Tableof Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **
| **x**                                                         | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                                    |
| **For the quarterly period ended****September 30, 2009** |
| ** **                                                    |
| **OR**                                                        |
| ** **                                                    |
| **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** | ** ** | **Registrant,  State of Incorporation,  Address and Telephone Number** | ** ** | **I.R.S.  Employer  Identification  No.** |
|-----------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------|
|                        |       |                                                                   |       |                                      |
| **1-9052**                  | ** ** | **DPL INC.**                                                           | ** ** | **31-1163136**                            |
|                        |       | **(An  Ohio Corporation)**                                             |       |                                      |
| ** **                  |       | **1065  Woodman Drive  Dayton, Ohio 45432**                            | ** ** | ** **                                |
|                        |       | **937-224-6000**                                                       |       |                                      |
|                        |       |                                                                   |       |                                      |
| **1-2385**                  | ** ** | **THE DAYTON POWER AND LIGHT COMPANY**                                 | ** ** | **31-0258470**                            |
| ** **                  |       | **(An  Ohio Corporation)**                                             | ** ** | ** **                                |
| ** **                  |       | **1065  Woodman Drive  Dayton, Ohio 45432**                            | ** ** | ** **                                |
| ** **                  |       | **937-224-6000**                                                       | ** ** | ** **                                |

 

Indicate by check markwhether each 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 filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 
| DPL Inc.                            | Yes x | No o |   |
|-------------------------------------|-------|------|--------|
| The Dayton Power and  Light Company | Yes x | No o |   |

 

Indicate by check markwhether each registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).

 
| DPL Inc.                            | Yes o | No o |   |
|-------------------------------------|-------|------|--------|
| The Dayton Power and  Light Company | Yes o | No o |   |

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| ** **                          | ** ** | **Large**       | ** ** | ** **      | ** ** | ** **          | ** ** | **Smaller**   |
|-------------------------------------|------------|-----------------|------------|-----------------|------------|---------------------|------------|---------------|
| ** **                          | ** ** | **accelerated** | ** ** | **Accelerated** | ** ** | **Non-accelerated** | ** ** | **reporting** |
| ** **                          | ** ** | **filer**       | ** ** | **filer**       | ** ** | **filer**           | ** ** | **company**   |
| DPL  Inc.                           |       | x               |       | o               |       | o                   |       | o             |
| The  Dayton Power and Light Company |       | o               |       | o               |       | x                   |       | o             |

 

Indicate by check markwhether each registrant is a shell company (as defined in Rule 12b-2 ofthe Exchange Act).

 
| DPL Inc.                            | Yes o | No x |   |
|-------------------------------------|-------|------|--------|
| The Dayton Power and  Light Company | Yes o | No x |   |

 

As of October 27, 2009, each registrant had thefollowing shares of common stock outstanding:

 
| **Registrant**                          | ** ** | **Description**                    | ** ** | **Shares Outstanding** |
|-----------------------------------------|------------|------------------------------------|------------|-----------------------------|
|                                    |       |                               |       |                        |
| **DPL  Inc.**                           | ** ** | **Common  Stock, $0.01 par value** |       | 119,765,729                 |
| ** **                              | ** ** | ** **                         | ** ** | ** **                  |
| **The  Dayton Power and Light Company** | ** ** | **Common  Stock, $0.01 par value** |       | 41,172,173                  |

 

This combined Form 10-Q is separately filed by DPLInc. and The Dayton Power and Light Company. Information contained herein relating to any individual registrant isfiled by such registrant on its own behalf. Each registrant makes no representation as to information relating to aregistrant other than itself.

 

 

 

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**DPL Inc. and The Dayton Power and Light Company**

 

**Index**

 
| ** **                                  | ** **                                                                                  | **Page No.** |
|---------------------------------------------|---------------------------------------------------------------------------------------------|-------------------|
| **Glossary of Terms**                       |                                                                                        | 3                 |
| ** **                                  |                                                                                        |              |
| **Part I  Financial Information** |                                                                                        |
| ** **                                  |                                                                                        |              |
| Item 1                                      | Financial Statements  — **DPL** and **DP&L**                                       | ** **        |
|                                        |                                                                                        |              |
|                                        | Condensed Consolidated Statements of Results of  Operations — **DPL**                  | 6                 |
|                                        |                                                                                        |              |
|                                        | Condensed Consolidated Statements of Cash Flows — **DPL**                              | 7                 |
|                                        |                                                                                        |              |
|                                        | Condensed Consolidated Balance Sheets — **DPL**                                        | 8                 |
|                                        |                                                                                        |              |
|                                        | Condensed Consolidated Statements of Results of  Operations — **DP&L**             | 10                |
|                                        |                                                                                        |              |
|                                        | Condensed Consolidated Statements of Cash Flows — **DP&L**                         | 11                |
|                                        |                                                                                        |              |
|                                        | Condensed Consolidated Balance Sheets — **DP&L**                                   | 12                |
|                                        |                                                                                        |              |
|                                        | Notes to Condensed Consolidated Financial Statements                                        | 14                |
|                                        |                                                                                        |              |
| Item 2                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 42                |
|                                        |                                                                                        |              |
|                                        | Electric Sales and Revenues                                                                 | 66                |
|                                        |                                                                                        |              |
| Item 3                                      | Quantitative  and Qualitative Disclosures about Market Risk                                 | 66                |
|                                        |                                                                                        |              |
| Item 4                                      | Controls and  Procedures                                                                    | 66                |
|                                        |                                                                                        |              |
| **Part II  Other Information**    |                                                                                        |
| ** **                                  |                                                                                        |              |
| Item 1                                      | Legal Proceedings                                                                           | 67                |
|                                        |                                                                                        |              |
| Item 1A                                     | Risk Factors                                                                                | 67                |
|                                        |                                                                                        |              |
| Item 2                                      | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 68                |
|                                        |                                                                                        |              |
| Item 3                                      | Defaults  Upon Senior Securities                                                            | 68                |
|                                        |                                                                                        |              |
| Item 4                                      | Submission  of Matters to a Vote of Security Holders                                        | 68                |
|                                        |                                                                                        |              |
| Item 5                                      | Other Information                                                                           | 68                |
|                                        |                                                                                        |              |
| Item 6                                      | Exhibits                                                                                    | 69                |
|                                        |                                                                                        |              |
| **Other**                                   |                                                                                        |              |
| ** **                                  |                                                                                        |              |
| Signatures                                  |                                                                                        | 70                |
|                                        |                                                                                        |              |
| Certifications                              |                                                                                        |              |

 

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**GLOSSARYOF TERMS**

 

The following select abbreviations or acronyms areused in this Form 10-Q:

 
| **Abbreviation  or Acronym** | ** ** | **Definition**                                                                                                                                                                                                                         |
|------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| AOCI                         |       | Accumulated Other  Comprehensive Income                                                                                                                                                                                                |
| ASU                          |       | Accounting Standards  Update                                                                                                                                                                                                           |
| CAA                          |       | Clean Air Act                                                                                                                                                                                                                          |
| CO2                          |       | Carbon Dioxide                                                                                                                                                                                                                         |
| CCEM                         |       | Customer Conservation  and Energy Management                                                                                                                                                                                           |
| CRES                         |       | Competitive Retail  Electric Service                                                                                                                                                                                                   |
| DPL                          |       | DPL Inc., the parent  company                                                                                                                                                                                                          |
| DPLE                         |       | DPL Energy, LLC, a  wholly owned subsidiary of DPL which engages in the operation of peaking  generation facilities                                                                                                                    |
| DPLER                        |       | DPL Energy  Resources, Inc., a wholly owned subsidiary of DPL which sells retail  electric energy and other energy services                                                                                                       |
| DP&L                     |       | The Dayton Power and  Light Company, the principal subsidiary of DPL and a public utility which  sells electricity to residential, commercial, industrial and governmental  customers in a 6,000 square mile area of West Central Ohio |
| DSM                          |       | Demand-Side Management,  a program under which customers typically receive a discount, rebate or other  form of incentive in return for agreeing to reduce their electricity  consumption upon request by the utility.                 |
| EITF                         |       | Emerging Issues Task  Force                                                                                                                                                                                                            |
| EPS                          |       | Earnings Per Share                                                                                                                                                                                                                     |
| ESOP                         |       | Employee Stock  Ownership Plan                                                                                                                                                                                                         |
| ESP                          |       | Electric Security  Plans, filed with the PUCO, pursuant to Ohio law                                                                                                                                                                    |
| FASB                         |       | Financial Accounting  Standards Board                                                                                                                                                                                                  |
| FASC                         |       | FASB Accounting  Standards Codification                                                                                                                                                                                                |
| FERC                         |       | Federal Energy  Regulatory Commission                                                                                                                                                                                                  |
| FGD                          |       | Flue Gas  Desulfurization                                                                                                                                                                                                              |
| GAAP                         |       | Generally Accepted  Accounting Principles in the United States                                                                                                                                                                         |
| GHG                          |       | Greenhouse Gases                                                                                                                                                                                                                       |
| KWh                          |       | Kilowatt hours                                                                                                                                                                                                                         |
| MVIC                         |       | Miami Valley Insurance  Company, a wholly owned insurance subsidiary of DPL that provides insurance  services to DPL and its subsidiaries                                                                                              |
| NOx                          |       | Nitrogen Oxide                                                                                                                                                                                                                         |
| NYMEX                        |       | New York Mercantile  Exchange                                                                                                                                                                                                          |
| Ohio EPA                     |       | Ohio Environmental  Protection Agency                                                                                                                                                                                                  |
| OTC                          |       | Over-The-Counter                                                                                                                                                                                                                       |
| OVEC                         |       | Ohio Valley Electric  Corporation, an electric generating company in which DP&L owns a 4.9%  equity interest                                                                                                                       |

 

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| **Abbreviation  or Acronym** | ** ** | **Definition**                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| PJM                          |       | PJM Interconnection,  L.L.C., a regional transmission organization                                                                                                                                                                                                                                                                                                                                                                                                           |
| PRP                          |       | Potentially Responsible  Party                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| PUCO                         |       | Public Utilities  Commission of Ohio                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| RSU                          |       | Restricted Stock Units                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| RTO                          |       | Regional Transmission  Organization                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| RPM                          |       | Reliability Pricing  Model                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| SB 221                       |       | Ohio Senate Bill 221,  an Ohio electric energy bill that was signed by the Governor on May 1,  2008 and went into effect July 31, 2008. This new law required all Ohio  distribution utilities to file either an electric security plan or a market  rate option to be in effect January 1, 2009. The law also contains  annual targets relating to advanced energy portfolio standards, renewable  energy, demand reduction and energy efficiency standards. |
| SCR                          |       | Selective Catalytic  Reduction                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| SEC                          |       | Securities and Exchange  Commission                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| SECA                         |       | Seams Elimination  Charge Adjustment                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| SFAS                         |       | Statement of Financial  Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| SO2                          |       | Sulfur Dioxide                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Stipulation                  |       | On February 24,  2009, DP&L filed a Stipulation and Recommendation on its ESP filing  pursuant to SB 221, which was signed by the Staff of the PUCO, the Office of  the Ohio Consumers’ Counsel and various intervening parties. The PUCO  approved the Stipulation on June 24, 2009. The material terms of this  Stipulation were discussed further in our Annual Report on Form 10-K for  the fiscal year ended December 31, 2008.            |
| TCRR                         |       | Transmission Cost  Recovery Rider                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| USEPA                        |       | U.S. Environmental  Protection Agency                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| USF                          |       | Universal Service Fund                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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**DPLInc.** and **The Dayton Power and Light Company** filecurrent, annual and quarterly reports, proxy statements (**DPL Inc.**only)and other information required by the Securities Exchange Act of 1934, asamended, with the SEC.  You may read andcopy any document we file at the SEC’s Public Reference Room located at100 F Street N.E., Washington, D.C. 20549, USA. Please call the SEC at (800) SEC-0330 for further information on thePublic Reference Room.  Our SEC filingsare also available to the public from the SEC’s web site at http://www.sec.gov.

 

Our public internet siteis http://www.dplinc.com.  We makeavailable, free of charge, through our internet site, our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, andForms 3, 4 and 5 filed on behalf of our directors and executive officers, andamendments to those reports filed or furnished pursuant to the SecuritiesExchange Act of 1934, as amended, as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the SEC.

 

Inaddition, our public internet site includes other items related to corporategovernance matters, including, among other things, our governance guidelines,charters of various committees of the Board of Directors and our code ofbusiness conduct and ethics applicable to all employees, officers anddirectors.  You may obtain copies ofthese documents, free of charge, by sending a request, in writing, to DPLInvestor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.

 

Forward-lookingStatements:  Certain statements contained in this reportare “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Pleasesee page 42 for more information about forward-looking statementscontained in this report.

** **

**Part I — Financial Information**

 

This report includes thecombined filing of **DPL** and **DP&L.  DP&L**isthe principal subsidiary of **DPL**providingapproximately 97% of **DPL’s**totalconsolidated revenue and approximately 95% of **DPL’s**totalconsolidated asset base.  Throughout thisreport, the terms “we,” “us,” “our” and “ours” are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in the section.

 

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**Item 1 —Financial Statements**

 

**DPL INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **$ in millions except per share  amounts**             | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| **Revenues**                                                 | ** ** | **$**                  | **407.3**  |                   | $          | 414.5 | ** ** | **$** | **1,183.5** |   | $ | 1,209.4 |   |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| **Cost of revenues:**                                        |       |                   |       |                   |       |   |   |   |   |
| Fuel                                                         | ** ** | **84.4**               |       | 62.2                   | ** ** | **241.7** |   | 192.5 |   |
| Purchased power                                              | ** ** | **65.0**               |       | 119.8                  | ** ** | **188.0** |   | 288.9 |   |
| Total cost of revenues                                       | ** ** | **149.4**              |       | 182.0                  | ** ** | **429.7** |   | 481.4 |   |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| **Gross margin**                                             | ** ** | **257.9**              |       | 232.5                  | ** ** | **753.8** |   | 728.0 |   |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| **Operating expenses:**                                      |       |                   |       |                   |       |   |   |   |   |
| Operation and maintenance                                    | ** ** | **73.8**               |       | 68.2                   | ** ** | **226.3** |   | 200.4 |   |
| Depreciation and amortization                                | ** ** | **36.1**               |       | 35.3                   | ** ** | **107.8** |   | 102.5 |   |
| General taxes                                                | ** ** | **30.2**               |       | 30.7                   | ** ** | **89.8** |   | 93.0 |   |
| Amortization of regulatory assets                            | ** ** | **1.3**                |       | 2.1                    | ** ** | **4.5** |   | 7.6 |   |
| Total operating expenses                                     | ** ** | **141.4**              |       | 136.3                  | ** ** | **428.4** |   | 403.5 |   |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| **Operating income**                                         | ** ** | **116.5**              |       | 96.2                   | ** ** | **325.4** |   | 324.5 |   |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| **Other income / (expense), net:**                           |       |                   |       |                   |       |   |   |   |   |
| Investment income                                            | ** ** | **0.1**                |       | 0.5                    | ** ** | **0.7** |   | 3.1 |   |
| Interest expense                                             | ** ** | **(19.6**              | **)**      | (21.9                  | )          | **(60.7** | **)** | (67.9 | ) |
| Other income / (deductions)                                  | ** ** | **(0.9**               | **)**      | (0.4                   | )          | **(2.0** | **)** | (0.9 | ) |
| Total other income / (expense), net                          | ** ** | **(20.4**              | **)**      | (21.8                  | )          | **(62.0** | **)** | (65.7 | ) |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| **Earnings before income tax**                               | ** ** | **96.1**               |       | 74.4                   | ** ** | **263.4** |   | 258.8 |   |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| Income tax expense                                           | ** ** | **28.2**               |       | 26.4                   | ** ** | **84.2** |   | 85.9 |   |
| **Net income**                                               | ** ** | **$**                  | **67.9**   |                   | $          | 48.0 | ** ** | **$** | **179.2** |   | $ | 172.9 |   |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| **Average number of common shares  outstanding (millions):** |       |                   |       |                   |       |   |   |   |   |
| Basic                                                        | ** ** | **112.4**              |       | 109.9                  | ** ** | **112.2** |   | 109.6 |   |
| Diluted                                                      | ** ** | **114.4**              |       | 115.0                  | ** ** | **113.4** |   | 116.2 |   |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| **Earnings per share of common  stock:**                     |       |                   |       |                   |       |   |   |   |   |
| Basic                                                        | ** ** | **$**                  | **0.60**   |                   | $          | 0.44 | ** ** | **$** | **1.60** |   | $ | 1.58 |   |
| Diluted                                                      | ** ** | **$**                  | **0.59**   |                   | $          | 0.42 | ** ** | **$** | **1.58** |   | $ | 1.49 |   |
|                                                         |       |                   |       |                   |       |   |   |   |   |
| **Dividends paid per share of common  stock**                | ** ** | **$**                  | **0.285**  |                   | $          | 0.275 | ** ** | **$** | **0.855** |   | $ | 0.825 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**DPLINC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

 
| ** **                                                                         | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** |
| **$ in millions**                                                             | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                                               |       |                   |       |   |   |
| **Cash flows from operating activities:**                                          |       |                   |       |   |   |
| Net  income                                                                        | ** ** | **$**                  | **179.2**  |   | $ | 172.9 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                     | ** ** | **107.8**              |       | 102.5 |   |
| Amortization  of regulatory assets                                                 | ** ** | **4.5**                |       | 7.6 |   |
| Deferred  income taxes                                                             | ** ** | **203.5**              |       | 32.7 |   |
| Changes  in certain assets and liabilities:                                        |       |                   |       |   |   |
| Accounts  receivable                                                               | ** ** | **43.1**               |       | (1.9 | ) |
| Deposits  and other advances                                                       | ** ** | **4.3**                |       | (3.7 | ) |
| Accounts  payable                                                                  | ** ** | **(66.7**              | **)**      | 24.3 |   |
| Accrued  taxes                                                                     | ** ** | **(128.3**             | **)**      | (66.4 | ) |
| Accrued  interest payable                                                          | ** ** | **(6.5**               | **)**      | (7.6 | ) |
| Pension  and retiree benefits                                                      | ** ** | **6.4**                |       | (0.7 | ) |
| Prepayments                                                                        | ** ** | **(0.3**               | **)**      | 0.3 |   |
| Deferred  regulatory costs, net                                                    | ** ** | **(34.5**              | **)**      | (12.8 | ) |
| Inventories                                                                        | ** ** | **(22.9**              | **)**      | (4.6 | ) |
| Other                                                                              | ** ** | **2.6**                |       | (0.1 | ) |
| **Net cash provided by operating activities**                                      | ** ** | **292.2**              |       | 242.5 |   |
|                                                                               |       |                   |       |   |   |
| **Cash flows from investing activities:**                                          |       |                   |       |   |   |
| Capital  expenditures                                                              | ** ** | **(134.6**             | **)**      | (173.8 | ) |
| Proceeds  from sale of property                                                    | ** ** | **1.2**                |       | — |   |
| Purchases  of short-term investments                                               | ** ** | **—**             |       | (9.9 | ) |
| Proceeds from maturity of short-term investment                                    | ** ** | **5.0**                |       | — |   |
| **Net cash used for investing activities**                                         | ** ** | **(128.4**             | **)**      | (183.7 | ) |
|                                                                               |       |                   |       |   |   |
| **Cash flows from financing activities:**                                          |       |                   |       |   |   |
| Exercise  of stock options                                                         | ** ** | **1.3**                |       | 1.7 |   |
| Tax  impact related to exercise of stock options                                   | ** ** | **0.1**                |       | 0.3 |   |
| Repurchase  of warrants                                                            | ** ** | **(15.9**              | **)**      | — |   |
| Retirement  of long-term debt                                                      | ** ** | **(175.0**             | **)**      | (100.0 | ) |
| Withdrawals  of restricted funds held in trust, net                                | ** ** | **6.7**                |       | 20.5 |   |
| Repurchase  of pollution control bonds                                             | ** ** | **—**             |       | (90.0 | ) |
| Withdrawals  from revolving credit facilities                                      | ** ** | **260.0**              |       | 105.0 |   |
| Repayment of borrowings from revolving credit  facility                            | ** ** | **(145.0**             | **)**      | (15.0 | ) |
| Dividends  paid on common stock                                                    | ** ** | **(95.7**              | **)**      | (89.9 | ) |
| **Net cash used for financing activities**                                         | ** ** | **(163.5**             | **)**      | (167.4 | ) |
|                                                                               |       |                   |       |   |   |
| **Cash and cash equivalents:**                                                     |       |                   |       |   |   |
| Net  change                                                                        | ** ** | **0.3**                |       | (108.6 | ) |
| Balance  at beginning of period                                                    | ** ** | **62.5**               |       | 134.9 |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                  | **62.8**   |   | $ | 26.3 |   |
|                                                                               |       |                   |       |   |   |
| **Supplemental cash flow information:**                                            |       |                   |       |   |   |
| Interest  paid, net of amounts capitalized                                         | ** ** | **$**                  | **67.1**   |   | $ | 71.6 |   |
| Income  taxes (refunded)/paid, net                                                 | ** ** | **$**                  | **(4.8**   | **)** | $ | 112.7 |   |
| Non-cash  financing and investing activities:                                      |       |                   |       |   |   |
| Accruals  for capital expenditures                                                 | ** ** | **$**                  | **9.3**    |   | $ | 43.3 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**DPL INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                       | ** ** | **At**                 | ** **  | **At**                | ** ** |
|--------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                       | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| **$ in  millions**                          | ** ** | **2009**               | ** **  | **2008**              | ** ** |
|                                             | ** ** | ** **             |        |                  |       |
| **ASSETS**                                       | ** ** | ** **             |        |                  |       |
|                                             | ** ** | ** **             |        |                  |       |
| **Current assets:**                              | ** ** | ** **             |        |                  |       |
| Cash  and cash equivalents                       | ** ** | **$**                  | **62.8**    |                  | $          | 62.5 |   |
| Restricted  funds held in trust                  | ** ** | **7.9**                |        | 14.5                  |       |
| Accounts  receivable, net (Note 2)               | ** ** | **292.0**              |        | 259.9                 |       |
| Inventories  (Note 2)                            | ** ** | **128.0**              |        | 105.1                 |       |
| Prepaid  income taxes                            | ** ** | **33.0**               |        | —                |       |
| Taxes  applicable to subsequent years            | ** ** | **14.2**               |        | 58.0                  |       |
| Other  prepayments and current assets            | ** ** | **22.9**               |        | 26.7                  |       |
| Total  current assets                            | ** ** | **560.8**              |        | 526.7                 |       |
|                                             | ** ** | ** **             |        |                  |       |
| **Property, plant and equipment:**               | ** ** | ** **             |        |                  |       |
| Property,  plant and equipment                   | ** ** | **5,170.5**            |        | 5,073.4               |       |
| Less:  Accumulated depreciation and amortization | ** ** | **(2,432.1**           | **)**       | (2,350.6              | )          |
|                                             | ** ** | **2,738.4**            |        | 2,722.8               |       |
|                                             | ** ** | ** **             |        |                  |       |
| Construction  work in process                    | ** ** | **142.0**              |        | 153.6                 |       |
| Total  net property, plant and equipment         | ** ** | **2,880.4**            |        | 2,876.4               |       |
|                                             | ** ** | ** **             |        |                  |       |
| **Other noncurrent assets:**                     | ** ** | ** **             |        |                  |       |
| Regulatory  assets (Note 3)                      | ** ** | **258.7**              |        | 233.7                 |       |
| Other  deferred assets                           | ** ** | **42.9**               |        | 38.3                  |       |
| Total  other noncurrent assets                   | ** ** | **301.6**              |        | 272.0                 |       |
|                                             | ** ** | ** **             |        |                  |       |
| **Total Assets**                                 | ** ** | **$**                  | **3,742.8** |                  | $          | 3,675.1 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

8

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Table of Contents

 

**DPL INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                          | ** ** | ** **              | ** ** | ** **             | ** ** | **At**                 | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | ** **              | ** ** | ** **             | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| **$ in  millions**                             | ** ** | **2009**                | ** ** | **2008**               | ** ** |
|                                                |       |                    |       |                   |       |                   |        |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**       |       |                    |       |                   |       |                   |        |                  |       |
|                                                |       |                    |       |                   |       |                   |        |                  |       |
| **Current liabilities:**                            | ** ** | ** **              | ** ** |                   |       |                   |        |                  |       |
| Current  portion - long-term debt                   |       |                    |       |                   | ** ** | **$**                  | **0.7**     |                  | $          | 175.7 |   |
| Accounts  payable                                   |       |                    |       |                   | ** ** | **71.0**               |        | 178.3                 |       |
| Accrued  taxes                                      |       |                    |       |                   | ** ** | **67.2**               |        | 130.4                 |       |
| Accrued  interest                                   |       |                    |       |                   | ** ** | **18.8**               |        | 25.0                  |       |
| Revolving  credit borrowings                        |       |                    |       |                   | ** ** | **115.0**              |        | —                |       |
| Customer  security deposits                         |       |                    |       |                   | ** ** | **19.4**               |        | 19.8                  |       |
| Other  current liabilities                          |       |                    |       |                   | ** ** | **26.2**               |        | 14.7                  |       |
| Total  current liabilities                          |       |                    |       |                   | ** ** | **318.3**              |        | 543.9                 |       |
|                                                |       |                    |       |                   |       |                   |        |                  |       |
| **Noncurrent liabilities:**                         | ** ** | ** **              | ** ** |                   |       |                   |        |                  |       |
| Long-term  debt                                     |       |                    |       |                   | ** ** | **1,375.8**            |        | 1,376.1               |       |
| Deferred  taxes                                     |       |                    |       |                   | ** ** | **637.0**              |        | 433.7                 |       |
| Regulatory  liabilities (Note 3)                    |       |                    |       |                   | ** ** | **125.3**              |        | 121.9                 |       |
| Pension  and retiree benefits                       |       |                    |       |                   | ** ** | **97.8**               |        | 94.7                  |       |
| Unamortized  investment tax credit                  |       |                    |       |                   | ** ** | **35.9**               |        | 38.0                  |       |
| Insurance  and claims costs                         |       |                    |       |                   | ** ** | **15.1**               |        | 17.6                  |       |
| Other  deferred credits                             |       |                    |       |                   | ** ** | **58.6**               |        | 50.7                  |       |
| Total  noncurrent liabilities                       |       |                    |       |                   | ** ** | **2,345.5**            |        | 2,132.7               |       |
|                                                |       |                    |       |                   |       |                   |        |                  |       |
| **Redeemable preferred stock of subsidiary**        |       |                    | ** ** | ** **             |       | **22.9**               |        | 22.9                  |       |
|                                                |       |                    |       |                   |       |                   |        |                  |       |
| Commitments  and contingencies (Note 14)            |       |                    |       |                   |       |                   |        |                  |       |
|                                                |       |                    |       |                   |       |                   |        |                  |       |
| **Common shareholders’ equity:**               | ** ** | ** **              | ** ** | ** **             | ** ** | ** **             | ** **  | ** **            | ** ** |
| Common  stock, at par value of $0.01 per share:     |       |                    |       |                   |       |                   |        |                  |       |
|                                                |       |                    |       |                   |       |                   |        |                  |       |
| ** **                                          | ** ** | **September 2009** | ** ** | **December 2008** | ** ** | ** **             | ** **  | ** **            | ** ** |
| Shares  authorized                                  |       | 250,000,000             |       | 250,000,000            |       |                   |        |                  |       |
| Shares  issued                                      |       | 163,724,211             |       | 163,724,211            |       |                   |        |                  |       |
| Shares  outstanding                                 |       | 116,115,729             |       | 115,961,880            | ** ** | **1.2**                |        | 1.2                   |       |
| Warrants                                            |       |                    |       |                   | ** ** | **19.0**               |        | 31.0                  |       |
| Common  stock held by employee plans                |       |                    | ** ** | ** **             |       | **(19.5**              | **)**       | (27.6                 | )          |
| Accumulated  other comprehensive loss               |       |                    | ** ** | ** **             |       | **(41.6**              | **)**       | (44.6                 | )          |
| Retained  earnings                                  |       |                    |       |                   | ** ** | **1,097.0**            |        | 1,015.6               |       |
| Total  common shareholders’ equity             |       |                    |       |                   | ** ** | **1,056.1**            |        | 975.6                 |       |
|                                                |       |                    |       |                   |       |                   |        |                  |       |
| **Total Liabilities and Shareholders’ Equity** | ** ** | ** **              | ** ** | ** **             |       | **$**                  | **3,742.8** |                  | $          | 3,675.1 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

9

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Table of Contents

 

