**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý** QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2005**

 

**o****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 1-2385**

 

**THE DAYTON POWER AND LIGHTCOMPANY**

(Exact name of registrant as specified in its charter)

 
| **OHIO**                                                          | ** ** | **31-0258470**                         |
|-------------------------------------------------------------------|------------|----------------------------------------|
| (State or other  jurisdiction  of incorporation or  organization) |       | (I.R.S. Employer  Identification  No.) |

 

**1065 Woodman Drive**

**Dayton, Ohio 45432**

(Address of principal executive offices)

 

**(937) 224-6000**

(Registrant’s telephone number, includingarea code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.

YES ý   NO o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

YES o   NO ý

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

YES o   NO ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

Asof October 21, 2005, 41,172,173 shares of the registrant’s common stockwere outstanding, all of which were held by DPL Inc.

 

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**INDEX**

 
| ** **        | ** **                | **Page No.**                                                                                |
|-------------------|---------------------------|---------------------------------------------------------------------------------------------|
| **Part I.**  | **Financial Information** |                                                                                        |
|              |                      |                                                                                        |   |
|              | Item 1.                   | Financial  Statements                                                                       |   |
|              |                      |                                                                                        |   |
|              |                      | Consolidated  Statement of Results of Operations                                            | 3 |
|              |                      |                                                                                        |   |
|              |                      | Consolidated  Statement of Cash Flows                                                       | 4 |
|              |                      |                                                                                        |   |
|              |                      | Consolidated  Balance Sheet                                                                 | 5 |
|              |                      |                                                                                        |   |
|              |                      | Notes  to Consolidated Financial Statements                                                 | 7 |
|              |                      |                                                                                        |   |
|              | Item  2.                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 17 |
|              |                      |                                                                                        |   |
|              |                      | Operating Statistics                                                                        | 35 |
|              |                      |                                                                                        |   |
|              | Item 3.                   | Quantitative  and Qualitative Disclosures about Market Risk                                 | 35 |
|              |                      |                                                                                        |   |
|              | Item 4.                   | Controls and Procedures                                                                     | 35 |
|              |                      |                                                                                        |   |
| **Part II.** | **Other Information**     |                                                                                        |
|              |                      |                                                                                        |   |
|              | Item 1.                   | Legal Proceedings                                                                           | 36 |
|              |                      |                                                                                        |   |
|              | Item 4.                   | Submission of Matters to a Vote of Security  Holders                                        | 37 |
|              |                      |                                                                                        |   |
|              | Item 5.                   | Other Information                                                                           | 38 |
|              |                      |                                                                                        |   |
|              | Item 6.                   | Exhibits                                                                                    | 38 |
|              |                      |                                                                                        |   |
| **Other**         |                      |                                                                                        |   |
|              |                      |                                                                                        |   |
|              | Signatures                | 39                                                                                          |
|              |                      |                                                                                        |   |
|              | Certifications            |                                                                                        |

 

**AvailableInformation:**

 

The Dayton Power and Light Company (DP&L or the Company) filescurrent, annual and quarterly reports and other information required by theSecurities Exchange Act of 1934, as amended, with the Securities and ExchangeCommission (SEC).  You may read and copyany document the Company files at the SEC’s public reference room located at100 F Street, N.E., Room 1580, Washington, D.C.  20549, USA. Please call the SEC at (800) SEC-0330 for further information on thepublic reference rooms.  The Company’sSEC filings are also available to the public from the SEC’s web site athttp://www.sec.gov.

 

The Company’s public web site is http://www.dplinc.com.  The Company makes available through its website, its annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports filed orfurnished pursuant to the Securities Exchange Act of 1934, as amended, as soonas reasonably practicable after it electronically files such material with, orfurnishes it to, the SEC.

 

In addition, the Company’s public web site includes other items relatedto corporate governance matters, including, among other things, the Company’sgovernance guidelines, charters of various committees of the Board of Directorsand the Company’s code of business conduct and ethics applicable to allemployees, officers and directors.  Youmay obtain copies of these documents, free of charge, by sending a request, inwriting, to DP&L Investor Relations, 1065 Woodman Drive, Dayton, Ohio45432.

 

2

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**Part I.  FinancialInformation**

 

### **Item 1.  Financial Statements**

 

**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS**

**($ in millions)**

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                            |       |                                       |       |                                      |       |   |   |   |   |
| Electric  revenues                      |       | **$**                                      | **355.5**  | ** **                                | $          | 310.2 |   | **$** | **952.0** | ** ** | $ | 893.4 |   |
|                                    |       | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| **Operating  Expenses**                 |       | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| Fuel                                    |       | **87.9**                                   | ** ** | 64.1                                      |       | **235.1** | ** ** | 187.3 |   |
| Purchased  power                        |       | **48.3**                                   | ** ** | 31.4                                      |       | **116.0** | ** ** | 84.6 |   |
| Operation  and maintenance              |       | **46.2**                                   | ** ** | 51.8                                      |       | **145.6** | ** ** | 152.5 |   |
| Depreciation  and amortization          |       | **31.8**                                   | ** ** | 29.6                                      |       | **92.9** | ** ** | 87.3 |   |
| Amortization  of regulatory assets, net |       | **0.6**                                    | ** ** | 0.1                                       |       | **1.5** | ** ** | 0.3 |   |
| General  taxes                          |       | **28.6**                                   | ** ** | 26.5                                      |       | **81.4** | ** ** | 78.2 |   |
| Total  operating expenses               |       | **243.4**                                  | ** ** | 203.5                                     |       | **672.5** | ** ** | 590.2 |   |
|                                    |       | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| **Operating  Income**                   |       | **112.1**                                  | ** ** | 106.7                                     |       | **279.5** | ** ** | 303.2 |   |
|                                    |       | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| Interest  expense                       |       | **(10.1**                                  | **)**      | (10.6                                     | )          | **(30.7** | **)** | (32.4 | ) |
| Charge for  early redemption of debt    |       | **(4.1**                                   | **)**      | —                                    |       | **(4.1** | **)** | — |   |
| Other income  (deductions)              |       | **2.9**                                    | ** ** | (0.8                                      | )          | **9.1** | ** ** | 1.5 |   |
|                                    |       | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| **Income  Before Income Taxes**         |       | **100.8**                                  | ** ** | 95.3                                      |       | **253.8** | ** ** | 272.3 |   |
|                                    |       | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| Income tax  expense                     |       | **37.7**                                   | ** ** | 39.8                                      |       | **101.5** | ** ** | 107.8 |   |
|                                    |       | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| **Net Income**                          |       | **63.1**                                   | ** ** | 55.5                                      |       | **152.3** | ** ** | 164.5 |   |
|                                    |       | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| Preferred  dividends                    |       | **0.2**                                    | ** ** | —                                    |       | **0.6** | ** ** | 0.2 |   |
|                                    |       | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| **Earnings  on Common Stock**           |       | **$**                                      | **62.9**   | ** **                                | $          | 55.5 |   | **$** | **151.7** | ** ** | $ | 164.3 |   |

 

See Notes to ConsolidatedFinancial Statements.

These interim statements areunaudited.

 

3

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONSOLIDATED STATEMENT OF CASH FLOWS**

**($ inmillions)**

 
| ** **                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| **Operating  Activities**                  |       | ** **                                | ** ** |   |   |
|                                       |       | ** **                                | ** ** |   |   |
| Net income                                 |       | **$**                                     | **152.3**  | ** ** | $ | 164.5 |   |
| Adjustments:                               |       | ** **                                | ** ** |   |   |
| Depreciation  and amortization             |       | **92.9**                                  | ** ** | 87.3 |   |
| Amortization  of regulatory assets, net    |       | **1.5**                                   | ** ** | 0.3 |   |
| Charge for  early redemption of debt       |       | **4.1**                                   | ** ** | — |   |
| Deferred  income taxes                     |       | **(11.4**                                 | **)**      | (5.5 | ) |
| Changes in  working capital:               |       | ** **                                | ** ** |   |   |
| Accounts  receivable                       |       | **(7.5**                                  | **)**      | 25.8 |   |
| Accounts  payable                          |       | **(2.8**                                  | **)**      | (11.2 | ) |
| Net  intercompany receivable / payable     |       | **(0.9**                                  | **)**      | 0.5 |   |
| Accrued  taxes payable                     |       | **37.6**                                  | ** ** | 103.8 |   |
| Accrued  interest payable                  |       | **3.1**                                   | ** ** | 5.1 |   |
| Prepayments                                |       | **3.9**                                   | ** ** | (2.0 | ) |
| Inventories                                |       | **(9.4**                                  | **)**      | (12.9 | ) |
| Deferred  compensation assets              |       | **1.6**                                   | ** ** | 8.2 |   |
| Deferred  compensation obligations         |       | **7.9**                                   | ** ** | 1.1 |   |
| Other (Note  2)                            |       | **0.6**                                   | ** ** | (9.2 | ) |
| Net cash  provided by operating activities |       | **273.5**                                 | ** ** | 355.8 |   |
|                                       |       | ** **                                | ** ** |   |   |
| **Investing  Activities**                  |       | ** **                                | ** ** |   |   |
| Capital  expenditures                      |       | **(137.1**                                | **)**      | (62.4 | ) |
| Net cash  used for investing activities    |       | **(137.1**                                | **)**      | (62.4 | ) |
|                                       |       | ** **                                | ** ** |   |   |
| **Financing  Activities**                  |       | ** **                                | ** ** |   |   |
| Issuance of  long-term debt, net           |       | **211.2**                                 | ** ** | — |   |
| Retirement  of long-term debt              |       | **(218.9**                                | **)**      | (0.4 | ) |
| Dividends  paid on common stock            |       | **(75.0**                                 | **)**      | (150.0 | ) |
| Dividends paid  on preferred stock         |       | **(0.6**                                  | **)**      | (0.2 | ) |
| Net cash  used for financing activities    |       | **(83.3**                                 | **)**      | (150.6 | ) |
|                                       |       | ** **                                | ** ** |   |   |
| **Cash and  cash equivalents**             |       | ** **                                | ** ** |   |   |
| Net change                                 |       | **53.1**                                  | ** ** | 142.8 |   |
| Balance at  beginning of period            |       | **17.2**                                  | ** ** | 17.2 |   |
| Balance at  end of period                  |       | **$**                                     | **70.3**   | ** ** | $ | 160.0 |   |
|                                       |       | ** **                                | ** ** |   |   |
| **Cash  Paid During the Period for:**      |       | ** **                                | ** ** |   |   |
| Interest                                   |       | **$**                                     | **25.3**   | ** ** | $ | 24.2 |   |
| Income taxes                               |       | **$**                                     | **67.2**   | ** ** | $ | 2.2 |   |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

4

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONSOLIDATED BALANCE SHEET**

**($ inmillions)**

 
| ** **                                                                                      | ** ** | **At  September 30,  2005** | ** **  | **At  December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| **ASSETS**                                                                                      |       |                             |        |                            |       |
|                                                                                            |       |                             |        |                            |       |
| **Property**                                                                                    |       |                             |        |                            |       |
| Property,  plant and equipment                                                                  |       | **$**                            | **4,064.7** | ** **                      | $          | 3,944.6 |   |
| Less:  Accumulated depreciation and amortization                                                |       | **(1,944.0**                     | **)**       | (1,864.4                        | )          |
| Net property                                                                                    |       | **2,120.7**                      | ** **  | 2,080.2                         |       |
|                                                                                            |       | ** **                       | ** **  |                            |       |
| **Current  Assets**                                                                             |       | ** **                       | ** **  |                            |       |
| Cash and  cash equivalents                                                                      |       | **70.3**                         | ** **  | 17.2                            |       |
| Accounts  receivable, less provision for uncollectible accounts of $1.0 and $1.1,  respectively |       | **164.3**                        | ** **  | 153.8                           |       |
| Inventories,  at average cost (Note 2)                                                          |       | **79.3**                         | ** **  | 69.8                            |       |
| Prepaid  taxes                                                                                  |       | **11.6**                         | ** **  | 46.4                            |       |
| Other (Note  2)                                                                                 |       | **24.6**                         | ** **  | 24.8                            |       |
| Total  current assets                                                                           |       | **350.1**                        | ** **  | 312.0                           |       |
|                                                                                            |       | ** **                       | ** **  |                            |       |
| **Other  Assets**                                                                               |       | ** **                       | ** **  |                            |       |
| Income taxes  recoverable through future revenues                                               |       | **31.4**                         | ** **  | 32.5                            |       |
| Other  regulatory assets                                                                        |       | **53.1**                         | ** **  | 41.5                            |       |
| Other (Note  2)                                                                                 |       | **178.3**                        | ** **  | 175.2                           |       |
| Total other  assets                                                                             |       | **262.8**                        | ** **  | 249.2                           |       |
|                                                                                            |       | ** **                       | ** **  |                            |       |
| **Total  Assets**                                                                               |       | **$**                            | **2,733.6** | ** **                      | $          | 2,641.4 |   |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

5

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONSOLIDATED BALANCE SHEET**

**($ inmillions)**

**(continued)**

 
| ** **                                | ** ** | **At  September 30,  2005** | ** **  | **At  December 31,  2004** | ** ** |
|-------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| **CAPITALIZATION  AND LIABILITIES**       |       |                             |        |                            |       |
|                                      |       |                             |        |                            |       |
| **Capitalization**                        |       |                             |        |                            |       |
| Common  shareholder’s equity         |       |                             |        |                            |       |
| Common stock                              |       | **$**                            | **0.4**     | ** **                      | $          | 0.4 |   |
| Other  paid-in capital                    |       | **783.2**                        | ** **  | 782.9                           |       |
| Accumulated  other comprehensive income   |       | **43.9**                         | ** **  | 43.1                            |       |
| Earnings  reinvested in the business      |       | **306.3**                        | ** **  | 229.7                           |       |
| Total common  shareholder’s equity   |       | **1,133.8**                      | ** **  | 1,056.1                         |       |
|                                      |       | ** **                       | ** **  |                            |       |
| Preferred  stock                          |       | **22.9**                         | ** **  | 22.9                            |       |
|                                      |       | ** **                       | ** **  |                            |       |
| Long-term  debt (Note 5)                  |       | **686.1**                        | ** **  | 686.6                           |       |
| Total  capitalization                     |       | **1,842.8**                      | ** **  | 1,765.6                         |       |
|                                      |       | ** **                       | ** **  |                            |       |
| **Current  Liabilities**                  |       | ** **                       | ** **  |                            |       |
| Accounts  payable                         |       | **97.9**                         | ** **  | 107.8                           |       |
| Accrued  taxes                            |       | **130.8**                        | ** **  | 124.8                           |       |
| Accrued  interest                         |       | **14.1**                         | ** **  | 10.7                            |       |
| Other (Note  2)                           |       | **25.1**                         | ** **  | 22.1                            |       |
| Total  current liabilities                |       | **267.9**                        | ** **  | 265.4                           |       |
|                                      |       | ** **                       | ** **  |                            |       |
| **Deferred  Credits and Other**           |       | ** **                       | ** **  |                            |       |
| Deferred  taxes                           |       | **352.0**                        | ** **  | 365.8                           |       |
| Unamortized  investment tax credit        |       | **47.1**                         | ** **  | 49.3                            |       |
| Other (Note  2)                           |       | **223.8**                        | ** **  | 195.3                           |       |
| Total  deferred credits and other         |       | **622.9**                        | ** **  | 610.4                           |       |
|                                      |       | ** **                       | ** **  |                            |       |
| **Contingencies  (Note 7)**               |       | ** **                       | ** **  |                            |       |
| ** **                                |       | ** **                       | ** **  |                            |       |
| **Total  Capitalization and Liabilities** |       | **$**                            | **2,733.6** | ** **                      | $          | 2,641.4 |   |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

6

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**Notes to Consolidated Financial Statements**

 

**1.****             ****Basis of Presentation**

 

**Basis of Consolidation**

 

The Dayton Power and Light Company (DP&L or the Company) preparesits consolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America (GAAP).  The consolidated financial statements includethe accounts of DP&L and its majority-owned subsidiaries.  Investments that are not majority owned areaccounted for using the equity method when DP&L’s investment allows it theability to exert significant influence, as defined by GAAP.  Undivided interests in jointly-ownedgeneration facilities are consolidated on a pro rata basis.  All material intercompany accounts andtransactions are eliminated in consolidation.

 

DP&L has prepared the unaudited consolidated financial statementsin this report, pursuant to the rules and regulations of the Securitiesand Exchange Commission (SEC).  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations.  These consolidated financial statementsshould be read in conjunction with the consolidated financial statements andnotes thereto in DP&L’s 2004 Annual Report on Form 10-K.

 

**Estimates, Judgments and Reclassifications**

 

The preparation of financial statements in conformity with GAAPrequires management to make estimates and judgments that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements and the revenue andexpenses of the period reported. Significant items subject to such estimates and judgments include thecarrying value of property, plant and equipment; the valuation of derivativeinstruments; valuation allowance for receivables and deferred income taxes; andassets and liabilities related to employee benefits.  Actual results may differ from thoseestimates.  Reclassifications have beenmade in certain prior years’ amounts to conform to the current reportingpresentation.

