently have no borrowings on the revolvers.

As Paul mentioned earlier, we recently filed a motion with the PUCO request the commission approval to withdraw DP&L’s AMI and Smart Grid filing. Given this action, we are moving forward with alternative cash deployment plans. First, concerning capital expenditures; our near-term ongoing maintenance capital expenditures are estimated to be approximately $200 million per year.

In addition to these expenditures, over the next three years, the company projects spending an additional $150 million to $200 million, on transmission and distribution projects. These are incremental to our ongoing maintenance capital plan and reflect projects needed to meet changing the reliability standards involving transmission lines down to 100 KV and to enhance distribution network reliability.

Next, we announced in our earnings release that our Board approved a new share repurchase plan of up to $200 million till 2013. Under this plan DP&L may repurchase its common stock from time to time in the open market through private transaction or otherwise on such terms and conditions as the company deems appropriate. Although the plan will run through the end of 2013 it may be modified or terminated at any time without notice.

We expect to finance these activities with a combination of cash on hand, cash flows from operations and short-term financings.

The company does not currently plan to issue any long-tem debt entering 2011 other than refinancing the $297 million DPL facility that matures during the fourth quarter of 2011.

The capital projects and the share repurchase plan will continue to be reviewed and may be revised in light of changes in financial and economic conditions, load forecast, legislative and regulatory developments, and changing environmental standards among other factors.

Turning to our earnings guidance, we are reaffirming our 2010 earnings guidance range of $2.35 to $ 2.55 per share. As was mentioned earlier we expect the gross margin impact of switching to be approximately $50 million for 2010, and weather normalized retail sales volumes to be 0.5% to 1% above 2009 levels

Looking ahead to 2011 we have set our earnings range at $2.30 to $2.55 per share. As it relates to 2007 revenue drivers we are forecasting weather adjusted retail sales to be 1% higher that at 2010. From a retail competition standpoint the impact from customer shopping and DP&L service territory, it’s estimated to be 20 to $25 million compared to $15 million in 2010.

Regarding wholesale market activities we are projecting wholesale sales to be between 2900 and 3300 gigawatt hours. These sales are based on estimated on peak market pricing for power of $40 per megawatt hour and off-peak pricing of $30 per megawatt hour.

We assume 2011 gas prices of approximately $4.50 per MMBtu. From a supply standpoint we anticipate generation volumes to be between 15,000 and 16,000 gigawatt hours for 2011. Additionally we accept gains from coal sales to be $6 million, which is relatively flat compared to our expected gains for 2010.

With the economic pressures continuing it is important that we continue to control our operating and maintenance costs as we have historically done. Excluding costs for one-for-one revenue recovery, O&M cost are forecasted to increase 2% from 2010 to 2011.

And lastly the midpoint of the range reflects an approximate $0.04 benefit related to the share repurchase program. The actual benefit to earnings will be dependent upon the timing and amount of shares repurchased in 2011.

With that operator we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Paul Ridzon of KeyBanc.

Paul Ridzon - KeyBanc

I know you don’t want to show your hand too much but $200 million over 3 years may not have a huge impact on an annual basis. How much do you could do in 2011?

Fred Boyle

Well. I think for 2011, we’ll continue to evaluate the market conditions and capital needs and we may start buyback decisions and we’ll be reporting our buyback activity on a quarterly basis as we moved forward.

Paul Ridzon - KeyBanc

And one of the other cash usages you’ve discussed in the past revolved around the dividend, you had an unchanged dividend declaration but that was the fourth at that level. Is that correct?

Fred Boyle

That is correct. And consistent with our prior practices, we plan to evaluate the dividend level with the Board and discuss that with the Board during December of this year. And after that meeting, we would expect to announce any changes if any to the dividend.

Paul Ridzon - KeyBanc

And then lastly, this O&M trends is a little bit improving from what we’ve seen. There has always been discussions on cost cutting and you’ve always replied that your costs are pretty well under control and, there is not a whole lot of meat left on the bone. Do you think you control to that 2% here?

Fred Boyle

Yes, Paul. I think we had a very good quarter. We’ve incurred some expenses on disability plan as well as from early retirement options and many of those positions we end up not having to refill. We’re able to sort of re-jigger the organization. So, we’re going to continue to look for opportunities to do that and maintain our tight cost control.

Operator

(Operator Instructions) Your next question comes from the line Alex Kania of Banc of America.

Alex Kania - Banc of America

Good morning. As of speaking about the legacy incremental CapEx that you are going to be doing on distribution and transmission, how do you think about that in terms of your timing of recovery.

I guess so along with your ESP in 2012 which at you would be filing a 14d rate case in Ohio, is there some mechanism for kind of work related recovery on any transmission. Is that what you are doing? That sort of will be very helpful.

Paul Barbas

Yes, As far as our distribution rates are concerned under the settlement that was reached in 2009 they are frozen through 2012. So the effective timing of any change in rates reflecting the incremental and distribution capital spend would not be reflected until 2013 at the earliest and we will be evaluating as we more forward the timing of any rate activity on the distribution side.

On the T&D side certainly the incremental transmission investments would require a [deferred filing] and we will continue to be looking at that. We maybe get the investments completed and in service and than be looking towards filing at that point in time.

Alex Kania - Banc of America

Great thanks and just one follow up question is on I guess with respect to the generation portfolio and environmental standards that are coming down the road. I know that Duke Energy has talked about with some uncertainty with respect to that Stuart Plant.

I was wondering if that would kind of affect unit of Duke alone and kind of what your most recent thoughts are in terms of whether not you might see a need to scrub that plant in the future.

Paul Barbas

I guess we have a really made a decision we continue to work with Duke on that Alex, and I don’t think they have a reached the final decision in that and also the types thing that the partners do talk extensively about and certainly to discussion and then is fairly volatile over the last several months and certainly will impact any decision such as that.

Operator

At this time there are no further questions in the Q&A and now I would like to turn the call over to Mr. Fred Boyle for closing remarks.

Fred Boyle

Okay. Well, I like to thank very one for listening and for your interest in the company and we will look forward to talking to you in the later part of February after announcing our year-and results.

Paul Barbas

I guess I will see many of you out over the next few days while at the EEI Financial Conference. So thank you everyone.

Fred Boyle

Thank you.

Operator

Thank for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day

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