**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF RESULTS OFOPERATIONS**

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **$ in  millions**              | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                 |       |                   |       |                   |       |   |   |   |   |
| **Revenues**                         | ** ** | **$**                  | **398.2**  |                   | $          | 401.5 | ** ** | **$** | **1,153.7** |   | $ | 1,191.8 |   |
|                                 |       |                   |       |                   |       |   |   |   |   |
| **Cost of revenues:**                |       |                   |       |                   |       |   |   |   |   |
| Fuel                                 | ** ** | **83.0**               |       | 57.0                   | ** ** | **236.2** |   | 183.6 |   |
| Purchased  power                     | ** ** | **64.7**               |       | 120.1                  | ** ** | **187.1** |   | 291.8 |   |
| Total  cost of revenues              | ** ** | **147.7**              |       | 177.1                  | ** ** | **423.3** |   | 475.4 |   |
|                                 |       |                   |       |                   |       |   |   |   |   |
| **Gross margin**                     | ** ** | **250.5**              |       | 224.4                  | ** ** | **730.4** |   | 716.4 |   |
|                                 |       |                   |       |                   |       |   |   |   |   |
| **Operating expenses:**              |       |                   |       |                   |       |   |   |   |   |
| Operation  and maintenance           | ** ** | **70.2**               |       | 65.4                   | ** ** | **217.5** |   | 191.0 |   |
| Depreciation  and amortization       | ** ** | **33.6**               |       | 32.8                   | ** ** | **100.2** |   | 95.0 |   |
| General  taxes                       | ** ** | **30.2**               |       | 30.6                   | ** ** | **89.3** |   | 92.4 |   |
| Amortization  of regulatory assets   | ** ** | **1.3**                |       | 2.1                    | ** ** | **4.5** |   | 7.6 |   |
| Total  operating expenses            | ** ** | **135.3**              |       | 130.9                  | ** ** | **411.5** |   | 386.0 |   |
|                                 |       |                   |       |                   |       |   |   |   |   |
| **Operating income**                 | ** ** | **115.2**              |       | 93.5                   | ** ** | **318.9** |   | 330.4 |   |
|                                 |       |                   |       |                   |       |   |   |   |   |
| **Other income / (expense), net:**   |       |                   |       |                   |       |   |   |   |   |
| Investment  income                   | ** ** | **0.4**                |       | 0.6                    | ** ** | **2.4** |   | 6.3 |   |
| Interest  expense                    | ** ** | **(10.2**              | **)**      | (8.9                   | )          | **(28.9** | **)** | (26.7 | ) |
| Other  income / (deductions)         | ** ** | **(0.9**               | **)**      | (0.4                   | )          | **(1.8** | **)** | (1.0 | ) |
| Total  other income / (expense), net | ** ** | **(10.7**              | **)**      | (8.7                   | )          | **(28.3** | **)** | (21.4 | ) |
|                                 |       |                   |       |                   |       |   |   |   |   |
| **Earnings before income tax**       | ** ** | **104.5**              |       | 84.8                   | ** ** | **290.6** |   | 309.0 |   |
|                                 |       |                   |       |                   |       |   |   |   |   |
| Income  tax expense                  | ** ** | **30.5**               |       | 30.0                   | ** ** | **92.8** |   | 101.9 |   |
| **Net income**                       | ** ** | **74.0**               |       | 54.8                   | ** ** | **197.8** |   | 207.1 |   |
|                                 |       |                   |       |                   |       |   |   |   |   |
| Dividends  on preferred stock        | ** ** | **0.2**                |       | 0.2                    | ** ** | **0.6** |   | 0.6 |   |
|                                 |       |                   |       |                   |       |   |   |   |   |
| **Earnings on common stock**         | ** ** | **$**                  | **73.8**   |                   | $          | 54.6 | ** ** | **$** | **197.2** |   | $ | 206.5 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

10

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** |
| **$ in  millions**                                                            | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                                               |       |                   |       |   |   |
| **Cash flows from operating activities:**                                          |       |                   |       |   |   |
| Net income                                                                         | ** ** | **$**                  | **197.8**  |   | $ | 207.1 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                     | ** ** | **100.2**              |       | 95.0 |   |
| Amortization  of regulatory assets                                                 | ** ** | **4.5**                |       | 7.6 |   |
| Deferred  income taxes                                                             | ** ** | **202.6**              |       | 31.2 |   |
| Changes  in certain assets and liabilities:                                        |       |                   |       |   |   |
| Accounts  receivable                                                               | ** ** | **34.1**               |       | 0.7 |   |
| Deposits  and other advances                                                       | ** ** | **6.6**                |       | (3.9 | ) |
| Accounts  payable                                                                  | ** ** | **(66.0**              | **)**      | 23.5 |   |
| Accrued  taxes                                                                     | ** ** | **(143.9**             | **)**      | (61.1 | ) |
| Accrued  interest payable                                                          | ** ** | **2.5**                |       | 2.3 |   |
| Prepayments                                                                        | ** ** | **(0.4**               | **)**      | (0.3 | ) |
| Pension  and retiree benefits                                                      | ** ** | **6.4**                |       | (0.7 | ) |
| Deferred  regulatory costs, net                                                    | ** ** | **(34.5**              | **)**      | (12.8 | ) |
| Inventories                                                                        | ** ** | **(22.8**              | **)**      | (4.7 | ) |
| Other                                                                              | ** ** | **(8.4**               | **)**      | (10.1 | ) |
| **Net cash provided by operating activities**                                      | ** ** | **278.7**              |       | 273.8 |   |
|                                                                               |       |                   |       |   |   |
| **Cash flows from investing activities:**                                          |       |                   |       |   |   |
| Capital  expenditures                                                              | ** ** | **(129.9**             | **)**      | (173.1 | ) |
| **Net cash used for investing activities**                                         | ** ** | **(129.9**             | **)**      | (173.1 | ) |
|                                                                               |       |                   |       |   |   |
| **Cash flows from financing activities:**                                          |       |                   |       |   |   |
| Payment  of short-term debt                                                        | ** ** | **—**             |       | (20.0 | ) |
| Withdrawals  of restricted funds held in trust, net                                | ** ** | **6.7**                |       | 20.5 |   |
| Repurchase  of pollution control bonds                                             | ** ** | **—**             |       | (90.0 | ) |
| Withdrawals  from revolving credit facilities                                      | ** ** | **260.0**              |       | 105.0 |   |
| Repayment  of borrowings from revolving credit facility                            | ** ** | **(145.0**             | **)**      | (15.0 | ) |
| Dividends  paid on common stock to parent                                          | ** ** | **(270.0**             | **)**      | (80.0 | ) |
| Dividends  paid on preferred stock                                                 | ** ** | **(0.6**               | **)**      | (0.6 | ) |
| **Net cash used for financing activities**                                         | ** ** | **(148.9**             | **)**      | (80.1 | ) |
|                                                                               |       |                   |       |   |   |
| **Cash and cash equivalents:**                                                     |       |                   |       |   |   |
| Net  change                                                                        | ** ** | **(0.1**               | **)**      | 20.6 |   |
| Balance  at beginning of period                                                    | ** ** | **20.8**               |       | 13.2 |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                  | **20.7**   |   | $ | 33.8 |   |
|                                                                               |       |                   |       |   |   |
| **Supplemental cash flow information:**                                            |       |                   |       |   |   |
| Interest  paid, net of amounts capitalized                                         | ** ** | **$**                  | **27.3**   |   | $ | 21.7 |   |
| Income  taxes (refunded)/paid, net                                                 | ** ** | **$**                  | **(4.9**   | **)** | $ | 112.2 |   |
| Non-cash  financing and investing activities:                                      |       |                   |       |   |   |
| Accruals  for capital expenditures                                                 | ** ** | **$**                  | **9.3**    |   | $ | 43.3 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

11

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                       | ** ** | **At**                 | ** **  | **At**                | ** ** |
|--------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                       | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| **$ in  millions**                          | ** ** | **2009**               | ** **  | **2008**              | ** ** |
|                                             |       |                   |        |                  |       |
| **ASSETS**                                       |       |                   |        |                  |       |
|                                             |       |                   |        |                  |       |
| **Current assets:**                              |       |                   |        |                  |       |
| Cash  and cash equivalents                       | ** ** | **$**                  | **20.7**    |                  | $          | 20.8 |   |
| Restricted  funds held in trust                  | ** ** | **7.9**                |        | 14.5                  |       |
| Accounts  receivable, net (Note 2)               | ** ** | **281.3**              |        | 225.4                 |       |
| Inventories  (Note 2)                            | ** ** | **126.6**              |        | 103.8                 |       |
| Prepaid  income taxes                            | ** ** | **36.7**               |        | —                |       |
| Taxes  applicable to subsequent years            | ** ** | **14.1**               |        | 57.9                  |       |
| Other  prepayments and current assets            | ** ** | **24.8**               |        | 23.8                  |       |
| Total  current assets                            | ** ** | **512.1**              |        | 446.2                 |       |
|                                             |       |                   |        |                  |       |
| **Property, plant and equipment:**               |       |                   |        |                  |       |
| Property,  plant and equipment                   | ** ** | **4,912.4**            |        | 4,817.9               |       |
| Less:  Accumulated depreciation and amortization | ** ** | **(2,339.3**           | **)**       | (2,265.5              | )          |
|                                             | ** ** | **2,573.1**            |        | 2,552.4               |       |
|                                             |       |                   |        |                  |       |
| Construction  work in process                    | ** ** | **141.2**              |        | 153.0                 |       |
| Total  net property, plant and equipment         | ** ** | **2,714.3**            |        | 2,705.4               |       |
|                                             |       |                   |        |                  |       |
| **Other noncurrent assets:**                     |       |                   |        |                  |       |
| Regulatory  assets (Note 3)                      | ** ** | **258.7**              |        | 233.7                 |       |
| Other  deferred assets                           | ** ** | **57.7**               |        | 50.5                  |       |
| Total  other noncurrent assets                   | ** ** | **316.4**              |        | 284.2                 |       |
|                                             |       |                   |        |                  |       |
| **Total Assets**                                 | ** ** | **$**                  | **3,542.8** |                  | $          | 3,435.8 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

12

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Tableof Contents

 

**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                          | ** ** | **At**                 | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| **$ in  millions**                             | ** ** | **2009**               | ** **  | **2008**              | ** ** |
|                                                |       |                   |        |                  |       |
| **LIABILITIES AND SHAREHOLDER’S EQUITY**       |       |                   |        |                  |       |
|                                                |       |                   |        |                  |       |
| **Current liabilities:**                            |       |                   |        |                  |       |
| Current  portion - long-term debt                   | ** ** | **$**                  | **0.7**     |                  | $          | 0.7 |   |
| Accounts  payable                                   | ** ** | **70.7**               |        | 176.6                 |       |
| Accrued  taxes                                      | ** ** | **67.7**               |        | 128.0                 |       |
| Accrued  interest                                   | ** ** | **15.8**               |        | 12.9                  |       |
| Revolving  credit borrowings                        | ** ** | **115.0**              |        | —                |       |
| Customer  security deposits                         | ** ** | **19.4**               |        | 19.8                  |       |
| Other  current liabilities                          | ** ** | **26.2**               |        | 14.2                  |       |
| Total  current liabilities                          | ** ** | **315.5**              |        | 352.2                 |       |
|                                                |       |                   |        |                  |       |
| **Noncurrent liabilities:**                         |       |                   |        |                  |       |
| Long-term  debt                                     | ** ** | **883.6**              |        | 884.0                 |       |
| Deferred  taxes                                     | ** ** | **620.8**              |        | 417.8                 |       |
| Regulatory  liabilities (Note 3)                    | ** ** | **125.3**              |        | 121.9                 |       |
| Pension  and retiree benefits                       | ** ** | **97.8**               |        | 94.7                  |       |
| Unamortized  investment tax credit                  | ** ** | **35.9**               |        | 38.0                  |       |
| Other  deferred credits                             | ** ** | **58.7**               |        | 50.8                  |       |
| Total  noncurrent liabilities                       | ** ** | **1,822.1**            |        | 1,607.2               |       |
|                                                |       |                   |        |                  |       |
| **Redeemable preferred stock**                      | ** ** | **22.9**               |        | 22.9                  |       |
|                                                |       |                   |        |                  |       |
| Commitments  and contingencies (Note 14)            |       |                   |        |                  |       |
|                                                |       |                   |        |                  |       |
| **Common shareholder’s equity:**               |       |                   |        |                  |       |
| Common  stock, at par value of $0.01 per share      | ** ** | **0.4**                |        | 0.4                   |       |
| Other  paid-in capital                              | ** ** | **780.7**              |        | 783.1                 |       |
| Accumulated  other comprehensive loss               | ** ** | **(33.3**              | **)**       | (37.5                 | )          |
| Retained  earnings                                  | ** ** | **634.5**              |        | 707.5                 |       |
| Total  common shareholder’s equity             | ** ** | **1,382.3**            |        | 1,453.5               |       |
|                                                |       |                   |        |                  |       |
| **Total Liabilities and Shareholder’s Equity** | ** ** | **$**                  | **3,542.8** |                  | $          | 3,435.8 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

13

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**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

**1.     Basis ofPresentation**

 

**Description of Business**

 

**DPL**is a diversifiedregional energy company organized in 1985 under the laws of Ohio.  Our executive offices are located at 1065Woodman Drive, Dayton, Ohio 45432 — telephone (937) 224-6000.

 

**DPL’s** principal subsidiary is**DP&L**.  **DP&L**is a public utility incorporated in 1911 under the laws of Ohio.  **DP&L**sells electricity to residential, commercial, industrial and governmentalcustomers in a 6,000 square mile area of West Central Ohio.  **DP&L** alsosells electricity to DPLER, an affiliate, to satisfy the electric requirementsof DPLER’s retail customers.  Electricityfor **DP&L’s** 24 county servicearea is primarily generated at eight coal-fired power plants and is distributedto more than 500,000 retail customers. Principal industries served include automotive, food processing, paper,plastic manufacturing and defense.

 

**DP&L’s**sales reflect the general economic conditions and seasonal weather patterns ofthe area.  **DP&L** sells any excess energy and capacity into thewholesale market.

 

**DPL’s** other significant subsidiaries includeDPLE, which engages in the operation of peaking generating facilities; DPLER,which is a CRES provider selling retail electric energy and other energyservices; and MVIC, our captive insurance company that provides insuranceservices to us and our subsidiaries.  Allof **DPL’s** subsidiaries are wholly owned.

 

**DPL** and **DP&L**conduct their principal business in one business segment - Electric.

 

**Financial Statement Presentation**

 

We prepare consolidated financialstatements.  **DPL’s**condensed consolidated financial statements include the accounts of **DPL** and its wholly-owned subsidiaries,including **DP&L**.  **DP&L** has anundivided ownership interest in seven electric generating facilities andnumerous transmission facilities.  Theseundivided interests in jointly owned facilities are consolidated on a pro ratabasis.  All material intercompanyaccounts and transactions are eliminated in consolidation.

 

These financialstatements have been prepared in accordance with GAAP for interim financialstatements and with the instructions of Form 10-Q and Regulation S-X.  Accordingly, certain information and footnotedisclosures normally included in the annual financial statements prepared inaccordance with GAAP have been omitted from this interim report.  Therefore, our interim financial statementsin this report should be read along with the annual financial statementsincluded in our Annual Report on Form 10-K for the fiscal year ended December 31,2008.

 

In the opinion of ourmanagement, the condensed consolidated financial statements in this reportcontain all adjustments necessary to fairly state our financial condition as ofSeptember 30, 2009; our results of operations for the three months andnine months ended September 30, 2009; and our cash flows for the ninemonths ended September 30, 2009. Unless otherwise noted, all adjustments are normal and recurring innature.  Due to seasonal weathervariations, the timing of outages of electric generating units, changes ineconomic conditions involving commodity prices and competition, interim resultsfor the three months and nine months ended September 30, 2009 may not beindicative of our results that will be realized for the full year ending December 31,2009.

 

Certain amounts fromprior periods have been reclassified to conform to the current period presentation.

 

We have evaluated allsubsequent events through October 28, 2009 which is the date thesefinancial statements were filed with the SEC.

 

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The preparation offinancial statements in conformity with GAAP requires us to make estimates andjudgments that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the revenue and expensesof the periods reported.  Actual resultscould differ from those estimates. Significant items subject to such estimates and judgments include: the carryingvalue of property, plant and equipment; unbilled revenues; the valuation ofderivative instruments; the valuation of insurance and claims liabilities; thevaluation of allowances for receivables and deferred income taxes; regulatoryassets and liabilities; reserves recorded for income tax exposures; litigation;contingencies; the valuation of asset retirement obligations; and assets andliabilities related to employee benefits.

 

**Taxes Collected from Customersand Remitted to Governmental Authorities**

 

**DP&L** collects certain excise taxes levied bystate or local governments from its customers. **DP&L’s** excise taxes are accountedfor on a gross basis and recorded as revenues in the accompanying condensedconsolidated statements of results of operations for the three months and ninemonths ended September 30, 2009 and 2008, respectively, as follows:

** **
| ** **                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **$ in  millions**   | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| State/local excise  taxes | ** ** | **$**                  | **12.8**   |                   | $          | 14.0 | ** ** | **$** | **38.0** |   | $ | 40.1 |   |
|                           |            |                        |            |                        |            |  |  |  |  |  |  |  |  |

 

**RecentlyAdopted Accounting Standards**

 

**FASBCodification**

 

We adopted FASC 105, “GenerallyAccepted Accounting Principles” (formerly SFAS No. 168, “The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles—a replacement of FASB Statement No. 162”), on September 30,2009.  The objective of this Statement isto replace Statement 162 and to establish the FASB Accounting StandardsCodification (Codification) as the source of authoritative accountingprinciples recognized by the FASB to be applied by nongovernmental entities inthe preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of theSEC under authority of federal securities laws are also sources ofauthoritative GAAP for SEC registrants. This update did not have a material impact on our overall results ofoperations, financial position or cash flows.

 

**Disclosures about DerivativeInstruments and Hedging Activities**

 

We adopted an update toFASC 815, “Derivatives and Hedging” (formerly SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities — an amendment to FASBStatement No. 133”), on January 1, 2009.  This update requires an entity to provideenhanced disclosures about: (a) how and why an entity uses derivativeinstruments; (b) how derivative instruments and related hedged items areaccounted for under FASC 815 and its related interpretations; and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance and cash flows. This update did not have a material impact on our overall results ofoperations, financial position or cash flows. See Note 13 of Notes to Condensed Consolidated Financial Statements.

 

**ParticipatingSecurities and Earnings per Share (EPS)**

 

Weadopted an update to FASC 260, “Earnings per Share” (formerly Staff PositionEITF 03-6-1, “Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities”) on January 1, 2009.  This update clarifies that unvestedshare-based awards that contain non-forfeitable rights to dividends or dividendequivalents (whether paid or unpaid) are participating securities and must beincluded in the computation of EPS pursuant to the two-class method.  This update did not have a material impact onour overall results of operations, financial position or cash flows.

 

**Meaningof “Indexed to a Company’s Own Stock”**

 

Weadopted an update to FASC 815, “Derivatives and Hedging” (formerly EITF Issue No. 07-5,“Determining Whether an Instrument (or Embedded Feature) is Indexed to anEntity’s Own Stock”), on January 1, 2009. This update gives guidance on when a financial instrument is consideredto be indexed to a company’s own stock to meet the criteria for FASC815-10-15-74(a) (formerly paragraph 11(a) of FASB Statement No. 133,“Accounting for Derivative Financial Instruments.”)  This update did not have a material impact onour overall results of operations, financial position or cash flows.

 

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**InterimDisclosures about Fair Value of Financial Instruments**

 

Weadopted an update of FASC 825, “Financial Instruments” (formerly Staff PositionSFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of FinancialInstruments”), on June 30, 2009. This update requires disclosure about the fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements.  Thisupdate did not have a material impact on our overall results of operations,financial position or cash flows.  SeeNote 12 of Notes to Condensed Consolidated Financial Statements.

 

**SubsequentEvents**

 

We adopted FASC 855, “SubsequentEvents” (formerly SFAS 165), on June 30, 2009.  FASC 855 incorporates the guidance in theAmerican Institute of Certified Public Accountants’ Auditing Standard 560 —Subsequent Events, into the accounting guidance.  This new standard does not change currentaccounting practices.  FASC 855 did not have a material impact onour overall results of operations, financial position or cash flows.

 

**RecentlyIssued Accounting Standards**

 

**Variable Interest Entities**

 

In June 2009, theFASB issued ASU 2009-02 “Omnibus Update” (formerly SFAS No. 167, a revisionto FASB Interpretation No. 46(R), “**Consolidationof Variable Interest Entities,”) (ASU 2009-02) effective for**annualreporting periods beginning after November 15, 2009.  This standard updates FASC 810, “Consolidation.”  ASU 2009-02 changes how a company determineswhen an entity that is insufficiently capitalized or is not controlled throughvoting (or similar rights) should be consolidated.  The determination of whether a company isrequired to consolidate an entity is based on, among other things, an entity’spurpose and design and a company’s ability to direct the activities of theentity that most significantly impact the entity’s economic performance.  We are currently evaluating the impact ofadopting ASU 2009-02 and have not yet determined the significance of these new rules toour overall results of operations, financial position or cash flows.

 

**Disclosuresabout Pensions and Other Postretirement Benefits**

 

InDecember 2008, the FASB issued an update to FASC 715, “Compensation —Retirement Plans” (formerly Staff Position SFAS 132(R)-1, “Employers’Disclosures about Postretirement Benefit Plan Assets”), effective for fiscalyears ending after December 15, 2009. We expect to adopt this update on December 31, 2009.  This update requires disclosures aboutbenefit plan assets similar to the disclosure required in FASC 820, “Fair ValueMeasurements and Disclosures.”  It alsorequires discussions on investment allocation decisions, major categories ofplan assets and significant concentrations of risk in plan assets for theperiod.  We have evaluated this updateand do not expect these new rules to have a material impact on our overallresults of operations, financial position or cash flows.

 

**Redeemable EquityInstruments**

 

In August 2009, theFASB issued ASU 2009-04, “Accounting for Redeemable Equity instruments, anamendment to Section 480-10-S99,” (ASU 2009-04) effective for the firstreporting period (including interim periods) beginning after its issuance.  ASU 2009-04 clarifies that SEC Accounting Series Release268 pertains to preferred stocks and other redeemable securities includingcommon stock, derivative instruments, non-controlling interest, securities heldby an employee stock ownership plan and share-based payment arrangements withemployees.  We have evaluated ASU 2009-04and do not expect these new rules to have a material impact on our overallresults of operations, financial position or cash flows.

 

**Measuring Liabilitiesat Fair Value**

 

InAugust 2009, the FASB issued ASU 2009-05, “Measuring Liabilities at FairValue,” (ASU 2009-05) effective for the first reporting period (includinginterim periods) beginning after its issuance. ASU 2009-05 provides additional guidance clarifying the measurement ofliabilities at fair value.  We are currently evaluating the impact ofadopting ASU 2009-05 and have not yet determined the significance of these new rules toour overall results of operations, financial position or cash flows.

 

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**Investments in Certain Entitiesthat Calculate Net Asset Value per Share**

 

In September 2009,the FASB issued ASU 2009-12, “Fair Value Measurements and Disclosures,” (ASU2009-12) effective for interim and annual periods ending after December 15,2009.  ASU 2009-12 updates FASC 820-10, “FairValue Measurements and Disclosures — Overall” and allows, as a practicalexpedient, a reporting entity to measure the fair value of an investment thatis within the scope of these amendments on the basis of the net asset value pershare of the investment if the net asset value of the investment is calculatedin a manner consistent with the measurement principles of FASC 946, “FinancialServices — Investment Companies.”  We arecurrently evaluating the impact of adopting ASU 2009-12 and have not yetdetermined the significance of these new rules to our overall results ofoperations, financial position or cash flows.

 

**2.             Supplemental Financial Informationand Comprehensive Income**

 

**DPL Inc.**

 
| ** **                                         | ** ** | **At**                 | ** ** | **At**                | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                             | ** ** | **2009**               | ** ** | **2008**              | ** ** |
|                                               |       |                   |       |                  |       |
| **Accounts receivable, net:**                      |       |                   |       |                  |       |
| Unbilled  revenue                                  | ** ** | **$**                  | **65.0**   |                  | $          | 82.5 |   |
| Customer  receivables                              | ** ** | **104.7**              |       | 107.5                 |       |
| Amounts  due from partners in jointly-owned plants | ** ** | **18.5**               |       | 28.0                  |       |
| Coal  sales                                        | ** ** | **11.8**               |       | 25.6                  |       |
| Refundable  taxes (a)                              | ** ** | **90.8**               |       | 14.9                  |       |
| Other                                              | ** ** | **2.3**                |       | 2.5                   |       |
| Provision  for uncollectible accounts              | ** ** | **(1.1**               | **)**      | (1.1                  | )          |
| **Total accounts receivable, net**                 | ** ** | **$**                  | **292.0**  |                  | $          | 259.9 |   |
|                                               |       |                   |       |                  |       |
| **Inventories, at average cost:**                  |       |                   |       |                  |       |
| Fuel  and emission allowances                      | ** ** | **$**                  | **89.3**   |                  | $          | 68.7 |   |
| Plant  materials and supplies                      | ** ** | **38.1**               |       | 36.3                  |       |
| Other                                              | ** ** | **0.6**                |       | 0.1                   |       |
| **Total inventories, at average cost**             | ** ** | **$**                  | **128.0**  |                  | $          | 105.1 |   |

 

**DP&L**

 
| ** **                                         | ** ** | **At**                 | ** ** | **At**                | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                             | ** ** | **2009**               | ** ** | **2008**              | ** ** |
|                                               |       |                   |       |                  |       |
| **Accounts receivable, net:**                      |       |                   |       |                  |       |
| Unbilled  revenue                                  | ** ** | **$**                  | **61.3**   |                  | $          | 74.7 |   |
| Customer  receivables                              | ** ** | **99.3**               |       | 96.7                  |       |
| Amounts  due from partners in jointly-owned plants | ** ** | **18.5**               |       | 28.0                  |       |
| Coal  sales                                        | ** ** | **11.8**               |       | 25.6                  |       |
| Refundable  taxes (a)                              | ** ** | **90.8**               |       | —                |       |
| Other                                              | ** ** | **0.7**                |       | 1.5                   |       |
| Provision  for uncollectible accounts              | ** ** | **(1.1**               | **)**      | (1.1                  | )          |
| **Total accounts receivable, net**                 | ** ** | **$**                  | **281.3**  |                  | $          | 225.4 |   |
|                                               |       |                   |       |                  |       |
| **Inventories, at average cost:**                  |       |                   |       |                  |       |
| Fuel  and emission allowances                      | ** ** | **$**                  | **89.3**   |                  | $          | 68.7 |   |
| Plant  materials and supplies                      | ** ** | **36.7**               |       | 35.0                  |       |
| Other                                              | ** ** | **0.6**                |       | 0.1                   |       |
| **Total inventories, at average cost**             | ** ** | **$**                  | **126.6**  |                  | $          | 103.8 |   |

 

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*(a) **The taxreceivable at September 30, 2009 results from the recognition of certaintax benefits relating to a change in the tax accounting method for deductionspertaining to repairs, depreciation and mixed service costs.  This receivable is available to be offsetagainst future income tax liabilities and is expected to be collected withinthe next 12 months.*

 

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**2.             SupplementalFinancial Information and Comprehensive Income (continued)**

 

**DPL Inc.**

 
| ** **                                                                      | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                      | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Comprehensive income:**                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                                                      | ** ** | **$**                                      | **67.9**   |                                      | $          | 48.0 | ** ** | **$** | **179.2** |   | $ | 172.9 |   |
| Net change in unrealized gains (losses) on  financial instruments               |       | **0.5**                                    |       | (0.2                                      | )          | **0.7** |   | (0.6 | ) |
| Net change in deferred gains (losses) on cash flow  hedges                      | ** ** | **—**                                 |       | 2.5                                       | ** ** | **1.2** |   | (2.2 | ) |
| Net change in unrealized gains (losses) on pension  and postretirement benefits |       | **0.8**                                    |       | 0.5                                       |       | **2.4** |   | 1.5 |   |
| Deferred income taxes related to unrealized gains  and (losses)                 | ** ** | **(0.4**                                   | **)**      | (1.1                                      | )          | **(1.3** | **)** | 0.3 |   |
| **Comprehensive income**                                                        | ** ** | **$**                                      | **68.8**   |                                      | $          | 49.7 | ** ** | **$** | **182.2** |   | $ | 171.9 |   |

 

**DP&L**

 
| ** **                                                                      | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                      | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Comprehensive income:**                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                                                      | ** ** | **$**                                      | **74.0**   |                                      | $          | 54.8 | ** ** | **$** | **197.8** |   | $ | 207.1 |   |
| Net change in unrealized gains (losses) on  financial instruments               |       | **3.5**                                    |       | (2.2                                      | )          | **2.6** |   | (12.5 | ) |
| Net change in deferred gains (losses) on cash flow  hedges                      | ** ** | **—**                                 |       | 2.5                                       | ** ** | **1.2** |   | (2.2 | ) |
| Net change in unrealized gains (losses) on pension  and postretirement benefits |       | **0.8**                                    |       | 0.5                                       |       | **2.4** |   | 1.5 |   |
| Deferred income taxes related to unrealized gains  and (losses)                 | ** ** | **(1.4**                                   | **)**      | (0.4                                      | )          | **(2.0** | **)** | 5.1 |   |
| **Comprehensive income**                                                        | ** ** | **$**                                      | **76.9**   |                                      | $          | 55.2 | ** ** | **$** | **202.0** |   | $ | 199.0 |   |

 

**3. Regulatory Matters**

 

Accounting standardsdefine regulatory assets as the deferral of costs expected to be recovered infuture customer rates and regulatory liabilities as current cost recovery incustomer rates of expected future expenditures. **DP&L** has applied these accountingstandards to its regulated businesses, which include its electric transmissionand distribution businesses.

 

Regulatory assets andliabilities on the condensed consolidated balance sheets include:

 
| ** **                                            | ** ** | ** **       | ** ** | ** **       | ** ** | **At**                 | ** ** | **At**                | ** ** |
|-------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **Type of**      | ** ** | **Amortization** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                                | ** ** | **Recovery (a)** | ** ** | **Through**      | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **Regulatory Assets:**                                |       |             |       |             |       |                   |       |                  |       |
| Deferred  recoverable income taxes                    |       | C/B              |       | Ongoing          | ** ** | **$**                  | **80.7**   |                  | $          | 81.2 |   |
| Pension  benefits                                     |       | C                |       | Ongoing          | ** ** | **80.0**               |       | 83.3                  |       |
| Unamortized  loss on reacquired debt                  |       | C                |       | Ongoing          | ** ** | **16.0**               |       | 17.2                  |       |
| Electric  Choice systems costs                        |       | F                |       | 2011             | ** ** | **4.7**                |       | 7.1                   |       |
| Regional  transmission organization costs             |       | D                | ** ** | ** **       |       | **7.4**                |       | 8.5                   |       |
| Transmission,  capacity and other PJM-related costs   |       | F                |       | 2011             | ** ** | **29.5**               |       | —                |       |
| Deferred  storm costs - 2008                          |       | D                | ** ** | ** **       |       | **15.7**               |       | 13.1                  |       |
| Power  plant emission fees                            |       | C                |       | Ongoing          | ** ** | **6.1**                |       | 6.3                   |       |
| CCEM  smart grid and advanced metering infrastructure |       | D                | ** ** | ** **       |       | **6.5**                |       | 6.4                   |       |
| CCEM  energy efficiency programs                      |       | F                |       | Ongoing          | ** ** | **4.5**                |       | 1.9                   |       |
| Other costs                                           | ** ** | ** **       |       |             |       | **7.6**                |       | 8.7                   |       |
| **Total regulatory assets**                           | ** ** | ** **       |       |             |       | **$**                  | **258.7**  |                  | $          | 233.7 |   |
|                                                  |       |             |       |             |       |                   |       |                  |       |
| **Regulatory Liabilities:**                           |       |             |       |             |       |                   |       |                  |       |
| Asset  retirement obligations - regulated property    | ** ** | ** **       |       |             |       | **$**                  | **99.0**   |                  | $          | 96.0 |   |
| SECA  net revenue subject to refund                   | ** ** | ** **       |       |             |       | **20.1**               |       | 20.1                  |       |
| Postretirement  benefits and other                    | ** ** | ** **       |       |             |       | **6.2**                |       | 5.8                   |       |
| **Total regulatory liabilities**                      | ** ** | ** **       |       |             |       | **$**                  | **125.3**  |                  | $          | 121.9 |   |

 

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*(a)**      **F – Recovery of incurred costsplus rate of return.*

*C – Recovery of incurred costsonly.*

*B – Balance has an offsettingliability resulting in no impact on rate base.*

*D – Recovery not yet determined,but is probable of occurring in the future.*

 

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**Regulatory Assets**

 

We evaluate ourregulatory assets each period and believe recovery of these assets isprobable.  We have received or requesteda return on certain regulatory assets for which we are currently recovering orseeking recovery through rates.