 

**Recently Issued Accounting Standards**

 

***Stock-Based Compensation***

 

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-BasedPayment” (SFAS 123R). SFAS 123R replaces SFAS 123, “Accounting for Stock-BasedCompensation”, and supersedes Accounting Principles Board Opinion No. 25(Opinion 25), “Accounting for Stock Issued to Employees”.  SFAS 123R will provide investors and otherusers of financial statements with more complete and neutral financialinformation by requiring that the compensation cost relating to share-basedpayment transactions be recognized in financial statements.  That cost will be measured based on the fairvalue of the equity or liability instruments issued.  SFAS 123R covers a wide range of share-basedcompensation arrangements including share options, restricted share plans, performance-basedawards, share appreciation rights, and employee share purchase plans.  SFAS 123R establishes standards in which toaccount for transactions where an entity exchanges its equity instruments forgoods or services or incurs liabilities in exchange for goods or services thatare based on the fair value of the entity’s equity instruments or settled byissuance of equity instruments.  Thisstatement focuses primarily on accounting for employee services paid for byshare-based transactions.  SFAS 123Rrequires a public entity to measure the cost of employee services received andpaid for by equity instruments to be based on the fair-value of such equity onthe grant date.  This cost net ofestimated forfeitures, is recognized in results of operations over the periodin which employees are required to provide service.  Liabilities initially incurred will be basedon the fair-value of equity instruments and then be re-measured at eachsubsequent reporting date until the liability is ultimately settled.  The fair-value for employee share options andother similar instruments at the grant date will be estimated usingoption-pricing models and excess tax benefits will be recognized as an additionto paid-in capital.  Cash retained fromthe excess tax benefits will be presented in the statement of cash flows asfinancing cash inflows.  The provisionsof this Statement shall be effective for the Company no later than January 1,2006.  DP&L is currently accountingfor such share-based transactions granted after January 1, 2003, usingSFAS 123, “Accounting for Stock-Based Compensation.”  DP&L is evaluating the effect of this newstandard on the Company’s results of operations, cash flows and financialposition.

 

***Inventory Costs***

 

In November 2004, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 151, “Inventory Costs, anamendment of ARB No. 43, Chapter 4” (SFAS 151).  The amendments made by SFAS 151 clarify thatabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterials (spoilage) should be recognized as current-period charges and requirethe allocation of fixed production overheads to inventory based on the normalcapacity of the production facilities. The guidance is effective for inventory costs incurred during fiscalyears beginning after June 15, 2005. Earlier application is permitted for inventory costs

 

7

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incurred during fiscal years beginning after November 23,2004.  The Company is evaluating theimpact of the adoption of SFAS 151 but does not believe the impact will besignificant to the Company’s overall results of operations, cash flows orfinancial position.

 

***Exchange of Nonmonetary Assets***

 

In December 2004, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 153, “Exchange ofNonmonetary Assets, an amendment of APB Opinion No. 29” (SFAS 153).  The guidance in APB Opinion No. 29, “Accountingfor Nonmonetary Transactions”, is based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged.  The guidance in that Opinion,however, included certain exceptions to that principle.  SFAS 153 amends Opinion 29 to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance.  A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange.  The provisions of SFAS 153 shall be effectivefor nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005.  This statement had no impact onthe Company’s results of operations, cash flow or financial position.

 

***The American Jobs Creation Act of 2004***

 

On October 22, 2004, the President signed the American JobsCreation Act of 2004 (the Act).  On December 21,2004, the Financial Accounting Standards Board (FASB) issued two FASB StaffPositions (FSP) regarding the accounting implications of the Act related to (1) thededuction for qualified domestic production activities (FSP FAS 109-1) and (2) theone-time tax benefit for the repatriation of foreign earnings (FSP FAS 109-2).  The guidance in the FSPs applies to financialstatements for periods ending after the date the Act was enacted.  The Act provides a deduction up to 9 percent(when fully phased-in) of the lesser of (a) qualified productionactivities income, as defined by the Act, or (b) taxable income (after thededuction for the utilization of any net operating loss carry forwards).  This tax deduction is limited to 50 percentof W-2 wages paid by the taxpayer.  TheAct also creates a temporary incentive for U.S. corporations to repatriate accumulatedincome earned abroad by providing an 85 percent dividends received deductionfor certain dividends from controlled foreign corporations.  The Company reduced its tax expense by $1.3million for the nine months ended September 30, 2005 as a result of thededuction for qualified domestic production activities.

 

***Discontinued Operations***

 

In November 2004, the EITF issued EITF 03-13, “Applying theConditions in Paragraph 42 of FASB Statement No. 144, ‘Accounting for theImpairment or Disposal of Long-Lived Assets’, in Determining Whether to ReportDiscontinued Operations” (SFAS No. 144). This guidance should be applied to a component of an enterprise that iseither disposed of or classified as held for sale in fiscal periods beginningafter December 15, 2004.  Operatingresults related to a component that is either disposed of or classified as heldfor sale within an enterprise’s fiscal year that includes November 30,2004, may be classified to reflect the consensus.  The Company determined that SFAS No. 144did not have an impact on its results of operations, financial condition orcash flows.

 

***Accounting for Conditional Asset RetirementObligations***

 

In March 2005, the Financial AccountingStandards Board issued FASB Interpretation No. 47, “Accounting forConditional Asset Retirement Obligations” (FIN 47).  This Interpretation clarifies that the term *conditional asset retirement obligation* asused in FASB Statement No. 143, “*Accountingfor Asset Retirement Obligations” (SFAS 143),* refers to a legalobligation to perform an asset retirement activity in which the timing and (or)method of settlement are conditional on a future event that may or may not bewithin the control of the entity.  Theobligation to perform the asset retirement activity is unconditional eventhough uncertainty exists about the timing and (or) method of settlement.  Thus, the timing and (or) method ofsettlement may be conditional on a future event.  Accordingly, an entity is required torecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated.  The fair value of a liability for theconditional asset retirement obligation should be recognized when incurred—generallyupon acquisition, construction, or development and (or) through the normaloperation of the asset.  Uncertaintyabout the timing and (or) method of settlement of a conditional assetretirement obligation should be factored into the measurement of the liabilitywhen sufficient information exists.  SFAS143 acknowledges that in some cases, sufficient information may not beavailable to reasonably estimate the fair value of an asset retirementobligation.  This Interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation.  This Interpretation is effective no laterthan the end of fiscal years ending after December 15, 2005.  Retrospective application for interimfinancial information is permitted but is not required.  Early adoption of this Interpretation isencouraged.  DP&L is evaluating theeffect of this new standard on the Company’s results of operations, cash flowsand financial position.

 

8

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***Accounting Changes and Error Corrections***

 

In June 2005, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 154, “Accounting Changesand Error Corrections- a replacement of APB Opinion No. 20 and FASBStatement No. 3” (SFAS 154).  ThisStatement replaces APB Opinion No. 20, “Accounting Changes,” and FASBStatement No. 3, “Reporting Accounting Changes in Interim FinancialStatements,” and changes the requirements for the accounting for and reportingof a change in accounting principle.  This Statement applies to allvoluntary changes in accounting principle.  It also applies to changesrequired by an accounting pronouncement in the unusual instance that thepronouncement does not include specific transition provisions.  When apronouncement includes specific transition provisions, those provisions shouldbe followed.  This Statement shall beeffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005.

 

9

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**2.  Supplemental Financial Information**

 
| **$ in millions**                             | ** ** | **At  September 30,  2005** | ** ** | **At  December 31,  2004** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         |       |                             |       |                            |       |
| **Inventories,  at average cost**                  |       |                             |       |                            |       |
| Plant  materials and supplies                      |       | **$**                            | **29.2**   | ** **                      | $          | 29.1 |   |
| Fuel and  emission allowances                      |       | **50.1**                         | ** ** | 40.7                            |       |
| Total  inventories, at average cost                |       | **$**                            | **79.3**   | ** **                      | $          | 69.8 |   |
|                                               |       | ** **                       | ** ** |                            |       |
| **Other  current assets**                          |       | ** **                       | ** ** |                            |       |
| Prepayments                                        |       | **$**                            | **8.7**    | ** **                      | $          | 11.2 |   |
| Deposits and  other advances                       |       | **10.6**                         | ** ** | 1.6                             |       |
| Current  deferred income taxes                     |       | **2.3**                          | ** ** | 6.8                             |       |
| Miscellaneous  work in progress                    |       | **2.1**                          | ** ** | 4.5                             |       |
| Other                                              |       | **0.9**                          | ** ** | 0.7                             |       |
| Total other  current assets                        |       | **$**                            | **24.6**   | ** **                      | $          | 24.8 |   |
|                                               |       | ** **                       | ** ** |                            |       |
| **Other  deferred assets**                         |       | ** **                       | ** ** |                            |       |
| Master Trust  assets                               |       | **$**                            | **111.5**  | ** **                      | $          | 106.4 |   |
| Prepaid  pension                                   |       | **36.5**                         | ** ** | 38.2                            |       |
| Unamortized  loss on reacquired debt               |       | **22.4**                         | ** ** | 23.8                            |       |
| Unamoritized  debt expense                         |       | **6.7**                          | ** ** | 5.6                             |       |
| Other                                              |       | **1.2**                          | ** ** | 1.2                             |       |
| Total other  deferred assets                       |       | **$**                            | **178.3**  | ** **                      | $          | 175.2 |   |
|                                               |       | ** **                       | ** ** |                            |       |
| **Other  current liabilities**                     |       | ** **                       | ** ** |                            |       |
| Customer  security deposits and other advances     |       | **$**                            | **19.2**   | ** **                      | $          | 17.3 |   |
| Current  portion - long-term debt                  |       | **0.9**                          | ** ** | 1.5                             |       |
| Other                                              |       | **5.0**                          | ** ** | 3.3                             |       |
| Total other  current liabilities                   |       | **$**                            | **25.1**   | ** **                      | $          | 22.1 |   |
|                                               |       | ** **                       | ** ** |                            |       |
| **Other  deferred credits**                        |       | ** **                       | ** ** |                            |       |
| Asset  retirement obligations - regulated property |       | **$**                            | **81.5**   | ** **                      | $          | 77.5 |   |
| Trust  obligations                                 |       | **75.9**                         | ** ** | 68.2                            |       |
| Retirees’  health and life benefits           |       | **32.8**                         | ** ** | 32.4                            |       |
| FERC  transitional payment deferral                |       | **9.8**                          | ** ** | —                          |       |
| Environmental  reserves                            |       | **0.1**                          | ** ** | 0.1                             |       |
| Legal  reserves                                    |       | **3.0**                          | ** ** | 3.3                             |       |
| Asset  retirement obligations - generation         |       | **5.4**                          | ** ** | 5.1                             |       |
| Other                                              |       | **15.3**                         | ** ** | 8.7                             |       |
| Total other  deferred credits                      |       | **$**                            | **223.8**  | ** **                      | $          | 195.3 |   |

 
| ** **                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| **$ in millions**              | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| **Cash  flows - Other**             |       |                                      |       |   |   |
| Payroll  taxes payable              |       | **$**                                     | **0.1**    | ** ** | $ | (11.1 | ) |
| Deposits and  other advances        |       | **(6.9**                                  | **)**      | 8.9 |   |
| Deferred  storm costs               |       | **(5.6**                                  | **)**      | — |   |
| FERC  transitional payment deferral |       | **15.4**                                  | ** ** | — |   |
| Other                               |       | **(2.4**                                  | **)**      | (7.0 | ) |
| Total cash  flows - Other           |       | **$**                                     | **0.6**    | ** ** | $ | (9.2 | ) |

 
| ** **                                                                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **$ in millions**                                                                                  | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Comprehensive  income**                                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                                                                              |       | **$**                                      | **63.1**   | ** **                                | $          | 55.5 |   | **$** | **152.3** | ** ** | $ | 164.5 |   |
| Net change  in unrealized gains (losses) on financial instruments, net of  reclassification adjustments |       | **1.1**                                    | ** ** | 3.3                                       |       | **6.6** | ** ** | (0.5 | ) |
| Net change  in deferred gains on cash flow hedges                                                       |       | **(2.0**                                   | **)**      | (0.7                                      | )          | **(4.8** | **)** | (2.3 | ) |
| Deferred  income taxes related to unrealized gains (losses)                                             |       | **0.2**                                    | ** ** | (1.3                                      | )          | **(1.0** | **)** | 0.5 |   |
| Comprehensive  income                                                                                   |       | **$**                                      | **62.4**   | ** **                                | $          | 56.8 |   | **$** | **153.1** | ** ** | $ | 162.2 |   |

 

10

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**3.****              Pension andPostretirement Benefits**

 

DP&L sponsors a defined benefit plan for substantially all itsemployees.  For collective bargainingemployees, the defined benefits are based on a specific dollar amount per yearof service.  For all other employees, thedefined benefit plan is based primarily on compensation and years ofservice.  The Company funds pension planbenefits as accrued in accordance with the minimum funding requirements of theEmployee Retirement Income Security Act of 1974 (ERISA).  The Company also maintains a SupplementalExecutive Retirement Plan for certain current and former executives.

 

Qualified employees who retired prior to 1987and their dependents are eligible for health care and life insurancebenefits.  DP&L has funded theunion-eligible health benefit using a Voluntary Employee BeneficiaryAssociation Trust.

 

The net periodic benefit cost of the pension and postretirement benefitplans for the three months ended September 30 was:

 

**Net periodic benefit cost**

 
| ** **                                   | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|----------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                       | ** ** | **2005**    | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                 | ** ** | **$**       | **0.9**    | ** **         | $          | 0.9 | ** ** | **$** | **—** | ** ** | $ | — |   |
| Interest  cost                               | ** ** | **3.9**     | ** ** | 4.0                | ** ** | **0.5** | ** ** | 0.5 |   |
| Expected  return on assets                   | ** ** | **(5.4**    | **)**      | (5.4               | **)**      | **(0.1** | **)** | (0.2 | ) |
|                                         |       |        | ** ** |               |       |   | ** ** |   |   |
| Amortization  of unrecognized:               |       |        | ** ** |               |       |   | ** ** |   |   |
| Actuarial  (gain) loss                       | ** ** | **1.0**     | ** ** | 0.4                | ** ** | **(0.1** | **)** | (0.2 | ) |
| Prior  service cost                          | ** ** | **0.6**     | ** ** | 0.7                | ** ** | **—** | ** ** | — |   |
| Transition obligation                        | ** ** | **—**  | ** ** | —             | ** ** | **—** | ** ** | — |   |
| Net periodic  benefit cost                   | ** ** | **1.0**     | ** ** | 0.6                | ** ** | **0.3** | ** ** | 0.1 |   |
| Curtailment  (a)                             | ** ** | **0.1**     | ** ** | —             | ** ** | **—** | ** ** | — |   |
| Net periodic  benefit cost after curtailment | ** ** | **$**       | **1.1**    | ** **         | $          | 0.6 | ** ** | **$** | **0.3** | ** ** | $ | 0.1 |   |

 

----

(a)     The curtailment relates to a freeze in benefits for the remaining activeemployee participating in the Supplemental Executive Retirement Plan.

 

The net periodic benefit cost of the pension and postretirement benefitplans for the nine months ended September 30 was:

 

**Net periodic benefit cost**

 
| ** **                                   | ** ** | **Pension** |       | **Postretirement** | ** ** |
|----------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                       | ** ** | **2005**    | ** ** | **2004**           |       | **2005** | ** ** | **2004** | ** ** |
| Service cost                                 | ** ** | **$**       | **2.9**    | ** **         | $          | 2.8 |   | **$** | **—** | ** ** | $ | — |   |
| Interest  cost                               | ** ** | **11.8**    | ** ** | 12.0               |       | **1.4** | ** ** | 1.5 |   |
| Expected  return on assets                   | ** ** | **(16.1**   | **)**      | (16.3              | )          | **(0.4** | **)** | (0.5 | ) |
|                                         |       |        | ** ** |               |       |   | ** ** |   |   |
| Amortization  of unrecognized:               |       |        | ** ** |               |       |   | ** ** |   |   |
| Actuarial  (gain) loss                       | ** ** | **2.9**     | ** ** | 1.4                |       | **(0.6** | **)** | (0.7 | ) |
| Prior  service cost                          | ** ** | **1.7**     | ** ** | 2.0                |       | **—** | ** ** | — |   |
| Transition  obligation                       | ** ** | **—**  | ** ** | —             |       | **0.1** | ** ** | 0.1 |   |
| Net periodic  benefit cost                   | ** ** | **3.2**     | ** ** | 1.9                |       | **0.5** | ** ** | 0.4 |   |
| Curtailment  (a)                             | ** ** | **0.1**     | ** ** | —             |       | **—** | ** ** | — |   |
| Net periodic  benefit cost after curtailment | ** ** | **$**       | **3.3**    | ** **         | $          | 1.9 |   | **$** | **0.5** | ** ** | $ | 0.4 |   |

 

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(a)     The curtailment relates to a freeze in benefits for the remaining activeemployee participating in the Supplemental Executive Retirement Plan.

 

11

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The following estimated benefit payments, whichreflect future service, are expected to be paid as follows:

 

**Estimated Future Benefit Payments**

 
| **$ in millions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------|------------|-------------|------------|--------------------|------------|
|                   |       |        |       |               |       |
| 2005                   |       | $           | 4.8        |               | $          | 1.0 |   |
| 2006                   |       | $           | 19.7       |               | $          | 3.1 |   |
| 2007                   |       | $           | 20.0       |               | $          | 3.1 |   |
| 2008                   |       | $           | 19.1       |               | $          | 3.0 |   |
| 2009                   |       | $           | 20.2       |               | $          | 2.9 |   |
| 2010                   |       | $           | 20.5       |               | $          | 2.8 |   |
| 2011 – 2015       |       | $           | 106.8      |               | $          | 11.8 |   |

 

**4. Stock-Based Compensation**

 

DP&L accounts for DPL Inc. stock options granted on or after January 1,2003 under the fair value method set forth in FASB Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-based Compensation”(SFAS 123).  This standard requires therecognition of compensation expense for stock-based awards to reflect the fairvalue of the award on the date of grant.  DP&L follows Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) andrelated Accounting Principles Board and FASB interpretations in accounting forstock-based compensation granted before January 1, 2003.  If DP&L had used the fair value method ofaccounting for stock-based compensation granted prior to 2003, earnings oncommon stock would have been reported as follows:

 
| ** **                             | ** **                                                                                   | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|----------------------------------------------------------------------------------------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **$ in millions**                 | ** **                                                                                   | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Earnings on  common stock, as reported |                                                                                         | **$**                                      | **62.9**   | ** **                                | $          | 55.5 |   | **$** | **151.7** | ** ** | $ | 164.3 |   |
| Add:                                   | Total stock-based compensation expense  determined under APB 25, net of related tax effects  |                                       | **—** | ** **                                | —     |   | **—** | ** ** | — |   |
| Deduct:                                | Total stock-based compensation expense determined  under FAS 123, net of related tax effects |                                       | **—** | ** **                                | (0.7       | ) | **(0.1** | **)** | (2.2 | ) |
| Pro-forma  earnings on common stock    |                                                                                         | **$**                                      | **62.9**   | ** **                                | $          | 54.8 |   | **$** | **151.6** | ** ** | $ | 162.1 |   |
|                                        |                                                                                              |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

During the third quarter 2005, 0.39 million DPL Inc. stock options wereexercised by former officers of the Company who are not affiliated with theCompany’s pending litigation against three of its former executives.  For the nine months ended September 30,2005, a total of 0.845 million stock options have been exercised by formerofficers who are not affiliated with the Company’s pending litigation againstthree of its former executives.  See Part II,Item 1-Legal Proceedings.

 

12

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**5. Long-term Debt, Notes Payable and Compensating Balances**

 
| **$ in millions**                                                                           | ** ** | **At  September 30,  2005** | ** ** | **At  December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| First Mortgage Bonds maturing:                                                                   |       | ** **                       | ** ** |                            |       |
| 2013 - 5.125%                                                                                    |       | **$**                            | **470.0**  | ** **                      | $          | 470.0 |   |
| Pollution  Control Series maturing through 2034 - 4.78% and 2027 - 6.43%,  respectively (a) |       | **214.4**                        | ** ** | 104.4                           |       |
|                                                                                             |       | **684.4**                        | ** ** | 574.4                           |       |
|                                                                                             |       | ** **                       | ** ** |                            |       |
| Air Quality  Development Authority Pollution Control Bonds - 6.10% Series due 2030          |       | ** **                       | ** ** | 110.0                           |       |
| Obligation  for capital leases                                                                   |       | **3.2**                          | ** ** | 3.8                             |       |
| Unamortized  debt discount and premium (net)                                                     |       | **(1.5**                         | **)**      | (1.6                            | )          |
| Total                                                                                            |       | **$**                            | **686.1**  | ** **                      | $          | 686.6 |   |

 

----

(a)  Weightedaverage interest rates for 2005 and 2004, respectively.

 

# **The amounts of maturities forthe capital leases are $0.2 million for the remainder of 2005, $0.9 million in2006, $0.9 million in 2007, $0.7 million in 2008 and $0.7 million in 2009.  Substantially all property of DP&L issubject to the mortgage lien securing the First Mortgage Bonds.**

 

On September 29, 2003, DP&L issued $470 million principalamount of First Mortgage Bonds, 5.125% Series due 2013.  The net proceeds from the sale of the bonds,after expenses, were used on October 30, 2003, to (i) redeem $226million principal amount of DP&L’s First Mortgage Bonds, 8.15% Series due2026, at a redemption price of 104.075% of the principal amount plus accruedinterest to the redemption date and (ii) redeem $220 million principalamount of DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at aredemption price of 103.765% of the principal amount plus accrued interest tothe redemption date.  The 5.125% Series due2013 were not registered under the Securities Act of 1933, but were offered andsold through a private placement in compliance with Rule 144A under theSecurities Act of 1933.  The bondsincluded step-up interest provisions requiring the Company to pay additionalinterest if (i) DP&L’s registration statement was not declaredeffective by the SEC within 180 days from the issuance of the new bonds or (ii) theexchange offer was not completed within 210 days from the issuance of the newbonds.  The registration statement wasnot declared effective and the exchange offer was not timely completed and, asa result, the Company was required to pay additional interest of 0.50% until aregistration statement was declared effective, at which point the additionalinterest was reduced by 0.25%.  Theremaining additional interest of 0.25% continued until the exchange offer wascompleted.  The exchange offerregistration for these securities was filed with the SEC on April 26, 2005and declared effective on May 18, 2005, at which point the additionalinterest was reduced by 0.25%.  Theexchange offer was completed on June 23, 2005, thereby eliminating theadditional interest in total.

 

In February 2004, DP&L entered into a $20 million MasterLetter of Credit Agreement with a financial lending institution.  This agreement supports performance assuranceneeds in the ordinary course of business. The Company has certain contractual agreements for the sale and purchaseof power, fuel and related energy services that contain credit rating relatedclauses allowing the counterparties to seek additional surety under certainconditions.  On February 24, 2005,the Company entered into an amendment to extend the term of this Agreement forone year and reduce the maximum dollar volume of letters of credit to $10million.  As of September 30, 2005,the Company had two outstanding letters of credit for a total of $3.1 million.

 

In May 2005,DP&L obtained a $100 million unsecured revolving credit agreement thatextended and replaced its previous revolving credit agreement of $100million.  The new agreement, renewableannually, expires on May 30, 2010 and provides credit support for theCompany’s business requirements during this period. This may be increased up to$150 million.  The facility contains onefinancial covenant, maximum debt to total capitalization.  This covenant is currently met.  The Company had no outstanding borrowingsunder this credit facility at September 30, 2005 or at year-end 2004.  Fees associated with this credit facility areapproximately $0.2 million per year. Changes in credit ratings, however, may affect the applicable interestrate for the revolving credit agreement.

 

On August 17, 2005, the Company completed the refinancing of$214.4 million of pollution control bonds. The specific issues refinanced consisted of:

 

•                  $41.3million of Ohio Water Development Authority (OWDA) bonds;

•                  $137.8million of Ohio Air Quality Development Authority (OAQDA) bonds; and

•                  $35.3million of Boone County, Kentucky (Boone County) bonds.

 

13

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On August 17, 2005, theCompany entered into a separate loan agreement with the OWDA, OAQDA and BooneCounty for new pollution control bonds with a weighted average interest rate of4.78%.  The proceeds of the bonds wereused to repay the previously existing pollution control bonds with a weightedaverage of 6.26% on September 16, 2005. To secure the repayment of its obligations to the OWDA, OAQDA and BooneCounty, the Company entered into a 43rd Supplemental Indenture toits First and Refunding Mortgage for a like amount ($214.4 million) of FirstMortgage Bonds with The Bank of New York serving as Trustee.

 

There are no inter-company debt collateralizations or debt guaranteesbetween DP&L and its parent.  None ofthe debt obligations of DP&L are guaranteed or secured by its parent oraffiliates and no cross-collateralization exists between the Company and DPL orany affiliate.

 

**6. Income Taxes**

 

On June 30, 2005, Governor Taft signed House Bill 66 into lawwhich significantly changed the tax structure in Ohio.  The majorprovisions of the bill include phasing-out the Ohio Franchise Tax, phasing-outthe Personal Property Tax for non-utility taxpayers and phasing-in a CommercialActivities Tax.  The Ohio Franchise Taxphase-out required second quarter adjustments to income tax expense. Income taxes were increased by $0.3 million as a result of the tax lawchange.  Other provisions of House Bill66 are being evaluated by DP&L.

 

On September 1, 2005 the Internal Revenue Service (IRS) issued anexamination report for the tax years 1998 through 2003 that shows proposedchanges to the Company’s federal income tax liability for each of thoseyears.  The proposed changes result in atotal tax deficiency, penalties and interest of approximately $0.5 million asof October 15, 2005.  The Company iscurrently reviewing the examination report and intends to file a formal writtenprotest to certain proposed changes with the IRS Office of Appeals by November 1,2005.  The Company believes it hasadequate reserves for any tax deficiency, penalties and interest resulting fromthe proposed changes and as a result, the proposed changes did not adverselyaffect the Company’s results from operations for the three months ended September 30,2005.

 

The Company is under audit review by state agencies for the tax years2002 through 2004.  Depending upon the outcome of these audits, theCompany may be required to increase or decrease its reserves.  The Company believes it has adequate reservesin each tax jurisdiction but cannot predict the outcome of these audits.

 

**7.  Commitmentsand Contingencies**

 

**Contingencies**

 

In the normal course of business, DP&L is subject to variouslawsuits, actions, proceedings, claims and other matters asserted under lawsand regulations.  DP&L believes the amountsprovided in its consolidated financial statements, as prescribed by GAAP, areadequate in light of the probable and estimable contingencies.  However, there can be no assurances that theactual amounts required to satisfy alleged liabilities from various legalproceedings, claims, and other matters discussed below, and to comply withapplicable laws and regulations, will not exceed the amounts reflected inDP&L’s Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amountsprovided as of September 30, 2005, cannot be reasonably determined.

 

**Environmental Matters**

 

DP&L’s facilities and operations are subject to a wide range ofenvironmental regulations and law.  Inthe normal course of business, the Company has investigatory and remedialactivities underway at these facilities to comply, or to determine compliance,with such regulations.

 

The Company has been identified, either by a government agency or by aprivate party seeking contribution to site clean-up costs, as a potentiallyresponsible party (PRP) at two sites pursuant to state and federal laws.  The Company records liabilities for probableestimated loss in accordance with Statement of Financial Accounting Standards No. 5,“Accounting for Contingencies” (SFAS 5). To the extent a probable loss can only be estimated by reference to arange of equally probable outcomes, and no amount within the range appears tobe a better estimate than any other amount, the Company accrues for the low endof the range.  Because of uncertaintiesrelated to these matters, accruals are based on the best information availableat the time.  DP&L evaluates thepotential liability related to probable losses quarterly and may revise itsestimates.  Such revisions in the estimatesof the potential liabilities could have a material effect on the Company’sresults of operations and financial position.

 

**Legal Matters**

 

DP&Lis a wholly-owned subsidiary of DPL Inc. (DPL). MVE, Inc. (MVE) is also a wholly-owned subsidiary of DPL.

 

14

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OnAugust 24, 2004, DPL, DP&L and MVE filed a Complaint against Mr. Forster,Ms. Muhlenkamp and Mr. Koziar in the Court of Common Pleas ofMontgomery County, Ohio asserting legal claims against them relating to thetermination of the Valley Partners Agreements, challenging the validity of thepurported amendments to the deferred compensation plans and to the employmentand consulting agreements with Messrs. Forster and Koziar and Ms. Muhlenkamp,and the propriety of the distributions from the plans to Messrs. Forsterand Koziar and Ms. Muhlenkamp, and alleging that Messrs. Forster andKoziar and Ms. Muhlenkamp breached their fiduciary duties and breachedtheir consulting and employment contracts. DPL, DP&L and MVE seek, among other things, damages in excess of $25thousand, disgorgement of all amounts improperly withdrawn by Messrs. Forsterand Koziar and Ms. Muhlenkamp from the deferred compensation plans and acourt order declaring that DPL, DP&L and MVE have no further obligationsunder the consulting and employment contracts due to those breaches.

 

Defendants Forster, Koziar and Muhlenkamp filedmotions to dismiss the Complaint and motions to stay discovery pending a rulingon the motions to dismiss.  In addition,pursuant to applicable statutes, regulations and agreements, DPL and DP&LhaD been advancing certain of Defendants’ attorneys’ fees and expenses withrespect to various matters other than the litigation between Defendants and DPLand DP&L in Florida and Ohio, and believe that other requested advances arenot required.  On February 7, 2005, Mr. Forsterand Ms. Muhlenkamp filed a motion in DP&L’s and DPL’s Ohio litigationseeking to compel DPL, MVE and DP&L to pay all attorneys’ fees and expensesthat have not been advanced to them.  On May 10,2005, the Court denied the motions to dismiss filed by Defendants Forster,Koziar, and Muhlenkamp.  On June 15,2005, Defendants Forster and Muhlenkamp filed an answer and filed counterclaimsagainst DPL, DP&L, MVE and individually against the current members of theBoard of Directors of DPL Inc. as well as two former Board members and variouscompensation plans of DPL and DP&L. On June 15, 2005, Defendant Koziar filed his answer and filedcounterclaims against DPL, DP&L and individually against the currentmembers of the Board of Directors of DPL Inc. and two former Board members ofDPL.  On June 29, 2005, DPL,DP&L and MVE filed an amended complaint against the Defendants.  On July 18, 2005, Defendants filedanswers to that amended complaint and Defendant Koziar filed amendedcounterclaims that included claims against various compensation plans of DPLand DP&L that he had not named in his initial counterclaims.  Defendants’ answers substantially denied theallegations made by DPL, DP&L and MVE and denied any liability.  The counterclaims and amended counterclaimsallege that DPL, DP&L, MVE, various compensation plans and the individualdefendants breached the terms of the employment and consulting contracts ofDefendants Forster, Muhlenkamp and Koziar, and the terms of the compensationplans.  They further allege theories ofbreach of fiduciary duty, breach of contract, promissory estoppel, tortiousinterference, conversion, replevin and violations of ERISA under which theyseek distribution of deferred compensation balances, conversion of stockincentive units, exercise of options and payment of amounts allegedly owedunder the contracts and plans.  Forster,Muhlenkamp and Koziar also seek payment of attorneys’ fees and expenses onclaims similar to those filed in the Forster and Muhlenkamp motion forattorneys’ fees and expenses.  On August 18,2005, the Court denied Defendants Forster’s and Muhlenkamp’s motion regardingadvancement of fees.  Mr. Forsterand Ms. Muhlenkamp continue to litigate the issue of payment of attorneys’fees as part of their counterclaims.

 

On March 15, 2005, Mr. Forster and Ms. Muhlenkampfiled a lawsuit in New York state court against the purchasers of the privateequity investments in the financial asset portfolio and against outside counselto DPL and DP&L concerning purported entitlements in connection with thepurchase of those investments.  Theyassert that DPL, DP&L and MVE had ongoing obligations to make certainpayments to them based on the financial asset portfolio’s returns and that anypurchaser of portfolio investments should have been obligated to assume thoseobligations.  DPL, DP&L and MVE arenot defendants in that case; however, they are parties to an indemnificationagreement with respect to the purchaser defendants.  Those defendants have requested that DPL,DP&L and MVE indemnify them in connection with that litigation, and DPL,DP&L and MVE have acknowledged indemnity obligations.  On March 28, 2005, DPL, DP&L and MVEfiled a Motion for Preliminary Injunction in the Ohio case, requesting that thecourt issue a preliminary injunction against Mr. Forster and Ms. Muhlenkampregarding the New York lawsuit.  Since certain key issues raised by Mr. Forsterand Ms. Muhlenkamp in their New York lawsuit are identical to the issuesraised in the pending Ohio lawsuit, DPL, DP&L and MVE believed that thoseissues should be heard and resolved in the pending Ohio lawsuit.  Mr. Forsterand Ms. Muhlenkamp filed a brief opposing the preliminary injunction on April 15,2005.  DPL, DP&L and MVE filed theirreply brief on April 25, 2005.  Thecourt heard the motion on May 6, 2005 and on August 18, 2005, issueda preliminary injunction against Mr. Forster and Ms. Muhlenkamp thatprecludes them from pursuing these key issues in the New York trial court orany other forum other than the Ohio litigation. In addition, the purchaser defendants, our indemnitee in the New Yorkaction filed a motion to stay or dismiss that case.  The New York court heard this motion on June 23,2005 and on July 5, 2005 entered an order severing the claims broughtagainst the purchaser defendants and granting the purchaser defendants’ motionto stay those claims temporarily.  On August 15,2005, Mr. Forster and Ms. Muhlenkamp moved to vacate the stay.  At a hearing on October 12, 2005, theNew York court denied that motion and continued the stay.

 

On September 12, 2005, Mr. Forster andMs. Muhlenkamp appealed the preliminary injunction entered by the Ohiocourt, for which they have sought expedited treatment.  At a status hearing on September 14, theOhio trial court requested that the parties brief the issue of whether theinterlocutory appeal affected the court’s jurisdiction to

 

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proceed with the litigation.  DPL, MVE and the Company filed a briefdiscussing their position that the Ohio trial court continues to havejurisdiction to proceed with the merits of the case.  Defendants Forster and Muhlenkamp did notaddress the jurisdictional issue, but filed a motion to stay the Ohio casepending the appeal or, alternatively, to modify the injunction to allow them topursue discovery in the New York case.  DPL, MVE and the Company filed a brief opposing that motion and informedthe Ohio court of the New York court’s decision to continue the stay.  The Ohio court has not yet ruled on thejurisdictional issue or the motion filed by Mr. Forster and Ms. Muhlenkamp.

 

Counsel to Mr. Forster and Ms. Muhlenkampare sending their attorneys’ invoices for the New York action to DPL and theCompany for fee advancement and have continued to send monthly invoices for theOhio action to DPL and the Company for fee advancement.  DPL and the Company continue to maintain thatthey are not required to advance payment with respect to any of those charges.

 

Cumulatively through September 30, 2005, DPL and the Company haveaccrued for accounting purposes, obligations of approximately $53 million toreflect claims regarding deferred compensation, estimated MVE incentives and/orlegal fees that Defendants assert are payable per contracts.  DPL and the Company disputes Defendantsentitlement to any of those sums and, as noted above is pursuing litigationagainst them contesting all such claims.

 

**Long-term Obligations and CommercialCommitments**

 

DP&L enters into various contractual and other long-termobligations that may affect the liquidity of its operations.  At September 30, 2005, these include:

 

**Long Term Obligations**

 
| ** **                           | ** ** | **Payment Year** | ** ** |
|--------------------------------------|------------|------------------|------------|
| **$ in millions**               | ** ** | **2005**         | ** ** | **2006 & 2007** | ** ** | **2008 & 2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                 |       |             |       |   |   |   |   |   |   |   |   |
| Long-term  debt                      |       | $                | —     |   | $ | — |   | $ | — |   | $ | 682.9 |   | $ | 682.9 |   |
| Interest  payments                   |       | 12.0             |       | 68.7 |   | 68.7 |   | 34.3 |   | 183.7 |   |
| Pension and  postretirement payments |       | 5.8              |       | 45.9 |   | 45.2 |   | 141.9 |   | 238.8 |   |
| Capital  leases                      |       | 0.2              |       | 1.8 |   | 1.4 |   | 0.7 |   | 4.1 |   |
| Operating  leases                    |       | 0.6              |       | 0.5 |   | — |   | — |   | 1.1 |   |
| Coal  contracts* *(a)           |       | 84.9             |       | 582.4 |   | 83.5 |   | 85.3 |   | 836.1 |   |
| Other  long-term obligations         |       | 19.9             |       | 15.0 |   | 0.5 |   | — |   | 35.4 |   |
| Total  long-term obligations         |       | $                | 123.4      |   | $ | 714.3 |   | $ | 199.3 |   | $ | 945.1 |   | $ | 1,982.1 |   |

 

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(a)  DP&Loperated units.