 

Deferred recoverableincome taxesrepresent deferred income tax assets recognized from the normalization offlow-through items as the result of amounts previously provided tocustomers.  This is the cumulativeflow-through benefit given to regulated customers that will be collected fromthem in future years.  Since currentlyexisting temporary differences between the financial statements and the relatedtax basis of assets will reverse in subsequent periods, these deferredrecoverable income taxes are amortized.

 

Pension benefits represent the qualifying FASC 715, “Compensation— Retirement Benefits” (formerly SFAS No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans - an amendment to FASBStatements No. 87, 88, 106 and 132(R)”) costs of our regulated operationsthat for ratemaking purposes are deferred for future recovery.  We recognize an asset for a plan’s overfundedstatus or a liability for a plan’s underfunded status, and recognize, as acomponent of other comprehensive income (OCI), the changes in the funded statusof the plan that arise during the year that are not recognized as a componentof net periodic benefit cost.  Thisregulatory asset represents the regulated portion that would otherwise becharged as a loss to OCI.

 

Unamortized loss onreacquired debtrepresents losses on long-term debt reacquired or redeemed in priorperiods.  These costs are being amortizedover the life of the original issues.

 

Electric Choice systemscosts representcosts incurred to modify the customer billing system for unbundled customer ratesand electric choice utility bills relative to other generation suppliers andinformation reports provided to the state administrator of the low-incomepayment program.  In March 2006, thePUCO issued an order that approved our tariff as filed.  We began collecting this rider immediatelyand expect to recover all costs over five years.

 

Regional transmissionorganization costsrepresent costs incurred to join a RTO. The recovery of these costs has not yet been determined.

 

Transmission, capacityand other PJM-related costs represent the costs related to transmission,capacity, ancillary service and other PJM-related charges that have beenincurred as a member of PJM.

 

On February 19,2009, the PUCO approved **DP&L’s**request to defer such costs incurred since July 31, 2008 consistent withthe provisions of SB 221.  On May 27,2009, the PUCO granted **DP&L**authority to recover these costs through retail rates beginning June 1,2009.  Subsequently, the IndustrialEnergy Users of Ohio (IEU-OH) filed an application for rehearing claiming thePUCO’s May 27, 2009 order allowing for recovery of RPM costs through aTCRR was unlawful.  The PUCO issued anorder granting rehearing for additional review and, on September 9, 2009,issued an order directing **DP&L** toremove the deferred and current RPM capacity costs from the TCRR rider yet alsoindicating that these RPM capacity costs may be recoverable under a separaterider.  **DP&L**made a compliance filing on September 23, 2009, where it removed suchcosts from the TCRR rider and proposed an RTO RPM rider for the recovery ofsuch costs.  On October 21, 2009,the PUCO Staff filed a staff report in the case recommending that the PUCOapprove both of **DP&L’s** proposed riders.  The outcome of this proceeding cannot bedetermined at this time, but, based on past precedent and the PUCO’s ordersreceived thus far, we continue to believe that these costs are probable ofrecovery.  At September 30, 2009,the net total of deferred RPM capacity costs amounted to $24.4 million.

 

Deferred storm costs -2008 relate tocosts incurred to repair the damage caused by hurricane force winds in September 2008,as well as other major 2008 storms.  On January 14,2009, the PUCO granted **DP&L** theauthority to defer these costs with a return until such time that **DP&L** seeks recovery in a future rate proceeding.

 

Power plant emission fees represent costs paid to the State ofOhio since 2002 for environmental monitoring. An application is pending before the PUCO to amend an approved raterider that had been in effect to collect fees that were paid and deferred inyears prior to 2002.  These deferredcosts incurred prior to 2002 have been fully recovered.  Based on past precedent from the PUCO, webelieve these costs are probable of future rate recovery.

 

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CCEM smart grid andadvanced metering infrastructure costs represent costs incurred as a result of studying anddeveloping distribution system upgrades and implementation of advanced meteringinfrastructure.  Consistent with theStipulation, **DP&L** re-filed its smart gridand advanced metering infrastructure business cases with the PUCO on August 4,2009 seeking recovery of costs associated with a 10-year plan to deploy smartmeters, distribution and substation automation, core telecommunications,supporting software and in-home technologies.   On August 5,2009, **DP&L** submitted an application forAmerican Recovery and Reinvestment Act (ARRA) funding under the Integratedand/or Crosscutting Systems topic area for the Smart Grid Investment GrantProgram.   The application, which sought $145.1 million of matchingfunds, focused on the first three years of **DP&L’s**10-year plan.  On October 27, 2009, wewere notified by the United States Department of Energy (DOE) that we will notreceive funding under the ARRA.

 

CCEM energy efficiencyprogram costsrepresent costs incurred to develop and implement various new customer programsaddressing energy efficiency.  A portionof these costs is being recovered over three years as part of the Stipulationbeginning July 1, 2009; the remaining portion is subject to a two-yeartrue-up process.

 

Other costs primarily include consumer educationadvertising costs regarding electric deregulation, settlement system costs,other PJM and rate case costs; and derivative activity related to fuel coststhat will be recovered over various periods.

 

**RegulatoryLiabilities**

 

Asset retirementobligations - regulated property reflect an estimate of amounts collected in customerrates that are expected to be incurred to remove existing transmission anddistribution property from service upon retirement.

 

SECA net revenue subject to refund represents our deferral of amountscollected in customer rates during 2005 and 2006.  SECA revenue and expenses representFERC-ordered transitional payments for the use of transmission lines withinPJM.  A hearing was held in early 2006 todetermine if these transitional payments are subject to refund, but no rulinghas been issued.  We began receiving andpaying these transitional payments in May 2005.

 

Postretirement benefitsand otherrepresent the qualifying FASC 715, “Compensation — Retirement Benefits”(formerly SFAS No. 158, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans - an amendment to FASB Statements No. 87,88, 106 and 132(R)”) gains related to our regulated operations that forratemaking purposes are probable of being reflected in future rates.  We recognize an asset for a plan’s overfundedstatus or a liability for a plan’s underfunded status, and recognize, as acomponent of OCI, the changes in the funded status of the plan that ariseduring the year that are not recognized as a component of net periodic benefitcost.  This regulatory liabilityrepresents the regulated portion that would otherwise be charged as a gain toOCI.

 

**4.  Ownership of Facilities**

 

**DP&L** and other Ohio utilities have undividedownership interests in seven electric generating facilities and numeroustransmission facilities.  Certainexpenses, primarily fuel costs for the generating units, are allocated to theowners based on their energy usage.  Theremaining expenses, investments in fuel inventory, plant materials andoperating supplies, and capital additions are allocated to the owners inaccordance with their respective ownership interests.  As of September 30, 2009, we had $114 million of constructionwork in progress at such facilities.  **DP&L’s** share of the operating cost ofsuch facilities is included within the corresponding line in the condensedconsolidated statements of results of operations and **DP&L’s** share of the investment in the facilities isincluded in the condensed consolidated balance sheets.  The majority of the construction work inprogress at the Conesville Unit 4 is related to a new FGD installation and isexpected to be completed in the fourth quarter of 2009.

 

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**DP&L’s** undivided ownership interest in suchfacilities at September 30, 2009, is as follows:

 
| ** **                             | ** ** | **DP&L****Share** | ** ** | **DP&L****Investment** | ** ** |
|----------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **            | ** ** | ** **                 | ** ** | **Gross  Plant** | ** ** | **Accumulated** | ** ** | **Construction** | ** ** |
| ** **                             | ** ** | ** **            | ** ** | **Production**             | ** ** | **In  Service** | ** ** | **Depreciation** | ** ** | **Work in  Progress** | ** ** |
| ** **                             | ** ** | **Ownership  (%)**    | ** ** | **Capacity  (MW)**         | ** ** | **($ in  millions)** | ** ** | **($ in  millions)** | ** ** | **($ in  millions)** | ** ** |
| Production  Units:                     |       |                  |       |                       |       |   |   |   |   |   |   |
| Beckjord  Unit 6                       |       | 50.0                  |       | 210                        |       | $ | 78 |   | $ | 55 |   | $ | 1 |   |
| Conesville  Unit 4                     |       | 16.5                  |       | 129                        |       | 41 |   | 28 |   | 85 |   |
| East  Bend Station                     |       | 31.0                  |       | 186                        |       | 200 |   | 128 |   | 1 |   |
| Killen  Station                        |       | 67.0                  |       | 402                        |       | 604 |   | 273 |   | 1 |   |
| Miami  Fort Units 7&8              |       | 36.0                  |       | 368                        |       | 344 |   | 120 |   | 6 |   |
| Stuart  Station                        |       | 35.0                  |       | 820                        |       | 682 |   | 243 |   | 17 |   |
| Zimmer  Station                        |       | 28.1                  |       | 365                        |       | 1,055 |   | 593 |   | 3 |   |
| Transmission  (at varying percentages) |       |                  |       |                       |       | 91 |   | 53 |   | — |   |
| Total                                  |       |                  |       | 2,480                      |       | $ | 3,095 |   | $ | 1,493 |   | $ | 114 |   |

 

**5.     Long-term Debtand Revolving Credit Borrowings**

 
| ** **                                                  | ** ** | **At**                 | ** **  | **At**                | ** ** |
|-------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                  | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                      | ** ** | **2009**               |        | **2008**              |       |
| **DP&L**- First mortgage bonds maturing                 |       |                   |        |                  |       |
| 2013  - 5.125%                                              | ** ** | **$**                  | **470.0**   |                  | $          | 470.0 |   |
| **DP&L** - Pollution control series maturing            |       |                   |        |                  |       |
| 2028  - 4.70%                                               | ** ** | **35.3**               |        | 35.3                  |       |
| **DP&L** - Pollution control series maturing            |       |                   |        |                  |       |
| 2034  - 4.80%                                               | ** ** | **179.1**              |        | 179.1                 |       |
| **DP&L** - Pollution control series maturing            |       |                   |        |                  |       |
| 2036  - 4.80%                                               | ** ** | **100.0**              |        | 100.0                 |       |
| **DP&L** - Pollution control series maturing            |       |                   |        |                  |       |
| 2040  - variable rates: 0.24% - 0.85% and 0.80% - 1.25% (a) | ** ** | **100.0**              |        | 100.0                 |       |
| ** **                                                  |       | **884.4**              |        | 884.4                 |       |
|                                                        |       |                   |        |                  |       |
| **DP&L** - Obligation for capital lease                 | ** ** | **—**             |        | 0.6                   |       |
| Unamortized  debt discount                                  | ** ** | **(0.8**               | **)**       | (1.0                  | )          |
| Total  long-term debt - **DP&L**                        | ** ** | **$**                  | **883.6**   |                  | $          | 884.0 |   |
|                                                        |       |                   |        |                  |       |
| **DPL Inc.** - Senior Notes 6.875% Series due 2011     | ** ** | **297.4**              |        | 297.4                 |       |
| **DPL Inc.** - Note to Capital Trust II 8.125% due 2031     | ** ** | **195.0**              |        | 195.0                 |       |
| Unamortized  debt discount                                  | ** ** | **(0.2**               | **)**       | (0.3                  | )          |
| Total  long-term debt - **DPL**                             | ** ** | **$**                  | **1,375.8** |                  | $          | 1,376.1 |   |

 

----

| *(a)* | *Range of  interest rates for nine months ended September 30, 2009 and the one  month ended December 31, 2008, respectively.**These  pollution control bonds were issued on December 4, 2008.* |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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At September 30,2009, scheduled maturities of long-term debt, including capital leaseobligations, are summarized as follows:

 
| **$ in  millions** | ** ** | **DPL** | ** ** | **DP&L** | ** ** |
|-------------------------|------------|---------|------------|--------------|------------|
| 2010                    |       | $       | 0.7        |         | $          | 0.7 |   |
| 2011                    |       | 297.4   |       | —       |       |
| 2012                    |       | —  |       | —       |       |
| 2013                    |       | 470.0   |       | 470.0        |       |
| 2014                    |       | —  |       | —       |       |
| Thereafter              |       | 609.4   |       | 414.4        |       |
|                    |       | $       | 1,377.5    |         | $          | 885.1 |   |

 

Significant changes inour long-term debt and revolving credit borrowings since the beginning of 2009include the following:

 

On March 31, 2009, **DPL** paid off $175 million of 8.00% Senior Notes when thenotes became due.

 

On April 21, 2009, **DP&L** entered into a $100 million unsecured revolvingcredit agreement with a syndicated bank group. The agreement is for a 364-day term expiring on April 20,2010.  The facility contains onefinancial covenant: **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  As of September 30, 2009, **DP&L**was in compliance with thiscovenant with a ratio of 0.43 to 1.00. As of September 30, 2009, the borrowings outstanding under thisfacility amounted to $80 million.  On October 28,2009, **DP&L** paid off the $80million that was outstanding under this facility.  This repayment was made using cash on hand aswell as proceeds from the October 26, 2009 exercise of warrants asdiscussed in Note 10 of Notes to Condensed Consolidated Financial Statements.

 

On July 29, 2009, **DP&L** repaid $105 million of the $140 million borrowingthat was outstanding under its $220 million unsecured revolving creditagreement. This repayment was made using $25 million of cash on hand and an $80million withdrawal that was made on July 28, 2009 from the $100 millionfacility referred to in the preceding paragraph.  At September 30, 2009, the borrowingsoutstanding under this facility amounted to $35 million.  On October 28, 2009, **DP&L** repaid an additional $10 million that wasoutstanding under this facility. This repayment was made using cash on hand aswell as proceeds from the warrant exercise mentioned in the precedingparagraph.

 

Afterconsidering the payments made on October 28, 2009 as discussed in thepreceding paragraphs, borrowings under the $100 million facility were paid offwhile those outstanding under the $220 million facility amounted to $25 millionas of that date.  At October 28,2009, the combined cash available to **DP&L** underthese revolving credit facilities amounted to $295 million.

 

Theweighted average interest rate paid on outstanding borrowings during both thethree and nine months ended September 30, 2009 was 2.3% under bothrevolving credit facilities.

 

**6.     Pension andPostretirement Benefits**

 

We sponsor a definedbenefit plan for substantially all employees. For collective bargaining employees, the defined benefits are based on aspecific dollar amount per year of service. For all other employees, the defined benefit plan is based primarily oncompensation and years of service. We fund pension plan benefits as accrued inaccordance with the minimum funding requirements of the Employee RetirementIncome Security Act of 1974 (ERISA).  Inaddition, we have a Supplemental Executive Retirement Plan (SERP) for certainactive and retired key executives. Benefits under this SERP have been frozen and no additional benefits canbe earned.

 

Qualified employees whoretired prior to 1987 and their dependents are eligible for postretirementhealth care and life insurance benefits, while qualified employees who retiredafter 1987 are eligible for postretirement life insurance benefits.  We have funded the union-eligible healthbenefit using a Voluntary Employee Beneficiary Association Trust.

 

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In the following tables,the amounts presented for pension include both the defined benefit pension planand the SERP in the aggregate and the amounts presented for postretirementinclude both health and life insurance benefits.

 

Thenet periodic benefit cost of the pension and postretirement benefit plans forboth **DPL** and **DP&L**for the three months ended September 30, 2009 and 2008 was:

 

**Net periodic benefit cost**

 
| ** **                    | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**        | ** ** | **2009**    | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                  | ** ** | **$**       | **0.9**    |               | $          | 0.8 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                 | ** ** | **4.5**     |       | 4.1                | ** ** | **0.4** |   | 0.4 |   |
| Expected return on assets     | ** ** | **(5.6**    | **)**      | (6.0               | )          | **(0.1** | **)** | (0.1 | ) |
|                          |       |        |       |               |       |   |   |   |   |
| Amortization of unrecognized: |       |        |       |               |       |   |   |   |   |
| Actuarial (gain) loss         | ** ** | **1.1**     |       | 0.7                | ** ** | **(0.2** | **)** | (0.2 | ) |
| Prior service cost            | ** ** | **0.9**     |       | 0.6                | ** ** | **—** |   | — |   |
| Net periodic benefit cost     | ** ** | **$**       | **1.8**    |               | $          | 0.2 | ** ** | **$** | **0.1** |   | $ | 0.1 |   |

 

Thenet periodic benefit cost of the pension and postretirement benefit plans forboth **DPL** and **DP&L**for the nine months ended September 30, 2009 and 2008 was:

 

**Net periodic benefit cost**

 
| ** **                    | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**        | ** ** | **2009**    | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                  | ** ** | **$**       | **2.7**    |               | $          | 2.4 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                 | ** ** | **13.3**    |       | 12.3               | ** ** | **1.3** |   | 1.2 |   |
| Expected return on assets     | ** ** | **(16.8**   | **)**      | (18.0              | )          | **(0.3** | **)** | (0.3 | ) |
|                          |       |        |       |               |       |   |   |   |   |
| Amortization of unrecognized: |       |        |       |               |       |   |   |   |   |
| Actuarial (gain) loss         | ** ** | **3.3**     |       | 2.1                | ** ** | **(0.6** | **)** | (0.6 | ) |
| Prior service cost            | ** ** | **2.6**     |       | 1.8                | ** ** | **—** |   | — |   |
| Net periodic benefit cost     | ** ** | **$**       | **5.1**    |               | $          | 0.6 | ** ** | **$** | **0.4** |   | $ | 0.3 |   |

 

Thefollowing estimated benefit payments, which reflect future service, areexpected to be paid as follows:

 

**EstimatedFuture Benefit Payments:**

 
| **$ in  millions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------|------------|-------------|------------|--------------------|------------|
| 2009                    |       | $           | 5.2        |               | $          | 0.7 |   |
| 2010                    |       | $           | 21.2       |               | $          | 2.7 |   |
| 2011                    |       | $           | 21.6       |               | $          | 2.6 |   |
| 2012                    |       | $           | 22.3       |               | $          | 2.5 |   |
| 2013                    |       | $           | 23.1       |               | $          | 2.4 |   |
| 2014  – 2018       |       | $           | 120.8      |               | $          | 9.7 |   |

 

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**7.     Share-BasedCompensation**

 

Share-based compensationexpense was not significant for the three months or nine months ended September 30,2009.

 

Share-based awards issuedin **DPL’s**common stock will be distributedfrom treasury stock.  **DPL** believes it has sufficient treasury stock to satisfy alloutstanding share-based awards.

 

Summarized share-basedcompensation activity for both **DPL** and **DP&L** for the three months ended September 30, 2009and 2008 was as follows:

 
| ** **                          | ** ** | **Options**            | ** ** | **RSUs**   | ** ** | **Performance Shares**      | ** ** |
|-------------------------------------|------------|------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **2009**               | ** ** | **2008**   | ** ** | **2009**                    | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Outstanding  at beginning of period | ** ** | **836,500**            |       | 896,500    | ** ** | **10,120**                  |       | 19,768 | ** ** | **237,704** |   | 190,727 |   |
| Granted                             | ** ** | **—**             |       | —     | ** ** | **—**                  |       | — | ** ** | **—** |   | — |   |
| Dividends                           | ** ** | **—**             |       | —     | ** ** | **—**                  |       | — | ** ** | **—** |   | — |   |
| Exercised                           | ** ** | **(60,000**            | **)**      | (40,400    | )          | **(6,809**                  | **)**      | (9,648 | ) | **—** |   | — |   |
| Expired                             | ** ** | **—**             |       | —     | ** ** | **—**                  |       | — | ** ** | **—** |   | — |   |
| Forfeited                           | ** ** | **—**             |       | —     | ** ** | **—**                  |       | — | ** ** | **—** |   | — |   |
| Outstanding  at period end          | ** ** | **776,500**            |       | 856,100    | ** ** | **3,311**                   |       | 10,120 | ** ** | **237,704** |   | 190,727 |   |
| Exercisable  at period end          | ** ** | **776,500**            |       | 856,100    | ** ** | **—**                  |       | — | ** ** | **—** |   | — |   |
|                                | ** ** | ** **             |       |       | ** ** | ** **                  |       |   | ** ** | ** ** |   |   |   |
| ** **                          | ** ** | ** **             | ** ** | ** ** | ** ** | **Management  Performance** | ** ** | ** ** |   |   |   |
| ** **                          | ** ** | **Restricted  Shares** | ** ** | **Shares** | ** ** | ** **                  |       |   |   |
| ** **                          | ** ** | **2009**               | ** ** | **2008**   | ** ** | **2009**                    | ** ** | **2008** | ** ** | ** ** |   |   |   |
| Outstanding  at beginning of period | ** ** | **70,647**             |       | 61,200     | ** ** | **87,863**                  |       | 39,144 |   | ** ** |   |   |   |
| Granted                             | ** ** | **95,036**             |       | 19,347     | ** ** | **—**                  |       | — |   | ** ** |   |   |   |
| Dividends                           | ** ** | **—**             |       | —     | ** ** | **—**                  |       | — |   | ** ** |   |   |   |
| Exercised                           | ** ** | **—**             |       | —     | ** ** | **—**                  |       | — |   | ** ** |   |   |   |
| Expired                             | ** ** | **—**             |       | —     | ** ** | **—**                  |       | — |   | ** ** |   |   |   |
| Forfeited                           | ** ** | **—**             |       | —     | ** ** | **(3,622**                  | **)**      | — |   | ** ** |   |   |   |
| Outstanding  at period end          | ** ** | **165,683**            |       | 80,547     | ** ** | **84,241**                  |       | 39,144 |   | ** ** |   |   |   |
| Exercisable  at period end          | ** ** | **—**             |       | —     | ** ** | **—**                  |       | — |   | ** ** |   |   |   |
|                                |       |                   |       |       |       |                        |       |   |   | ** ** |   |   |   |
| ** **                          | ** ** | **Director  RSUs**     | ** ** | ** ** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2009**               | ** ** | **2008**   | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding  at beginning of period | ** ** | **20,272**             |       | 15,986     |       |                        |       |   |   | ** ** |   |   |   |
| Granted                             | ** ** | **—**             |       | —     |       |                        |       |   |   | ** ** |   |   |   |
| Dividends  accrued                  | ** ** | **474**                |       | 248        |       |                        |       |   |   | ** ** |   |   |   |
| Exercised  and issued               | ** ** | **—**             |       | —     |       |                        |       |   |   | ** ** |   |   |   |
| Exercised  and deferred             | ** ** | **(242**               | **)**      | —     |       |                        |       |   |   | ** ** |   |   |   |
| Forfeited                           | ** ** | **—**             |       | (1,149     | )          |                        |       |   |   | ** ** |   |   |   |
| Outstanding  at period end          | ** ** | **20,504**             |       | 15,085     |       |                        |       |   |   | ** ** |   |   |   |
| Exercisable  at period end          | ** ** | **—**             |       | —     |       |                        |       |   |   | ** ** |   |   |   |

 

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Summarizedshare-based compensation activity for both **DPL** and **DP&L** for the nine months ended September 30, 2009and 2008 was as follows:

 
| ** **                        | ** ** | **Options** | ** ** | **RSUs** | ** ** | **Performance Shares** | ** ** |
|-----------------------------------|------------|-------------|------------|----------|------------|------------------------|------------|
| ** **                        | ** ** | **2009**    | ** ** | **2008** | ** ** | **2009**               | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Outstanding  at beginning of year | ** ** | **836,500** |       | 946,500  | ** ** | **10,120**             |       | 22,976 | ** ** | **156,300** |   | 142,108 |   |
| Granted                           | ** ** | **—**  |       | —   | ** ** | **—**             |       | — | ** ** | **124,588** |   | 93,298 |   |
| Dividends                         | ** ** | **—**  |       | —   | ** ** | **—**             |       | — | ** ** | **—** |   | — |   |
| Exercised                         | ** ** | **(60,000** | **)**      | (90,400  | )          | **(6,809**             | **)**      | (11,253 | ) | **—** |   | — |   |
| Expired                           | ** ** | **—**  |       | —   | ** ** | **—**             |       | — | ** ** | **(36,445** | **)** | (37,426 | ) |
| Forfeited                         | ** ** | **—**  |       | —   | ** ** | **—**             |       | (1,603 | ) | **(6,739** | **)** | (7,253 | ) |
| Outstanding  at period end        | ** ** | **776,500** |       | 856,100  | ** ** | **3,311**              |       | 10,120 | ** ** | **237,704** |   | 190,727 |   |
| Exercisable  at period end        | ** ** | **776,500** |       | 856,100  | ** ** | **—**             |       | — | ** ** | **—** |   | — |   |

 
| ** **                        | ** ** | ** **            | ** ** | ** ** | ** ** | **Management Performance** | ** ** | ** ** |       |       |   |
|-----------------------------------|------------|-----------------------|------------|------------|------------|----------------------------|------------|------------|------------|------------|--------|
| ** **                        | ** ** | **Restricted Shares** | ** ** | **Shares** | ** ** | ** **                 |       |       |       |
| ** **                        | ** ** | **2009**              | ** ** | **2008**   | ** ** | **2009**                   | ** ** | **2008**   | ** ** | ** ** |   |   |   |
| Outstanding  at beginning of year | ** ** | **69,147**            |       | 42,200     | ** ** | **39,144**                 |       | —     |       | ** ** |   |   |   |
| Granted                           | ** ** | **97,536**            |       | 39,347     | ** ** | **48,719**                 |       | 39,144     |       | ** ** |   |   |   |
| Dividends                         | ** ** | **—**            |       | —     | ** ** | **—**                 |       | —     |       | ** ** |   |   |   |
| Exercised                         | ** ** | **(1,000**            | **)**      | (1,000     | )          | **—**                 |       | —     |       | ** ** |   |   |   |
| Expired                           | ** ** | **—**            |       | —     | ** ** | **—**                 |       | —     |       | ** ** |   |   |   |
| Forfeited                         | ** ** | **—**            |       | —     | ** ** | **(3,622**                 | **)**      | —     |       | ** ** |   |   |   |
| Outstanding  at period end        | ** ** | **165,683**           |       | 80,547     | ** ** | **84,241**                 |       | 39,144     |       | ** ** |   |   |   |
| Exercisable  at period end        | ** ** | **—**            |       | —     | ** ** | **—**                 |       | —     |       | ** ** |   |   |   |

 
| ** **                        | ** ** | **Director RSUs** | ** ** | ** ** |       |       |   | ** ** |   |       |   |
|-----------------------------------|------------|-------------------|------------|------------|------------|------------|--------|------------|--------|------------|--------|
| ** **                        | ** ** | **2009**          | ** ** | **2008**   | ** ** | ** ** |   |       |   | ** ** |   |   |   |
| Outstanding  at beginning of year | ** ** | **15,546**        |       | 13,573     |       | ** ** |   |       |   | ** ** |   |   |   |
| Granted                           | ** ** | **20,016**        |       | 15,752     |       | ** ** |   |       |   | ** ** |   |   |   |
| Dividends  accrued                | ** ** | **1,310**         |       | 630        |       | ** ** |   |       |   | ** ** |   |   |   |
| Exercised  and issued             | ** ** | **(2,066**        | **)**      | (13,721    | )          | ** ** |   |       |   | ** ** |   |   |   |
| Exercised  and deferred           | ** ** | **(14,302**       | **)**      | —     |       | ** ** |   |       |   | ** ** |   |   |   |
| Forfeited                         | ** ** | **—**        |       | (1,149     | )          | ** ** |   |       |   | ** ** |   |   |   |
| Outstanding  at period end        | ** ** | **20,504**        |       | 15,085     |       | ** ** |   |       |   | ** ** |   |   |   |
| Exercisable  at period end        | ** ** | **—**        |       | —     |       | ** ** |   |       |   | ** ** |   |   |   |

 

On September 17,2009, the **DPL** Board of Directors approved atwo-part equity compensation award under **DPL’s**2006****Equity and Performance Incentive Plan for certain of **DPL’s** executive officers. The first part is a restricted share grant and the second part is amatching restricted share grant.  A totalof 90,036 restricted shares were granted on September 17, 2009 as part ofthe restricted share grant.  Theserestricted shares vest after five years if the participant remains continuouslyemployed with **DPL** and if the year over yearaverage EPS has increased by at least 1% from 2009 - 2013.  Under the matching restricted share grant,participants will have a three-year period from the date of plan implementationduring which they may purchase **DPL** commonshares equal in value to up to two times their base salary.  **DPL** will matchthe shares purchased with another grant of restricted stock (matchingrestricted share grant).  The percentagematch by **DPL** is detailed in the tablebelow.  The matching restricted sharegrant will vest over a three year period if the participant continues to holdthe originally purchased shares and remains continuously employed with **DPL.** The restricted shares are registered in the executive’sname, carry full voting privileges and receive dividends as declared and paidon all **DPL** common shares.