 

Long-term debt:

 

Long-term debt as of September 30, 2005,consists of First Mortgage Bonds and pollution control revenue obligations andincludes unamortized debt discount.  SeeNote 5 of Notes to Consolidated Financial Statements.

 

Interest payments:

 

Interest payments through 2010 associatedwith the Long-term debt described above. See Note 5 of Notes to Consolidated Financial Statements.

 

Pension and Postretirement payments:

 

As of September 30,2005, DP&L had estimated future benefit payments as outlined in Note 3 ofNotes to Consolidated Financial Statements. These estimated future benefit payments are projected through 2015.

 

Capital leases:

 

As of September 30, 2005, the Companyhad two capital leases that expire in November 2007 and September 2010.

 

Operating leases:

 

As of September 30, 2005, the Companyhad several operating leases with various terms and expiration dates.

 

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Coal contracts:

 

The Company has entered into variouslong-term coal contracts to supply portions of its coal requirements for itsgenerating plants.  Contract prices aresubject to periodic adjustment, and some contracts have features that limitprice escalation in any given year.

 

Other long-term obligations:

 

As of September 30, 2005, the Companyhad various other long-term obligations including non-cancelable contracts topurchase goods and services with various terms and expiration dates.

 

DP&L enters into various commercial commitments, which may affectthe liquidity of its operations.  At September 30,2005, these include:

 

**Commercial Commitments**

 
| ** **                    | ** ** | **Expiring Year** | ** ** |
|-------------------------------|------------|-------------------|------------|
| **$ in millions**        | ** ** | **2005**          | ** ** | **2006 & 2007** | ** ** | **2008 & 2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                          |       |              |       |   |   |   |   |   |   |   |   |
| Credit facilities             |       | $                 | —     |   | $ | — |   | $ | — |   | $ | 100.0 |   | $ | 100.0 |   |
| Guarantees                    |       | —            |       | 17.8 |   | — |   | — |   | 17.8 |   |
| Total  commercial commitments |       | $                 | —     |   | $ | 17.8 |   | $ | — |   | $ | 100.0 |   | $ | 117.8 |   |

 

Credit facilities:

 

In May 2005, the Company replaced itsprevious $100 million revolving credit agreement with a $100 million, 364 dayunsecured credit facility that is renewable annually and expires on May 30,2010.  At September 30, 2005, therewere no borrowings outstanding under this credit agreement.  The new facility may be increased up to $150million.

 

Guarantees:

 

DP&L owns a 4.9% equity ownershipinterest in an electric generation company. As of September 30, 2005, DP&L could be responsible for therepayment of 4.9%, or $14.9 million, of a $305 million debt obligation and also4.9%, or $2.9 million, of a separate $60 million debt obligation.  Both obligations mature in 2006.

 

**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

Certain statements contained in this discussionare “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Mattersdiscussed in this report which relate to events or developments that areexpected to occur in the future, including management’s expectations, strategicobjectives, business prospects, anticipated economic performance and financialcondition and other similar matters constitute forward-looking statements.  Forward-looking statements are based onmanagement’s beliefs, assumptions and expectations of the Company’s futureeconomic performance, taking into account the information currently availableto management.  These statements are notstatements of historical fact.  Suchforward-looking statements are subject to risks and uncertainties and investorsare cautioned that outcomes and results may vary materially from thoseprojected due to various factors beyond the control of The Dayton Power andLight Company (DP&L or the Company), including but not limited to:  abnormal or severe weather; unusualmaintenance or repair requirements; changes in fuel costs; changes inelectricity, coal, environmental emissions, gas and other commodity prices;increased competition; regulatory changes and decisions; changes in accountingrules; financial market conditions; and general economic conditions.

 

Forward-looking statements speak only as of the date of the document inwhich they are made.  The Companydisclaims any obligation or undertaking to provide any updates or revisions toany forward-looking statement to reflect any change in its expectations or anychange in events, conditions or circumstances on which the forward-lookingstatement is based.  (See FACTORS THAT MAY AFFECTFUTURE RESULTS.)

 

**OTHERMATTERS**

 

**Debt Refinancing**

 

On August 17, 2005, DP&L completed the refinancing of $214.4million of pollution control bonds.  Thespecific issues refinanced consisted of:

 

•                  $41.3million of Ohio Water Development Authority (OWDA) bonds;

•                  $137.8million of Ohio Air Quality Development Authority (OAQDA) bonds; and

 

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•                  $35.3million of Boone County, Kentucky (Boone County) bonds.

 

On August 17, 2005, the Company entered into a separate loanagreement with the OWDA, OAQDA and Boone County for new pollution control bondswith a weighted average interest rate of 4.78%. The proceeds of the bonds were used to repay the previously existingpollution control bonds with a weighted average of 6.26% on September 16,2005.  To secure the repayment of itsobligations to the OWDA, OAQDA and Boone County, the Company entered into a 43rdSupplemental Indenture to its First and Refunding Mortgage for a like amount($214.4 million) of First Mortgage Bonds with The Bank of New York serving asTrustee.

 

**Governmental and Regulatory Inquiries**

 

On April 7, 2004, DPL received notice that the staff of the PUCOwas conducting an investigation into the Company’s financial condition as aresult of previously disclosed matters concerning corporate governance andfinancial reporting raised by an employee during the 2003 year-end financialclosing process (the Thobe Memorandum). On May 27, 2004, the PUCO ordered the Company to file a plan ofutility financial integrity that outlines the actions DPL has taken or willtake to insulate DP&L utility operations and customers from its unregulatedactivities.  DP&L was required tofile this plan by March 2, 2005.  OnFebruary 4, 2005, the Company filed its protection plan with the PUCO andexpressed its intention to continue to cooperate with the PUCO in theirinvestigation.  On March 29, 2005,the Ohio Consumers Counsel (OCC) filed comments with the PUCO on the Company’sfinancial plan of integrity, requesting the PUCO continue the investigation andmonitor DP&L’s progress toward implementation of its financial plan of integrity.  On June 29, 2005, the PUCO closed itsinvestigation, citing significant positive actions taken by the Companyincluding changes in the Board of Directors as well as executive management ofDP&L, and that no apparent diminution of service quality has occurredbecause of the events that initiated the investigation.

 

On or about June 24, 2004, the SEC commenced a formalinvestigation into the issues raised by the Thobe Memorandum.  DPL and the Company are cooperating with theinvestigation.

 

On May 28, 2004, the United States Attorney’s Office for theSouthern District of Ohio, assisted by the Federal Bureau of Investigation,notified DPL and the Company that it has initiated an inquiry involving thesubject matters covered by its internal investigation.  DPL and the Company are cooperating with thisinvestigation.

 

Commencing on or about June 24, 2004, the Internal Revenue Service(IRS) has issued a series of data requests to DPL and the Company regardingissues raised in the Thobe Memorandum. The staff of the IRS has requested that DPL and the Company providecertain documents, including but not limited to, matters concerningexecutive/director deferred compensation plans, management stock incentiveplans and MVE financial statements.  DPLand the Company are cooperating with these requests.

 

On March 3, 2005, the Company received a notice that the FederalEnergy Regulatory Commission (FERC) had instituted an operational audit ofDP&L regarding its compliance with its Code of Conduct within the transmissionand generation areas.  On October 7,2005, the FERC issued its Findings and Conclusions, stating that the Company “generallycomplied with the [FERC’s] Standard of Conduct” except for three (3) areas,all of which were corrected to the satisfaction of the FERC prior to theissuance of these Findings and Conclusions.

 

**Competition and Regulation**

 

The Company has historically operated in a rate-regulated environmentproviding electric generation and energy delivery, consisting of transmissionand distribution services, as a single product to its retail customers.  Prior to the legislation discussed below,DP&L did not have retail competitors in its service territory.

 

In October 1999, legislation became effective in Ohio that gaveelectric utility customers a choice of energy providers beginning on January 1,2001.  Under this legislation, electricgeneration, power marketing, and power brokerage services supplied to retailcustomers in Ohio are deemed to be competitive and are not subject tosupervision and regulation by the PUCO.

 

As required by this legislation, the Company filed its transition plan(Electric Transition Plan) with the PUCO on December 20, 1999.  The Company received the PUCO approval of itsplan on September 21, 2000.

 

The Electric Transition Plan provided for a three-year transitionperiod, which began on January 1, 2001 and ended on December 31,2003.  The plan also provided for a 5%residential rate reduction on the generation component of the rates, whichreduced annual revenue by approximately $14 million; rate certainty for thethree-year period for customers that continued to purchase power from theCompany; guaranteed rates for a six-year period for transmission and deliveryservices; and recovery by the Company of transition costs of approximately $600million.

 

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On October 28, 2002, the Company filed with the PUCO a request foran extension of its market development period that would continue its currentrate structure through December 31, 2005 and provide its retail customerswith rate stability.  The Company enteredinto a Stipulation and Recommendation with five other parties, and on September 2,2003, the PUCO issued an Opinion and Order adopting the Stipulation withmodifications (the Stipulation).  TheStipulation provides the following: The Company’s market development periodwill continue through December 31, 2005; retail generation rates willremain frozen at present levels; a credit issued to customers who electcompetitive retail generation service will increase over two years; and a ratestabilization period from January 1, 2006 through December 31, 2008,during which its retail generation rates in effect on January 1, 2004 willserve as market-based rates.  Beginning January 1,2006, rates may be modified by up to 11% of generation rates to reflectincreased costs associated with fuel, environmental compliance, taxes,regulatory changes, and security measures. Further, the PUCO may approve an increase to the residential generationdiscount commencing January 1, 2006. The PUCO’s decision was appealed to the Ohio Supreme Court, which lateraffirmed the PUCO’s Order approving the Stipulation.

 

On April 4, 2005, the Company filed a request at the PUCO toimplement a rate stabilization surcharge effective January 1, 2006pursuant to the Stipulation discussed above. Pursuant to the Stipulation, the surcharge is capped at 11% of thegeneration portion of the Company’s rates. The surcharge, if approved, would produce approximately $76 million inadditional annual revenue beginning in 2006. The case is set for hearing before the PUCO beginning November 4,2005.

 

As a part of the Stipulation, the Company agreed to implement aVoluntary Enrollment Process that would provide customers with an option tochoose a competitive supplier to provide their retail generation service shouldswitching not reach 20% in each customer class by October 2004.  Approximately 51 thousand residentialcustomers that volunteered for the program were bid out to Competitive RetailElectric Service (CRES) providers who are registered in the Company’s serviceterritory.  As of August 30, 2005,the fourth and final bidding for 2005 took place and no bids werereceived.  The magnitude of any customerswitching and the financial impact of this program are not expected to bematerial to the Company’s results of operations, cash flows or financialposition in 2005.  Future period effectscannot be determined at this time.

 

As of October 2005 three unaffiliated marketers were registered asCRES providers in the Company’s service territory; to date, there has been nosignificant activity from these suppliers. DPLER, an affiliated company, is also a registered CRES provider andaccounted for nearly all load served by CRES providers within DP&L’sservice territory in 2004 and for the first nine months of 2005.  In addition, several communities in theCompany’s service area have passed ordinances allowing the communities tobecome government aggregators for the purpose of offering alternative electricgeneration supplies to their citizens. To date none of these communities have aggregated.

 

There was a complaint filed on January 21, 2004 at the PUCOconcerning the pricing of the Company’s billing services.  Additionally, on December 16, 2003, acomplaint was filed at the PUCO alleging that DP&L has established improperbarriers to competition.  On October 13,2004, the parties reached a settlement on the pricing of the Company’s billingservices that it will charge CRES providers. Additionally, on October 19, 2004, the Company entered into asettlement with Dominion Retail, Green Mountain Energy, and the Staff of thePUCO that resolves all matters in the competition barrier complaint.  This settlement provides that the Companywill modify the manner in which customer partial payments are applied tobilling charges and the Company will no longer offer to purchase thereceivables of CRES providers who operate in its certified territory.  On February 2, 2005, the PUCO issued anOrder approving both settlements with minor modifications.  This Order gives the Company the right todefer costs of approximately $18 million and later file for recovery over afive year period, subject to PUCO approval. The OCC filed a Motion for Rehearing which was later denied by the PUCOand on May 23, 2005, the OCC appealed the order to the Ohio SupremeCourt.  On June 17, 2005, theCompany filed for PUCO approval for recovery of the deferred billing costs pluscarrying charges beginning January 1, 2006.  If approved as proposed, this new rider willresult in approximately $6 million in additional annual revenue through2010.  A hearing is scheduled for November 29,2005 in this proceeding.  On August 16,2005, the Office of the Ohio Consumers Counsel (OCC) filed a Complaint againstthe Company in Mercer County Common Pleas Court relating to billing costs thatmay be charged to residential customers. The Company filed a motion to dismiss the case.  A decision is pending in that proceeding.

 

The Company provides transmission and wholesale electric service to 12municipal customers in its service territory, which distribute electricitywithin its incorporated limits.  TheCompany also maintains an interconnection agreement with one municipality thathas the capability to generate a portion of its energy requirements.  Sales to these municipalities represented 1%of total electricity sales in 2004.  TheCompany’s contract with one municipality expired in February 2005 creatingreduced future generation sales to municipalities.

 

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The Federal Energy Regulatory Commission (FERC) issued a final rule onDecember 20, 1999, which required all public utilities that own, operate,or control interstate transmission lines to file a proposal to join a regionaltransmission organization (RTO) or file a description of efforts taken toparticipate in an RTO or reasons for not participating in an RTO.  In June 2003, the Company turned overcertain transmission functions for PJM Interconnection, L.L.C. (PJM) to operateincluding management of certain information systems, scheduling, marketmonitoring and security coordination. The Company was fully integrated into PJM on October 1, 2004.

 

As of December 31, 2004, the Company had invested a total ofapproximately $18.0 million in its efforts to join a RTO.  On March 8, 2005, the Company, alongwith Commonwealth Edison and American Electric Power Service Corporation, filedto recover a portion of integration expenses relating to efforts to join theRTO.  On May 6, 2005, FERC approvedthe filing subject to certain modifications. Applications for rehearing were granted. By order issued October 17, 2005, a hearing is being held inabeyance pending settlement efforts.

 

Effective October 1, 2004, PJM began to assess a FERC-approvedadministrative fee on every megawatt consumed by the Company’s customers.  On October 26, 2004, the Company filedan application with the PUCO for authority to modify its accounting proceduresto defer collection of this PJM administrative fee, effective October 1,2004, plus carrying charges, until such time as the Company has obtained theauthority to adjust its rates (i.e., after January 1, 2006) pursuant tothe Stipulation.  On June 1, 2005the PUCO authorized the Company to defer the PJM administrative fee, pluscarrying charges incurred after the date of the application requesting theauthority to defer the charges.  On July 1,2005 the OCC filed an Application for Rehearing, which was subsequently deniedby the PUCO, and on September 9, 2005 the case was appealed to the OhioSupreme Court.  On July 1, 2005, theCompany filed a subsequent case requesting PUCO authority for recovery of thePJM administrative fee from retail customers beginning January 1,2006.  If approved as filed, this willresult in approximately an additional $8 million in revenue per year for threeyears.

 

Rejecting in part the Initial Decision covering transmission rates forservice through and out of service territories, on July 23, 2003 the FERCissued an Order that the rates for transmission service through and out of theservice territories of seven former Alliance RTO companies, including DP&L,may be unjust, unreasonable, or unduly discriminatory or preferential.  Subsequently, the FERC required the partiesto enter into settlement discussions.  OnMarch 19, 2004, the FERC approved a settlement agreement regardingtransmission pricing that allowed the Company to continue to charge itsexisting transmission rate until December 1, 2004.  The settlement agreement also outlined theprinciples and procedures to arrive at a single, long-term transmission pricingstructure to be effective December 1, 2004.  On October 1, 2004, the Company, alongwith approximately 60 other parties filed a long-term pricing plan with theFERC.  On November 18, 2004, theFERC approved this rate design.  Inaddition, the FERC ordered transitional payments, known as Seams EliminationCharge Adjustment (SECA), to be effective December 1, 2004 through March 31,2006.  On February 10, 2005, FERCissued an order that reaffirmed the pricing structure, but set the SECA ratesfor hearing, subject to refund.  Severalparties have sought rehearing of the FERC orders and there likely will beappeals filed in the matter.  All motionsfor rehearing are pending.

 

Beginning May 2005, the Company began receiving these FERC orderedtransitional payments and has received $17.1 million of SECA collections net ofSECA charges.  The Company’s managementbelieves that appropriate reserves of $15.4 million have been established inthe event that such SECA collections are required to be refunded.  The ultimate outcome of the proceedingestablishing SECA rates is uncertain at this time.  However, based on the amount of reserves establishedfor this item, the results of this proceeding are not expected to have amaterial adverse effect on the Company’s financial condition, results ofoperations or cash flows.

 

On May 31, 2005, the FERC instituted a proceeding under FederalPower Act Section 206 concerning the justness and reasonableness of PJM’srate design.  This proceeding sets therates for hearing and requests that all of PJM members, which include theCompany, address the justness and reasonableness of the current ratedesign.  The Company cannot determinewhat effect, if any the outcome of this proceeding may have on its futurerecovery of transmission revenues.  An April 18,2006 hearing is scheduled in this case.