 

Thematching criteria are:

 
| **Value (Cost Basis) of  Shares Purchased as a  % of 2009 Base Salary** | ** ** | **Company % Match  of Value of Shares  Purchased** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| <25%                                                                 |       | 25%                                                |       |
| 25% to 50%                                                              |       | 50%                                                |       |
| 50% to 100%                                                             |       | 75%                                                |       |
| 100% to 200%                                                            |       | 125%                                               |       |

 

Thematching percentage will be applied on a cumulative basis and adjusted at theend of each quarter.

 

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**8.  Earnings per Share**

 

Basic EPS is based on theweighted-average number of **DPL**common shares outstanding during the year. Diluted EPS is based on the weighted-average number of **DPL** common and common-equivalent sharesoutstanding during the year, except in periods where the inclusion of suchcommon-equivalent shares is anti-dilutive. Excluded from outstanding shares for these weighted-average computationsare unreleased shares held by **DPL’s** ESOP.

 

The common-equivalentshares excluded from the calculation of diluted EPS, because they wereanti-dilutive, were not material for both the three months and nine monthsended September 30, 2009.

 

The following illustratesthe reconciliation of the numerators and denominators of the basic and dilutedearnings per share computations:

 
| ** **                            | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| **$ in millions except per**     | ** ** | **Net**                                   | ** ** | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **share amounts**                     | ** ** | **Income**                                | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic EPS**                         | ** ** | **$**                                     | **67.9**   | ** ** | **112.4** | ** ** | **$** | **0.60** |   | $ | 48.0 |   | 109.9 |   | $ | 0.44 |   |
|                                  |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive****Securities:** |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Warrants  (a)                         | ** ** | ** **                                |       | **1.8** |   |   |   |   |   | 4.9 |   |   |   |
| Stock  options and performance shares | ** ** | ** **                                |       | **0.2** |   |   |   |   |   | 0.2 |   |   |   |
|                                  |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                       | ** ** | **$**                                     | **67.9**   | ** ** | **114.4** | ** ** | **$** | **0.59** |   | $ | 48.0 |   | 115.0 |   | $ | 0.42 |   |

 
| ** **                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| **$ in millions except per**     | ** ** | **Net**                                  | ** ** | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **share amounts**                     | ** ** | **Income**                               | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic EPS**                         | ** ** | **$**                                    | **179.2**  | ** ** | **112.2** | ** ** | **$** | **1.60** |   | $ | 172.9 |   | 109.6 |   | $ | 1.58 |   |
|                                  |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive****Securities:** |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Warrants  (a)                         | ** ** | ** **                               |       | **1.0** |   |   |   |   |   | 6.4 |   |   |   |
| Stock  options and performance shares | ** ** | ** **                               |       | **0.2** |   |   |   |   |   | 0.2 |   |   |   |
|                                  |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                       | ** ** | **$**                                    | **179.2**  | ** ** | **113.4** | ** ** | **$** | **1.58** |   | $ | 172.9 |   | 116.2 |   | $ | 1.49 |   |

 

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*(a)** **On March 20, 2009, **DPL** repurchased 7.1 million warrants, each at a price of$2.25.  The repurchased warrants werecancelled by **DPL** on the date they wererepurchased.  Also, on September 17,2009, a warrant holder exercised 0.5 million warrants under a cashless exercisetransaction resulting in the issuance by **DPL** of 93,200shares of common stock.  See Note 10 ofNotes to Condensed Consolidated Financial Statements.*

 

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**9.  Redeemable Preferred Stock**

 

**DP&L**has $100 par value preferred stock,4,000,000 shares authorized, of which 228,508 are outstanding as of September 30,2009.  **DP&L**also has $25 par value preferred stock, 4,000,000 shares authorized, none ofwhich were outstanding as of September 30, 2009.  The table below details the preferred sharesoutstanding at September 30, 2009.

 
| ** **              | ** ** | ** **    | ** ** | **Redemption**         | ** ** | **Shares**             | ** ** | ** **               | ** ** | ** **               | ** ** |
|-------------------------|------------|---------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **              | ** ** | **Preferred** | ** ** | **Price at**           | ** ** | **Outstanding at**     | ** ** | **Par Value at**         | ** ** | **Par Value at**         | ** ** |
| ** **              | ** ** | **Stock**     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,**   | ** ** | **December 31,**    | ** ** |
| ** **              | ** ** | **Rate**      | ** ** | **2009**               | ** ** | **2009**               | ** ** | **2009**                 | ** ** | **2008**                 | ** ** |
| ** **              | ** ** | ** **    | ** ** | ** **             | ** ** | ** **             | ** ** | **($ in millions)** | ** ** | **($ in millions)** | ** ** |
| DP&L  Series A |       | 3.75          | %          | $                      | 102.50     |                   | 93,280     |                     | $          | 9.3                      |       | $ | 9.3 |   |
| DP&L  Series B |       | 3.75          | %          | $                      | 103.00     |                   | 69,398     |                     | 7.0        |                     | 7.0        |   |
| DP&L  Series C |       | 3.90          | %          | $                      | 101.00     |                   | 65,830     |                     | 6.6        |                     | 6.6        |   |
| Total                   |       |          |       |                   |       | 228,508                |       | $                        | 22.9       |                     | $          | 22.9 |   |

 

The **DP&L**preferred stock may be redeemed at **DP&L’s**option as determined by its Board of Directors at the per-share redemptionprices indicated above, plus cumulative accrued dividends.  In addition, **DP&L’s**Amended Articles of Incorporation contain provisions that permit preferredstockholders to elect members of the Board of Directors in the event thatcumulative dividends on the preferred stock are in arrears in an aggregateamount equivalent to at least four full quarterly dividends.  Since this potential redemption-triggeringevent is not solely within the control of **DP&L**, thepreferred stock is presented on the balance sheet as “Redeemable PreferredStock” in a manner consistent with temporary equity as defined in GAAP.

 

As long as any **DP&L** preferred stock is outstanding, **DP&L’s** Amended Articles of Incorporation also containprovisions restricting the payment of cash dividends on any of its common stockif, after giving effect to such dividend, the aggregate of all such dividendsdistributed subsequent to December 31, 1946 exceeds the net income of **DP&L** available for dividends on its common stocksubsequent to December 31, 1946, plus $1.2 million.  As of September 30, 2009, all earningsreinvested in the business of **DP&L** wereavailable for common stock dividends.  Wedo not expect this restriction to have an effect on the payment of cashdividends in the future.  **DPL** records dividends on preferred stock of **DP&L** as part of interest expense.  We expect all 2009 earnings reinvested in thebusiness of **DP&L** to be available for **DP&L** common stock dividends, payable to **DPL**.

 

**10.  Common Shareholders’ Equity**

 

In February 2000,**DPL** entered into a series ofrecapitalization transactions which included the issuance of 31.6 millionwarrants for an aggregate purchase price of $50 million.  The warrants are exercisable, in whole or inpart, for common shares at any time during the twelve-year period commencing onMarch 13, 2000.  Each warrant isexercisable for one common share, subject to anti-dilution adjustments (e.g.,stock split, stock dividend) at an exercise price of $21.00 per common share.

 

At December 31,2008, **DPL** had 19.6 million outstandingwarrants.  On March 20, 2009, **DPL** re-purchased 7.1 million of such warrants at a price of$2.25 each.  The repurchased warrantswere cancelled by **DPL**on the datethey were repurchased.  In addition, on September 17,2009, a warrant holder exercised 0.5 million warrants under a cashless exercisetransaction resulting in the issuance by **DPL** of 93,200shares of common stock from treasury stock. Accordingly, at September 30, 2009, **DPL**had approximately 12 million warrants outstanding.

 

On October 26, 2009,a warrant holder exercised 3.5 million warrants for cash.  As a result of this exercise, **DPL** issued 3.5 million shares of common stock from treasurystock and in turn received $73.5 million in cash.  **DPL** used theproceeds from this transaction to pay down borrowings under its revolvingcredit facilities.  However, ultimatelyit intends to use an amount equal to such proceeds to repurchase shares underits Stock Repurchase Program discussed below. See Note 5 of Notes toCondensed Consolidated Financial Statements. At October 28, 2009, **DPL** had approximately8.5 million warrants outstanding.

 

On October 28, 2009,the **DPL** Board of Directors approved a StockRepurchase Program (the Program) under which **DPL**may use proceeds from the exercise of warrants to repurchase common stock fromtime to time in the open market, through private transactions or otherwise. TheProgram will run through June 30, 2012, which is three months after theend of the warrant exercise period.

 

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**11.  Income Taxes**

 

The followingtable details the effective tax rates for the three months and nine monthsended September 30, 2009 and 2008:

 
| ** **   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------|------------|------------------------|------------|------------------------|------------|
| ** **   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **   | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|         |       |                   |       |                   |       |   |   |   |   |
| **DPL**      |       | 29.3                   | %          | 35.5                   | %          | 32.0 | % | 33.2 | % |
|         |       |                   |       |                   |       |   |   |   |   |
| **DP&L** |       | 29.2                   | %          | 35.4                   | %          | 31.9 | % | 33.0 | % |

 

For both **DPL** and **DP&L** andfor the three and nine months ended September 30, 2009, the decreases inthe effective tax rates from the same periods in 2008 are primarily due toestimate-to-actual tax adjustments related to the Internal Revenue Code Section 199– domestic production deduction (Section 199 deduction) and state taxliabilities for 2008 and to changes to the 2009 estimated tax benefits relatedto the Section 199 deduction and the phase-out of the Ohio FranchiseTax.  During the three months ended September 30,2009, we recorded tax benefits in the amounts of $4.6 million and $2.9 millionrelating to the Section 199 deduction and state tax liabilities,respectively.

 

Deferred tax liabilitiesfor both **DPL** and **DP&L**increased by approximately $203 million during the nine months ended September 30,2009.  This increase is related to thetax effects resulting from the recognition of certain income tax benefits relating to a change in thetax accounting method for deductions pertaining to repairs, depreciation andmixed service costs; and the tax effects of other temporary differencesprimarily associated with accelerated depreciation of additions to property,plant and equipment.

 

**12.  FairValue Measurements**

 

The fair values of ourfinancial instruments are based on market quotes of similar instruments andrepresent estimates of possible value that may not be realized in thefuture.  The table below presents thefair value and cost of our non-derivative financial instruments at September 30,2009 and December 31, 2008.

 
| ** **             | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **$ in millions** | ** ** | **Cost**                    | ** ** | **Fair Value**             | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| **DPL Inc.**           |       |                        |       |                       |       |   |   |   |   |
| **Assets**             |       |                        |       |                       |       |   |   |   |   |
| Master  Trust Assets   |       | $                           | 12.0       |                       | $          | 12.2 |   | $ | 13.6 |   | $ | 13.1 |   |
|                   |       |                        |       |                       |       |   |   |   |   |
| **Liabilities**        |       |                        |       |                       |       |   |   |   |   |
| Debt                   |       | $                           | 1,376.6    |                       | $          | 1,348.3 |   | $ | 1,551.8 |   | $ | 1,470.5 |   |
|                   |       |                        |       |                       |       |   |   |   |   |
| **DP&L**           |       |                        |       |                       |       |   |   |   |   |
| **Assets**             |       |                        |       |                       |       |   |   |   |   |
| Master  Trust Assets   |       | $                           | 26.1       |                       | $          | 39.0 |   | $ | 29.9 |   | $ | 40.2 |   |
|                   |       |                        |       |                       |       |   |   |   |   |
| **Liabilities**        |       |                        |       |                       |       |   |   |   |   |
| Debt                   |       | $                           | 884.4      |                       | $          | 846.4 |   | $ | 884.7 |   | $ | 815.7 |   |

 

Long-term debt is fair valued based on current public market prices fordisclosure purposes only.  Unrealizedgains or losses are not recognized in the financial statements, as long-termdebt is presented at amortized cost in the financial statements.  The long-term debt amounts include thecurrent portion payable in the next twelve months and have maturities thatrange from 2009 to 2040.

 

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Fair value is defined asthe exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date.  The fair valuehierarchy requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value.  These inputs are then categorized as Level 1(quoted prices in active markets for identical assets or liabilities); Level 2(observable inputs such as quoted prices for similar assets or liabilities orquoted prices in markets that are not active); or Level 3 (unobservableinputs).

 

Valuations of assets andliabilities reflect the value of the instrument including the values associatedwith counterparty risk.  We include ourown credit risk and our counterparty’s credit risk in our calculation of fairvalue using the Global Corporate Cumulative Average Default Rates.

 

The fair value of assetsand liabilities measured on a recurring basis and the respective categorywithin the fair value hierarchy for **DPL** wasdetermined as follows:

 
| ** **              | ** ** | **Assets  and Liabilities Measured at Fair Value on a Recurring Basis** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **              | ** ** | ** **                                                              | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | ** ** | ** ** | **Fair Value on** | ** ** |
| ** **              | ** ** | **Fair Value at  September 30,  2009***                            | ** ** | **Based on Quoted  Prices in Active  Market** | ** ** | **Other  Observable  Inputs** | ** ** | **Unobservable  Inputs** | ** ** | **Collateral and  Counterparty  Netting** | ** ** | **Balance Sheet at  September 30,  2009** | ** ** |
| **$ in millions**  | ** ** | **DPL**                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **DPL** | ** ** |
| **Assets**              |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Master  Trust Assets    |       | $                                                                       | 12.2       |   | $ | — |   | $ | 12.2 |   | $ | — |   | $ | — |   | $ | 12.2 |   |
| Derivative  Assets      |       | 13.8                                                                    |       | — |   | 13.8 |   | — |   | (4.4 | ) | 9.4 |   |
| Total                   |       | $                                                                       | 26.0       |   | $ | — |   | $ | 26.0 |   | $ | — |   | $ | (4.4 | ) | $ | 21.6 |   |
|                    |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**         |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Derivative  Liabilities |       | $                                                                       | 9.0        |   | $ | 2.7 |   | $ | 6.3 |   | $ | — |   | $ | (5.9 | ) | $ | 3.1 |   |
| Total                   |       | $                                                                       | 9.0        |   | $ | 2.7 |   | $ | 6.3 |   | $ | — |   | $ | (5.9 | ) | $ | 3.1 |   |

 

----

*Includes credit valuation adjustments forcounterparty risk. 

 

The fair value of assetsand liabilities measured on a recurring basis and the respective categorywithin the fair value hierarchy for **DP&L** wasdetermined as follows:

 

|                    |       | **Assets  and Liabilities Measured at Fair Value on a Recurring Basis** |       |
|-------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **              | ** ** | ** **                                                              | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | ** ** | ** ** | **Fair Value on** | ** ** |
| ** **              | ** ** | **Fair Value at  September 30,  2009***                            | ** ** | **Based on Quoted  Prices in Active  Market** | ** ** | **Other  Observable  Inputs** | ** ** | **Unobservable  Inputs** | ** ** | **Collateral and  Counterparty  Netting** | ** ** | **Balance Sheet at  September 30,  2009** | ** ** |
| **$ in millions**  | ** ** | **DP&L (a)**                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **DP&L** | ** ** |
| **Assets**              |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Master  Trust Assets    |       | $                                                                       | 39.0       |   | $ | 26.8 |   | $ | 12.2 |   | $ | — |   | $ | — |   | $ | 39.0 |   |
| Derivative  Assets      |       | 13.8                                                                    |       | — |   | 13.8 |   | — |   | (4.4 | ) | 9.4 |   |
| Total                   |       | $                                                                       | 52.8       |   | $ | 26.8 |   | $ | 26.0 |   | $ | — |   | $ | (4.4 | ) | $ | 48.4 |   |
|                    |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**         |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Derivative  Liabilities |       | $                                                                       | 9.0        |   | $ | 2.7 |   | $ | 6.3 |   | $ | — |   | $ | (5.9 | ) | $ | 3.1 |   |
| Total                   |       | $                                                                       | 9.0        |   | $ | 2.7 |   | $ | 6.3 |   | $ | — |   | $ | (5.9 | ) | $ | 3.1 |   |

 

----

*Includes credit valuation adjustments forcounterparty risk. 

 

*(a)  **DP&L** holds **DPL**stock in the Master Trust that is eliminated in consolidation.*

 

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Level 1 inputs are usedfor **DPL** common stock held by the MasterTrust and for derivative contracts such as heating oil futures.  The fair value is determined by reference toquoted market prices and other relevant information generated by markettransactions.  Level 2 inputs are used tovalue derivatives such as financial transmission rights where the quoted pricesare from a relatively inactive market; forward power contracts and forwardNYMEX-quality coal contracts which are traded on the OTC market but which arevalued using prices on the NYMEX for similar contracts on the OTC market; andopen-ended mutual funds that are in the Master Trust valued using the end ofday Net Asset Value (NAV).

 

The fair value of assetsand liabilities measured on a non-recurring basis are based on Level 3inputs.  The fair value of an assetretirement obligation (ARO) is estimated by discounting expected cash outflowsto their present value at the initial recording of the liability.  Cash outflows are based on the approximatefuture disposal cost as determined by market information, historicalinformation or management judgment. During the three months ended September 30, 2009, **DP&L** did not have any new ARO costs or increases tocurrent AROs.

 

At September 30,2009, we did not have any investments in money market funds classified as cashand cash equivalents in our condensed consolidated balance sheets.  The money market funds have quoted pricesthat are generally equivalent to par.

 

***Master Trust Assets***

 

**DP&L** established a Master Trustto hold assets for the benefit of employees participating in **DP&L’s** Deferred Compensation Plan and other employeebenefit purposes and these assets are not used for general operatingpurposes.  These assets are primarilycomprised of open-ended mutual funds and **DPL** commonstock.  The **DPL**common stock held by the Master Trust in **DP&L’s**consolidated balance sheet is eliminated in consolidation and is not reflectedin **DPL**’s consolidated balance sheet. Theseassets are valued using current public market prices on a quarterly basis.  Any unrealized gains or losses are recognizedin Other Comprehensive Income until the securities are sold.

 

**DPL** had $0.2 million inunrealized gains and no unrealized losses on the Master Trust assets in OCI at September 30,2009 and no unrealized gains and $0.5 million in unrealized losses in OCI at December 31,2008.

 

**DP&L** had $12.9 million inunrealized gains and no unrealized losses on the Master Trust assets in OCI at September 30,2009 and $10.9 million in unrealized gains and $0.5 in unrealized losses in OCIat December 31, 2008.

 

No unrealized gains or losses are expected to be transferred toearnings in 2009.

 

***DerivativeInstruments***

 

In the normalcourse of business, **DPL** and **DP&L** enter into various derivative financialinstruments.  See Note 13 of Notes toCondensed Consolidated Financial Statements.

 

**13.  DerivativeInstruments and Hedging Activities**

 

In the normalcourse of business, **DPL** and **DP&L** enter into various derivative financialinstruments.  We use derivativesprincipally to manage the risk of changes in market prices forcommodities.  The derivatives that we useto economically hedge this risk are governed by our risk management policiesfor forward and futures contracts.  Ourpositions are continually assessed within our structured hedging programs todetermine whether new or offsetting transactions are required.  The objective of the hedging program isgenerally to mitigate financial risks while ensuring that sufficient volumesare available to meet our requirements. We monitor and value derivative positions monthly as part of our riskmanagement processes.  We use publishedsources for pricing when possible to mark positions to market.  All of our derivative instruments are usedfor risk management purposes and are designated as a cash flow hedge or markedto market each reporting period.

 

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***CashFlow Hedges***

 

As part of our riskmanagement processes, we identify the relationships between hedging instrumentsand hedged items, as well as the risk management objective and strategy forundertaking various hedge transactions. The mark-to-market value of cash flow hedges, as determined by currentpublic market prices, will continue to fluctuate with changes in market pricesup to contract expiration.  The effectiveportion of the hedging transaction is recognized in Other Comprehensive Income(OCI) and transferred to earnings when the hedged forecasted transaction takesplace or when the hedged forecasted transaction is probable of notoccurring.  The ineffective portion ofthe cash flow hedge is recognized in earnings in the current period.  All risk components were taken into accountto determine the hedge effectiveness of the cash flow hedges.

 

We currently use cashflow hedging with forward power contracts and in 2003 we entered into aninterest rate swap which was settled that same year.  As of September 30, 2009,the maximum length of time that we are hedging our exposure to variability infuture cash flows related to forecasted transactions is 108 months.  Approximately $2.2 million of accumulated gains in OCIrelated to the above mentioned power hedges are expected to be reclassified toearnings over the next twelve months. The balance of the remaining deferred gain from the interest rate swapin OCI is being amortized into earnings over the life of the relatedbonds.  Approximately $2.5 million ofaccumulated gains in OCI related to the above referenced interest rate hedgeare expected to be reclassified to earnings over the next twelve months.

 

The followingtable provides information concerning gains or losses recognized in OCI:

 
| ** **                                                      | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **$ in millions**                                          | ** ** | **Power**                                        | ** ** | **Interest  Rate  Hedge** | ** ** | **Power  and  Capacity** | ** ** | **Interest  Rate  Hedge** | ** ** |
| Beginning Accumulated Derivative Gain/(Loss) in  OCI            | ** ** | **$**                                            | **(0.3**   | **)** | **$** | **17.2** |   | $ | (1.5 | ) | $ | 19.7 |   |
| Net change associated with current period hedging  transactions | ** ** | **6.2**                                          | ** ** | **—** |   | (5.5 | ) | — |   |
| Net amount of any reclassification into earnings                | ** ** | **(3.1**                                         | **)**      | **(1.8** | **)** | 4.9 |   | (1.8 | ) |
| Ending Accumulated Derivative Gain/(Loss) in OCI                | ** ** | **$**                                            | **2.8**    | ** ** | **$** | **15.4** |   | $ | (2.1 | ) | $ | 17.9 |   |

 

***Markto Market***

 

Certain derivativecontracts are entered into on a regular basis as part of our risk managementprogram but do not qualify for hedge accounting or the normal purchase andsales exceptions under FASC 815. Accordingly, such contracts are recorded at fair value with changes inthe fair value charged or credited to the income statement in the period inwhich the change occurred.  This iscommonly referred to as “mark to market” accounting.  Contracts we enter into as part of our riskmanagement program may be settled financially, by physical delivery or netsettled with the counterparty.  Wecurrently mark to market Financial Transmission Rights (FTRs), heating oilfutures and forward NYMEX-quality coal contracts that do not qualify for cashflow hedge accounting.

 

**DP&L** enters into coal contracts from time totime to supply its generating plants.  Weperform a quarterly evaluation of the different coal markets to determine ifthese coal contracts are considered derivative instruments under FASC 815.  **DP&L** hasconcluded that NYMEX and NYMEX look-a-like coal contracts are consideredderivative instruments because they have been determined to be readilyconvertible to cash under FASC 815.

 

***RegulatoryAssets and Liabilities***

 

UnderFASC 980, “Regulated Operations,” if a cost is probable of recovery in futurerates, it should be deferred as a regulatory asset.  If a gain is probable of being returned tocustomers, it should be deferred as a regulatory liability.  Portions of the derivative contracts that aremarked to market each reporting period and are related to the retail portion of**DP&L’s** load requirements will beincluded as part of the fuel clause approved in the Stipulation beginning January 1,2010.  The terms of the Stipulation werediscussed in our Annual Report on Form 10-K for the fiscal year ended December 31,2008.  As a result, **DP&L**believes certain fuel costs, if incurred after the fuel rate becomes effectiveon January 1, 2010, are probable of recovery.  The Ohio jurisdictional retail portion of theheating oil futures and the NYMEX-quality coal contracts will be deferred as aregulatory asset or liability until the contracts settle.  If these unrealized gains and losses are nolonger deemed to be probable of recovery through our rates, they will bereclassified into earnings in the period such determination is made.

 

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At September 30,2009, **DP&L** had the following outstandingderivative instruments:

 

(In Thousands)

 
| **Commodity**                  | ** ** | **Accounting Treatment** | ** ** | **Unit** | ** ** | **Purchases** | ** ** | **Sales** | ** ** | **Net  Purchase/  (Sale)** | ** ** |
|--------------------------------|------------|-------------------------------|------------|----------|------------|---------------|------------|-----------|------------|----------------------------|------------|
| FTRs                           |       | Mark to Market                |       | MW       |       | 16.7          |       | —    |       | 16.7                       |       |
| Heating  Oil Futures           |       | Mark to Market                |       | Gallons  |       | 5,166.0       |       | —    |       | 5,166.0                    |       |
| Forward  Power Contracts       |       | Cash Flow Hedge               |       | MWH      |       | —        |       | (2,043.4  | )          | (2,043.4                   | )          |
| NYMEX-quality  Coal Contracts* |       | Mark to Market                |       | Tons     |       | 3,348.0       |       | (1,550.0  | )          | 1,798.0                    |       |

 

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*Includes ourpartner’s share for the jointly-owned plants that DP&L operates.

 

The following table showsthe fair value and balance sheet classification of **DP&L’s**derivative instruments designated as hedging instruments.

 

Fair Values of Derivative Instruments Designated as Hedging Instruments

 
| ** **                                           | ** ** | ** **     | ** ** | ** **   | ** ** | **At September 30, 2009** | ** ** |
|------------------------------------------------------|------------|----------------|------------|--------------|------------|--------------------------------|------------|
| **$ in millions**                               | ** ** | **Fair Value** | ** ** | **Netting*** | ** ** | **Balance Sheet Location**     | ** ** | **Fair Value  on Balance  Sheet** | ** ** |
| **Short-Term Derivative Positions**                  |       |           |       |         |       |                           |       |   |   |
|                                                 |       |           |       |         |       |                           |       |   |   |
| Forward Power Contracts in an Asset position         |       | $              | 3.4        |         | $          | (0.9                           | )          | Other  Current Assets |   | $ | 2.5 |   |
|                                                 |       |           |       |         |       |                           |       |   |   |
| Forward Power Contracts in a Liability position      |       | (1.3           | )          | 0.9          |       | Other  Current Liabilities     |       | (0.4 | ) |
| ** **                                           |       |           |       |         |       |                           |       |   |   |
| **Total short-term derivative cash  flow positions** |       | $              | 2.1        |         | $          | —                         |       |   |   | $ | 2.1 |   |
|                                                 |       |           |       |         |       |                           |       |   |   |
| **Long-Term Derivative Positions**                   |       |           |       |         |       |                           |       |   |   |
| Forward Power Contracts in an Asset position         |       | $              | 0.5        |         | $          | —                         |       | Other  Deferred Assets |   | $ | 0.5 |   |
| Forward Power Contracts in a Liability position      |       | —         |       | —       |       | Other  Deferred Credits        |       | — |   |
| ** **                                           |       |           |       |         |       |                           |       |   |   |
| **Total long-term derivative cash  flow positions**  |       | $              | 0.5        |         | $          | —                         |       |   |   | $ | 0.5 |   |
|                                                 |       |           |       |         |       |                           |       |   |   |
| **Total Cash Flow Hedges**                           |       | $              | 2.6        |         | $          | —                         |       |   |   | $ | 2.6 |   |

 

----

*Includescounterparty netting.

 

Thefollowing tables show the amount and income statement classification of thegains and losses on **DP&L’s**derivatives designated as hedging instruments for the three- and nine-monthperiods ending September 30, 2009.

 

**For thethree months ending September 30, 2009**

 
| **$ in millions**                                                                                | ** ** | **Amount of Gain or  (Loss) Recognized  in AOCI on  Derivative (Effective  Portion)** | ** ** | **Location of Gain or  (Loss) Reclassified  from AOCI into  Income (Effective  Portion)** | ** **       | **Amount of Gain or  (Loss) Reclassified  from AOCI into  Income (Effective  Portion)** | ** ** | **Location of Gain or  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion)** | ** ** | **Amount of Gain or  (Loss) Recognized in  Income on Derivative  (Ineffective Portion)** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------------|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| **Derivatives Designated as Hedging Instruments**                                                     | ** ** | ** **                                                                                                               | ** ** | ** **                                                                                                                   | ** **       | ** **                                                                                                                 | ** ** |
| Interest  Rate Hedge                                                                                  |       | $                                                                                                                        | —     |                                                                                                                         | Interest Expense |                                                                                                                       | $          | 0.6                                                                                                                            |       | Interest Expense                                                                                                                 |       | $ | — |   |
| Forward  Power Contracts                                                                              |       | 3.2                                                                                                                      |       | Wholesale Revenue                                                                                                            |             | (2.5                                                                                                                       | )          | Wholesale Revenue                                                                                                              |       | —                                                                                                                           |       |
| **Total Effect of Derivative Instruments Designated as  Hedging Instruments on the Income Statement** | ** ** | ** **                                                                                                               | ** ** |
|                                                                                                  |       | $                                                                                                                        |  3.2  |                                                                                                                         |             |                                                                                                                       | $          | (1.9                                                                                                                           | )          |                                                                                                                             |       | $ | — |   |

 

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**For thenine months ending September 30, 2009**

 
| **$ in millions**                                                                                | ** ** | **Amount of Gain or  (Loss) Recognized  in AOCI on  Derivative (Effective  Portion)** | ** ** | **Location of Gain or  (Loss) Reclassified  from AOCI into  Income (Effective  Portion)** | ** **       | **Amount of Gain or  (Loss) Reclassified  from AOCI into  Income (Effective  Portion)** | ** ** | **Location of Gain or  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion)** | ** ** | **Amount of Gain or  (Loss) Recognized in  Income on Derivative  (Ineffective Portion)** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------------|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| **Derivatives Designated as Hedging Instruments**                                                     | ** ** | ** **                                                                                                               | ** ** | ** **                                                                                                                   | ** **       | ** **                                                                                                                 | ** ** |
| Interest  Rate Hedge                                                                                  |       | $                                                                                                                        | —     |                                                                                                                         | Interest Expense |                                                                                                                       | $          | 1.8                                                                                                                            |       | Interest Expense                                                                                                                 |       | $ | — |   |
| Forward  Power Contracts                                                                              |       | 6.2                                                                                                                      |       | Wholesale Revenue                                                                                                            |             | (3.2                                                                                                                       | )          | Wholesale Revenue                                                                                                              |       | —                                                                                                                           |       |
| **Total Effect of Derivative Instruments Designated as  Hedging Instruments on the Income Statement** | ** ** | ** **                                                                                                               | ** ** |
|                                                                                                  |       | $                                                                                                                        |  6.2  |                                                                                                                         |             |                                                                                                                       | $          | (1.4                                                                                                                           | )          |                                                                                                                             |       | $ | — |   |

 

The following table showsthe fair value and balance sheet classification of **DP&L’s**derivative instruments not designated as hedging instruments.