 

On January 25, 2005, the FERC issued an Order that, in part, foundthat PJM is authorized in certain circumstances to limit the price at whichcertain generators can offer to sell their power to PJM during periods ofelectric transmission constraints and thereby removed a previous exemption fromthese limitations for generation units constructed after 1996.  The Company is actively appealing thisdecision.  This Order does not impact theCompany’s coal-fired facilities.  TheCompany does not expect this Order to materially affect its results ofoperations and financial condition for 2005.

 

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On August 8, 2005, the Energy Policy Act of 2005 (the 2005 Act)was enacted.  This new law encompassesseveral areas including, but not limited to: electric reliability, repeal ofthe Public Utility Holding Company Act of 1935, promotion of energy infrastructure,preservation of a diverse fuel supply for electric generation and energyefficiency.  From this landmarklegislation will come numerous rulemakings such that the Company cannot at thistime measure the financial, operating and reporting impact of this new law.

 

On September 16, 2005, the FERC issued a Notice of Inquiry tosolicit comments regarding (i) revisions to the Order 888, the Open AccessTransmission Tariff (OATT) and the OATTs of public utilities; (ii) implementationof the Energy Policy Act of 2005 regarding open access transmission serviceprovided by nonpublic utilities; and (iii) the definition of native loadobligation contained in the Energy Policy Act of 2005.  Comments are due November 22, 2005 inthis proceeding.

 

On September 30, 2005, the New York Stock Exchange (NYSE) filedwith the SEC a proposed rule filing (SR-NYSE-2005-68) that among otherthings, eliminates the current NYSE requirement that listed companies (likeDP&L) “physically” distribute an annual report to shareholders and allowscompanies like DP&L to satisfy the annual financial statement distributionrequirement by making DP&L’s Form 10-K available on or by a linkthrough its corporate website with a prominent undertaking in English todeliver a paper copy, free of charge, to any shareholder who requests it.

 

Inresponse to the Energy Policy Act of 2005, on September 1, 2005, the FERCissued a NOPR proposing to amend its regulations to incorporate the criteria anentity must satisfy to qualify to be the Electric Reliability Organization(ERO) that will propose and enforce reliability standards subject to FERCapproval.  The NOPR also included relatedmatters on delegating ERO authority, the creation of advisory bodies andreporting requirements.

 

Also, in response to the Energy Policy Act of 2005, on October 11,2005, the FERC issued a NOPR proposing significant modifications to the FERC’sregulations on the Public Utility Regulatory Policies Act (PURPA).  The NOPR proposes rules to: (1) moreclosely scrutinize whether a co-generation qualified facility actually uses itsthermal output in a productive and beneficial manner and is primarily used forindustrial, commercial, or institutional purposes; (2) ensure that thereis continuing progress in the development of efficient electric energygenerating technology and extend existing efficiency standards from gas andoil-fired qualified facilities to coal-fired qualifying facilities; (3) eliminatequalifying facility exemptions from regulation under Sections 205 and 206 of theFederal Power Act and the new Public Utility Holding Company Act of 2005; and (4) eliminatethe 50 percent electric ownership limitation. The FERC plans to issue the final rule by February 6, 2006.

 

**EnvironmentalMatters**

 

The operations of DP&L, including the Company’scommonly-owned facilities, are subject to a wide range of federal, state, andlocal environmental regulations and laws as to air and water quality, disposalof solid waste and other environmental matters, including the location,construction and operation of new and existing electric generating facilitiesand most electric transmission lines.  As such, existing environmentalregulations may be periodically revised.  In addition to revised rules,new legislation could be enacted that may affect our estimated constructionexpenditures.  See “Construction Additions.”  In the normal course ofbusiness, the Company has ongoing programs and activities underway at thesefacilities to comply, or to determine compliance, with such existing, new and/orproposed regulations and legislation.

 

The Company has been identified, either by agovernment agency or by a private party seeking contribution to site clean-upcosts, as a potentially responsible party (PRP) at two sites pursuant to stateand federal laws.  The Company records liabilities for probable estimatedloss in accordance with Statement of Financial Accounting Standards No. 5(SFAS 5), “Accounting for Contingencies.”  To the extent a probable losscan only be estimated by reference to a range of equally probable outcomes, andno amount within the range appears to be a better estimate than any otheramount, the Company accrues for the low end of the range.  Because ofuncertainties related to these matters, accruals are based on the best informationavailable at the time.  The Company evaluates the potential liabilityrelated to probable losses quarterly and may revise its estimates.  Suchrevisions in the estimates of the potential liabilities could have a materialadverse effect on our results of operations and financial position.

 

**Air and Water Quality**

 

InNovember 1999, the United States Environmental Protection Agency (USEPA)filed civil complaints and Notices of Violations (NOVs) against operators andowners of certain generation facilities for alleged violations of the Clean AirAct (CAA).  Generation units operated by CG&E (Beckjord 6) and CSP(Conesville 4) and co-owned by the Company were referenced in theseactions.  Numerous northeast states have filed complaints or have indicatedthat they will be joining the USEPA’s action against CG&E and CSP. The Company was not identified in the NOVs, civil

 

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complaintsor state actions.  In December 2000, CG&E announced that it hadreached an Agreement in Principle with the USEPA and other plaintiffs in aneffort to settle the claims. As of September 30, 2005, discussions on thefinal terms of the settlement continue and the outcome of these claims or theeffect, if any, on the Company has not been determined.  In June 2000,the USEPA issued a NOV to DP&L-operated J.M. Stuart Station (co-owned bythe Company, CG&E, and CSP) for alleged violations of the CAA.  TheNOV contained allegations consistent with NOVs and complaints that the USEPAhad recently brought against numerous other coal-fired utilities in theMidwest.  The Company intends to vigorously challenge the NOV.

 

OnSeptember 21, 2004, the Sierra Club filed a lawsuit against the Companyand the other owners of the Stuart Generating Station in the United StatesDistrict Court for the Southern District of Ohio for alleged violations of theCAA.  The Company intends to vigorously defend this matter.

 

OnNovember 17, 2004, a citizens’ suit was filed against CG&E (*Freeman v. CG&E*) for alleged violationsof the CAA.  The Company believes the allegations are meritless andbelieves CG&E, as the operator of the Zimmer generating station, willvigorously defend the matter on behalf of all co-owners.

 

OnNovember 18, 2004, the State of New York and seven other states filed suitagainst the American Electric Power Corporation (AEP) and various subsidiaries,alleging various CAA violations at a number of AEP electric generatingfacilities, including Conesville Unit 4 (co-owned by CG&E, CSP and the Company). The Company believes the allegations are without merit and that AEP, on behalfof all co-owners, will vigorously defend the matter.

 

OnOctober 27, 2003, the USEPA published its final rules regarding theequipment replacement provision (ERP) of the routine maintenance, repair andreplacement (RMRR) exclusion of the CAA.  Subsequently, on December 24,2003, the United States Court of Appeals for the D.C. Circuit (D.C. Circuit)stayed the effective date of the rule pending its decision on the meritsof the lawsuits filed by numerous states and environmental organizationschallenging the final rules. On June 10, 2005, USEPA published itsreconsideration of the ERP upholding the ERP as it was originally issued in2003 and clarifying the basis and support for selecting 20 percent for thethreshold cost criterion.  As a result of the stay, it is expected thatthe Ohio Environmental Protection Agency (Ohio EPA) will delay its previouslyannounced intent to adopt the RMRR rule.  At this time, the Company isunable to determine if orwhen the Ohio EPA will adopt the RMRR rule.

 

InSeptember 1998, the USEPA issued a final rule requiring states tomodify their State Implementation Plans (SIPs) under the CAA.  On July 18,2002, the Ohio EPA adopted rules that constitute Ohio’s NOx SIP, which issubstantially similar to the federal CAA Section 126 rulemaking andfederal NOx SIP.  On August 5, 2003, the USEPA published itsconditional approval of Ohio’s nitrogen oxide (NOx) SIP, with an effective dateof September 4, 2003.  Ohio’s SIP requires NOx reductions atcoal-fired generating units effective May 31, 2004.

 

Inorder to meet these NOx requirements, the Company’s capital expenditures forthe installation of selective catalytic reduction (SCR) equipment totaledapproximately $175 million.  On May 31, 2004, the Company beganoperation of its SCRs.  The Company’s NOx reduction strategy andassociated expenditures to meet the federal reduction requirements shouldsatisfy the Ohio SIP NOx reduction requirements.

 

OnDecember 17, 2003, the USEPA proposed the Interstate Air Quality Rule (IAQR)designed to reduce and permanently cap sulfur dioxide (SO2) and NOxemissions from electric utilities.  Theproposed IAQR focused on states, including Ohio, whose power plant emissionsare believed to be significantly contributing to fine particle and ozonepollution in other downwind states in the eastern United States.  On June 10, 2004, the USEPA issued asupplemental 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 theCAIR and initiated reconsideration on one issue.  The Company cannot predict the outcome of thereconsideration proceedings, the petitions or pending litigation. CAIR willhave a material effect on our operations. The Company anticipates that Phase I of CAIR will require theinstallation of flue gas desulfurization (FGD) equipment and annual operationof the currently-installed SCR.

 

OnJanuary 30, 2004, the USEPA published its proposal to restrict mercury andother air toxics from coal-fired and oil-fired utility plants.  The final Clean Air Mercury Rule (CAM-R)was signed March 15, 2005 and was published on May 18, 2005. Thefinal rules will have a material effect on our operations.  The Company anticipates that the FGD beingplanned to meet the requirements of CAIR may be adequate to meet the Phase Irequirements of CAM-R. The Company expects that additional controls will beneeded to meet the Phase II requirements of CAM-R that go into effect January 1,2018. On March 29, 2005, nine states sued USEPA, opposing the regulatoryapproach taken by USEPA.  On March 31,2005, various groups requested that USEPA stay implementation of CAM-R.  On August 4, 2005, the United StatesCourt of Appeals for the District of Columbia denied the motion for stay.  EPA is expected to initiate reconsiderationproceedings on one or more issues.  TheCompany cannot predict the outcome of the reconsideration proceedings orpending litigation.

 

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Under the CAIR and CAM-R cap and trade programs for SO2,  NOx and mercury, the Company estimatesit will spend more than $500 million from 2005 through 2008 to install thenecessary pollution controls.  If CAM-Rlitigation results in plant specific mercury controls, the Company’s costs maybe higher.  Due to the ongoinguncertainties associated with the litigation of the CAM-R, the Company cannotproject the final costs at this time.

 

OnJuly 15, 2003, the Ohio EPA submitted to the USEPA its recommendations foreight-hour ozone nonattainment boundaries for the metropolitan areas withinOhio.  On April 15, 2004, the USEPA issued its list of ozonenonattainment designations.  The Company owns and/or operates a number offacilities in counties designated as nonattainment with the ozone nationalambient air quality standard.  The Company does not know at this time whatfuture regulations may be imposed on its facilities and will closely monitorthe regulatory process.  Ohio EPA will have until April 15, 2007 todevelop regulations to attain and maintain compliance with the eight-hour ozonenational ambient air quality standard.   Numerous parties have filedpetitions for review.  The Company cannot predict the outcome of USEPA’sreconsideration petitions.

 

OnJanuary 5, 2005, the USEPA published its final nonattainment designationsfor the national ambient air quality standard for Fine Particulate Matter 2.5(PM 2.5) designations.  These designations included counties and partialcounties in which the Company operates and/or owns generating facilities. On March 4, 2005, the Company and other Ohio electric utilities andelectric generators filed a petition for review in the D.C. Circuit Court ofAppeals, challenging the final rule creating these designations.  TheOhio EPA will have three years to develop regulations to attain and maintaincompliance with the PM 2.5 national ambient air quality standard.  TheCompany cannot determine the outcome of this petition or the effect such OhioEPA regulations will have on its operations.

 

InApril 2002, the USEPA issued proposed rules governing existingfacilities that have cooling water intake structures.  Final rules werepublished in the Federal Register on July 9, 2004.  A number ofparties appealed the rules to the federal Court of Appeals for the SecondCircuit in New York.  The Company anticipates that future studies may beneeded at certain generating facilities.  The Company cannot predict theimpact such studies may have on future operations or the outcome of litigationproceedings.

 

OnMarch 5, 2004, the USEPA issued final national emissions standards forhazardous air pollutants for stationary combustion turbines.  The effectof the final standards on our operations is not expected to be material. On July 1, 2004, the USEPA finalized, but has not yet published, rules thatremove four subcategories of new combustion turbines from regulation under thehazardous air pollutant regulations.

 

OnApril 14, 2003, the USEPA issued proposed final rules for standardsof performance for stationary gas turbines.  On May 23, 2003, theUSEPA withdrew the direct final rules.  The final rules were reissuedon July 8, 2004 and were determined to not have an impact on existingcombustion turbine facilities.

 

OnMay 5, 2004, the USEPA issued its proposed regional haze rule, whichaddresses how states should determine best available retrofit technology (BART)for sources covered under the regional haze rule.  Final rules werepublished July 6, 2005, providing States with several options fordetermining whether sources in the State should be subject to BART.  In the final rule, USEPA made the determination that CAIR achievesgreater progress than BART and may be used by States as a BARTsubstitute.  Numerous units owned and operated by the Company will beimpacted by BART.  The Company cannot determine the extent of the impactuntil Ohio determines how BART will be implemented.

 

OnMay 4, 2004, the Ohio EPA issued a final National Pollutant DischargeElimination System permit for J.M. Stuart Station that continues the station’s316(a) variance.

 

Duringthe three-year term of the draft permit, the Company will conduct a thermaldischarge study to evaluate the technical feasibility and economicreasonableness of water cooling methods other than cooling towers.

 

OnOctober 13, 2005, the USEPA issued a proposed rule concerning thetest for measuring whether modifications to electric generating units shouldtrigger application of New Source Review (NSR) standards under the CAA.  The proposed rule provides for twodifferent hourly emissions test options for comment versus the USEPA’s currentmethod of measuring previous actual emission levels to projected actualemission levels after the modification. A third option that tests emissions increase based upon emissions perunit of energy output is also available for comment.  The Company cannot predict the outcome ofthis rulemaking or its impact on current environmental litigation.

 

**LandUse**

 

InSeptember 2002, the Company and other parties received a special noticethat the USEPA considers them to be PRPs for the clean-up of hazardoussubstances at the South Dayton Dump landfill site. On August 4, 2005, the

 

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Companyand other parties received a general notice regarding the performance of aRemedial Investigation and Feasibility Study (RI/FS) under a SuperfundAlternative approach.  On October 5,2005, the Company received a special notice letter inviting it to enter intonegotiations with USEPA to conduct the RI/FS.   Although theinformation available to the Company does not demonstrate that DP&Lcontributed hazardous substances to the site, the Company will seek from USEPAa de minimis settlement at the site.  Should USEPA pursue a civil action,the Company will vigorously challenge it.

 

**OVERVIEWAND FUTURE EXPECTATIONS**

 

As part of Ohio’s electric deregulation law, all of the state’s investor-ownedutilities are required to join a RTO, whose role is to administer an electricmarketplace and insure reliability.  In October 2004,the Company successfully integrated its 1,000 miles of high-voltagetransmission into the PJM RTO.  PJM ensuresthe reliability of the high-voltage electric power system serving 44 millionpeople in all or parts of Delaware, Indiana, Kentucky, Maryland, Michigan, NewJersey, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the Districtof Columbia.  PJM coordinates and directsthe operation of the region’s transmission grid; administers a competitivewholesale electricity market, the world’s largest; and plans regionaltransmission expansion improvements to maintain grid reliability and relievecongestion.

 

In the third quarter of 2005, DP&L’s operating income increased$5.4 million or 5% from the third quarter of 2004.  Total revenues of $355.5 million in the thirdquarter of 2005 exceeded total revenues for the third quarter of 2004 by $45.3million resulting from an increase in average market rates and ancillaryrevenues associated with the Company’s participation in PJM.  These increases were largely offset by adecline in wholesale electric sales volume. Operating expenses of $243.4 million in the third quarter of 2005increased by $39.9 million or 20% compared to the same period in the prioryear.  This increase was primarily theresult of higher fuel and purchased power costs.  DP&L’s earnings on common stock of $62.9million in the third quarter of 2005 increased $7.4 million compared to thethird quarter of 2004.

 

For the nine months ended September 30, 2005, DP&L’s operatingincome of $279.5 million decreased $23.7 million from the same period of theprior year.  Electric revenues of $952.0million exceeded the same period in 2004 by $58.6 million primarily resultingfrom an increase in average market rates and ancillary revenues associated withthe Company’s participation in PJM. These increases were largely offset by a decline in wholesale electricsales volume.  Operating expenses of$672.5 million for the nine months ended September 30, 2005 were greaterthan the nine months ended September 30, 2004 by $82.3 million or 14%primarily relating to increases in fuel and purchased power costs.  DP&L’s reported earnings on common stockof $151.7 million for the nine months ended September 30, 2005 decreased$12.6 million from the nine months ended September 30, 2004.

 

TheCompany has offered enhanced retirement benefits and severance packages toemployees affected by changes within the Company’s call center.  The offer is voluntary and the Companyexpects these pre-tax costs not to exceed $1.3 million in total over the nexttwo quarters.