 

FairValues of Derivative Instruments Not Designated as Hedging Instruments

 
| ** **                                          | ** ** | ** **     | ** ** | ** **   | ** ** | **At September 30, 2009** | ** ** |
|-----------------------------------------------------|------------|----------------|------------|--------------|------------|--------------------------------|------------|
| **$ in millions**                              | ** ** | **Fair Value** | ** ** | **Netting*** | ** ** | **Balance Sheet Location**     | ** ** | **Fair Value on  Balance Sheet** | ** ** |
| **Short-term Derivative Positions**                 |       |           |       |         |       |                           |       |   |   |
| FTRs in an Asset position                           |       | $              | 1.3        |         | $          | —                         |       | Other  Current Assets |   | $ | 1.3 |   |
| Heating Oil Futures in a Liability position         |       | (2.5           | )          | 2.5          |       | Other  Current Liabilities     |       | — |   |
| NYMEX-Quality Coal Forwards in an Asset position    |       | 4.6            |       | (1.4         | )          | Other  Current Assets          |       | 3.2 |   |
| NYMEX-Quality Coal Forwards in a Liability position |       | (3.1           | )          | 1.4          |       | Other  Current Liabilities     |       | (1.7 | ) |
| ** **                                          |       |           |       |         |       |                           |       |   |   |
| **Total short-term derivative MTM  positions**      |       | $              | 0.3        |         | $          | 2.5                            |       |   |   | $ | 2.8 |   |
|                                                |       |           |       |         |       |                           |       |   |   |
| **Long-term Derivative Positions**                  |       |           |       |         |       |                           |       |   |   |
| Power Contracts in a Liability Position             |       | $              | (0.2       | )            | $          | —                         |       | Other  Deferred Credits |   | $ | (0.2 | ) |
| Heating Oil Futures in a Liability position         |       | (0.2           | )          | 0.2          |       | Other  Deferred Credits        |       | — |   |
| NYMEX-Quality Coal Forwards in an Asset position    |       | 4.0            |       | (2.1         | )          | Other  Deferred Assets         |       | 1.9 |   |
| NYMEX-Quality Coal Forwards in a Liability position |       | (1.7           | )          | 0.9          |       | Other  Deferred Credits        |       | (0.8 | ) |
| ** **                                          |       |           |       |         |       |                           |       |   |   |
| **Total long-term derivative MTM  positions**       |       | $              | 1.9        |         | $          | (1.0                           | )          |   |   | $ | 0.9 |   |
|                                                |       |           |       |         |       |                           |       |   |   |
| **Total MTM Position**                              |       | $              | 2.2        |         | $          | 1.5                            |       |   |   | $ | 3.7 |   |

 

----

*Includescounterparty and collateral netting.

 

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The following tables show the amount and incomestatement or balance sheet classification of the gains and losses on **DP&L’s** derivatives not designated as hedging instrumentsfor the three- and nine-month periods ending September 30, 2009.

 

**Forthe Three Months Ending September 30, 2009**

 
| **$ in millions**                           | ** ** | **NYMEX  Coal*** | ** ** | **Heating  Oil** | ** ** | **FTRs** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------|------------|----------|------------|-----------|------------|
| Unrealized  (gain)/loss                          |       | $                | (13.9      | )                | $          | (0.3     | )          | $         | 0.4        |   | $ | (13.8 | ) |
| Realized  (gain)/loss                            |       | 0.8              |       | 0.7              |       | 0.2      |       | 1.7       |       |
| Total                                            |       | $                | (13.1      | )                | $          | 0.4      |       | $         | 0.6        |   | $ | (12.1 | ) |
| **Recorded on Balance Sheet: debit/(credit)**    |       |             |       |             |       |     |       |      |       |
| Partner’s  share of (gain)/loss             |       | $                | (7.1       | )                | $          | —   |       | $         | —     |   | $ | (7.1 | ) |
| Regulatory  asset/liability                      |       | (1.4             | )          | 0.1              |       | —   |       | (1.3      | )          |
|                                             |       |             |       |             |       |     |       |      |       |
| **Recorded in Income Statement: debit/(credit)** |       |             |       |             |       |     |       |      |       |
| Purchased  power                                 |       | —           |       | —           |       | 0.6      |       | 0.6       |       |
| Fuel                                             |       | (4.6             | )          | 0.3              |       | —   |       | (4.3      | )          |
| O&M                                          |       | —           |       | —           |       | —   |       | —    |       |
| Total                                            |       | $                | (13.1      | )                | $          | 0.4      |       | $         | 0.6        |   | $ | (12.1 | ) |

 

----

*Includesgains and losses on financially settled derivative contracts and cost to marketadjustments on physically settled derivative contracts.

 

**For theNine Months Ended September 30, 2009**

 
| **$ in millions**                           | ** ** | **NYMEX  Coal*** | ** ** | **Heating  Oil** | ** ** | **FTRs** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------|------------|----------|------------|-----------|------------|
| Unrealized  (gain)/loss                          |       | $                | (3.8       | )                | $          | (3.6     | )          | $         | (1.3       | ) | $ | (8.7 | ) |
| Realized  (gain)/loss                            |       | —           |       | 2.5              |       | 0.1      |       | 2.6       |       |
| Total                                            |       | $                | (3.8       | )                | $          | (1.1     | )          | $         | (1.2       | ) | $ | (6.1 | ) |
| **Recorded on Balance Sheet: debit/(credit)**    |       |             |       |             |       |     |       |      |       |
| Partner’s  share of (gain)/loss             |       | $                | (1.9       | )                | $          | —   |       | $         | —     |   | $ | (1.9 | ) |
| Regulatory  asset/liability                      |       | (1.8             | )          | 1.2              |       | —   |       | (0.6      | )          |
|                                             |       |             |       |             |       |     |       |      |       |
| **Recorded in Income Statement: debit/(credit)** |       |             |       |             |       |     |       |      |       |
| Purchased  power                                 |       | —           |       | —           |       | (1.2     | )          | (1.2      | )          |
| Fuel                                             |       | (0.1             | )          | (2.2             | )          | —   |       | (2.3      | )          |
| O&M                                          |       | —           |       | (0.1             | )          | —   |       | (0.1      | )          |
|                                             |       | $                |  (3.8 | )                | $          | (1.1     | )          | $         | (1.2       | ) | $ | (6.1 | ) |

 

----

*Includesgains and losses on financially settled derivative contracts and cost to marketadjustments on physically settled derivative contracts.

 

Certain of our OTC commodity derivative contracts areunder master netting agreements that contain provisions that require our debtto maintain an investment grade credit rating from credit rating agencies.  If our debt were to fall below investmentgrade, we would be in violation of these provisions, and the counterparties tothe derivative instruments could request immediate payment or demand immediateand ongoing full overnight collateralization of the mark to market loss.  The aggregate fair value of all derivativeinstruments that are in a mark to market loss position at September 30,2009, is $9.0 million.  This amount isoffset by $2.7 million in a broker margin account which offsets our losspositions on the NYMEX Clearport traded heating oil and coal contracts.  If our debt were to fall below investmentgrade, we would have to post collateral for the remaining $6.3 million.

 

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**14.  ContractualObligations, Commitments and Contingencies**

 

**DPL Inc. — Guarantees**

 

In the normal course ofbusiness, **DPL**enters into various agreements with its wholly-ownedsubsidiary DPLE providing financial or performance assurance to thirdparties.  These agreements are enteredinto primarily to support or enhance the creditworthiness otherwise attributedto DPLE on a stand-alone basis, therebyfacilitating the extension of sufficient credit to accomplish DPLE’s intendedcommercial purposes.  There have been no material changes toour guarantees as disclosed in our Annual Report on Form 10-K for thefiscal year ended December 31, 2008. Through September 30, 2009, **DPL** has notincurred any losses related to the guarantees of DPLE’s obligations and webelieve it is unlikely that **DPL**would be required to perform or incur any losses in the future associated withany of the above guarantees of DPLE’s obligations.

 

**DP&L — Equity Ownership Interest**

 

**DP&L** owns a 4.9% equity ownership interest inOVEC, an electric generation company.  Asof September 30, 2009, **DP&L**could be responsible for the repayment of 4.9%, or $54.9 million, of a $1,120.7million debt obligation that matures in 2026. This would only happen if OVEC defaulted on its debt payments.  As of September 30, 2009, we are notaware of any default by OVEC on its debt payment obligations.

 

Other than the guarantees discussed above, **DPL** and **DP&L**do not have any other off-balance sheet arrangements that have or arereasonably likely to have a current or future material effect on our financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources.

 

**Commercial Commitments and Contractual Obligations**

 

Therehave been no material changes, outside the ordinary course of business, to ourcommercial commitments and to the information disclosed in the contractualobligations table in our Annual Report on Form 10-K for the fiscal yearended December 31, 2008.

 

**Contingencies**

 

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  We believe the amounts provided in ourcondensed 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, tax examinations, and other matters, including the mattersdiscussed below, and to comply with applicable laws and regulations, will notexceed the amounts reflected in our condensed consolidated financialstatements.  As such, costs, if any, thatmay be incurred in excess of those amounts provided as of September 30,2009, cannot be reasonably determined.

 

Environmental Matters

 

**DPL**,**DP&L** and our subsidiaries’ facilities and operations are subjectto a wide range of environmental regulations and laws by federal, state andlocal authorities.

 

As well as imposingcontinuing compliance obligations, these laws and regulations authorize theimposition of substantial penalties for noncompliance, including fines,injunctive relief and other sanctions. In the normal course of business, wehave investigatory and remedial activities underway at these facilities tocomply, or to determine compliance, with such regulations.  We recordliabilities for losses that are probable of occurring and can be reasonablyestimated.** DPL,** through its wholly owned captive insurance subsidiaryMVIC, has an actuarially calculated reserve for environmental matters.  We evaluate the potential liability relatedto probable losses quarterly and may revise our estimates.  Such revisionsin the estimates of the potential liabilities could have a material effect onour results of operations, financial position or cash flows.

 

Air Quality

 

In 1990, the federalgovernment amended the CAA to further regulate air pollution.  Under the law, the USEPA sets limits on howmuch of a pollutant can be in the air anywhere in the United States.  The CAA allows individual states to havestronger pollution controls, but states are not allowed to have weaker pollutioncontrols than those set for the whole country. The CAA has a material effect on our operations and such effects aredetailed below with respect to certain programs under the CAA.

 

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On October 27, 2003,the USEPA published final rules regarding the equipment replacementprovision (ERP) of the routine maintenance, repair and replacement (RMRR)exclusion of the CAA.  Activities at power plants that fall within thescope of the RMRR exclusion do not trigger new source review requirements,including the imposition of stricter emission limits.  On December 24, 2003, the United StatesCourt of Appeals for the D.C. Circuit stayed the effective date of the rule pendingits decision on the merits of the lawsuits filed by numerous states andenvironmental organizations challenging the final rules.  On June 6, 2005, the USEPA issued itsfinal response on the reconsideration of the ERP exclusion.  The USEPA clarified its position, but did notchange any aspect of the 2003 final rules. This decision was appealed and the D.C. Circuit vacated the final rules onMarch 17, 2006.  The scope of theRMRR exclusion remains uncertain due to this action by the D.C Circuit, as wellas multiple litigations not directly involving us where courts are defining thescope of the exception with respect to the specific facts and circumstances ofthe particular power plants and activities before the courts.  While we believe that we have not engaged inany activities with respect to our existing power plants that would trigger thenew source review requirements, if new source review requirements were imposedon any of **DP&L’s** existing power plants, theresults could be materially adverse to us.

 

The USEPA issued aproposed rule on October 20, 2005 concerning the test for measuringwhether modifications to electric generating units should trigger applicationof New Source Review (NSR) standards under the CAA.  A supplemental rule was also proposed onMay 8, 2007 to include additional options for determining if there is anemissions increase when an existing electric generating unit makes a physicalor operational change.  The rule waschallenged by environmental organizations and has not been finalized.  While we cannot at this time predict theoutcome of this rulemaking, any finalized rules could materially affectour operations.

 

On December 17,2003, the USEPA proposed the Interstate Air Quality Rule (IAQR) designedto reduce and permanently cap SO2 and NOX emissions from electric utilities.  The proposed IAQR focused on states,including Ohio, whose power plant emissions are believed to be significantlycontributing to fine particle and ozone pollution in other downwind states inthe eastern United States.  On June 10,2004, the USEPA issued a supplemental proposal to the IAQR, now renamed theClean Air Interstate Rule (CAIR). The final rules were signed on March 10, 2005 and werepublished on May 12, 2005.  CAIRcreated an interstate trading program for annual NOX emission allowances and made modifications toan existing trading program for SO2.  On August 24, 2005, the USEPA proposedadditional revisions to the CAIR.  On July 11,2008, the U.S. Court of Appeals for the District of Columbia Circuit issued adecision to vacate the USEPA’s CAIR and its associated Federal ImplementationPlan and remanded to the USEPA with instructions to issue new regulations thatconformed with the procedural and substantive requirements of the Clean AirAct.  The Court’s decision, in part,invalidated the new NOX annual emission allowance trading program andthe modifications to the SO2 emission trading program established by the March 10,2005 rules, and created uncertainty regarding future NOX and SO2 emissionreduction requirements and their timing. The USEPA and a group representing utilities filed a request for arehearing en banc on September 24, 2008. On December 23, 2008, the U.S. Court of Appeals issued an order onreconsideration that permits CAIR to remain in effect until the USEPA issuesnew regulations that would conform to the Clean Air Act requirements and theCourt’s July 11, 2008 decision.

 

Pursuant tothe CAIR, the Ohio EPA initiated an EarlyReduction Credit (ERC) program for annual NOx emission allowances for 2008 and2009.  **DP&L** qualified for ERCs inexcess of what was initially allocated to **DP&L** andsubmitted the data for all ERCs generated. **DP&L** has been informed that becausecertain unrelated entities failed to meet all requirements for their allocatedERCs, additional ERCs would be allocated to all entities that generated ERCs inexcess of their initial allocation.  **DP&L** isexpected to be allocated between  28% -33% more ERCs than its initial allocation.

 

We cannot at this timepredict the timing or the outcome of any new regulations relating to CAIR.  CAIR has and will continue to have a materialeffect on our operations.  In 2007, theOhio EPA revised their State Implementation Plan (SIP) to incorporate a CAIRprogram consistent with the IAQR.  TheOhio EPA had received partial approval from USEPA and had been awaiting fullprogram approval from the USEPA when the U.S. Court of Appeals issued its July 11,2008 decision.  As a result of the December 23,2008 order, the Ohio EPA proposed revised rules on May 11, 2009,which were finalized on July 15, 2009. On September 25, 2009, theUSEPA issued a full SIP approval for the Ohio CAIR program.  **DP&L** doesnot expect that full SIP approval of the Ohio CAIR program will have a significantimpact on operations.

 

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Inthe fourth quarter of 2007, **DP&L** begana program for selling excess emission allowances, including annual NOx emission allowances andSO2 emissionallowances that were the subject of CAIR trading programs.  In subsequent quarters, **DP&L**recognized gains from the sale of excess emission allowances to thirdparties.  The court’s CAIR decisionaffected the trading market for excess allowances and impacted **DP&L’s** program for selling additional excess allowancesin 2008.  Although in January 2009we resumed selling excess allowances due to the revival of the trading market,the long-term impact of the court’s decision, and of the actions the USEPA orothers will take in response to this decision,****isnot fully known at this time and could have an adverse effect on us.

 

On January 30, 2004,the USEPA published its proposal to restrict mercury and other air toxins fromcoal-fired and oil-fired utility plants. The USEPA “de-listed” mercury as a hazardous air pollutant fromcoal-fired and oil-fired utility plants and, instead, proposed a cap-and-tradeapproach to regulate the total amount of mercury emissions allowed from suchsources.  The final Clean Air Mercury Rule (CAMR)was signed March 15, 2005 and was published on May 18, 2005.  On March 29, 2005, nine states suedUSEPA, opposing the cap-and-trade regulatory approach taken by USEPA.  In 2007, the Ohio EPA adopted rules implementingthe CAMR program.  On February 8,2008, the Court of Appeals struck down the USEPA regulations, finding that theUSEPA had not complied with statutory requirements applicable to “de-listing” ahazardous air pollutant and that a cap-and-trade approach was not authorized bylaw for “listed” hazardous air pollutants. A request for rehearing before the entire Court of Appeals was deniedand a petition for review before the U.S. Supreme Court was filed on October 17,2008.  On February 23, 2009, theU.S. Supreme Court denied the petition. USEPA will have to move forward to set Maximum Available ControlTechnology (MACT) standards for coal- and oil-fired electric generating units.  We anticipate that it will take a few yearsfor the USEPA to gather new data to promulgate updated MACT standards and forthe regulations to become effective.  Atthis time, **DP&L** is unable to determinethe impact of the promulgation of new MACT standards on its financial positionor results of operations; however, a MACT standard could have a materialadverse effect on our operations, in particular, our unscrubbed units.  We cannot at this time project the finalcosts we may incur to comply with any resulting mercury restriction regulations.

 

On July 15, 2003,the Ohio EPA submitted to the USEPA its recommendations for eight-hour ozonenon-attainment boundaries for the metropolitan areas within Ohio.  On April 15,2004, the USEPA issued its list of ozone non-attainment designations. Since these initial designations, the Ohio EPA has recommended that nine areasdesignated non-attainment be designated as attainment.  Currently USEPA has redesignated eight ofthose areas as attainment for the eight-hour ozone national ambient air qualitystandards, including counties where **DP&L**ownsand/or operates a number of facilities. In redesignating these counties as attainment, the Ohio EPA submittedand USEPA approved amendments to the SIP that include maintenance plans forthese areas.  In June 2007, the OhioEPA submitted a plan to USEPA for attaining the eight-hour ozone standard forthe Cincinnati-Hamilton area in which **DP&L**owns anumber of facilities.  While **DP&L**cannot predict the outcome of this redesignationeffort at this time, any such redesignation could have a material adverseeffect on us.

 

In 2004, eight states andthe City of New York filed a lawsuit in Federal District Court for the SouthernDistrict of New York against American Electric Power Company, Inc. (AEP),one of AEP’s subsidiaries, Cinergy Corp. (a subsidiary of Duke EnergyCorporation (Duke Energy)) and four other electric power companies.  A similar lawsuit was filed against thesecompanies in the same court by Open Space Institute, Inc., Open SpaceConservancy, Inc. and The Audubon Society of New Hampshire.  The lawsuits allege that the companies’emissions of carbon dioxide contribute to global warming and constitute apublic or private nuisance.  The lawsuitsseek injunctive relief in the form of specific emission reduction commitments.  In 2005, the Federal District Court dismissedthe lawsuits, holding that the lawsuits raised political questions that shouldnot be decided by the courts.  The plaintiffsappealed.  Finding that the plaintiffshave standing to sue and can assert federal common law nuisance claims, theUnited States Court of Appeals for the Second Circuit on September 21,2009 vacated the dismissal of the Federal District Court and remanded thelawsuits back to the Federal District Court for further proceedings.  Although we are not named as a party to theselawsuits, **DP&L** is a co-owner of coal-firedplants with Duke Energy and AEP (or their subsidiaries) that could be affectedby the outcome of these lawsuits.  TheSecond Circuit Court’s decision could also encourage these or other plaintiffsto file similar lawsuits against other electric power companies, includingus.  We are unable at this time topredict with certainty the impact that these lawsuits might have on us.

 

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In September 2004,the Sierra Club filed a lawsuit against **DP&L**andthe other owners of the Stuart generating station in the U.S. District Courtfor the Southern District of Ohio for alleged violations of the CAA and thestation’s operating permit.  On August 7,2008, a consent decree was filed in the U.S. District Court in full settlementof these CAA claims.  Under the terms of the consent decree, **DP&L** and the other owners of the Stuart generatingstation agreed to: (i) certain emission targets related to NOx, SO2 and particulate matter; (ii) make energyefficiency and renewable energy commitments that are conditioned on receivingPUCO approval for the recovery of costs; (iii) forfeit 5,500 sulfurdioxide allowances; and (iv) provide funding to a third party non-profitorganization to establish a solar water heater rebate program.  **DP&L** andthe other owners of the station also entered into an attorneys’ fee agreementto pay a portion of the Sierra Club’s attorney and expert witness fees. The parties to the lawsuit filed a joint motion on October 22, 2008,seeking an order by the U.S. District Court approving the consent decree withfunding for the third party non-profit organization set at $300,000.  On October 23, 2008, the U.S. DistrictCourt approved the consent decree.  On October 21,2009, the Sierra Club filed with the U.S. District Court a motion forenforcement of the consent decree based on the Sierra Club’s interpretation ofthe consent decree that would require certain NOx emissions that **DP&L** has been excluding from its computations to beincluded for purposes of complying with the emission targets and reportingrequirements of the consent decree.  **DP&L**believes that it is properly computing and reporting NOx emissions under theconsent decree and will oppose the Sierra Club’s motion.

 

On January 5, 2005,the USEPA published its final non-attainment designations for the nationalambient air quality standard for Fine Particulate Matter 2.5 (PM 2.5). These designations included counties and partial counties in which **DP&L** operates and/or owns generating facilities. On March 4, 2005, **DP&L** andother Ohio electric utilities and electric generators filed a petition forreview in the D.C. Circuit Court of Appeals, challenging the final rule creatingthese designations.  On November 30, 2005, the court ordered USEPA todecide on all petitions for reconsideration by January 20, 2006.  On January 20, 2006, USEPA denied thepetitions for reconsideration.  On July 7,2009, the D.C. Circuit Court of Appeals upheld the USEPA non-attainmentdesignations for the areas impacting **DP&L’s**generation plants, however, on October 8, 2009, the USEPA issued newdesignations based on 2008 monitoring data that showed all areas in attainmentto the standard with the exception of several counties in northeastern Ohio.

 

On May 5, 2004, theUSEPA issued its proposed regional haze rule, which addresses how states shoulddetermine the Best Available Retrofit Technology (BART) for sources coveredunder the regional haze rule.  Final rules were published July 6,2005, providing states with several options for determining whether sources inthe state should be subject to BART.  In the final rule, USEPA made thedetermination that CAIR achieves greater progress than BART and may be used bystates as a BART substitute.  Numerous units owned and operated by us willbe impacted by BART.  We cannot determine the extent of the impact untilOhio determines how BART will be implemented.

 

In response to a U.S.Supreme Court decision that the USEPA has the authority to regulate CO2 emissions frommotor vehicles, the USEPA made a finding that CO2 and certain other gases are pollutants underthe CAA.  The USEPA has not yet identified the specifics of how thesenewly designated pollutants will be regulated. In April, 2009, the USEPA issued a proposed endangerment finding underthe CAA.  The proposed finding determinedthat CO2 and other Green House Gases (GHGs) from motorvehicles threaten the health and welfare of future generations by contributingto climate change.  If the proposedfinding is finalized, it could lead to the regulation of CO2 and other GHGsfrom sources other than motor vehicles, including coal-fired plants that we ownand operate.  Recently, several billshave been introduced at the federal level to regulate GHG emissions.  In June 2009, the U.S. House ofRepresentatives passed H.R. 2454, the American Clean Energy and Security Act (ACES).  This proposed legislation targets a reductionin the emission of GHGs from large sources by 80% in 2050 through an economywide cap and trade program.  ACES alsoincludes energy efficiency and renewable energy initiatives.  Proposed GHG legislation finalized at afuture date is expected to have a significant effect on **DP&L’**soperations and costs, which could adversely affect our net income and financialposition.  However, due to theuncertainty associated with such legislation, **DP&L**is currently unable to predict the final outcome or the financial impact thatthis legislation will have on it.  On September 22,2009, the USEPA issued a final rule for mandatory reporting of GHGs fromlarge sources that emit 25,000 metric tons per year or more of CO2,  includingelectric generating units.  The firstreport will be submitted in March 2011 for 2010 emissions.  This reporting rule will guidedevelopment of policies and programs to reduce emissions.  **DP&L** doesnot anticipate that this reporting rule will result in any significantcost or other impact on current operations.

 

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On July 15, 2009,the USEPA proposed revisions to its primary National Ambient Air QualityStandard for nitrogen dioxide.  Thischange could affect certain emission sources in heavy traffic areas like theI-75 corridor between Cincinnati and Dayton. At this point, **DP&L** cannotdetermine the effect of this potential change, if any, on its operations.

 

On September 16,2009, the USEPA announced that it would reconsider the 2008 national groundlevel ozone standard.  A more stringentambient ozone standard may lead to stricter NOx emission standards in thefuture.  At this point, **DP&L** cannot determine the effect of this potentialchange, if any, on its operations.

 

*AirQuality — Litigation Involving Co-Owned Plants*

 

In March 2000, asamended in June 2004, the U.S. Department of Justice filed a complaint inan Indiana federal court against Cinergy Corp. (now part of Duke Energy) andtwo Cinergy subsidiaries for alleged violations of the CAA at variousgeneration units operated by PSI Energy, Inc. and CG&E, includinggeneration units co-owned by  **DP&L**  (Beckjord Unit 6 and Miami Fort Unit7).  A retrial has been held in which the second jury found for DukeEnergy on some allegations, but for plaintiffs with respect to units at anotherone of Duke Energy’s wholly-owned facilities. In a separate phase II remedies trial with respect to violations foundin the first trial, Duke Energy was ordered to close down three of itswholly-owned generating units by September 2009, surrender some emissionallowances and pay a fine.  None of theviolations found or remedies ordered relate to generating units owned in partby **DP&L**.

 

*Air Quality — Notices ofViolation Involving Co-Owned Plants*

 

 On March 13, 2008, Duke Energy Ohio Inc., the operator of theZimmer generating station, received a Notice of Violation (NOV) and a Findingof Violation from the USEPA alleging violations of the CAA, the Ohio StateImplementation Program (SIP) and permits for the Station in areas including SO2, opacity and increased heat input.  **DP&L** is aco-owner of the Zimmer generating station and could be affected by the eventualresolution of this matter.  Duke EnergyOhio Inc. is expected to act on behalf of itself and the co-owners with respectto this matter.  At this time, **DP&L** is unable to predict the outcome of this matter.

 

 In June 2000, the USEPA issued a NOV to the **DP&L**-operated Stuart generating station (co-owned by **DP&L**, CG&E, and CSP) for allegedviolations of the CAA.  The NOV containedallegations consistent with NOVs and complaints that the USEPA had recentlybrought against numerous other coal-fired utilities in the Midwest.  The NOV indicated the USEPA may: (1) issuean order requiring compliance with the requirements of the Ohio SIP; or (2) bringa civil action seeking injunctive relief and civil penalties of up to $27,500per day for each violation.  To date,neither action has been taken.  At thistime, **DP&L** cannot predict the outcome ofthis matter.

 

In November 1999,the USEPA filed civil complaints and NOVs against operators and owners ofcertain generation facilities for alleged violations of the CAA.  Generation units operated by CG&E(Beckjord Unit 6) and CSP (Conesville Unit 4) and co-owned by **DP&L** were referenced in theseactions.  Numerous northeast states havefiled complaints or have indicated that they will be joining the USEPA’s actionagainst CG&E and CSP.  Although **DP&L** was not identified in the NOVs,civil complaints or state actions, the results of such proceedings couldmaterially affect **DP&L’s**co-owned plants.

 

 In December 2007, the Ohio EPA issued a NOV to the **DP&L**-operated Killen generating station (co-owned by **DP&L** and CG&E) for alleged violations of theCAA.  The NOVs alleged deficiencies inthe continuous monitoring of opacity.  Acompliance plan has been submitted to the Ohio EPA.  To date, no further actions have been takenby the Ohio EPA.

 

*Air Quality — Other IssuesInvolving Co-Owned Plants*

 

In 2006, **DP&L** detected a malfunction with its emission monitoringsystem at the **DP&L**-operated Killengenerating station (co-owned by **DP&L** andCG&E) and ultimately determined its SO2 and NOx emissions data were under reported.  **DP&L** haspetitioned the USEPA to accept an alternative methodology for calculatingactual emissions for 2005 and the first quarter 2006.  **DP&L**hassufficient allowances in its general account to cover the understatement and isworking with the USEPA to resolve the matter. Management does not believe the ultimate resolution of this matter willhave a material impact on results of operations, financial position or cashflows.

 

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*Air Quality — Notices ofViolation Involving Wholly-Owned Plants*

 

In 2007, the Ohio EPA andthe USEPA issued NOVs to **DP&L** foralleged violations of the CAA at the O.H. Hutchings Station.  The NOVs alleged deficiencies relate to stackopacity and particulate emissions. Discussions are under way with the USEPA, the U.S. Department of Justiceand Ohio EPA.  **DP&L**has provided data to those agencies regarding its maintenance expenses andoperating results.  On December 15,2008, **DP&L** received a request from theUSEPA for additional documentation with respect to those issues and other CleanAir Act issues including issues relating to capital expenses and any changes incapacity or output of the units at the O.H. Hutchings station.  During2009, **DP&L** has continued tosubmit various other operational and performance data to USEPA in compliancewith its request.  While **DP&L**is currently unable to determine the timing, costs,or method by which the issues may be resolved, action by the USEPA on thismatter could have a material adverse effect on us.

 

Water Quality

 

On July 9, 2004, theUSEPA issued final rules pursuant to the Clean Water Act governingexisting facilities that have cooling water intake structures.  The rules requirean assessment of impingement and/or entrainment of organisms as a result ofcooling water withdrawal.  A number ofparties appealed the rules to the Federal Court of Appeals for the SecondCircuit in New York and the Court issued an opinion on January 25, 2007remanding several aspects of the rule to USEPA for reconsideration. Several parties petitioned the U.S. Supreme Court for review of the lower courtdecision.  On April 14, 2008, theSupreme Court elected to review the lower court decision on the issue ofwhether USEPA can compare costs with benefits in determining the besttechnology available for minimizing adverse environmental impact at coolingwater intake structures.  Briefs weresubmitted to the Court in the summer of 2008 and oral arguments were held in December 2008.  In April 2009, the U.S. Supreme Courtruled that USEPA did have the authority to compare costs with benefits indetermining best technology available. USEPA is developing proposed regulations which it hopes to issue forpublic comment by mid-2010.