 

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**RESULTS OF OPERATIONS**

 

**IncomeStatement Highlights**

 
| ** **                                                | ** **       | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **$ in millions**                                    | ** **       | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                      |             |                                       |       |                                      |       |   |   |   |   |
| Electric  revenues                                        |             | **$**                                      | **355.5**  | ** **                                | $          | 310.2 |   | **$** | **952.0** | ** ** | $ | 893.4 |   |
| Less:                                                     | Fuel             |                                       | **87.9**   | ** **                                | 64.1       |   | **235.1** | ** ** | 187.3 |   |
|                                                      | Purchased  power |                                       | **48.3**   | ** **                                | 31.4       |   | **116.0** | ** ** | 84.6 |   |
| Net electric  margin (a)                                  |             | **$**                                      | **219.3**  | ** **                                | $          | 214.7 |   | **$** | **600.9** | ** ** | $ | 621.5 |   |
|                                                      |             | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| Net electric  margin as a percentage of Electric revenues |             | **61.7**                                   | **%**      | 69.2                                      | %          | **63.1** | **%** | 69.6 | % |
|                                                      |             | ** **                                 | ** ** |                                      |       | ** ** | ** ** |   |   |
| Operating  income                                         |             | **$**                                      | **112.1**  | ** **                                | $          | 106.7 |   | **$** | **279.5** | ** ** | $ | 303.2 |   |

 

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(a)     For purposes of discussing operating results,DP&L presents and discusses net electric margin.  This format is useful to investors because itallows analysis and comparability of operating trends and includes the sameinformation that is used by management to make decisioins regarding the Company’sfinancial performance.

 

**Revenues**

 

Electric revenues increased to $355.5 million in the third quarter of2005 from $310.2 million in the third quarter of 2004 reflecting primarilyhigher average rates for wholesale revenues, higher retail sales volume, andancillary revenues associated with participation in PJM.  These increases were offset by lowerwholesale sales volume.  Retail revenuesincreased $20.5 million, primarily resulting from $20.8 million related tohigher sales volume.  The increase insales was primarily driven by warmer weather in 2005 as cooling degree-dayswere up 59% to 772 compared to 487 in 2004. Wholesale revenues increased $2.5 million primarily related to a $20.4million increase in average rates that was offset by a $17.9 million decline inwholesale sales volume.  During the thirdquarter of 2005, ancillary revenues from RTO services were $22.2 million.  The Company did not participate in a RTO forthe same period for 2004.  RTO ancillaryrevenues primarily consist of compensation for use of the Company’stransmission assets, reactive supply, regulation services, and operatingreserves.

 

For the nine months ended September 30, 2005, electric revenuesincreased to $952.0 million compared to $893.4 million for the nine monthsended September 30, 2004, reflecting higher average rates for wholesaleand retail revenues, increased retail sales volume, and ancillary revenuesassociated with participation in PJM. These increases were offset by lower wholesale sales volume.  Retail revenues increased $19.4 million,primarily resulting from $18.6 million in higher sales volume resulting fromwarmer weather than 2004 and $5.9 million in higher average rates, partiallyoffset by $5.1 million in lower miscellaneous retail revenues reflectingtransmission services that were under contract in 2004 that are now provided byPJM.  Wholesale revenues decreased $16.0million, primarily related to a $72.2 million decline in sales volume that waspartially offset by a $56.2 million increase related to higher average marketrates.  For the nine months ended September 30,2005, ancillary revenues from RTO services were $55.2 million.  The Company did not participate in a RTO forthe same period for 2004.  RTO ancillaryrevenues primarily consist of compensation for use of the Company’stransmission assets, reactive supply, and regulation services.  Heating degree-days were up 1% to 3,538 forthe nine months ended September 30, 2005 compared to 3,506 for the sameperiod in 2004.  Cooling degree-days werealso up 37% to 1,050 for the nine months ended September 30, 2005 comparedto 767 for the same period in 2004 reflecting the warmer weather that occurredthis year.

 

**Electric Margins, Fuel and Purchased Power**

 

DP&L’s net electric margin of $219.3 million in the third quarterof 2005 increased by $4.6 million as compared to the net electric margin of$214.7 million in the third quarter of 2004. As a percentage of total electric revenues, net electric margindecreased by 7.5 percentage points to 61.7% from 69.2%.  This decline is primarily attributed toincreased fuel and purchased power costs, partially offset by an increase in electricrevenues.  Fuel costs increased by $23.8million for the three months ended September 30, 2005 compared to the sameperiod in 2004 primarily resulting from higher average fuel costs, including$2.8 million of additional expense for emission allowances.  Purchased power costs increased by $16.9million in the third quarter of 2005 compared to the same period in 2004primarily resulting from $13.0 million of charges associated with moving poweracross PJM; the Company did not

 

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participate in a RTO for the same period in 2004.  The remaining increase of $3.9 million wasrelated to higher average market rates for power purchases partially offset bylower purchased power volumes.

 

The Company’s net electric margin of $600.9 million for the nine monthsended September 30, 2005 decreased by $20.6 million when compared to thenet electric margin of $621.5 million for the nine months ended September 30,2004.  As a percentage of total electricrevenues, net electric margin decreased by 6.5 percentage points to 63.1% from69.6%.  This decline is primarily theresult of increased fuel and purchased power costs, partially offset by anincrease in electric revenues.  Fuelcosts increased by $47.8 million for the nine months ended September 30,2005 compared to the same period in 2004 primarily resulting from higheraverage fuel costs, including $8.0 million of additional expense for emissionallowances.  Purchased power costsincreased by $31.4 million for the nine months ended September 30, 2005compared to the same period in 2004 primarily resulting from $36.3 million ofcharges associated with moving power across PJM; the Company did notparticipate in a RTO for the same period in 2004.  The remaining decrease of $4.9 million wasrelated to lower purchased power volumes partially offset by higher averagemarket rates for power purchases.

 

**Operation and Maintenance Expense**

 

Operation and maintenance expense decreased $5.6 million for the threemonths ended September 30, 2005 compared to the same period in 2004primarily resulting from a decrease in Directors and Officers’ liabilityinsurance costs of $4.0 million, coal brokering gains from Cinergy Corporationof $1.5 million, lower legal expenses of $1.0 million, and $0.9 million oflower director fees and mark to market adjustments for stock incentiveunits.  These decreases were partiallyoffset by a $3.3 million increase in production expenses resulting fromincreased generation reflecting the warmer than normal weather.

 

For the nine months ended September 30, 2005, operation andmaintenance expense decreased $6.9 million compared to the same period in 2004primarily as a result of a $10.8 million decrease in Directors and Officers’liability insurance costs and lower Sarbanes-Oxley project costs of $1.4million.  These decreases were partiallyoffset by higher director fees and mark to market adjustments for stockincentive units of $3.4 million, and a $2.6 million increase in transmissionand distribution expenses resulting from increased line clearance activitiesand maintenance from storms and heat-related equipment failures.

 

**Depreciation and Amortization**

 

Depreciation expense increased $2.2 million in the third quarter of2005 compared to the third quarter of 2004 primarily resulting from a higher plantbase, primarily from additions related to distribution activities.  For the nine months ended September 30,2005, depreciation expense increased $5.6 million compared to the same periodin 2004 reflecting a higher plant base, primarily related to pollution controland distribution additions.

 

**Amortization of Regulatory Assets**

 

Amortization expense was $1.2 million greater for the nine months endedSeptember 30, 2005 as compared to prior year primarily reflecting theamortization of PJM start-up costs as well as PJM integration costs that werepreviously deferred prior to DP&L’s entrance into the PJM market on October 1,2004.

 

**General Taxes**

 

General taxes increased $2.1 million for the three months ended September 30,2005 as compared to the same period last year primarily from higher KWH taxexpense of $1.6 million.  For the ninemonths ended September 30, 2005, general tax expense was $3.2 million or4% higher than the same period in 2004 primarily from higher KWH tax expense of$1.7 million and higher payroll tax expense of $1.3 million.  The higher KWH tax is related to increasedretail customer sales resulting from warmer weather than that experienced inthe prior year.

 

**Charge for Early Redemption of Debt**

 

During the third quarter of 2005, the Company recorded a $4.1 millioncharge resulting from the $2.2 million premium paid for the early redemption ofthe 6.10% Series Ohio Air Quality Development Authority obligations due2030 that was completed in September 2005 as well as the write-off ofunamortized debt expense of $1.9 million associated with the existing $214.4million pollution control bonds that were refinanced.

 

## **OtherIncome (Deductions)**

 

Other income (deductions) for the three months ended September 30,2005 increased $3.7 million compared to the three months ended September 30,2004.  This increase primarily resultedfrom $3.2 million in lower investment monitoring fees, $1.5 million in interestincome from cash investments, and $0.6 million of higher dividend income fromMaster Trust assets.  These increaseswere offset by decreased gains from the sale of pollution control emissionallowances of $2.9 million.

 

For the nine months ended September 30, 2005, other incomeincreased $7.6 million primarily resulting from $12.3 million of gains realizedfrom the sale of pollution control emission allowances in 2005 compared to $8.3million of

 

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gains from emission allowance sales in 2004, $1.5 million of increaseddividend income from Master Trust assets, $1.3 million of interest income fromcash investments, and $1.3 million of lower revolving credit facility fees.

 

## **IncomeTax Expense**

 

Income tax expense decreased $2.1 million in the third quarter of 2005compared to the third quarter of 2004 primarily reflecting an adjustment of taxreserves and decreased $6.3 million for the nine months ended September 30,2005 compared to the nine months ended September 30, 2004, primarilyreflecting lower income.

 

On June 30, 2005, Governor Taft signed House Bill 66 into lawwhich significantly changed the tax structure in Ohio.  The majorprovisions of the bill include phasing-out the Ohio Franchise Tax, phasing-outthe Personal Property Tax for non-utility taxpayers and phasing-in a CommercialActivities Tax.  The Ohio Franchise Taxphase-out required second quarter adjustments to income tax expense. Other provisions of House Bill 66 are being evaluated by the Company.

 

On September 1, 2005 the Internal Revenue Service (IRS) issued anexamination report for the tax years 1998 through 2003 that shows proposedchanges to the Company’s federal income tax liability for each of thoseyears.  The proposed changes result in atotal tax deficiency, penalties and interest of approximately $0.5 million asof October 15, 2005.  The Company iscurrently reviewing the examination report and intends to file a formal writtenprotest to certain proposed changes with the IRS Office of Appeals by November 1,2005.  The Company believes it hasadequate reserves for any tax deficiency, penalties and interest resulting fromthe proposed changes and as a result, the proposed changes did not adverselyaffect the Company’s results from operations for the three months ended September 30,2005.

 

DP&L is under audit review by state agencies for the tax years 2002through 2004.  Depending upon the outcome of these audits, the Company maybe required to increase or decrease its reserves.  The Company believes it has adequate reservesin each tax jurisdiction but cannot predict the outcome of these audits.

 

**Preferred Dividends**

 

For the three months and nine months ended September 30, 2005,respectively, preferred dividends increased $0.2 million or 100% and $0.4million or 200% over the same periods in 2004 resulting from the suspension ofdividend payments arising from the delayed filing of the Company’s 2003 Form 10-Kfiling.  The Company’s 2003 Form 10-Kwas filed in the fourth quarter of 2004 and all suspended dividends were paidat that time.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

DP&L’s cash and cash equivalents totaled $70.3 million at September 30,2005 compared to $160.0 million at September 30, 2004.  This decrease was primarily attributed tolower profitability relating to higher fuel and purchased power costs and lesscash provided by working capital. DP&L’s cash and cash equivalents totaled $17.2 million at December 31,2004.

 

The Company generated net cash from operating activities of $273.5million for the nine months ended September 30, 2005 compared to $355.8million for the nine months ended September 30, 2004.  The net cash from operating activities forthe nine months ended September 30, 2005 and 2004 was primarily the resultof operating profitability and cash provided by working capital.  The decline in operating cash flow of $82.3million in the nine months ended September 30, 2005 compared to the ninemonths ended September 30, 2004 is primarily the result of lower operatingprofitability relating to higher fuel and purchased power costs as well as lesscash from accounts receivable and higher tax payments.  The tariff-based revenue from DP&L’sbusiness continues to be the principal source of cash from operatingactivities.  Management believes that thediversified retail customer mix of residential, commercial, and industrialclasses provides the Company with a reasonably predictable gross cash flow.

 

Net cash flows used for investing activities was $137.1 million for thenine months ended September 30, 2005 and $62.4 million for the nine monthsended September 30, 2004.  The netcash used in both periods was to provide funding for capital expenditures.

 

Net cash flows used for financing activities was $83.3 million for thenine months ended September 30, 2005 and $150.6 million for the ninemonths ended September 30, 2004. Net cash flows used for financing activities for each of these periodswere to pay dividends on common stock to the parent company, retirement oflong-term debt, and for dividends paid on preferred stock.  In the third quarter of 2005, the Companyalso refinanced three series of long-term debt in order to take advantage ofthe current low interest rates.  The debtseries redeemed were $41.3 million in outstanding Ohio Water DevelopmentAuthority obligations maturing through 2027 with a weighted average interestrate of 6.4%; $137.8 million in outstanding Ohio Air Quality DevelopmentAuthority obligations maturing through 2030 with a weighted average interestrate of 6.2%; and $35.3 million in outstanding Boone

 

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County, Kentucky obligations maturing through 2022 with a weightedaverage interest rate of 6.5%.  They werereplaced with three series of new debt: $35.3 million of 4.70% Series First Mortgage Bonds due 2028, $137.8million of 4.80% Series First Mortgage Bonds due 2034, and $41.3 millionof 4.80% Series First Mortgage Bonds due 2034.

 

The Company has obligations to make future payments for capitalexpenditures, debt agreements, lease agreements and other long-term purchaseobligations, and has certain contingent commitments such as guarantees.  The Company believes its cash flows fromoperations, the credit facilities (existing or future arrangements), and othershort- and long-term debt financing will be sufficient to satisfy its future workingcapital, capital expenditures and other financing requirements for theforeseeable future.  DP&L’s abilityto generate positive cash flows from operations is dependent on generaleconomic conditions, competitive pressures, and other business and risk factorsdescribed in “Factors That May Affect Future Results.”  If the Company is unable to generatesufficient cash flows from operations, or otherwise comply with the terms ofits credit facilities, DP&L may be required to refinance all or a portion ofits existing debt or seek additional financing alternatives.  A discussion of each of DP&L’s criticalliquidity commitments is outlined below.

 

**Capital Requirements**

 

# **Construction additions were$127.5 million and $62.1 million for the nine months ended September 30,2005 and 2004, respectively, and are expected to approximate $193 million in2005.**

 

# **Planned constructionadditions for 2005 relate to DP&L’s environmental compliance program, powerplant equipment, and its transmission and distribution system.  During the last three years, capitalexpenditures have been primarily utilized to meet the Company’s state andfederal standards for Nitrogen Oxide (NOx) emissions from power plants, to addto its transmission and distribution system and to make power plantimprovements.**

 

Capital projects are subject to continuingreview and are revised in light of changes in financial and economicconditions, load forecasts, legislative and regulatory developments andchanging environmental standards, among other factors.  Over the next four years, DP&L isprojecting to spend an estimated $930 million ($850 million previouslyreported) in capital projects, approximately $515 million ($441 millionpreviously reported) of which is to meet changing environmental standards.  The Company’s ability to complete its capitalprojects and the reliability of future service will be affected by itsfinancial condition, the availability of internal and external funds atreasonable cost, and adequate and timely return on these capital investments.  DP&L expects to finance its constructionadditions in 2005 with internally-generated funds.

 

**Debt and Debt Covenants**

 

At September 30, 2005, the Company’sscheduled maturities for capital lease obligations over the next five years are$0.2 million for the remainder of 2005, $0.9 million in 2006, $0.9 million in2007, $0.7 million in 2008, and $0.7 million in 2009.  Substantially all property of DP&L issubject to the mortgage lien securing the First Mortgage Bonds.  Debt maturities in 2005 are expected to befinanced with internal funds.  Certaindebt agreements contain reporting and financial covenants for which the Companyis in compliance as of September 30, 2005 and expects to be in complianceduring the near term.

 

Issuance of additional amounts of first mortgage bonds by DP&L islimited by the provisions of its mortgage; however, management believes thatDP&L continues to have sufficient capacity to issue first mortgage bonds tosatisfy its requirements in connection with its current refinancing andconstruction programs.  The amounts andtiming of future financings will depend upon market and other conditions, rateincreases, levels of sales and construction plans.

 

In May 2005,DP&L obtained a $100 million unsecured revolving credit agreement thatextended and replaced its previous revolving credit agreement of $100million.  The new agreement, renewableannually, expires on May 30, 2010, and provides credit support for theCompany’s business requirements during this period. This may be increased up to$150 million.  The facility contains onefinancial covenant, maximum debt to total capitalization.  This covenant is currently met.  The Company had no outstanding borrowingsunder this credit facility at September 30, 2005 or at year-end 2004.  Fees associated with this credit facilitywere approximately $0.2 million per year. Changes in credit ratings, however, may affect the applicable interestrate for the revolving credit agreement.

 

On August 17, 2005, the Company completed the refinancing of$214.4 million of pollution control bonds. The specific issues refinanced consisted of:

 

•                  $41.3million of Ohio Water Development Authority (OWDA) bonds;

•                  $137.8million of Ohio Air Quality Development Authority (OAQDA) bonds; and

•                  $35.3million of Boone County, Kentucky (Boone County) bonds.

 

On August 17, 2005, theCompany entered into a separate loan agreement with the OWDA, OAQDA and Boone

 

28

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County for new pollutioncontrol bonds with a weighted average interest rate of 4.78%.  The proceeds of the bonds were used to repaythe previously existing pollution control bonds with a weighted average of6.26% on September 16, 2005.  Tosecure the repayment of its obligations to the OWDA, OAQDA and Boone County,the Company entered into a 43rd Supplemental Indenture to its Firstand Refunding Mortgage for a like amount ($214.4 million) of First MortgageBonds with The Bank of New York serving as Trustee.

 

In February 2004, DP&L entered into a $20 million MasterLetter of Credit Agreement with a financial lending institution.  This agreement supports performance assuranceneeds in the ordinary course of business. The Company has certain contractual agreements for the sale and purchaseof power, fuel and related energy services that contain credit rating relatedclauses allowing the counterparties to seek additional surety under certainconditions.  On February 24, 2005,the Company entered into an amendment to extend the term of this Agreement forone year and reduce the maximum dollar volume of letters of credit to $10million.  As of September 30, 2005,the Company had two outstanding letters of credit for a total of $3.1 million.