 

On May 4, 2004, theOhio EPA issued a final National Pollutant Discharge Elimination System permit(the Permit) for J.M. Stuart Station that continued our authority to dischargewater from the station into the Ohio River. During the three-year term of the Permit, we conducted a thermal discharge study to evaluate the technicalfeasibility and economic reasonableness of water cooling methods other thancooling towers.  In December 2006,we submitted an application for the renewal of the Permit that was due toexpire on June 30, 2007.  In July 2007we received a draft permit proposing to continue our authority to dischargewater from the station into the Ohio River. On February 5, 2008 we received a letter from Ohio EPA indicatingthat they intended to impose a compliance schedule as part of the final Permit,that requires us to implement one of two diffuser options for the discharge ofwater from the station into the Ohio River as identified in the thermaldischarge study.  Subsequently,representatives from **DP&L** andthe Ohio EPA have agreed to allow **DP&L** torestrict public access to the water discharge area as an alternative toinstalling one of the diffuser options. Ohio EPA issued a revised draft permit that was received on November 12,2008.  In December 2008, the USEPArequested that the Ohio EPA provide additional information regarding thethermal discharge in the draft permit. In June 2009, **DP&L**provided information to USEPA in response to their request to Ohio EPA.  The timing for issuance of a final permit isuncertain.

 

LandUse and Solid Waste Disposal

 

In September 2002,**DP&L** and other partiesreceived a special notice that the USEPA considers us to be PRPs for theclean-up of hazardous substances at the South Dayton Dump landfill site.  In August 2005, **DP&L** and other parties received ageneral notice regarding the performance of a Remedial Investigation andFeasibility Study (RI/FS) under a Superfund Alternative Approach.  In October 2005, **DP&L** received a special notice letterinviting it to enter into negotiations with USEPA to conduct the RI/FS.  No recent activity has occurred with respectto that notice or PRP status.  Morerecently, **DP&L** has received requests by theUSEPA and the existing PRP group to allow access to be given to **DP&L’s** service center building site, which is across astreet from the landfill site.  The USEPArequested access to drill monitoring and test wells to determine the extent ofthe landfill site’s contamination as well as to assess whether certainchemicals used at the service center building site might have migrated throughgroundwater to the landfill site. Pursuant to an Administrative Order issued by USEPA requiring access to **DP&L’s** service center building site, **DP&L** has granted such access and has met with USEPA’scontractor to facilitate access.  **DP&L**believes the chemicals used at its service centerbuilding site were appropriately disposed of and have not contributed to thecontamination at the South Dayton Dump landfill site.  While **DP&L** isunable at this time to predict the outcome of this matter, if **DP&L** were required to contribute to the clean-up of thesite, it could have a material adverse effect on us.

 

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In December 2003, **DP&L**and other parties received a special notice thatthe USEPA considers us to be PRPs for the clean-up of hazardous substances atthe Tremont City landfill site. Information available to **DP&L**doesnot demonstrate that it contributed hazardous substances to the site.  While **DP&L** isunable at this time to predict the outcome of this matter, if **DP&L** were required to contribute to the clean-up of thesite, it could have a material adverse effect on us.

 

In November 2007, aPRP group contacted **DP&L**seeking our financial participation in a settlement that the group had reachedwith the federal government with respect to the clean-up of an industrial siteonce owned by Carolina Transformer, Inc. **DP&L**’s business records clearlyshow we did not conduct business with Carolina Transformer that would requireour participation in any clean-up of the site.  **DP&L**hasdeclined to participate in the clean-up of this site.  While **DP&L** isunable at this time to predict the outcome of this matter, if **DP&L** were required to contribute to the clean-up of thesite, it could have a material adverse effect on us.

 

During 2008, a majorspill occurred at an ash pond owned by the Tennessee Valley Authority (TVA) asa result of a dike failure.  The spillgenerated a significant amount of national news coverage, and support fortighter regulations for the storage and handling of coal combustionproducts.  **DP&L**has ash ponds at the Killen, Hutchings and J.M. Stuart stations which itoperates, and also at generating stations operated by others but in which **DP&L** has an ownership interest.  We frequently inspect our ash ponds and donot anticipate any similar failures.  Itis widely expected that the federal government will develop new regulationscovering ash generated from the combustion of coal and impose additionalmonitoring, testing, or construction standards with respect to ash ponds andash landfills.  During March 2009,the USEPA, through a formal Information Collection Request, collectedinformation on ash pond facilities across the country, including those atKillen and J.M. Stuart stations. Subsequently USEPA collected similar information for HutchingsStation.  Due to the wide range ofpossible outcomes, **DP&L** isunable at this time to predict the timing or the financial impact of any futuregovernmental initiative that may occur.

 

Legal and Other Matters

 

In February 2007, **DP&L** filed a lawsuit against a coal supplier seekingdamages incurred due to the supplier’s failure to supply approximately 1.5million tons of coal to two jointly owned plants under a coal supply agreement,of which approximately 570 thousand tons was **DP&L’s**share.  **DP&L** obtained replacement coalto meet its needs.  The supplier hasdenied liability, and is currently in federal bankruptcy proceedings.  **DP&L** isunable to determine the ultimate resolution of this matter at this time. In accordance with GAAP, **DP&L** hasnot recorded any assets relating to this lawsuit.

 

On May 16, 2007, **DPL** filed a claim with Energy InsuranceMutual (EIM) to recoup legal expenses associated with our litigation againstcertain former executives.  Arbitration on that claim occurred on May 13,2009.  The arbitration panel issued a ruling inPhase 1 of the arbitration on September 25, 2009, finding that most of theclaims involving the former executives were covered.  Further arbitrationproceedings are scheduled to determine the amount of legal and fee expenses (ifany) that the insurer must pay.  **DPL** has, in accordance with GAAP, previously recorded theselegal expenses totaling $7.5 million to expense but has not recorded any assetsfor possible recovery of these expenses.

 

As a member of PJM, **DP&L** is subject to charges and costsassociated with PJM operations as approved by the FERC.  FERC Ordersissued in 2007 regarding the allocation of costs of large transmissionfacilities within PJM, could result in additional costs being allocated to **DP&L**of approximately $12 million ormore annually by 2012.  **DP&L**filed a notice of appeal to the U.S. Court of Appeals, D.C. Circuit on March 18,2008.  The appeal has been consolidated with other appeals taken by otherinterested parties of the same FERC Orders and the consolidated cases have beenassigned to the 7th Circuit.  On August 6, 2009, the 7th Circuit ruledthat the FERC had failed to provide a reasoned basis for the allocation methodit had approved.  On September 18, 2009, two interveners, BaltimoreGas and Electric Company and Old Dominion Electric Cooperative, jointly filed apetition before the 7th Circuit seeking rehearing.  **DP&L** and others of the originalpetitioners oppose the petition for rehearing.  At this time, **DP&L** is unable to predict the outcomeof the petition for rehearing or whether there may be further appeals to theU.S. Supreme Court.   The Court will not issue a mandate and FERCwill take no actions until all rehearing and appeals are resolved.  Untilsuch time as FERC may act in response to a court mandate, PJM will continue toapply the allocation methodology that had been approved by FERC in 2007. At this time, **DP&L** isunable to predict the outcome of this matter.

 

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In June 2009, theNorth American Electric Reliability Corporation (NERC), a FERC-certifiedelectric reliability organization responsible for developing and enforcingmandatory reliability standards, commenced a routine audit of **DP&L’s** operations. The audit, which was for the period June 18, 2007 to June 25,2009, evaluated **DP&L’s** compliance with 42requirements in 18 NERC-reliability standards. **DP&L** is currently subject to acompliance audit at a minimum of once every three years as provided by the NERCRules of Procedure. This audit was concluded during the three months endedSeptember 30, 2009 and its findings revealed that **DP&L**had some Possible Alleged Violations (PAVs) associated with five NERCReliability Standards.  Inresponse to the report, **DP&L** filedmitigation plans with NERC to address the PAVs.  These mitigation plans have been accepted and**DP&L** is currently awaiting aproposal for settlement from NERC.  Atthis time, we are unable to determine the extent, if any, of penalties thatwill be imposed on **DP&L**.

 

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

 

Certainstatements contained in this report are “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report that relateto events or developments that are expected to occur in the future, includingmanagement’s expectations, strategic objectives, business prospects,anticipated economic performance and financial condition and other similarmatters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs,assumptions and expectations of future economic performance, taking intoaccount the information currently available to management.  These statements are not statements ofhistorical fact and are typically identified by terms and phrases such as “anticipate,”“believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,”“plan,” “project,” “predict,” “will,” and similar expressions.  Such forward-looking statements are subjectto risks and uncertainties, and investors are cautioned that outcomes andresults may vary materially from those projected due to various factors beyondour control, including but not limited to: abnormal or severe weather andcatastrophic weather-related damage; unusual maintenance or repairrequirements; changes in fuel costs and purchased power, coal, environmentalemissions, natural gas, oil, and other commodity prices; volatility and changesin markets for electricity and other energy-related commodities; performance ofour suppliers and other counterparties; increased competition and deregulationin the electric utility industry; increased competition in the retailgeneration market; changes in interest rates; state, federal and foreignlegislative and regulatory initiatives that affect cost and investmentrecovery, emission levels and regulations, rate structures or tax laws; changesin federal and/or state environmental laws and regulations to which **DPL** and its subsidiaries are subject; the development andoperation of RTOs, including PJM to which **DPL’s** operatingsubsidiary (**DP&L**) has given control of itstransmission functions; changes in our purchasing processes, pricing, delays,employee, contractor, and supplier performance and availability; significantdelays associated with large construction projects; growth in our serviceterritory and changes in demand and demographic patterns; changes in accountingrules and the effect of accounting pronouncements issued periodically byaccounting standard-setting bodies; financial market conditions, includingimpacts the current financial crisis may have on our business and financialcondition; the outcomes of litigation and regulatory investigations,proceedings or inquiries; general economic conditions; and the risks and otherfactors discussed in **DPL’s** and **DP&L’s**filings with the SEC.

 

Forward-lookingstatements speak only as of the date of the document in which they aremade.  We disclaim any obligation orundertaking to provide any updates or revisions to any forward-lookingstatement to reflect any change in our expectations or any change in events,conditions or circumstances on which the forward-looking statement is based.

 

The following discussionshould be read in conjunction with the accompanying unaudited financialstatements and related footnotes included in **Part 1 —Financial Information**.

 

This report includes thecombined filing of **DPL** and **DP&L.  DP&L**isthe principal subsidiary of **DPL**providingapproximately 97% of **DPL’s**totalconsolidated revenue and approximately 95% of **DPL’s**totalconsolidated asset base.  Throughout thisreport the terms “we,” “us,” “our” and “ours” are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in this section.

 

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**BUSINESS OVERVIEW**

 

**DPL**is a diversifiedregional energy company organized in 1985 under the laws of Ohio.  Our executive offices are located at 1065Woodman Drive, Dayton, Ohio 45432 — telephone (937) 224-6000.

 

**DPL’s** principal subsidiary is**DP&L**.  **DP&L**is a public utility incorporated in 1911 under the laws of Ohio.  **DP&L**sells electricity to residential, commercial, industrial and governmentalcustomers in a 6,000 square mile area of West Central Ohio.  **DP&L** alsosells electricity to DPLER, an affiliate, to satisfy the electric requirementsof DPLER’s retail customers.  Electricityfor **DP&L’s** 24 county servicearea is primarily generated at eight coal-fired power plants and is distributedto more than 500,000 retail customers. Principal industries served include automotive, food processing, paper,plastic manufacturing and defense.

 

**DP&L’s**sales reflect the general economic conditions and seasonal weather patterns ofthe area.  **DP&L** sells any excess energy and capacity into thewholesale market.

 

**DPL’s** other significant subsidiaries includeDPLE, which engages in the operation of peaking generating facilities; DPLER,which is a CRES provider selling retail electric energy and other energyservices; and MVIC, our captive insurance company that provides insuranceservices to us and our subsidiaries.  Allof **DPL’s** subsidiaries are wholly-owned.

 

**DPL** and **DP&L**conduct their principal business in one business segment - Electric.

 

In addition to the issuesdisclosed in our Annual Report on Form 10-K for the fiscal year ended December 31,2008, which we believe are likely to have a significant impact on our resultsof operations and financial condition, we have identified certain additionalissues that we believe may have a significant impact on our results ofoperations and financial condition in the future.  The following issues mentioned below are notmeant to be exhaustive but to provide insight on matters that are likely tohave an effect on our results of operations and financial condition in thefuture:

 

·                  **Emissions — Climate ChangeLegislation**

 

Rules issued by theUSEPA and Ohio EPA that require substantial reductions in SO2, NOx, and mercury emissions impact our business andoperations.  We are installing (and haveinstalled) emission control technology and are taking other measures to complywith existing requirements for reductions in emissions.

 

In addition, there is a growing concernnationally and internationally about global climate change and the contributionof emissions of greenhouse gases, including most significantly, CO2.  This concern has led toincreased interest in legislation at the federal level, actions at the statelevel as well as litigation relating to greenhouse gas emissions, including aU.S. Supreme Court decision holding that the USEPA has the authority toregulate CO2 emissions from motor vehicles under theCAA.  In response to the Supreme Court’s decision, the USEPA made afinding that carbon dioxide and certain other gases are pollutants under theCAA.  In April 2009, the USEPA issued a proposed endangerment findingunder the CAA.  The proposed findingdetermined that CO2 and other GHG from motor vehicles threaten thehealth and welfare of future generations by contributing to climatechange.  If the proposed finding isfinalized, it could lead to the regulation of CO2 and other GHGfrom sources other than motor vehicles. Recently, several bills have been introduced at the federal level toregulate GHG emissions.  In June 2009,the U.S. House of Representatives passed H.R. 2454, the American Clean Energyand Security Act (ACES).  This proposedlegislation targets a reduction in the emission of GHG from large sources by80% in 2050 through an economy wide cap and trade program.  ACES also includes energy efficiency andrenewable energy initiatives.  Increasedpressure for carbon dioxide emissions reduction is also coming from investororganizations and the international community.  If legislation orregulations are passed at the federal or state levels that impose mandatoryreductions of CO2 and other greenhouse gases on generationfacilities, the cost to**DPL** and**DP&L** of such reductions could be material.

 

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·                  **RPM Capacity Auction Price**

 

The PJM RPM base residualauction (BRA) for the 2012/13 period cleared at a per megawatt price of $16/dayfor our RTO area.  Prior to this auction, the per megawatt price for the2011/2012 period was $110/day.  FutureRPM auction results will be dependent not only on the overall supply and demandof generation and load, but may also be impacted by congestion as well as PJM’sbusiness rules relating to bidding for Demand Response and EnergyEfficiency resources in the RPM auctions. We cannot predict the outcome of future auctions but if the currentauction price is sustained, our future results of operations, financialcondition and cash flows could be adversely impacted.

 

·                  **Ohio Competitive Considerations**

 

Overall power marketprices, as well as government aggregation initiatives, could lead to theentrance of competitors in our marketplace, affecting our results ofoperations, financial condition or cash flows. During the three months ended September 30, 2009, one additionalunaffiliated marketer registered as a CRES provider in **DP&L’s** service territory, bringing tofive the total number of unaffiliated CRES providers in **DP&L’s**service territory.  While there has beensome customer switching associated with unaffiliated marketers, it representedless than 0.11% of sales through September 30, 2009.  DPLER, anaffiliated company, is also a registered CRES provider and accounted for 99% ofthe total kWh supplied by CRES providers within **DP&L’s** service territory through September 30,2009.  We currently cannot determine theextent to which customer switching to unaffiliated CRES providers will occur inthe future and the impact this will have on our operations.

 

·                  **SB 221 Requirements**

 

SB 221 and theimplementation rules contain targets relating to advanced energy portfoliostandards, renewable energy, demand reduction, and energy efficiencystandards.  The standards require that,by the year 2025, 25% of the total number of kilowatt hours of electricity soldby the utility to retail electric consumers must come from alternative energyresources, which include “advanced energy resources” such as distributedgeneration, clean coal, advanced nuclear, energy efficiency, and fuel celltechnology; and “renewable energy resources” such as solar, hydro, wind,geothermal, and biomass. At least half of the 25% must be generated fromrenewable energy resources, including 0.5% from solar energy.  The advanced energy portfolio and energyefficiency standards began in 2009 with increases in required percentages eachyear.  SB 221 and the implementation rules donot include interim annual targets for energy efficiency and peak demandreductions, but require that energy efficiency programs save 22.3% compared toa baseline energy usage by 2025 and that peak demand reductions reach 7.75% by2018.  If any targets are not met,compliance penalties will apply.  Whilewe have started undertaking efforts to comply with this law, we currentlycannot predict the extent of our compliance with the applicable targets or thefuture impact these rules will have on our operations.

 

**REGULATIONUPDATES**

 

**Ohio Retail Matters**

 

In compliance with SB221, **DP&L**filed its electric securityplan at the PUCO on October 10, 2008. On February 24, 2009, **DP&L**reached an agreement with the majority of the parties to that case.  The resulting Stipulation extends **DP&L’s** rate plan through 2012, provides for recovery ofthe Ohio jurisdictional retail portion of fuel and purchased power costsbeginning January 2010 and provides for recovery of certain SB 221compliance costs.  The terms of theStipulation were discussed in greater detail in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008.  On June 24, 2009, the PUCO issued anorder granting approval of the Stipulation as filed and authorized **DP&L** to implement rates associated with alternativeenergy and energy efficiency compliance costs beginning July 1, 2009.

 

Consistent with theStipulation, **DP&L** filed its Smart Grid andAdvanced Metering infrastructure business cases at the PUCO on August 4,2009 seeking recovery of costs associated with a 10-year plan to deploy smartmeters, distribution and substation automation, core telecommunications,supporting software and in-home technologies.   On August 5,2009, **DP&L** submitted an application forAmerican Recovery and Reinvestment Act (ARRA) funding under the Integratedand/or Crosscutting Systems topic area for the Smart Grid Investment GrantProgram.   The application, which sought $145.1 million of matchingfunds, focused on the first three years of **DP&L’s**10-year plan.  On October 27, 2009, wewere notified by the United States Department of Energy (DOE) that we will notreceive funding under the ARRA.

 

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The Stipulation providedfor the establishment of a fuel and purchased power recovery rider beginning January 1,2010.  Per the provisions of theStipulation, **DP&L** is required to file itsproposed fuel rider no later than November 1, 2009.  **DP&L** is inthe process of developing this filing and anticipates an October 30, 2009filing date.

 

As a member of PJM, **DP&L** incurs costs and receives revenues from the RTOrelated to its transmission and generation assets, as well as its loadobligations for retail customers.  SB 221includes a provision that allows Ohio electric utilities to seek and obtain areconcilable rider to recover RTO-related costs and credits.  On February 19, 2009, the PUCO approved **DP&L’s** request to defer costs associated with itstransmission, capacity, ancillary service and other PJM-related chargesincurred as a member of PJM consistent with the provisions of SB 221.  **DP&L**subsequently filed to establish the TCRR that would incorporate all charges andcredits from the RTO as well as the amounts approved for deferral.  On May 27, 2009 the PUCO grantedapproval of this filing and **DP&L** beganrecovery of these costs on June 1, 2009. On June 19, 2009, the Industrial Energy Users of Ohio (IEU-OH)filed an application for rehearing claiming the PUCO’s order allowing forrecovery of reliability pricing model (RPM) costs through this rider wasunlawful.   On September 9, 2009,the PUCO granted rehearing, and issued an entry ordering **DP&L**to remove the RPM costs from the TCRR and refile its tariffs.  The Commission noted that although the RPMcosts are not recoverable through the TCRR, those costs may be recoverablethrough a separate rider.  On September 23,2009, **DP&L** filed two separate riders, aTCRR without RPM costs, and an RPM recovery rider.  On October 21, 2009, the PUCO Stafffiled a staff report in the case recommending the Commission approve both of **DP&L’s** proposed riders. The outcome of this proceeding cannot be determined at this time, but,based on past precedent and the PUCO’s orders received thus far, we continue tobelieve that these costs are probable of recovery.

 

As a member of PJM, **DP&L** is also subject to charges andcosts associated with PJM operations as approved by the FERC.  FERC Ordersissued in 2007 regarding the allocation of costs of large transmissionfacilities within PJM, could result in additional costs being allocated to **DP&L**of approximately $12 million ormore annually by 2012.  **DP&L**filed a notice of appeal to the U.S. Court of Appeals, D.C. Circuit on March 18,2008.  The appeal has been consolidated with other appeals taken by otherinterested parties of the same FERC Orders and the consolidated cases have beenassigned to the 7th Circuit.  On August 6, 2009, the 7th Circuit ruledthat the FERC had failed to provide a reasoned basis for the allocation methodit had approved.  On September 18, 2009, two interveners, BaltimoreGas and Electric Company and Old Dominion Electric Cooperative, jointly filed apetition before the 7th Circuit seeking rehearing.  **DP&L** and others of the originalpetitioners oppose the petition for rehearing.  At this time, **DP&L** is unable to predict the outcomeof the petition for rehearing or whether there may be further appeals to theU.S. Supreme Court.  The Court will not issue a mandate and FERC will takeno actions until all rehearing and appeals are resolved.  Until such timeas FERC may act in response to a court mandate, PJM will continue to apply theallocation methodology that had been approved by FERC in 2007.   On November 7,2008, **DP&L** filed a request atthe PUCO for authority to defer its costs associated with transmission,capacity, ancillary service and other PJM related charges incurred as a memberof PJM.  This filing was approved and is further discussed in theimmediately preceding paragraph.

 

OnJune 17, 2009, the PUCO issued in final form its rules relating toenergy efficiency, demand response, alternative energy and long-term forecastreports.  This was the last phase of SB221 implementation rules.  These rules requireelectric utilities to file compliance reports demonstrating how they plan tomeet the energy efficiency and demand response targets, what programs they haveimplemented, what the results of the programs were and what they expectcustomer response to future programs to be. The rules also require **DP&L** to file an annual integrated resource planthat demonstrates the generation resources it plans to utilize to meet customer electric demands as well as alternativeresource requirements, and the net impact of energy efficiency and demandresponse programs over a ten-year horizon. In a subsequent entry, the PUCO established a proceeding whereby allOhio electric utilities and interested parties are invited to workcooperatively to establish an energy efficiency measurement and verificationmanual that is designed to assist in verifying and measuring efficiencyprograms in the state of Ohio.  Theseproceedings are ongoing and may impact **DP&L’s** ability or inability to meet the energyefficiency and demand response targets established in SB 221.

 

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Therules were remanded to the PUCO from the legislative committee thatoversees rules implementing Ohio legislation.  The PUCO re-issued the rules in finalform on October 15, 2009 with only slight modifications.

 

OnSeptember 9, 2009, the PUCO issued an entry establishing a significantlyexcessive earnings test (SEET) proceeding. A workshop was held at the Commission offices on October 5, 2009 toallow interested parties to present concerns and discuss issues related to themethodology for determining whether an electric utility has significantlyexcessive earnings pursuant to the provisions contained in SB 221.  The order directs PUCO staff to develop andfile recommendations for the SEET and states that a procedural schedule will beestablished to allow for comments and reply comments by interestedparties.  Although **DP&L’s**Stipulation provides that the SEET does not apply to **DP&L**until 2013 based on 2012 earnings results, **DP&L**willactively participate in this proceeding.

 

**Federal Matters**

 

In June 2009, theNorth American Electric Reliability Corporation (NERC), a FERC-certifiedelectric reliability organization responsible for developing and enforcingmandatory reliability standards, commenced a routine audit of **DP&L’s** operations. The audit, which was for the period June 18, 2007 to June 25,2009, evaluated **DP&L’s** compliance with 42requirements in 18 NERC-reliability standards. **DP&L** is currently subject to a complianceaudit at a minimum of once every three years as provided by the NERC Rules ofProcedure. This audit was concluded during the three months ended September 30,2009 and its findings revealed that **DP&L** hadsome Possible Alleged Violations (PAVs) associated with five NERC ReliabilityStandards.  In response to thereport, **DP&L** filed mitigation plans withNERC to address the PAVs.  Thesemitigation plans have been accepted and **DP&L** iscurrently awaiting a proposal for settlement from NERC.  At this time, we are unable to determine theextent, if any, of penalties that will be imposed on **DP&L**.

 

**ENVIRONMENTAL UPDATES**

 

**DPL**,**DP&L** and our subsidiaries’ facilities and operations are subjectto a wide range of environmental regulations and laws by federal, state andlocal authorities.

 

As well as imposingcontinuing compliance obligations, these laws and regulations authorize theimposition of substantial penalties for noncompliance, including fines,injunctive relief and other sanctions. In the normal course of business, wehave investigatory and remedial activities underway at our facilities tocomply, or to determine compliance, with such regulations.  We recordliabilities for losses that are probable of occurring and can be reasonablyestimated.** DPL,** through its wholly owned captive insurance subsidiaryMVIC, has an actuarially calculated reserve for environmental matters.  We evaluate the potential liability relatedto probable losses quarterly and may revise our estimates.  Suchrevisions in the estimates of the potential liabilities could have a materialeffect on our results of operations, financial position or cash flows.

 

**Environmental Regulation andLitigation Related to Air Quality**

 

In response to a U.S.Supreme Court decision that the USEPA has the authority to regulate CO2 emissions frommotor vehicles, the USEPA made a finding that CO2 and certain other gases are pollutants underthe CAA.  The USEPA has not yet identified the specifics of how thesenewly designated pollutants will be regulated. In April, 2009, the USEPA issued a proposed endangerment finding underthe CAA.  The proposed finding determinedthat CO2 and other Green House Gases (GHGs) from motorvehicles threaten the health and welfare of future generations by contributingto climate change.  If the proposedfinding is finalized, it could lead to the regulation of CO2 and other GHGsfrom sources other than motor vehicles. Recently, several bills have been introduced at the federal level toregulate GHG emissions.  In June 2009,the U.S. House of Representatives passed H.R. 2454, the American Clean Energyand Security Act (ACES).  This proposedlegislation targets a reduction in the emission of GHGs from large sources by80% in 2050 through an economy wide cap and trade program.  ACES also includes energy efficiency andrenewable energy initiatives.  ProposedGHG legislation finalized at a future date is expected to have a significanteffect on **DP&L’**s operations.  However, due to the uncertainty associatedwith such future regulations, **DP&L** iscurrently unable to predict the final outcome or the financial impact that thisnew legislation will have on its future operations.  On September 22, 2009, the USEPA issueda final rule for mandatory reporting of GHGs from large sources that emit25,000 metric tons per year or more of CO2,  including electric generating units.  The first report will be submitted in March 2011for 2010 emissions.  This reporting rule willguide development of policies and programs to reduce emissions.  **DP&L** doesnot anticipate that this reporting rule will result in any significantcost or other impact on current operations.

 

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In 2004, eight states andthe City of New York filed a lawsuit in Federal District Court for the SouthernDistrict of New York against American Electric Power Company, Inc. (AEP),one of AEP’s subsidiaries, Cinergy Corp. (a subsidiary of Duke Energy Corporation(Duke)) and four other electric power companies.  A similar lawsuit was filed against thesecompanies in the same court by Open Space Institute, Inc., Open SpaceConservancy, Inc. and The Audubon Society of New Hampshire.  The lawsuits allege that the companies’emissions of carbon dioxide contribute to global warming and constitute apublic or private nuisance.  The lawsuitsseek injunctive relief in the form of specific emission reduction commitments.  In 2005, the Federal District Court dismissedthe lawsuits, holding that the lawsuits raised political questions that shouldnot be decided by the courts.  Theplaintiffs appealed.  Finding that theplaintiffs have standing to sue and can assert federal common law nuisanceclaims, the United States Court of Appeals for the Second Circuit on September 21,2009 vacated the dismissal of the Federal District Court and remanded thelawsuits back to the Federal District Court for further proceedings.  Although we are not named as a party to theselawsuits, **DP&L** is a co-owner of coal-firedplants with Duke and AEP (or their subsidiaries) that could be affected by theoutcome of these lawsuits.  The SecondCircuit Court’s decision could also encourage these or other plaintiffs to filesimilar lawsuits against other electric power companies, including us.  We are unable at this time to predict theimpact that these lawsuits might have on us.

 

Pursuant tothe Clean Air Interstate Rule (CAIR)previously discussed in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2008,(our “2008 10-K”) the Ohio EPA initiated an Early Reduction Credit (ERC)program for annual NOx emission allowances for 2008 and 2009.  **DP&L** qualified for ERCs in excess of what was initiallyallocated to **DP&L** and submitted the datafor all ERCs generated.  **DP&L** has been informed that because certain unrelatedentities failed to meet all requirements for their allocated ERCs, additionalERCs would be allocated to all entities that generated ERCs in excess of theirinitial allocation.  **DP&L** isexpected to be allocated between  28% -33% more ERCs than its initial allocation.

 

As previously reported inmore detail in our 2008 10-K, on October 23, 2008, the U.S. District Courtfor the Southern District of Ohio approved a consent decree that settled alawsuit initiated by the Sierra Club against **DP&L**and the other owners of the Stuart generating station for alleged violations ofthe CAA and the station’s operating permit.  On October 21, 2009, theSierra Club filed with the U.S. District Court a motion for enforcement of theconsent decree based on the Sierra Club’s interpretation of the consent decreethat would require certain NOx emissions that **DP&L**has been excluding from its computations to be included for purposes ofcomplying with the emission targets and reporting requirements of the consentdecree.  **DP&L** believes that it isproperly computing and reporting NOx emissions under the consent decree andwill oppose the Sierra Club’s motion.

 

Our 2008 10-K reports onlitigation challenging USEPA final non-attainment designations for the nationalambient air quality standard for Fine Particulate Matter 2.5 (PM2.5), includinggeographic areas in which **DP&L** hasownership in generation facilities. On July 7, 2009, the D.C. CircuitCourt of Appeals upheld the USEPA non-attainment designations for the areasimpacting **DP&L’s** generation plants.  However, on October 8, 2009, the USEPAissued new designations based on 2008 monitoring data that showed all areas inattainment to the standard with the exception of several counties innortheastern Ohio.