 

There are no inter-company debt collateralizations or debt guaranteesbetween DP&L and its parent.  None ofthe debt obligations of DP&L are guaranteed or secured by its parent oraffiliates and no cross-collateralization exist between the Company and DPL orany affiliate.

 

**Credit Ratings**

 

Currently, DP&L’s senior secured debt credit ratings are asfollows:

 
| ** **                             | ** ** | **Rating** | ** ** | **Outlook** | ** ** | **Effective**  | ** ** |
|----------------------------------------|------------|------------|------------|-------------|------------|----------------|------------|
| Fitch  Ratings                         |       | A-         |       | Stable      |       | July 2005 |       |
|                                   |       |       |       |        |       |           |       |
| Moody’s  Investors Service        |       | Baa1       |       | Positive    |       | July 2005 |       |
|                                   |       |       |       |        |       |           |       |
| Standard &  Poor’s Corp. |       | BBB-       |       | Positive    |       | May 2005  |       |

 

As reflected above, DP&L’s secured debt credit ratings areconsidered investment grade.

 

**Off-Balance Sheet Arrangements**

 

DP&L does not have any off-balance sheetarrangements that have or are reasonably likely to have a current or futureeffect on the Company’s financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources that arematerial to investors.

 

**Long-term Obligations and CommercialCommitments**

 

DP&L enters into various contractual and other long-term obligationsthat may affect the liquidity of its operations.  At September 30, 2005, these include:

 

**Long Term Obligations**

 
| ** **                           | ** ** | **Payment Year** | ** ** |
|--------------------------------------|------------|------------------|------------|
| **$ in millions**               | ** ** | **2005**         | ** ** | **2006 & 2007** | ** ** | **2008 & 2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                 |       |             |       |   |   |   |   |   |   |   |   |
| Long-term  debt                      |       | $                | —     |   | $ | — |   | $ | — |   | $ | 682.9 |   | $ | 682.9 |   |
| Interest  payments                   |       | 12.0             |       | 68.7 |   | 68.7 |   | 34.3 |   | 183.7 |   |
| Pension and  postretirement payments |       | 5.8              |       | 45.9 |   | 45.2 |   | 141.9 |   | 238.8 |   |
| Capital  leases                      |       | 0.2              |       | 1.8 |   | 1.4 |   | 0.7 |   | 4.1 |   |
| Operating  leases                    |       | 0.6              |       | 0.5 |   | — |   | — |   | 1.1 |   |
| Coal  contracts* *(a)           |       | 84.9             |       | 582.4 |   | 83.5 |   | 85.3 |   | 836.1 |   |
| Other  long-term obligations         |       | 19.9             |       | 15.0 |   | 0.5 |   | — |   | 35.4 |   |
| Total  long-term obligations         |       | $                | 123.4      |   | $ | 714.3 |   | $ | 199.3 |   | $ | 945.1 |   | $ | 1,982.1 |   |

 

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(a) DP&L operated units.

 

Long-term debt:

 

Long-term debt as of September 30, 2005,consists of First Mortgage Bonds and pollution control revenue obligations andincludes unamortized debt discount.  SeeNote 5 of Notes to Consolidated Financial Statements.

 

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Interest payments:

 

Interest payments through 2010 associatedwith the Long-term debt described above. See Note 5 of Notes to Consolidated Financial Statements.

 

Pension and Postretirement payments:

 

As of September 30,2005, DP&L had estimated future benefit payments as outlined in Note 3 ofNotes to Consolidated Financial Statements. These estimated future benefit payments are projected through 2015.

 

Capital leases:

 

As of September 30, 2005, the Companyhad two capital leases that expire in November 2007 and September 2010.

 

Operating leases:

 

As of September 30, 2005, the Companyhad several operating leases with various terms and expiration dates.

 

Coal contracts:

 

The Company has entered into variouslong-term coal contracts to supply portions of its coal requirements for itsgenerating plants.  Contract prices aresubject to periodic adjustment, and some contracts have features that limitprice escalation in any given year.

 

Other long-term obligations:

 

As of September 30, 2005, the Companyhad various other long-term obligations including non-cancelable contracts topurchase goods and services with various terms and expiration dates.

 

DP&L enters into various commercial commitments, which may affectthe liquidity of its operations.  At September 30,2005, these include:

 

**Commercial Commitments**

 
| ** **                    | ** ** | **Expiring Year** | ** ** |
|-------------------------------|------------|-------------------|------------|
| **$ in millions**        | ** ** | **2005**          | ** ** | **2006 & 2007** | ** ** | **2008 & 2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                          |       |              |       |   |   |   |   |   |   |   |   |
| Credit  facilities            |       | $                 | —     |   | $ | — |   | $ | — |   | $ | 100.0 |   | $ | 100.0 |   |
| Guarantees                    |       | —            |       | 17.8 |   | — |   | — |   | 17.8 |   |
| Total  commercial commitments |       | $                 | —     |   | $ | 17.8 |   | $ | — |   | $ | 100.0 |   | $ | 117.8 |   |

 

Credit facilities:

 

In May 2005, the Company replaced itsprevious $100 million revolving credit agreement with a $100 million, 364 dayunsecured credit facility that is renewable annually and expires on May 30,2010.  At September 30, 2005, therewere no borrowings outstanding under this credit agreement.  The new facility may be increased up to $150million.

 

Guarantees:

 

DP&L owns a 4.9% equity ownershipinterest in an electric generation company. As of September 30, 2005, DP&L could be responsible for therepayment of 4.9%, or $14.9 million, of a $305 million debt obligation and also4.9%, or $2.9 million, of a separate $60 million debt obligation.  Both obligations mature in 2006.

 

**MARKETRISK**

 

As a result of its operating, investing andfinancing activities, DP&L is subject to certain market risks, includingchanges in commodity prices for electricity, coal, environmental emissions andgas; and fluctuations in interest rates. Commodity pricing exposure includes the impacts of weather, marketdemand, potential coal supplier contract breaches or defaults, increasedcompetition and other economic conditions. For purposes of potential risk analysis, DP&L uses sensitivityanalysis to quantify potential impacts of market rate changes on the results ofoperations.  The sensitivity analysisrepresents hypothetical changes in market values that may or may not occur inthe future.

 

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**Commodity Pricing Risk**

 

For the nine months ended September 30, 2005, approximately 20percent of DP&L’s electric revenues were from sales of excess energy andcapacity in the wholesale market.  Energyand capacity in excess of the needs of existing retail customers is sold in thewholesale market when DP&L can identify opportunities with positivemargins.  As of September 30, 2005,a hypothetical increase or decrease of 10% in annual wholesale revenues,excluding RTO services, would result in approximately a $15 million increase ordecrease to earnings on common stock, assuming no change in costs.

 

Fuel (coal, natural gas, oil and emission allowances) and purchasedpower costs as a percent of total operating costs for the nine months ended September 30,2005 and 2004 were 52% and 46%, respectively. As of September 30, 2005, DP&L has contracted for substantiallyall of its projected coal requirements for 2005.  The prices to be paid by the Company underits long-term coal contracts are either fixed or subject to periodic adjustment.  Some contracts have features that limit priceescalations in any given year.  DP&Lhas also covered all of its estimated 2005 emission allowancerequirements.  The Company expects its2005 coal and net emission allowance costs to exceed its 2004 coal and netemission allowance costs by approximately 20% (assuming comparablevolumes).  This estimate presumes no coalsupply interruptions like an extended force majeure event or bargetransportation issues.  Purchased powercosts depend, in part, upon the timing and extent of planned and unplannedoutages of its generating capacity. DP&L will purchase power on a discretionary basis when wholesalemarket conditions provide opportunities to obtain power at a cost below theCompany’s internal production costs.  Asof September 30, 2005, a hypothetical increase or decrease of 10% inannual fuel and purchased power costs, excluding RTO services, would result inapproximately a $25.0 million increase or decrease to earnings on common stock.

 

**Interest Rate Risk**

 

As a result of DP&L’s normal borrowing and leasing activities, theCompany’s results are exposed to fluctuations in interest rates, which theCompany manages through its regular financing activities.  DP&L maintains a limited amount of cashon deposit or investments in cash equivalents that may be affected by adverseinterest rate fluctuations.  The Company’slong-term debt primarily represents publicly held secured debentures with fixedinterest rates.  At September 30,2005, DP&L had no short-term borrowings.

 

The carrying value of the Company’s debt was $687.0 million at September 30,2005, consisting of First Mortgage Bonds; guaranteed Air Quality DevelopmentAuthority, Water Development Authority and Boone County, Kentucky pollutioncontrol obligations; and capital leases. The fair value of this debt was $694.2 million, based on current marketprices or discounted cash flows using current rates for similar issues withsimilar terms and remaining maturities. The principal cash repayments and related weighted average interestrates by maturity date for long-term, fixed-rate debt at September 30,2005, are as follows:

 
| **Expected Maturity** | ** ** | **Long-term Debt**       | ** ** |
|-----------------------|------------|--------------------------|------------|
| **Date**              | ** ** | **Amount**               | ** ** | **Average Rate** | ** ** |
| ** **            | ** ** | **($ in millions)** | ** ** | ** ** | ** ** |
|                  |       |                     |       |   |   |
| 2005                  |       |                     | **$**      | **0.2** | ** ** | 5.0 | % |
| 2006                  |       |                     | **0.9**    | ** ** | 5.0 | % |
| 2007                  |       |                     | **0.9**    | ** ** | 5.0 | % |
| 2008                  |       |                     | **0.7**    | ** ** | 5.5 | % |
| 2009                  |       |                     | **0.7**    | ** ** | 5.5 | % |
| Thereafter            |       |                     | **683.6**  | ** ** | 5.0 | % |
| Total                 |       |                     | **$**      | **687.0** | ** ** | 5.0 | % |
|                  |       |                     | ** ** | ** ** |   |   |
| Fair Value            |       |                     | **$**      | **694.2** | ** ** |   |   |

 

Debt maturities in 2005 are expected to be financed with internalfunds.

 

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

 

This quarterly report and other documents that DP&L files with theSecurities and Exchange Commission (SEC) and other regulatory agencies, as wellas other oral or written statements the Company may make from time to time,contain information based on management’s beliefs and include forward-lookingstatements (within the meaning of the Private Securities Litigation Reform Actof 1995) that involve a number of known and unknown risks, uncertainties andassumptions. These forward-looking statements are not guarantees of futureperformance, and

 

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there are a number of factors including, but not limited to, thoselisted below, which could cause actual outcomes and results to differmaterially from the results contemplated by such forward-lookingstatements.  DP&L does not undertakeany obligation to publicly update or revise any forward-looking statements,whether as a result of new information, future events or otherwise. Theseforward-looking statements are identified by terms and phrases such as “anticipate”,“believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”,“plan”, “project”, “predict”, “will”, and similar expressions.

 

**Regulation/Competition**

 

DP&L operates in a rapidly changing industry with evolving industrystandards and regulations. In recent years, a number of federal and statedevelopments aimed at promoting competition triggered industryrestructuring.  Regulatory factors, suchas changes in the policies or procedures that set rates; changes in tax laws,tax rates, and environmental laws and regulations; changes in DP&L’sability to recover expenditures for environmental compliance, fuel andpurchased power costs and investments made under traditional regulation throughrates; and changes to the frequency and timing of rate increases, can affectthe Company’s results of operations and financial condition.  Additionally, financial or regulatoryaccounting principles or policies imposed by governing bodies can increaseDP&L’s operational and monitoring costs affecting its results of operationsand financial condition.

 

Changes in DP&L’s customer base, including municipal customeraggregation, could lead to the entrance of competitors in the Company’smarketplace affecting its results of operations and financial condition.

 

**Economic Conditions**

 

Economic pressures, as well as changing market conditions and otherfactors related to physical energy and financial trading activities, whichinclude price, credit, liquidity, volatility, capacity, transmission, andinterest rates can have a significant effect on DP&L’s operations and theoperations of its retail, industrial and commercial customers.

 

On October 8, 2005 Delphi Corporation filed for Chapter 11bankruptcy protection in the U.S. Bankruptcy Court for the Southern District ofNew York.  Delphi representsapproximately 1% of the Company’s annual revenues.

 

During the past few years, the merchant energyindustry in many parts of the United States has suffered from an oversupply ofmerchant generation and a decline in trading and marketing activity.  These market conditions are expected tocontinue for several years.  As a resultof these market conditions, the Company continues to evaluate the carryingvalues of certain long-lived generation assets.

 

**Reliance on Third Parties**

 

DP&L relies on many suppliers for the purchase and delivery ofinventory and components to operate its energy production, transmission anddistribution functions.  Unanticipatedchanges in the Company’s purchasing processes may affect the Company’s businessand operating results. In addition, the Company relies on others to provideprofessional services, such as, but not limited to, investment management,actuarial calculations, internal audit services, payroll processing and variousconsulting services.

 

**Operating Results Fluctuations**

 

Future operating results could be affected and are subject tofluctuations based on a variety of factors, including but not limited to:  unusual weather conditions; catastrophicweather-related damage; unscheduled generation outages; unusual maintenance orrepairs; changes in coal costs, gas supply costs, emissions allowance costs, oravailability constraints; environmental compliance, including costs ofcompliance with existing and future environmental requirements; and electrictransmission system constraints.

 

A majority of the Company’s employees are under a collective bargainingagreement expiring at the end of October 2005.  If the Company is unable to negotiate this orfuture collective bargaining agreements, the Company could experience workstoppages, which may affect its business and operating results.

 

Although the Company is not certain about the effect of HurricanesKatrina and Rita on its operations, there is a concern that the costs forgasoline, diesel fuel, natural gas, insurance, availability of electricequipment and electrical contractors will increase as a result of the damagedone to New Orleans and the Gulf Coast area.

 

**Regulatory Uncertainties and Litigation**

 

In the normal course of business, the Company is subject to variouslawsuits, actions, proceedings, claims and other matters asserted under lawsand regulations.  Additionally, theCompany is subject to diverse and complex laws and regulations, including thoserelating to corporate governance, public disclosure and reporting, andtaxation, which are rapidly changing and subject to additional changes in thefuture.  As further described in Part II,Item 1 – Legal Proceedings, the Company is also currently involved in variouslitigation in which the outcome is uncertain.

 

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Compliance with these rapid changes may substantially increase costs toDP&L’s organization and could affect its future operating results.

 

**Internal Controls**

 

DP&L’s internal controls, accounting policies and practices, andinternal information systems are intended to enable the Company to capture andprocess transactions in a timely and accurate manner in compliance withaccounting principles generally accepted in the United States of America, lawsand regulations, taxation requirements, and federal securities laws andregulations.  DP&L has implementedcorporate governance, internal control and accounting rules issued inconnection with the Sarbanes-Oxley Act of 2002. The Company’s internal controls and policies are being closely monitoredby management, as well as the Board of Directors, for continued compliance withSection 404 of the Act.  WhileDP&L believes these controls, policies, practices and systems are adequateto ensure data integrity, unanticipated and unauthorized actions of employees,temporary lapses in internal controls due to shortfalls in oversight, orresource constraints, could lead to improprieties and undetected errors thatcould impact the Company’s financial condition or results of operations.

 

**Environmental Compliance**

 

The Company’s generating facilities (both wholly-owned and co-ownedwith others) are subject to continuing federal and state environmental laws andregulations.  Management believes theCompany currently complies with all existing federal and state environmentallaws and regulations.  The Company owns anon-controlling, minority interest in several generating stations operated byThe Cincinnati Gas & Electric Company (CG&E) and Columbus SouthernPower Company (CSP).  Either or both ofthese parties are likely to take steps to ensure that these stations remain incompliance with applicable environmental laws and regulations.  As non-controlling owners in these generatingstations, the Company cannot predict the likely cost or timing forenvironmental compliance initiatives undertaken at these stations.  However, regardless of the choice forcompliance, the Company will be responsible for its’ pro rata share of theseexpenses based upon the Company’s ownership interest.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

DP&L’s consolidated financial statements are prepared in accordancewith generally accepted accounting principles in the United States (GAAP).  In connection with the preparation of thesefinancial statements, DP&L’s management is required to make assumptions,estimates and judgments that affect the reported amounts of assets,liabilities, revenues, expenses and the related disclosure of contingentliabilities.  These assumptions,estimates and judgments are based on management’s historical experience andassumptions that are believed to be reasonable at the time.  However, because future events and theireffects cannot be determined with certainty, the determination of estimatesrequires the exercise of judgment. DP&L’s critical accounting policies are those which requireassumptions to be made about matters that are highly uncertain.

 

Different estimates could have a material effect on its financialresults.  Judgments and uncertaintiesaffecting the application of these policies and estimates may result inmaterially different amounts being reported under different conditions orcircumstances.  Significant items subjectto such judgments include the carrying value of property, plant and equipment;the valuation of derivative instruments; valuation allowance for receivablesand deferred income taxes; the valuation of reserves related to currentlitigation; and assets and liabilities related to employee benefits.

 

There has been one significant change to the critical accountingpolicies as disclosed in DP&L’s Form 10-K as of December 31,2004. The following policy has been added to the Company’s critical accountingpolicies:

 

**Revenue Recognition**

 

The Company considers revenue realized, or realizable, and earned whenpersuasive evidence of an arrangement exists, the products or services havebeen provided to the customer, the sales price is fixed or determinable, andcollectibility is reasonably assured. The Company’s utility operating companies****record electric revenues when delivered to customers. Customers are billed throughout the month as electric meters are read. The Company recognizes revenues for retail energy sales that have not yet beenbilled, but where electricity has been consumed.  This is termed “unbilledrevenues” and is a widely recognized and accepted practice for utilities. The Company’s estimates of unbilled revenues use systems that consider variousfactors to calculate retail customer consumption at the end of eachmonth.  Given the use of these systems and the fact that customers arebilled monthly, the Company believes it is unlikely that materially differentresults will occur in future periods when these amounts are subsequentlybilled.