 

Our 2008 10-K reports onlitigation between the U.S. Department of Justice and Cinergy Corp. (now partof Duke Energy) and two Cinergy subsidiaries for alleged violations of the CAAat various generation units operated by PSI Energy, Inc. and CG&E,including generation units co-owned by  **DP&L**  (Beckjord Unit 6 and Miami Fort Unit7).  A retrial has been held in which the second jury found for DukeEnergy on some allegations, but for plaintiffs with respect to units at anotherone of Duke Energy’s wholly-owned facilities. In a separate phase II remedies trial with respect to violations foundin the first trial, Duke Energy was ordered to close down three of itswholly-owned generating units by September 2009, surrender certainemission allowances and pay a fine.  Noneof the violations found or remedies ordered relate to generating units owned inpart by **DP&L**.

 

Our 2008 10-K reports onlitigation between various residents of the Village of Moscow, Ohio suedCG&E, as the operator of Zimmer generating station (co-owned by CG&E, **DP&L** and CSP), for alleged violationsof the CAA and air pollution nuisances. A settlement was finalized during the three months ended September 30,2009.  The cash portion of the settlementwas $900,000, of which **DP&L**expects to be invoiced 28.1% based on its ownership share.  **DP&L** hasaccrued its portion of the cash settlement. Non-cash portions of the settlement are not expected to have materialeffects on the future operation of the station.

 

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Our 2008 10-K reports onNOVs issued in 2007, by the Ohio EPA and the USEPA to  **DP&L** for allegedviolations of the CAA at the O.H. Hutchings station.  During2009, **DP&L** has continued tosubmit various other operational and performance data to USEPA.  **DP&L**is unable to determine the timing, costs, or method by which the issues may beresolved.

 

On July 15, 2009,the USEPA proposed revisions to its primary National Ambient Air QualityStandard for nitrogen dioxide.  Thischange could affect certain emission sources in heavy traffic areas like theI-75 corridor between Cincinnati and Dayton. At this point, **DP&L** cannotdetermine the effect of this potential change, if any, on its operations.

 

On September 16,2009, the USEPA announced that it would reconsider the 2008 national groundlevel ozone standard.  A more stringentambient ozone standard may lead to stricter NOx emission standards in thefuture.  At this point, **DP&L** cannot determine the effect of this potentialchange, if any, on its operations.

 

On September 22,2009, the USEPA issued a final rule for mandatory reporting of GHG fromlarge GHG emissions sources in the U.S. Several **DPL** facilities will begincollecting data January 1, 2010. The first emission report is due on March 31, 2011, for emissionsduring 2010.

 

**Environmental Regulation andLitigation Related to****Land Use and Solid Waste Disposal**

 

Our 2008 10-Kreports on a special notice received in 2002, stating that the USEPA considers **DP&L** and other parties to be PRPs for the clean-up ofhazardous substances at the South Dayton Dump landfill site.   No recent activity has occurred with respect tothat notice or PRP status.  Morerecently, **DP&L** has received requests by theUSEPA and the existing PRP group to allow access to be given to **DP&L’s** service center building site, which is across astreet from the landfill site.  The USEPArequested access to drill monitoring and test wells to determine the extent ofthe landfill site’s contamination as well as to assess whether certainchemicals used at the service center building site might have migrated throughgroundwater to the landfill site. Pursuant to an Administrative Order issued by USEPA requiring access to **DP&L’s** service center building site, **DP&L** has granted such access and has met with USEPA’scontractor to facilitate access.  **DP&L**believes the chemicals used at its service centerbuilding site were appropriately disposed of and have not contributed to thecontamination at the South Dayton Dump landfill site.  While **DP&L** isunable at this time to predict the outcome of this matter, if **DP&L** were required to contribute to the clean-up of thesite, it could have a material adverse effect on us.

 

During 2008, a majorspill occurred at an ash pond owned by the Tennessee Valley Authority (TVA) asa result of a dike failure.  The spillgenerated a significant amount of national news coverage, and support fortighter regulations for the storage and handling of coal combustionproducts.  **DP&L**has ash ponds at the Killen, Hutchings and J.M. Stuart stations which itoperates, and also at generating stations operated by others but in which **DP&L** has an ownership interest.  We frequently inspect our ash ponds and donot anticipate any similar failures.  Itis widely expected that the federal government will develop new regulations coveringash generated from the combustion of coal and impose additional monitoring,testing, or construction standards with respect to ash ponds and ashlandfills.  During March 2009, theUSEPA, through a formal Information Collection Request, collected informationon ash pond facilities across the country, including those at Killen and J.M.Stuart stations.  Subsequently USEPAcollected similar information for Hutchings Station.  Due to the wide range of possible outcomes, **DP&L** is currently unable to assess the timing or thefinancial impact of any future governmental initiative that may occur.

 

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**FINANCIALOVERVIEW**

 

The followingfinancial overview relates to **DPL**, whichincludes its principal subsidiary **DP&L**.  The results of operations for both **DPL** and **DP&L** areseparately discussed in more detail following this financial overview.

 

For the threemonths ended September 30, 2009, net income was $67.9 million, or $0.59per share, compared to net income of $48 million, or $0.42 per share, for thesame period in 2008.   The increase innet income compared to the prior year was primarily due to:

 

·                  anincrease in retail rates primarily as a result of an increase in theenvironmental investment rider and the TCRR,

 

·                  anincrease in the volume of wholesale power sales,

 

·                  animprovement in plant performance which resulted in an increase in wholesalesales volume and a decrease in power purchase volume,

 

·                  adecrease in power purchase prices,

 

·                  adecrease in the average cost of fuel, and

 

·                  adecrease in the estimated annual effective income tax rate.

 

Partially offsetting these items were:

 

·                  adecrease in retail sales volume due to the impacts of milder weather and theeconomic slowdown,

 

·                  adecrease in wholesale power sales prices,

 

·                  adecrease in gains recognized from the sale of coal, and

 

·                  anincrease in the cost of fuel due to the increased volume of generation by ourpower plants.

 

For the nine months ended September 30, 2009, net income was $179.2million, or $1.58 per share, compared to net income of $172.9 million, or $1.49per share, for the same period in 2008.   The increase in net income compared to theprior year was primarily due to the following:

 

·                  anincrease in retail rates primarily as a result of an increase in theenvironmental investment rider and the TCRR,

 

·                  anincrease in the volume of wholesale power sales,

 

·                  animprovement in plant performance which resulted in an increase in wholesalesales volume and a decrease in power purchase volume,

 

·                  adecrease in power purchase prices,

 

·                  increasedgains recognized from the sale of coal, and

 

·                  reducedinterest costs as a result of certain outstanding debt redemptions.

 

Partially offsetting these items were:

 

·                  adecrease in retail sales volume due to the impacts of the economic slowdown andmilder summer weather,

 

·                  adecrease in wholesale power sales prices,

 

·                  adecrease in gains recognized from the sale of excess emission allowances,

 

·                  anincrease in the cost of fuel due to the increased volume of generation by ourpower plants and an increase in the average cost of fuel, and

 

·                  anincrease in pension and employee benefit related costs.

 

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**RESULTS OF OPERATIONS — DPL Inc.**

 

**DPL’s**results ofoperations include the results of its subsidiaries, including **DP&L**.  **DP&L**provides approximately 97% of the total revenues of**DPL. **Allmaterial intercompany accounts and transactions have been eliminated in consolidation.  A separate discussion of the results ofoperations for **DP&L** ispresented elsewhere in this report.

 

**IncomeStatement Highlights****—****DPL**

** **
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **$ in millions except per share  amounts** | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                             |       |                   |       |                   |       |   |   |   |   |
| **Revenues:**                                    |       |                   |       |                   |       |   |   |   |   |
| Retail                                           | ** ** | **$**                  | **318.8**  |                   | $          | 315.7 | ** ** | **$** | **921.3** |   | $ | 920.8 |   |
| Wholesale                                        | ** ** | **30.9**               |       | 27.9                   | ** ** | **81.5** |   | 124.8 |   |
| RTO revenues                                     | ** ** | **21.5**               |       | 31.3                   | ** ** | **68.4** |   | 84.4 |   |
| RTO capacity revenues                            | ** ** | **33.1**               |       | 36.8                   | ** ** | **103.2** |   | 70.7 |   |
| Other revenues                                   | ** ** | **3.0**                |       | 2.8                    | ** ** | **9.1** |   | 8.7 |   |
| Total revenues                                   | ** ** | **$**                  | **407.3**  |                   | $          | 414.5 | ** ** | **$** | **1,183.5** |   | $ | 1,209.4 |   |
|                                             |       |                   |       |                   |       |   |   |   |   |
| **Cost of revenues:**                            |       |                   |       |                   |       |   |   |   |   |
| Fuel costs                                       | ** ** | **$**                  | **95.9**   |                   | $          | 90.7 | ** ** | **$** | **291.7** |   | $ | 263.3 |   |
| Gains from sale of coal                          | ** ** | **(10.8**              | **)**      | (28.5                  | )          | **(45.9** | **)** | (40.3 | ) |
| Gains from sale of emission allowances           | ** ** | **(0.7**               | **)**      | —                 | ** ** | **(4.1** | **)** | (30.5 | ) |
| Net fuel                                         | ** ** | **84.4**               |       | 62.2                   | ** ** | **241.7** |   | 192.5 |   |
|                                             |       |                   |       |                   |       |   |   |   |   |
| Purchased power                                  | ** ** | **7.0**                |       | 56.8                   | ** ** | **36.7** |   | 122.2 |   |
| RTO charges                                      | ** ** | **25.9**               |       | 29.2                   | ** ** | **78.7** |   | 101.7 |   |
| RTO capacity charges                             | ** ** | **31.2**               |       | 33.8                   | ** ** | **100.3** |   | 65.0 |   |
| Recovery/(Deferral) of RTO related charges       | ** ** | **0.9**                |       | —                 | ** ** | **(27.7** | **)** | — |   |
| Total purchased power                            | ** ** | **65.0**               |       | 119.8                  | ** ** | **188.0** |   | 288.9 |   |
|                                             |       |                   |       |                   |       |   |   |   |   |
| Total cost of revenues                           | ** ** | **$**                  | **149.4**  |                   | $          | 182.0 | ** ** | **$** | **429.7** |   | $ | 481.4 |   |
|                                             |       |                   |       |                   |       |   |   |   |   |
| Gross margin (a)                                 | ** ** | **$**                  | **257.9**  |                   | $          | 232.5 | ** ** | **$** | **753.8** |   | $ | 728.0 |   |
|                                             |       |                   |       |                   |       |   |   |   |   |
| Gross margin as a percentage of revenues         |       | **63**                 | **%**      | 56                     | %          | **64** | **%** | 60 | % |
|                                             |       |                   |       |                   |       |   |   |   |   |
| **Operating income**                             | ** ** | **$**                  | **116.5**  |                   | $          | 96.2 | ** ** | **$** | **325.4** |   | $ | 324.5 |   |
|                                             |       |                   |       |                   |       |   |   |   |   |
| **Earnings per share of common  stock:**         |       |                   |       |                   |       |   |   |   |   |
| Basic                                            | ** ** | **$**                  | **0.60**   |                   | $          | 0.44 | ** ** | **$** | **1.60** |   | $ | 1.58 |   |
| Diluted                                          | ** ** | **$**                  | **0.59**   |                   | $          | 0.42 | ** ** | **$** | **1.58** |   | $ | 1.49 |   |

 

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| *(a)* | * * | *For purposes of discussing operating results, we present  and discuss gross margin. This format is useful to investors because it  allows analysis and comparability of operating trends and includes the same  information that is used by management to make decisions regarding our  financial performance.* |
|-------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**DPL — Revenues**

 

Retail customers, especially residential andcommercial customers, consume more electricity on warmer and colder days.Therefore,**DPL’s** retail salesvolume is impacted by the number of heating and cooling degree days occurringduring a year.  Since**DPL**plans to utilize its internal generating capacity to supply its retailcustomers’ needs first, increases in retail demand may decrease the volume ofinternal generation available to be sold in the wholesale market and viceversa.

 

The wholesale marketcovers a multi-state area and settles on an hourly basis throughout the year.Factors impacting**DPL’s** wholesalesales volume each hour of the year include wholesale market prices;**DPL’s** retail demand; retail demandelsewhere throughout the entire wholesale market area;**DPL** and non-**DPL** plants’ availability to sell into the wholesale market andweather conditions across the multi-state region.**DPL’s** plan is to make wholesale sales when market pricesallow for the economic operation of its generation facilities not beingutilized to meet its retail demand or when margin opportunities exist betweenthe wholesale sales and power purchase prices.

 

The following tableprovides a summary of changes in revenues from the prior period:

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **$ in millions**           | ** ** | **2009 vs. 2008**      | ** ** | **2009 vs. 2008**      | ** ** |
|                             |       |                   |       |                   |       |
| **Retail**                       |       |                   |       |                   |       |
| Rate                             |       | $                      | 39.4       |                   | $          | 88.0 |   |
| Volume                           |       | (36.0                  | )          | (86.6                  | )          |
| Other                            |       | (0.3                   | )          | (0.9                   | )          |
| **Total retail change**          | ** ** | **$**                  | **3.1**    | ** **             | **$**      | **0.5** | ** ** |
|                             |       |                   |       |                   |       |
| **Wholesale**                    |       |                   |       |                   |       |
| Rate                             |       | $                      | (43.3      | )                      | $          | (62.8 | ) |
| Volume                           |       | 46.3                   |       | 19.5                   |       |
| **Total wholesale change**       | ** ** | **$**                  | **3.0**    | ** **             | **$**      | **(43.3** | **)** |
|                             |       |                   |       |                   |       |
| **RTO capacity and other**       |       |                   |       |                   |       |
| RTO  capacity and other revenues | ** ** | **$**                  | **(13.3**  | **)**                  | **$**      | **16.9** | ** ** |
|                             |       |                   |       |                   |       |
| **Total revenues**               | ** ** | **$**                  | **(7.2**   | **)**                  | **$**      | **(25.9** | **)** |

 

For the three monthsended September 30, 2009, revenues decreased $7.2 million, or 2%, to$407.3 million from $414.5 million for the same period in the prior year. This decrease was primarily the result of lower retail sales volume and lowerwholesale average prices and decreased RTO capacity and other revenues,partially offset by higher average rates for retail sales, as well as increasedwholesale sales volume. The revenue components for the three months ended September 30,2009 are further discussed below:

 

·                  Retail revenues increased $3.1 millionresulting primarily from a 14% increase in average retail rates due largely tothe incremental effect of the recovery of costs under the third phase of theenvironmental investment rider (EIR) combined with the implementation of theTCRR.  The recovery of costs under theTCRR began on June 1, 2009.  Theincrease was partially offset by an 11% decrease in sales volume driven largelyby milder weather conditions which saw cooling degree days decrease 29%, andthe effects of the economic recession. As a result, retail revenues had a favorable $39.4 million pricevariance and an unfavorable $36.0 million sales volume variance.

 

·                  Wholesale revenues increased $3.0 millionprimarily as a result of a 167% increase in sales volume, partially offset by a58% decrease in wholesale average prices resulting in a favorable $46.3 millionvolume variance and an unfavorable $43.3 million wholesale price variance.

 

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·                  RTO capacity and other revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, decreased $13.3million compared to the same period in the prior year.  The decrease to RTO capacity and other RTOrevenues was primarily the result of a decrease in revenues from the PJMcapacity auction of $3.7 million, combined with a decrease in PJM transmissionand congestion revenues of $9.8 million.

 

For the nine months endedSeptember 30, 2009, revenues decreased $25.9 million, or 2%, to $1,183.5million from $1,209.4 million for the same period in the prior year.  Thisdecrease was primarily the result of lower retail sales volume as well asdecreased wholesale average prices, partially offset by higher average retail rates,increased wholesale sales volume and an increase in RTO capacity and otherrevenues. The revenue components for the nine months ended September 30,2009 are further discussed below:

 

·                  Retail revenues increased $0.5 millionresulting primarily from an 11% increase in average retail rates due largely tothe incremental effect of the recovery of costs under the third phase of theEIR combined with the implementation of the TCRR, partially offset by a 9%decrease in sales volume driven largely by the effects of the economicrecession and milder weather conditions. Heating and cooling degree days decreased by 4% and 14% to 3,521 daysand 731 days, respectively.  As a result,retail revenues had a favorable $88.0 million price variance and an unfavorable$86.6 million sales volume variance.

 

·                  Wholesale revenues decreased $43.3million primarily as a result of a 43% decrease in wholesale average pricespartially offset by a 16% increase in sales volume, resulting in an unfavorable$62.8 million wholesale price variance and a favorable $19.5 million salesvolume variance.

 

·                  RTO capacity and other revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, increased $16.9million compared to the same period in the prior year.  This increase was primarily the result ofadditional revenue of $32.5 million that was realized from the PJM capacityauction, partially offset by a decrease in PJM transmission and congestionrevenues of $16.0 million.

 

## **DPL— Cost of Revenues**

 

For the three monthsended September 30, 2009:

 

·                  Fuel costs, which include coal (net ofgains on sales), gas, oil and emission allowances (net of gains on sales),increased $22.2 million, or 36%, compared to the same period in 2008, primarilydue to the impact of lower gains realized from the sale of coal.  In 2009, gains from the sale of coal amountedto $10.8 million compared to $28.5 million during the same period in 2008.  Also contributing to the increase in fuelcosts was a 23% increase in the usage of fuel due mainly to improvedperformance of our generating facilities, which resulted in increasedgeneration output and a reduced demand for higher-cost purchased power.  The above increases to fuel costs werepartially offset by a 14% decrease in the average cost of fuel consumed perkilowatt-hour largely resulting from overall lower market prices of coal duringthe two comparative periods.

 

·                  Purchased power decreased $54.8 million,or 46%, compared to the same period in 2008. The decrease in purchased power primarily resulted from a $39.7 million decreaserelating to lower volumes of purchased power, a $10.1 million decrease relatedto lower average market rates, and a $5.0 million net decrease in RTO capacityand other RTO charges.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned andunanticipated outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

For the nine months endedSeptember 30, 2009:

 

·                  Fuel costs, which include coal (net of gains onsales), gas, oil and emission allowances (net of gains on sales), increased$49.2 million, or 26%, compared to the same period in 2008, primarily due tothe impact of lower gains realized from the sale of excess emissionallowances.  In 2009, **DP&L** realized $4.1 million in gains from the sale ofexcess emission allowances compared to $30.5 million during the same period in2008.  Also contributing to the increasein fuel costs was a 7% increase in the average cost of fuel consumed perkilowatt-hour largely resulting from higher market prices of coal combined withoutages at lower-cost units, as well as a 4% increase in the usage of fuel duemainly to improved performance of our generating facilities.  This improved performance of our generatingfacilities resulted in increased generation output and a reduced demand forhigher-cost purchased power.  The aboveincreases to fuel costs were partially offset by higher gains realized in 2009from the sale of coal.  In 2009, gainsfrom the sale of coal amounted to $45.9 million compared to $40.3 million forthe same period in 2008.

 

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·                  Purchased power decreased $100.9 million compared tothe same period in 2008.  The netdecrease in purchased power is partly a result of decreases of $59.2 millionand $26.3 million relating to lower volumes of purchased power and loweraverage market rates, respectively.  Alsocontributing to the decrease in purchased power is the deferral in 2009 ofcosts relating to **DPL’s**transmission, capacity and other PJM-related charges which were incurred as amember of PJM.  The deferral is discussedin greater detail in Note 3 of Notes to Condensed Consolidated FinancialStatements.  These decreases werepartially offset by increased RTO capacity and other RTO charges.  Wepurchase power to satisfy retail sales volume when generating facilities arenot available due to planned and unanticipated outages, or when market pricesare below the marginal costs associated with our generating facilities.

 

**DPL**—**Operation and Maintenance**

 

Thefollowing table provides a summary of the significant changes from the priorperiods of the operation and maintenance expense items:

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **$ in millions**                                    | ** ** | **2009 vs. 2008**      | ** ** | **2009 vs. 2008**      | ** ** |
| Pension                                                   |       | $                      | 2.0        |                   | $          | 5.4 |   |
| Low-income  payment program                               |       | 1.3                    |       | 4.7                    |       |
| Generating  facilities operating and maintenance expenses |       | (4.1                   | )          | 3.1                    |       |
| ESOP                                                      |       | 0.7                    |       | 2.8                    |       |
| Deferred  compensation                                    |       | 1.4                    |       | 2.6                    |       |
| Group  insurance                                          |       | 1.8                    |       | 1.7                    |       |
| Other,  net                                               |       | 2.5                    |       | 5.6                    |       |
| **Total operation and maintenance expense**               |       | $                      | 5.6        |                   | $          | 25.9 |   |

 

During thethree months ended September 30, 2009, operation and maintenance expenseincreased $5.6 million, or 8%, compared to the similar period in 2008.  This variance was primarily the result of:

 

·                  higher pension costs due primarily to adecline in the values of pension plan assets and increased benefits,

 

·                  increases in assistance for low-incomeretail customers which is funded by the USF rate rider,

 

·                  increases in employee incentive and benefitexpense funded by the ESOP,

 

·                  increased deferred compensation costs, and

 

·                  increased health insurance costs primarilyrelated to higher disability reserves.

 

Theseincreases were partially offset by lower operating and maintenance expenses atour generating facilities due largely to higher maintenance expenses incurredin the prior year related to unplanned outages at jointly-owned productionunits combined with lower operating costs in 2009.

 

Duringthe nine months ended September 30, 2009, operation and maintenanceexpense increased $25.9 million, or 13%, compared to the similar period in2008.  This variance was primarily theresult of:

 

·                  higher pension costs due primarily to adecline in the values of pension plan assets and increased benefits,

 

·                  increases in assistance for low-incomeretail customers which is funded by the USF rate rider,

 

·                  increases in operating and maintenanceexpenses for generating facilities largely due to costs associated withunplanned outages at jointly-owned production units,

 

·                  increases in employee incentive and benefitexpense funded by the ESOP,

 

·                  increased deferred compensation costs, and

 

·                  increased health insurance costs primarilyrelated to higher disability reserves.

 

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**DPL — Depreciation andAmortization**

 

For the three months andnine months ended September 30, 2009, depreciation and amortizationexpense increased $0.8 million and $5.3 million, respectively, compared to thesimilar periods in 2008 primarily as a result of higher asset balances at thegenerating stations.  These higherbalances were due largely to the completion of the FGD projects in 2008.

 

**DPL— General Taxes**

 

For the ninemonths ended September 30, 2009, general taxes decreased $3.2 millioncompared to the similar period in 2008 primarily due to lower property taxaccruals in 2009 compared to 2008 and lower KWh excise taxes resulting fromlower retail sales volume.

 

**DPL —****Amortization ofRegulatory Assets**

 

For the nine months endedSeptember 30, 2009, the amortization of regulatory assets was $3.1 millionlower than that of the similar period in 2008, primarily reflecting the 2008amortization of incremental costs incurred in 2004 and 2005 for severestorms.  These storm costs were fullyamortized in the third quarter of 2008.

 

**DPL —Investment Income**

 

For the nine months endedSeptember 30, 2009, investment income decreased $2.4 million compared tothe similar period in 2008 primarily as a result of lower cash and short-terminvestment balances in 2009 combined with overall lower market yields oninvestments.

 

**DPL**—**Interest Expense**

 

For the three monthsended September 30, 2009, interest expense decreased $2.3 million comparedto the same period in 2008 primarily due toa $3.5 million reduction in interest expense due to the redemption of **DPL’s** $175 million 8.00% Senior Notes on March 31,2009, partially offset by $1.0 million of lower capitalized interest,due largely to the completion of the FGD projects at the generating stations.

 

For the nine months endedSeptember 30, 2009, interest expense decreased $7.2 million compared tothe same period in 2008 primarily due to:

 

·      a $9.3 millionreduction in interest expense due to the redemption of **DPL’s**$175 million 8.00%Senior Notes and the $100 million 6.25%Senior Notes on March 31, 2009 and May 15, 2008, respectively,

 

·      a $1.6 millionwrite-off in 2008 of unamortized debt issuance costs relating to **DP&L’s** $90 million variable rate pollution control bondsfollowing their repurchase from the bondholders on April 4, 2008, and

 

·      $1.6 million of deferred interestcarrying costs on regulatory assets primarily associated with TCRR and the 2008incremental storm costs.  Theseregulatory assets are further discussed in Note 3 of Notes to CondensedConsolidated Financial Statements.

 

The above decreases werepartially offset by $5.9 million of lower capitalized interest in 2009 comparedto 2008, due largely to the completion of the FGD projects at the generatingstations.

 

## **DPL— Income Tax Expense**

## ** **

For the three monthsended September 30, 2009, income taxes increased $1.8 million, or 7%,compared to the same period in 2008, primarily reflecting an increase inpre-tax book income partially offset by a decrease in the effective tax rateresulting from estimate-to-actual adjustments of 2008 taxes and 2009 estimatedtax benefits related to a Section 199 — domestic production deduction (Section 199deduction) and the phase-out of the Ohio Franchise Tax.

 

For the nine months endedSeptember 30, 2009, income taxes decreased $1.7 million, or 2%, comparedto the same period in 2008, primarily due to decreases reflecting a lowereffective tax rate resulting from estimate-to-actual adjustments of 2008 taxesand 2009 estimated tax benefits related to an Internal Revenue Code Section 199deduction, the phase-out of the Ohio Franchise Tax and a 2008 settlementrelating to Ohio Franchise Taxes.  These decreaseswere partially offset by an increase in pre-tax book income.

 

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**RESULTS OF OPERATIONS — The Dayton Powerand Light Company (DP&L)**

 

**Income Statement Highlights —DP&L**

** **
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **$ in millions**                      | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                        |       |                   |       |                   |       |   |   |   |   |
| **Revenues:**                               |       |                   |       |                   |       |   |   |   |   |
| Retail                                      | ** ** | **$**                  | **301.8**  |                   | $          | 278.0 | ** ** | **$** | **875.8** |   | $ | 809.5 |   |
| Wholesale                                   | ** ** | **47.8**               |       | 61.9                   | ** ** | **124.7** |   | 233.7 |   |
| RTO  revenues                               | ** ** | **20.7**               |       | 30.4                   | ** ** | **66.0** |   | 83.5 |   |
| RTO  capacity revenues                      | ** ** | **27.9**               |       | 31.2                   | ** ** | **87.2** |   | 65.1 |   |
| Total  revenues                             | ** ** | **$**                  | **398.2**  |                   | $          | 401.5 | ** ** | **$** | **1,153.7** |   | $ | 1,191.8 |   |
|                                        |       |                   |       |                   |       |   |   |   |   |
| **Cost of revenues:**                       |       |                   |       |                   |       |   |   |   |   |
| Fuel  costs                                 | ** ** | **$**                  | **94.5**   |                   | $          | 85.5 | ** ** | **$** | **286.2** |   | $ | 254.4 |   |
| Gains  from sale of coal                    | ** ** | **(10.8**              | **)**      | (28.5                  | )          | **(45.9** | **)** | (40.3 | ) |
| Gains  from sale of emission allowances     | ** ** | **(0.7**               | **)**      | —                 | ** ** | **(4.1** | **)** | (30.5 | ) |
| Net  fuel                                   | ** ** | **83.0**               |       | 57.0                   | ** ** | **236.2** |   | 183.6 |   |
|                                        |       |                   |       |                   |       |   |   |   |   |
| Purchased  power                            | ** ** | **6.9**                |       | 58.0                   | ** ** | **36.6** |   | 126.0 |   |
| RTO  charges                                | ** ** | **25.6**               |       | 28.3                   | ** ** | **77.8** |   | 100.8 |   |
| RTO  capacity charges                       | ** ** | **31.3**               |       | 33.8                   | ** ** | **100.4** |   | 65.0 |   |
| Recovery/(Deferral)  of RTO related charges | ** ** | **0.9**                |       | —                 | ** ** | **(27.7** | **)** | — |   |
| Total  purchased power                      | ** ** | **$**                  | **64.7**   |                   | $          | 120.1 | ** ** | **$** | **187.1** |   | $ | 291.8 |   |
|                                        |       |                   |       |                   |       |   |   |   |   |
| Total  cost of revenues                     | ** ** | **$**                  | **147.7**  |                   | $          | 177.1 | ** ** | **$** | **423.3** |   | $ | 475.4 |   |
|                                        |       |                   |       |                   |       |   |   |   |   |
| Gross  margin (a)                           | ** ** | **$**                  | **250.5**  |                   | $          | 224.4 | ** ** | **$** | **730.4** |   | $ | 716.4 |   |
|                                        |       |                   |       |                   |       |   |   |   |   |
| Gross  margin as a percentage of revenues   |       | **63**                 | **%**      | 56                     | %          | **63** | **%** | 60 | % |
|                                        |       |                   |       |                   |       |   |   |   |   |
| **Operating income**                        | ** ** | **$**                  | **115.2**  |                   | $          | 93.5 | ** ** | **$** | **318.9** |   | $ | 330.4 |   |

 

----

| *(a)* | * * | *For purposes of discussing operating results, we present  and discuss gross margin. This format is useful to investors because it  allows analysis and comparability of operating trends and includes the same  information that is used by management to make decisions regarding our  financial performance.* |
|-------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**DP&L — Revenues**

 

Retail customers,especially residential and commercial customers, consume more electricity onwarmer and colder days. Therefore,**DP&L’s**retail sales volume is impacted by the number of heating and cooling degreedays occurring during a year.  Since**DP&L** plans to utilize its internal generating capacity to supplyits retail customers’ needs first, increases in retail demand may decrease thevolume of internal generation available to be sold in the wholesale market andvice versa.

 

Thewholesale market covers a multi-state area and settles on an hourly basisthroughout the year. Factors impacting**DP&L’s** wholesale sales volume each hour of the year includewholesale market prices;**DP&L’s**retail demand, retail demand elsewhere throughout the entire wholesale marketarea;**DP&L** and non-**DP&L** plants’ availability to sell intothe wholesale market and weather conditions across the multi-state region.**  DP&L’s**plan is to make wholesale sales when market prices allow for the economicoperation of its generation facilities that are not being utilized to meet itsretail demand or when margin opportunities exist between the wholesale salesand power purchase prices.