 

Additionally, the Company is subject to regulatory orders addressingthe justness and reasonableness of the PJM and Midwest Independent TransmissionSystem Operator (MISO) rates and related revenue distribution protocols.  Beginning May 2005, the Company beganreceiving Seams Elimination Charge Adjustment (SECA) payments and

 

33

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has recorded $17.1 million of SECA collections net of SECAcharges.  DP&L’s management is required to make assumptions, estimatesand judgments relating to the possibility of refund of these revenues.  These assumptions, estimates and judgmentsare based on management’s experience and assumptions that are believed to bereasonable at the time.  As a result ofthese assumptions, estimates and judgments, the Company is deferring a portionof these revenues for which management believes is subject to refund.  The deferred amount recorded during the thirdquarter 2005 was $15.4 million and is anticipated to be approximately $21.8million for the entire year of 2005.  Theabove amount collected under the SECA rates are subject to refund and theultimate outcome of the proceeding establishing SECA rates is uncertain at thistime.  However, based on the amount of reservesestablished for this item, the results of this proceeding are not expected tohave a material adverse effect on DP&L’s financial condition, results ofoperations or cash flows.

 

**Recently Issued Accounting Pronouncements**

 

A discussion of recently issued accounting pronouncements is describedin Note 1 of Notes to Consolidated Financial Statements and such discussion isincorporated by reference in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and made a part hereof.

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**OPERATINGSTATISTICS**

 
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|-------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                   | ** **  | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Electric**                         |       |                                       |        |                                      |       |   |   |   |   |
|                                 |       |                                       |        |                                      |       |   |   |   |   |
| Sales  (millions of kWh)             |       |                                       |        |                                      |       |   |   |   |   |
| Residential                          |       | **1,546**                                  | ** **  | 1,300                                     |       | **4,182** | ** ** | 3,921 |   |
| Commercial                           |       | **1,086**                                  | ** **  | 1,016                                     |       | **2,937** | ** ** | 2,856 |   |
| Industrial                           |       | **1,174**                                  | ** **  | 1,161                                     |       | **3,281** | ** ** | 3,338 |   |
| Other retail                         |       | **380**                                    | ** **  | 367                                       |       | **1,077** | ** ** | 1,057 |   |
| Other  miscellaneous revenues        |       | **—**                                 | ** **  | —                                    |       | **—** | ** ** | — |   |
| Total retail                         |       | **4,186**                                  | ** **  | 3,844                                     |       | **11,477** | ** ** | 11,172 |   |
|                                 |       | ** **                                 | ** **  |                                      |       | ** ** | ** ** |   |   |
| Wholesale                            |       | **719**                                    | ** **  | 956                                       |       | **1,913** | ** ** | 2,977 |   |
|                                 |       | ** **                                 | ** **  |                                      |       | ** ** | ** ** |   |   |
| Total sales                          |       | **4,905**                                  | ** **  | 4,800                                     |       | **13,390** | ** ** | 14,149 |   |
|                                 |       | ** **                                 | ** **  |                                      |       | ** ** | ** ** |   |   |
| Revenues ($ in  thousands)      |       | ** **                                 | ** **  |                                      |       | ** ** | ** ** |   |   |
| Residential                          |       | **$**                                      | **136,337** | ** **                                | $          | 117,277 |   | **$** | **362,294** | ** ** | $ | 341,856 |   |
| Commercial                           |       | **64,875**                                 | ** **  | 62,133                                    |       | **184,372** | ** ** | 179,396 |   |
| Industrial                           |       | **33,887**                                 | ** **  | 33,429                                    |       | **95,602** | ** ** | 97,145 |   |
| Other retail                         |       | **20,844**                                 | ** **  | 20,633                                    |       | **60,707** | ** ** | 60,136 |   |
| Other  miscellaneous revenues        |       | **2,771**                                  | ** **  | 4,722                                     |       | **7,836** | ** ** | 12,883 |   |
| Total retail                         |       | **258,714**                                | ** **  | 238,194                                   |       | **710,811** | ** ** | 691,416 |   |
|                                 |       | ** **                                 | ** **  |                                      |       | ** ** | ** ** |   |   |
| Wholesale                            |       | **74,567**                                 | ** **  | 72,046                                    |       | **186,029** | ** ** | 202,006 |   |
|                                 |       | ** **                                 | ** **  |                                      |       | ** ** | ** ** |   |   |
| RTO  ancillary revenues              |       | **22,239**                                 | ** **  | —                                    |       | **55,191** | ** ** | — |   |
|                                 |       | ** **                                 | ** **  |                                      |       | ** ** | ** ** |   |   |
| Total  revenues                      |       | **$**                                      | **355,520** | ** **                                | $          | 310,240 |   | **$** | **952,031** | ** ** | $ | 893,422 |   |
|                                 |       | ** **                                 | ** **  |                                      |       | ** ** | ** ** |   |   |
| Electric  customers at end of period |       | **511,948**                                | ** **  | 507,669                                   |       | **511,948** | ** ** | 507,669 |   |

 

# **Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

# ** **

See the “Market Risk” section of Item 2.

 

**Item 4.  Controls andProcedures**

 

The Company’s management evaluated, with theparticipation of the Chief Executive Officer and Chief Financial Officer, theeffectiveness of the Company’s disclosure controls and procedures as of the endof the period covered by this report. Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures were effective as of the end of the periodcovered by this report.  There has been no change in the Company’sinternal control over financial reporting that occurred during the quartercovered by this report that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**Part II. Other Information**

 

**Item 1.  Legal Proceedings**

 

OnAugust 24, 2004, DPL, DP&L and MVE filed a Complaint against Mr. Forster,Ms. Muhlenkamp and Mr. Koziar in the Court of Common Pleas ofMontgomery County, Ohio asserting legal claims against them relating to thetermination of the Valley Partners Agreements, challenging the validity of thepurported amendments to the deferred compensation plans and to the employmentand consulting agreements with Messrs. Forster and Koziar and Ms. Muhlenkamp,and the propriety of the distributions from the plans to Messrs. Forsterand Koziar and Ms. Muhlenkamp, and alleging that Messrs. Forster andKoziar and Ms. Muhlenkamp breached their fiduciary duties and breachedtheir consulting and employment contracts. DPL, DP&L and MVE seek, among other things, damages in excess of $25thousand, disgorgement of all amounts improperly withdrawn by Messrs. Forsterand Koziar and Ms. Muhlenkamp from the deferred compensation plans and acourt order declaring that DPL, DP&L and MVE have no further obligationsunder the consulting and employment contracts due to those breaches.

 

Defendants Forster, Koziar and Muhlenkamp filedmotions to dismiss the Complaint and motions to stay discovery pending a rulingon the motions to dismiss.  In addition,pursuant to applicable statutes, regulations and agreements, DPL and DP&Lhad been advancing certain of Defendants’ attorneys’ fees and expenses withrespect to various matters other than the litigation between Defendants and DPLand DP&L in Florida and Ohio, and believe that other requested advances arenot required.  On February 7, 2005, Mr. Forsterand Ms. Muhlenkamp filed a motion in DP&L’s and DPL’s Ohio litigationseeking to compel DPL, MVE and DP&L to pay all attorneys’ fees and expensesthat have not been advanced to them.  On May 10,2005, the Court denied the motions to dismiss filed by Defendants Forster,Koziar, and Muhlenkamp.  On June 15,2005, Defendants Forster and Muhlenkamp filed an answer and filed counterclaimsagainst DPL, DP&L, MVE and individually against the current members of theBoard of Directors of DPL Inc. as well as two former Board members and variouscompensation plans of DPL and DP&L. On June 15, 2005, Defendant Koziar filed his answer and filedcounterclaims against DPL, DP&L and individually against the currentmembers of the Board of Directors of DPL Inc. and two former Board members ofDPL.  On June 29, 2005, DPL,DP&L and MVE filed an amended complaint against the Defendants.  On July 18, 2005, Defendants filedanswers to that amended complaint and Defendant Koziar filed amendedcounterclaims that included claims against various compensation plans of DPLand DP&L that he had not named in his initial counterclaims.  Defendants’ answers substantially denied theallegations made by DPL, DP&L and MVE and denied any liability.  The counterclaims and amended counterclaimsallege that DPL, DP&L, MVE, various compensation plans and the individualdefendants breached the terms of the employment and consulting contracts ofDefendants Forster, Muhlenkamp and Koziar, and the terms of the compensationplans.  They further allege theories ofbreach of fiduciary duty, breach of contract, promissory estoppel, tortiousinterference, conversion, replevin and violations of ERISA under which theyseek distribution of deferred compensation balances, conversion of stockincentive units, exercise of options and payment of amounts allegedly owedunder the contracts and plans.  Forster,Muhlenkamp and Koziar also seek payment of attorneys’ fees and expenses onclaims similar to those filed in the Forster and Muhlenkamp motion forattorneys’ fees and expenses.  On August 18,2005, the Court denied Defendants Forster’s and Muhlenkamp’s motion regardingadvancement of fees.  Mr. Forsterand Ms. Muhlenkamp continue to litigate the issue of payment of attorneys’fees as part of their counterclaims.

 

On March 15, 2005, Mr. Forster and Ms. Muhlenkampfiled a lawsuit in New York state court against the purchasers of the privateequity investments in the financial asset portfolio and against outside counselto DPL and DP&L concerning purported entitlements in connection with thepurchase of those investments.  Theyassert that DPL, DP&L and MVE had ongoing obligations to make certainpayments to them based on the financial asset portfolio’s returns and that anypurchaser of portfolio investments should have been obligated to assume thoseobligations.  DPL, DP&L and MVE arenot defendants in that case; however, they are parties to an indemnificationagreement with respect to the purchaser defendants.  Those defendants have requested that DPL,DP&L and MVE indemnify them in connection with that litigation, and DPL,DP&L and MVE have acknowledged indemnity obligations.  On March 28, 2005, DPL, DP&L and MVEfiled a Motion for Preliminary Injunction in the Ohio case, requesting that thecourt issue a preliminary injunction against Mr. Forster and Ms. Muhlenkampregarding the New York lawsuit.  Since certain key issues raised by Mr. Forsterand Ms. Muhlenkamp in their New York lawsuit are identical to the issuesraised in the pending Ohio lawsuit, DPL, DP&L and MVE believed that thoseissues should be heard and resolved in the pending Ohio lawsuit.  Mr. Forsterand Ms. Muhlenkamp filed a brief opposing the preliminary injunction on April 15,2005.  DPL, DP&L and MVE filed theirreply brief on April 25, 2005.  Thecourt heard the motion on May 6, 2005 and on August 18, 2005, issueda preliminary injunction against Mr. Forster and Ms. Muhlenkamp thatprecludes them from pursuing these key issues in the New York trial court orany other forum other than the Ohio litigation. In addition, the purchaser defendants, our indemnitee in the New Yorkaction, filed a motion to stay or dismiss that case.  The New York court heard this motion on June 23,2005 and on July 5, 2005 entered an order severing the claims broughtagainst the purchaser defendants and granting the purchaser defendants’ motionto stay those claims temporarily.  On August 15,2005,

 

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Mr. Forster and Ms. Muhlenkamp movedto vacate the stay.  At a hearing on October 12,2005, the New York court denied that motion and continued the stay.

 

On September 12, 2005, Mr. Forster andMs. Muhlenkamp appealed the preliminary injunction entered by the Ohiocourt, for which they have sought expedited treatment.  At a status hearing on September 14, theOhio trial court requested that the parties brief the issue of whether theinterlocutory appeal affected the court’s jurisdiction to proceed with thelitigation.  DPL, MVE and the Companyfiled a brief discussing their position that the Ohio trial court continues tohave jurisdiction to proceed with the merits of the case.  Defendants Forster and Muhlenkamp did notaddress the jurisdictional issue, but filed a motion to stay the Ohio casepending the appeal or, alternatively, to modify the injunction to allow them topursue discovery in the New York case.  DPL, MVE and the Company filed a brief opposing that motion andinforming the Ohio court of the New York court’s decision to continue thestay.  The Ohio court has not yet ruledon the jurisdictional issue or the motion filed by Mr. Forster and Ms. Muhlenkamp.

 

Counsel to Mr. Forster and Ms. Muhlenkampare sending their attorneys’ invoices for the New York action to DPL and theCompany for fee advancement and have continued to send monthly invoices for theOhio action to DPL and the Company for fee advancement.  DPL and the Company continue to maintain thatthey are not required to advance payment with respect to any of those charges.

 

Cumulatively through September 30, 2005, DPL and the Company hasaccrued for accounting purposes, obligations of approximately $53 million toreflect claims regarding deferred compensation, estimated MVE incentives and/orlegal fees that Defendants assert are payable per contracts.  DPL and the Company disputes Defendantsentitlement to any of those sums and, as noted above is pursuing litigationagainst them contesting all such claims.

 

InNovember 1999, the United States Environmental Protection Agency (USEPA)filed civil complaints and Notices of Violations (NOVs) against operators andowners of certain generation facilities for alleged violations of the Clean AirAct (CAA).  Generation units operated by CG&E (Beckjord 6) and CSP(Conesville 4) and co-owned by the Company were referenced in theseactions.  Numerous northeast states have filed complaints or haveindicated that they will be joining the USEPA’s action against CG&E andCSP.  The Company was not identified in the NOVs, civil complaints orstate actions.  In December 2000, CG&E announced that it hadreached an Agreement in Principle with the USEPA and other plaintiffs in aneffort to settle the claims. As of December 31, 2004, discussions on thefinal terms of the settlement continue and the outcome of these claims or theeffect, if any, on the Company has not been determined.  In June 2000,the USEPA issued a NOV to DP&L-operated J.M. Stuart Station (co-owned bythe Company, CG&E, and CSP) for alleged violations of the CAA.  TheNOV contained allegations consistent with NOVs and complaints that the USEPAhad recently brought against numerous other coal-fired utilities in theMidwest.  The Company intends to vigorously challenge the NOV.

 

OnSeptember 21, 2004, the Sierra Club filed a lawsuit against the Companyand the other owners of the Stuart Generating Station in the United StatesDistrict Court for the Southern District of Ohio for alleged violations of theCAA.  The Company intends to vigorously defend this matter.

 

OnNovember 17, 2004, a citizens’ suit was filed against CG&E (*Freeman v. CG&E*) for allegedviolations of the CAA.  The Company believes the allegations are meritlessand believes CG&E, as the operator of the Zimmer generating station, willvigorously defend the matter on behalf of all co-owners.

 

OnNovember 18, 2004, the State of New York and seven other states filed suitagainst the American Electric Power Corporation (AEP) and various subsidiaries,alleging various CAA violations at a number of AEP electric generatingfacilities, including Conesville Unit 4 (co-owned by CG&E, CSP, and theCompany).  The Company believes the allegations are without merit and thatAEP, on behalf of all co-owners, will vigorously defend the matter.

 

OnJune 30, 2005, Christopher Robinson, Elizabeth May and KimberlyPerrotte filed a class action lawsuit in the Ontario Superior Court of Justiceagainst twenty-one utilities and electric generators, including the Company,located both in Canada and in the Northeast and Midwest of the UnitedStates.  The complaint alleges negligencein the operation of various power plants creating harmful levels of airpollutants that injured the class members identified.  The complaint demands $7.435 billion in compensatorydamages plus unspecified punitive damages. The Company believes all of the allegations are without merit and willvigorously defend the matter.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

There were no submissions to the security holder in the third quarter.

 

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**Item 5.  Other Information**

 

None.

 

**Item6.  Exhibits**

 

(a)                                  Thefollowing exhibits are filed herewith:

 

Exhibit 4.1 – Loan Agreement, dated as of August 1,2005, by and between Ohio Water Development Authority and The Dayton Power andLight Company.  (Filed as Exhibit 4.1to the Form 8-K filed August 24, 2005 (File No. 1-2385))

 

Exhibit 4.2 – Loan Agreement, dated as of August 1,2005, by and between Ohio Air Quality Development Authority and The DaytonPower and Light Company.  (Filed as Exhibit 4.2to the Form 8-K filed August 24, 2005 (File No. 1-2385))

 

Exhibit 4.3 - Loan Agreement, dated as of August 1,2005, by and between County of Boone, Kentucky and The Dayton Power and LightCompany.  (Filed as Exhibit 4.3 tothe Form 8-K filed August 24, 2005 (File No. 1-2385))

 

Exhibit 4.4 – 43rd SupplementalIndenture to the First and Refunding Mortgage, dated as of August 1, 2005,by and between the Bank of New York, as Trustee and The Dayton Power and LightCompany.  (Filed as Exhibit 4.4 tothe Form 8-K filed August 24, 2005 (File No. 1-2385))

 

Exhibits 31.1 and 31.2 – Officer’sCertifications pursuant to Section 302 of the Sarbanes Oxley Act of 2002

 

Exhibit 32 – Certification pursuant to Section 906of the Sarbanes-Oxley Act of 2002

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   |                  | ** THE DAYTON POWER AND LIGHT COMPANY**                                                                                                |
|--------|-----------------------|---------------------------------------------------------------------------------------------------------------------------------------------|
|   |                  |  (Registrant)                                                                                                                          |
|   |                  |                                                                                                                                        |
|   |                  |                                                                                                                                        |
| Date:  | October 28, 2005 |  /s/ James V. Mahoney                                                                                                                  |
|   |                  |  James V. Mahoney   President and Chief Executive Officer   (principal executive officer)                                    |
|   |                  |                                                                                                                                        |
|   |                  |                                                                                                                                        |
|   | October 28, 2005 |  /s/ John J. Gillen                                                                                                                    |
|   |                  |  John J. Gillen   Senior Vice President and Chief Financial Officer   (principal financial and principal accounting officer) |
|   |                  |                                                                                                                                        |
|   |                  |                                                                                                                                        |
|   | October 28, 2005 |  /s/ Daniel L. Thobe                                                                                                                   |
|   |                  |  Daniel L. Thobe                                                                                                                       |
|   |                  |  Corporate Controller                                                                                                                  |

 

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