 

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The following tableprovides a summary of changes in revenues from the prior period:

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **$ in  millions**          | ** ** | **2009 vs. 2008**      | ** ** | **2009 vs. 2008**      | ** ** |
|                             |       |                   |       |                   |       |
| **Retail**                       |       |                   |       |                   |       |
| Rate                             |       | $                      | 55.7       |                   | $          | 143.2 |   |
| Volume                           |       | (31.6                  | )          | (76.0                  | )          |
| Other                            |       | (0.3                   | )          | (0.9                   | )          |
| **Total  retail change**         | ** ** | **$**                  | **23.8**   | ** **             | **$**      | **66.3** | ** ** |
|                             |       |                   |       |                   |       |
| **Wholesale**                    |       |                   |       |                   |       |
| Rate                             |       | $                      | (134.3     | )                      | $          | (142.9 | ) |
| Volume                           |       | 120.2                  |       | 33.9                   |       |
| **Total  wholesale change**      | ** ** | **$**                  | **(14.1**  | **)**                  | **$**      | **(109.0** | **)** |
|                             |       |                   |       |                   |       |
| **RTO  capacity and other**      |       |                   |       |                   |       |
| RTO capacity and other  revenues | ** ** | **$**                  | **(13.0**  | **)**                  | **$**      | **4.6** | ** ** |
|                             |       |                   |       |                   |       |
| **Total  revenues**              | ** ** | **$**                  | **(3.3**   | **)**                  | **$**      | **(38.1** | **)** |

 

For the three monthsended September 30, 2009, revenues decreased $3.3 million, or 1%, to$398.2 million from $401.5 million in the same period of the prior year. This decrease was primarily the result of lower average prices for wholesalesales, lower retail sales volume and decreased RTO capacity and otherrevenues.  These decreases were partiallyoffset by higher average rates for retail sales and higher wholesale volumes.The revenue components for the three months ended September 30, 2009 arefurther discussed below:

 

·      Retail revenues increased $23.8 millionresulting primarily from a 23% increase in average retail rates due largely tothe incremental effect of the recovery of costs under the third phase of theEIR combined with the implementation of the TCRR.  The recovery of costs under the TCRR began onJune 1, 2009.  This increase waspartially offset by an 11% decrease in sales volume driven largely by milderweather conditions which saw cooling degree days decrease 29% , and the effectsof the economic recession.  As a result,retail revenues had a favorable $55.7 million price variance and an unfavorable$31.6 million sales volume variance.

 

·      Wholesale revenues decreased $14.1million primarily as a result of a 74% decrease in wholesale average prices,partially offset by a 194% increase in sales volume, resulting in anunfavorable $134.3 million wholesale price variance and a favorable $120.2million sales volume variance.

 

·      RTO capacity and other revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, decreased $13.0million compared to the same period in the prior year.  This decrease primarily resulted fromdecreased revenue of $3.3 million that was realized from the PJM capacityauction, combined with a decrease in PJM transmission and congestion revenuesof $9.7 million.

 

For the nine months endedSeptember 30, 2009, revenues decreased $38.1 million, or 3%, to $1,153.7million from $1,191.8 million in the same period of the prior year.  Thisdecrease was primarily the result of lower wholesale average prices and lowerretail sales volume, partially offset by higher average retail rates, increasedwholesale sales volume and an increase in RTO capacity and other revenues. Therevenue components for the nine months ended September 30, 2009 arefurther discussed below:

 

·      Retail revenues increased $66.3 millionresulting primarily from a 20% increase in average retail rates due largely tothe third phase of the EIR and the implementation of the TCRR, partially offsetby a 9% decrease in retail sales volume driven largely by the effects of theeconomic recession and milder weather conditions.  Heating and cooling degree days decreased by4% and 14% to 3,521 days and 731 days, respectively.  As a result, retail revenues had a favorable$143.2 million price variance and an unfavorable $76.0 million sales volumevariance.

 

·      Wholesale revenues decreased $109.0million primarily as a result of a 53% decrease in wholesale average prices,partially offset by a 14% increase in sales volume, resulting in an unfavorable$142.9 million wholesale price variance and a favorable $33.9 million salesvolume variance.

 

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·      RTO capacity and other revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, increased $4.6 millioncompared to the same period in the prior year. This increase primarily resulted from additional revenue of $22.1million that was realized from the PJM capacity auction, partially offset by a$17.5 million decrease in PJM transmission and congestion revenues.

 

## **DP&L— Cost of Revenues**

## ** **

For the three monthsended September 30, 2009:

 

·      Fuel costs, which include coal (net of gains onsales), gas, oil and emission allowances (net of gains on sales), increased$26.0 million, or 46%, compared to the same period in 2008 primarily due to theimpact of lower gains realized from the sale of coal.  In 2009, gains from the sale of coal amountedto $10.8 million compared to $28.5 million during the same period in 2008.  Also contributing to the increase in fuelcosts was a 23% increase in the usage of fuel due mainly to improvedperformance of our generating facilities and which resulted in increasedgeneration output and a reduced demand for higher-cost purchased power.  The above increases to fuel costs werepartially offset by a 10% decrease in the average cost of fuel consumed perkilowatt-hour largely resulting from overall lower market prices of coal duringthe two comparative periods.

 

·      Purchased power decreased $55.4 million, or 46%,compared to the same period in 2008.  Thedecrease in purchased power primarily resulted from a $40.6 million decreaserelating to lower volumes of purchased power, a $10.4 million decrease relatingto lower average market rates and a $4.3 million net decrease in RTO capacityand other RTO charges.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned andunanticipated outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

For the nine months endedSeptember 30, 2009:

 

·      Fuel costs, which include coal (net ofgains on sales), gas, oil and emission allowances (net of gains on sales),increased $52.6 million, or 29%, compared to the same period in 2008, primarilydue to the impact of lower gains realized from the sale of excess emissionallowances.  In 2009, **DP&L** realized $4.1 million in gains from the sale ofexcess emission allowances compared to $30.5 million during the same period in2008.  Also contributing to the increasein fuel costs was an 8% increase in the average cost of fuel consumed perkilowatt-hour largely resulting from higher market prices of coal combined withoutages at lower-cost units, as well as a 4% increase in the usage of fuel duemainly to improved performance of our generating facilities.  This improved performance of our generatingfacilities resulted in increased generation output and a reduced demand forhigher-cost purchased power.  The aboveincreases to fuel costs were partially offset by higher gains realized in 2009from the sale of coal.  In 2009, gainsfrom the sale of coal amounted to $45.9 million compared to $40.3 million forthe same period in 2008.

 

·      Purchased power decreased $104.7 millioncompared to the same period in 2008.  Thenet decrease in purchased power is partly a result of decreases of $61.7million and $27.6 million relating to lower volumes of purchased power andlower average market rates, respectively. Also contributing to the decrease in purchased power is the deferral in2009 of costs relating to **DP&L’s**transmission, capacity and other PJM-related charges which were incurred as amember of PJM.  See Note 3 of Notes toCondensed Consolidated Financial Statements. We purchase power to satisfyretail sales volume when generating facilities are not available due to plannedand unanticipated outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

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**DP&L**—**Operation and Maintenance**

 

Thefollowing table provides a summary of the significant changes from the priorperiods of the operation and maintenance expense items:

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **$ in millions**                                    | ** ** | **2009 vs. 2008**      | ** ** | **2009 vs. 2008**      | ** ** |
| Pension                                                   |       | $                      | 2.0        |                   | $          | 5.4 |   |
| Low-income  payment program                               |       | 1.3                    |       | 4.7                    |       |
| Generating  facilities operating and maintenance expenses |       | (4.1                   | )          | 3.1                    |       |
| ESOP                                                      |       | 0.6                    |       | 2.7                    |       |
| Group  insurance                                          |       | 1.8                    |       | 1.8                    |       |
| Deferred  compensation                                    |       | 0.3                    |       | 0.6                    |       |
| Other,  net                                               |       | 2.9                    |       | 8.2                    |       |
| **Total operation and maintenance expense**               |       | $                      | 4.8        |                   | $          | 26.5 |   |

 

During thethree months ended September 30, 2009, operation and maintenance expenseincreased $4.8 million, or 7%, compared to the similar period in 2008.  This variance was primarily the result of:

 

·      higher pension costs due primarily to adecline in the values of pension plan assets and increased benefits,

 

·      increases in assistance for low-incomeretail customers which is funded by the USF rate rider,

 

·      increases in employee incentive and benefitexpense funded by the ESOP,

 

·      increased health insurance costs primarilyrelated to higher disability reserves, and

 

·      increased deferred compensation costs.

 

Theseincreases were partially offset by lower operating and maintenance expenses atour generating facilities due largely to higher maintenance expenses incurredin the prior year related to unplanned outages at jointly-owned productionunits combined with lower operating costs in 2009.

 

Duringthe nine months ended September 30, 2009, operation and maintenanceexpense increased $26.5 million, or 14%, compared to the similar periods in2008.  This variance was primarily theresult of:

 

·      higher pension costs due primarily to adecline in the values of pension plan assets and increased benefits,

 

·      increases in assistance for low-incomeretail customers which is funded by the USF rate rider,

 

·      increases in operating and maintenanceexpenses for generating facilities largely due to costs associated withunplanned outages at jointly-owned production units ,

 

·      increases in employee incentive and benefitexpense funded by the ESOP,

 

·      increased health insurancecosts primarily related to higher disability reserves, and

 

·      increased deferred compensation costs.

 

**DP&L — Depreciation andAmortization**

 

For the three months andnine months ended September 30, 2009, depreciation and amortizationexpense increased $0.8 million and $5.2 million, respectively, compared to thesimilar periods in 2008 primarily as a result of higher asset balances at thegenerating stations.  These higherbalances were due largely to the completion of the FGD projects in 2008.

 

**DP&L— General Taxes**

 

For the ninemonths ended September 30, 2009, general taxes decreased $3.1 millioncompared to the similar period in 2008 primarily due to lower property taxaccruals in 2009 compared to 2008 and lower KWh excise taxes resulting fromlower retail sales volumes.

 

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**DP&L —****Amortization ofRegulatory Assets**

 

For the nine months endedSeptember 30, 2009, the amortization of regulatory assets was $3.1 millionlower than that of the similar period in 2008, primarily reflecting the 2008amortization of incremental costs incurred in 2004 and 2005 for severestorms.  These storm costs were fullyamortized in the third quarter of 2008.

 

**DP&L— Investment Income**

 

For the nine months endedSeptember 30, 2009, investment income decreased $3.9 million compared tothe same period in 2008 primarily as a result of lower market yields oninvestments.

 

**DP&L**—**Interest Expense**

 

Interest expense for thethree months ended September 30, 2009 increased $1.3 million compared tothe same period of the prior year primarily as a result of $1.0 million oflower capitalized interest in 2009 due largely to the completion of the FGDprojects at the generating stations.

 

Interest expense for thenine months ended September 30, 2009 increased $2.2 million compared tothe same period of the prior year primarily as a result of $5.9 million oflower capitalized interest due largely to the completion of the FGD projects atthe generating stations.  This increasewas partially offset by:

 

·      a $1.6 million write-off in 2008of unamortized debt issuance costs relating to **DP&L’s**$90 million variable rate pollution control bonds following their repurchasefrom the bondholders on April 4, 2008, and

 

·      $1.6 million of deferred interest carrying costs onregulatory assets primarily associated with TCRR and the 2008 incremental stormcosts.  These regulatory assets arefurther discussed in Note 3 of Notes to Condensed Consolidated FinancialStatements.

 

## **DP&L— Income Tax Expense**

## ** **

For the three monthsended September 30, 2009, income taxes increased $0.5 million, or 2%,compared to the same period in 2008, primarily reflecting an increase inpre-tax book income.  This increase waspartially offset by a decrease in the effective tax rate resulting from estimate-to-actualadjustments of 2008 taxes and 2009 estimated tax benefits related to a Section 199— domestic production deduction (Section 199 deduction) and the phase-outof the Ohio Franchise Tax.

 

For the nine months endedSeptember 30, 2009, income taxes decreased $9.1 million, or 9%, comparedto the same period in 2008, primarily due to decreases reflecting a lowerpre-tax book income, a lower effective tax rate resulting from estimate-to-actualadjustments of 2008 taxes and 2009 estimated tax benefits related to a Section 199deduction, the phase-out of the Ohio Franchise Tax and a 2008 settlementrelating to Ohio Franchise Taxes.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL REQUIREMENTS**

 

**DPL’s**financialcondition, liquidity and capital requirements include the consolidated resultsof **DP&L** and **DPL’s** consolidated subsidiaries.  All material intercompany accounts andtransactions have been eliminated in consolidation.

 

**DPL’s Cash Position**

 

**DPL’s** cash and cash equivalents totaled $62.8million at September 30, 2009, compared to $62.5 million at December 31,2008, an increase of $0.3 million.  Theincrease in cash and cash equivalents was primarily attributed to $292.2million of cash generated from operating activities, net borrowings from therevolving credit facilities of $115 million, net withdrawals of $6.7 millionfrom restricted funds drawn to fund pollution control capital expenditures and$5 million of cash from the maturity of a short-term investment, partiallyoffset by cash paid to retire $175 million of long-term debt, $134.6 million ofcapital expenditures, $95.7 million of dividends paid on common stock, and$15.9 million used to repurchase outstanding stock warrants.  At September 30, 2009, **DPL** had $7.9 million in restricted funds held in trust tofund pollution control capital expenditures.

 

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**DP&L’s Cash Position**

 

**DP&L’s** cash and cash equivalents totaled $20.7million at September 30, 2009, compared to $20.8 million at December 31,2008, a decrease of $0.1 million. The decrease in cash and cash equivalents wasprimarily attributed to $270 million in dividends paid on common stock to ourparent **DPL**, and $129.9 million used forcapital expenditures.  These cash inflowswere partially offset by $278.7 million in cash generated from operatingactivities, net borrowings of $115 million from the revolving credit facilitiesand net withdrawals of $6.7 million from restricted funds to pay for pollutioncontrol capital expenditures.   At September 30,2009, **DP&L** had $7.9 million in restrictedfunds held in trust to fund pollution control capital expenditures.

 

**Operating Activities**

 

For the nine months endedSeptember 30, 2009 and 2008, cash flows from operations were as follows:

 

**NetCash provided by Operating Activities**

 
| ** **                  | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **September 30,** | ** ** |
| **$ in millions** | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                        |       |                   |       |   |   |
| **DPL**                     | ** ** | **$**                  | **292.2**  |   | $ | 242.5 |   |
|                        |       |                   |       |   |   |
| **DP&L**                | ** ** | **$**                  | **278.7**  |   | $ | 273.8 |   |

 

The tariff-based revenuefrom our energy business continues to be the principal source of cash fromoperating activities.  Managementbelieves that the diversified retail customer mix of residential, commercialand industrial classes coupled with the rate relief approved by the PUCO willprovide us with a reasonably predictable gross cash flow from operations.

 

**DPL’s Cashprovided by Operating Activities**

 

**DPL** generated net cash from operatingactivities of $292.2 million and $242.5 million in the nine-month periods endedSeptember 30, 2009 and 2008, respectively. The net cash provided by operating activities for 2009 and 2008 wasprimarily the result of cash received from utility customers, partially offsetby cash used for fuel, purchased power, operating expenditures, interest andtaxes.  The fluctuations in certainassets and liabilities result from the timing of payments made and cashreceipts from our utility customers.

 

**DP&L’sCash provided by Operating Activities**

 

**DP&L** generated net cash from operatingactivities of $278.7 million and $273.8 million in the nine-month periods endedSeptember 30, 2009 and 2008, respectively. The net cash provided by operating activities for 2009 and 2008 wasprimarily the result of cash received from utility customers, partially offsetby cash used for fuel, purchased power, operating expenditures, interest andtaxes.  The fluctuations in certainassets and liabilities result from the timing of payments made and cashreceipts from our utility customers.

 

**Investing Activities**

 

For the nine months endedSeptember 30, 2009 and 2008, cash flows from investing activities were asfollows:

 

**NetCash used for Investing Activities**

 
| ** **             | ** ** | **Nine Months Ended**  | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **September 30,** | ** ** |
| **$ in millions** | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                   |       |                   |       |   |   |
| **DPL**                | ** ** | **$**                  | **(128.4** | **)** | $ | (183.7 | ) |
|                   |       |                   |       |   |   |
| **DP&L**           | ** ** | **$**                  | **(129.9** | **)** | $ | (173.1 | ) |

 

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**DPL’sCash used for Investing Activities**

 

**DPL’s**net cash usedfor investing activities was $128.4 million and $183.7 million in thenine-month periods ended September 30, 2009 and 2008, respectively. Net cash flows used for investing activities during both of theseperiods were primarily related to capital expenditures.

 

**DP&L’sCash used for Investing Activities**

 

**DP&L’s** net cash used for investing activitieswere $129.9 million and $173.1 million in the nine-month periods ended September 30,2009 and 2008, respectively.  Net cashflows used for investing activities during both of these periods were relatedto capital expenditures.

 

**Financing Activities**

 

For the nine months endedSeptember 30, 2009 and 2008, cash flows from financing activities were asfollows:

 

**Net Cash used for Financing Activities**

 
| ** **             | ** ** | **Nine Months Ended**  | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **September 30,** | ** ** |
| **$ in millions** | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                   |       |                   |       |   |   |
| **DPL**                | ** ** | **$**                  | **(163.5** | **)** | $ | (167.4 | ) |
|                   |       |                   |       |   |   |
| **DP&L**           | ** ** | **$**                  | **(148.9** | **)** | $ | (80.1 | ) |

 

**DPL’sCash used for Financing Activities**

 

**DPL’s**net cash usedfor financing activities in the nine months ended September 30, 2009 was $163.5 million compared to $167.4 million during the same periodof the prior year.  Net cash flows usedfor financing activities in the nine months ended September 30, 2009 wereprimarily the result of cash used to retire $175 million of long-term debt, topay dividends of $95.7 million to stockholders, and to repurchase $15.9 millionof outstanding stock warrants, partially offset by net borrowings of $115million from the revolving credit facilities and net withdrawals of $6.7million from the restricted funds held in trust.  Net cash flows used for financing activitiesin the nine months ended September 30, 2008 were primarily the result ofcash used to redeem the $100 million of long-term debt and to pay dividends of$89.9 million to stockholders, partially offset by net withdrawals of $20.5million from the restricted funds held in trust.

 

**DP&L’sCash used for Financing Activities**

 

**DP&L’s** net cash used for financing activitiesin the nine months ended September 30, 2009 was $148.9 million compared to$80.1 million during the same period of the prior year.  Net cash flows used for financing activitiesin the nine months ended September 30, 2009 were primarily the result ofcash used to pay common stock dividends of $270 million to our parent **DPL** partially offset by net borrowings of $115 million fromthe revolving credit facilities and $6.7 million in net withdrawals fromrestricted funds held in trust.  Net cashflows used for financing activities for the nine months ended September 30,2008 were primarily the result of cash used to pay common stock dividends of$80 million to our parent **DPL** and therepayment of a short-term loan from **DPL** of $20million, partially offset by net withdrawals of $20.5 million from restrictedfunds held in trust.

 

**DPL** and **DP&L** haveobligations to make future payments for capital expenditures, debt agreements,lease agreements and other long-term purchase obligations and have certaincontingent commitments such as guarantees. We believe our cash flows from operations, the credit facilities(existing or future arrangements), the senior notes and other short- andlong-term debt financing, will be sufficient to satisfy our future workingcapital, capital expenditures and other financing requirements for theforeseeable future.  Our ability togenerate positive cash flows is dependent on general economic conditions,competitive pressures and other business and risk factors described in Item 1aof our Annual Report on Form 10-K for the fiscal year ended December 31,2008 and supplemented by those described from time to time in Part II,Item 1A of our subsequent Quarterly Reports on Form 10-Q.  If we are unable to generate sufficient cashflows, or otherwise comply with the terms of our credit facilities, seniornotes and other long-term debt, we may be required to refinance all or aportion of our existing debt or seek additional financing alternatives.  A discussion of each of our criticalliquidity commitments is outlined below.

 

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** **

**Revolving Credit Facility**

 

On April 21, 2009, **DP&L** entered into a $100 million unsecured revolvingcredit agreement with a syndicated bank group. The agreement is for a 364-day term expiring on April 20,2010.  The facility contains onefinancial covenant: **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  As of September 30, 2009,**DP&L**was in compliance with thiscovenant with a ratio of 0.43 to 1.00. As of September 30, 2009, the borrowings outstanding under thisfacility amounted to $80 million.  This revolvingcredit facility is also discussed in the liquidity section below.

 

**Liquidity**

 

We expect our existingsources of liquidity to remain sufficient to meet our anticipatedobligations.  Our business is capitalintensive, requiring significant resources to fund operating expenses,construction expenditures, scheduled debt maturities and interest and dividendpayments.  For the remainder of 2009 andin subsequent years, we expect to satisfy these requirements with a combinationof cash from operations and funds from the capital markets as market conditionswarrant.  We also expect that theborrowing capacity under credit facilities will continue to be available tomanage working capital requirements during those periods.

 

We have access to $320million of short-term financing under two revolving credit facilities.  The first facility for $220 million expires November 2011and has three participating banks; the lead bank has a total commitment of 36%while the other two have commitments of 32% each.  The second is a 364-day $100 million facilitythat matures April 2010.  A total ofsix banks participate in this facility, with no bank having more than 26% ofthe total commitment.  The two bankgroups have no common members.  We arecurrently evaluating the impact the maturity of the $100 million facility willhave on our future liquidity and would expect to be able to renew or replacethis facility as needed.

 
| ** **                         | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** | **Amounts available as of** | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|----------------|------------|-----------------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** | **September 30, 2009** | ** ** |
| **$ in millions**             | ** ** | **Type**   | ** ** | **Maturity** | ** ** | **Commitment** | ** ** | **DPL**                     | ** ** | **DP&L** | ** ** |
|                               |       |       |       |         |       |           |       |                        |       |   |   |
| Dayton  Power & Light Co. |       | Revolving  |       | 11/21/2011   |       | $              | 220.0      |                        | $          | 185.0 |   | $ | 185.0 |   |
|                               |       |       |       |         |       |           |       |                        |       |   |   |
| Dayton  Power & Light Co. |       | Revolving  |       | 04/20/2010   |       | $              | 100.0      |                        | $          | 20.0 |   | $ | 20.0 |   |
|                               |       |       |       |         |       |           |       |                        |       |   |   |
|                               |       |       |       |         |       | $              | 320.0      |                        | $          | 205.0 |   | $ | 205.0 |   |

 

Asfurther discussed in Note 5 of Notes to Condensed Consolidated FinancialStatements, on October 28, 2009, **DP&L** repaid $90 million of the borrowingsoutstanding under the revolving credit facilities.  After considering these payments, the totalcash available under both facilities at that date amounted to $295 million.

 

The$220 million revolver has a $40 million Letter of Credit (LOC) sublimit.  As of September 30, 2009, there were nooutstanding LOCs.

 

Also,cash and cash equivalents for **DPL** and **DP&L** amounted to $62.8 million and $20.7 million,respectively, at September 30, 2009.

 

Inaddition, at September 30, 2009, **DP&L** had anet tax receivable in the amount of $90.8 million resulting from therecognition of certain tax benefits. This receivable is available to be offset against future income taxliabilities and is expected to be collected within the next 12 months.

 

**Capital Requirements**

 

**DPL’s** construction additions were $100.7million and $168.1 million during the nine-month periods ended September 30,2009 and 2008, respectively.  **DPL** is expected to spend approximately $60 million for theremainder of 2009.

 

**DP&L’s** construction additions were $99.3million and $166.9 million during the nine-month periods ended September 30,2009 and 2008, respectively.  **DP&L**is****expected tospend approximately $60 million for the remainder of 2009.  The remaining planned construction additionsfor 2009 relate to **DP&L’s**environmental compliance program, power plant equipment and its transmissionand distribution system.

 

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Capital projects aresubject to continuing review and are revised in light of changes in financialand economic conditions, load forecasts, legislative and regulatorydevelopments and changing environmental standards, among other factors.  **DPL**and its subsidiary **DP&L,**are projecting to spend approximately $540 millionand $530 million, respectively, in capital projects for the period 2009 through2011, which includes amounts already spent during the first nine months of 2009as quantified above.

 

On August 4, 2009, **DP&L** re-filed its smart grid and advanced meteringinfrastructure (AMI) business cases with the PUCO.  In addition to the capital projects mentionedin the preceding paragraph, **DPL** and **DP&L** are projecting to spend approximately $188 millionon capital projects for the period 2009 through 2011 related to the smart gridand AMI programs, pending approval from the PUCO.  The re-filing at the PUCO is furtherdiscussed in Note 3 of Notes to Condensed Consolidated Financial Statements.

 

Our ability to completecapital projects and the reliability of future service will be affected by ourfinancial condition, the availability of internal funds and the reasonable costof external funds.  We expect to financeour construction additions in 2009 with a combination of cash on hand,short-term financing and cash flows from operations.

 

**Debt Covenants**

 

Therehave been no changes to our debt covenants as disclosed in our Annual Report onForm 10-K for the fiscal year ended December 31, 2008 with theexception of the additional covenant relating to the $100 million revolvingcredit facility entered into on April 21, 2009 (discussed above).  We are in compliance with these debtcovenants at September 30, 2009.

 

**Credit Ratings**

 

The following tableoutlines the debt credit ratings and outlook of each company, along with theeffective dates of each rating and outlook for **DPL**and**DP&L**.

 
| ** **                             | ** ** | **DPL Inc. ****(a)** | ** ** | **DP&L ****(b)** | ** ** | **Outlook** | ** ** | **Effective**    | ** ** |
|----------------------------------------|------------|--------------------------------|------------|---------------------------|------------|-------------|------------|------------------|------------|
|                                   |       |                           |       |                      |       |        |       |             |       |
| Fitch  Ratings                         |       | BBB+                           |       | A+                        |       | Positive    |       | April 2008  |       |
| Moody’s  Investors Service        |       | Baa1                           |       | Aa3                       |       | Stable      |       | August 2009 |       |
| Standard &  Poor’s Corp. |       | BBB+                           |       | A                         |       | Stable      |       | April 2009  |       |

 

----

*(a)  Credit rating relates to **DPL’s** SeniorUnsecured debt.*

*(b)  Credit rating relates to **DP&L’s**Senior Secured debt.*

 

**Off-BalanceSheet Arrangements**

 

**DPLInc. - Guarantees**

 

In the normal course ofbusiness, **DPL**enters into various agreements with ourwholly owned generating subsidiary DPLE providing financial or performanceassurance to third parties.  Theseagreements are entered into primarily to support or enhance thecreditworthiness otherwise attributed to DPLE on a stand-alone basis, thereby facilitating the extension ofsufficient credit to accomplish DPLE’s intended commercial purposes.  Therehave been no material changes to our guarantees as disclosed in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2008.

 

**CommercialCommitments and Contractual Obligations**

 

Therehave been no material changes, outside the ordinary course of business, to ourcommercial commitments and to the information disclosed in the contractualobligations table in our Annual Report on Form 10-K for the fiscal yearended December 31, 2008.

 

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**MARKET RISK**

 

Inthe normal course of business, we are subject to certain market risksincluding, but not limited to, changes in commodity prices for electricity,coal, environmental emissions and gas, as well as fluctuations in interestrates.  Economic pressures, as well aschanging global market conditions and other factors related to physical energyand financial trading activities, which include price, credit, liquidity,volatility, capacity, transmission and interest rates, also can have asignificant effect on our operations and the operations of our customers.  Commodity pricing exposure includes theimpacts of weather, market demand, increased competition and other economicconditions.  For purposes of potentialrisk analysis, we use sensitivity analysis to quantify potential impacts ofmarket rate changes on the results of operations. The sensitivity analysisrepresents hypothetical changes in market values that may or may not occur inthe future.

 

OurCommodity Risk Management Committee (CRMC) is responsible for establishing riskmanagement policies and the monitoring and reporting of risk exposures. The CRMCmeets on a regular basis with the objective of identifying, assessing andquantifying material risk issues and developing strategies to manage theserisks.

 

**CommodityPricing Risk**

 

In 2008 and during thenine months ended September 30, 2009, the coal market has experiencedunprecedented price volatility.  The coalmarket has increasingly been influenced by both international and domesticsupply and consumption and, while we have all of the total expected coal volumeneeded to meet our retail and firm wholesale sales requirements for 2009 undercontract, sales requirements may change, particularly for retail load.  To the extent we are not able to hedgeagainst price volatility, our results of operations, financial position or cashflows could be materially affected.

 

Approximately7% of **DPL’s** and 11% of **DP&L’s** electric revenues for the nine months ended September 30, 2009 were from sales of excess energy in thewholesale market.  Energy in excess ofthe needs of existing retail customers is sold in the wholesale market when wecan identify opportunities with positive margins.

 

As of September 30,2009, a hypothetical increase or decrease of 10% in the price per megawatt hour of wholesale power could result inapproximately a $7 million increase or decrease to **DPL’s**annual net income.  This includes theimpact of a corresponding 10% change in the portion of purchased power used aspart of the sale.  The share of theinternal generation used to meet the wholesale sale would not be affected bythe 10% change in wholesale prices.

 

As of September 30,2009, a hypothetical increase or decrease of 10% in the price per megawatt hour of wholesale power, including theimpact of a corresponding 10% change in the portion of purchased power used aspart of the sale, could result in approximately a $10 million increase ordecrease to **DP&L’s** annual netincome.

 

**DPL’s** fuel (including coal, gas, oil andemission allowances) and purchased power costs as a percent of total operatingcosts in the nine months ended September 30, 2009 and 2008 were 50% and54%, respectively.  **DP&L’s** fuel (including coal, gas, oiland emission allowances) and purchased power costs as a percent of totaloperating costs were 51% and 55% for the nine-month periods ending September 30,2009 and 2008, respectively.  We havesubstantially all of the total expected coal volume needed to meet our retailand firm wholesale sales requirements for 2009 under contract.  The majority of our contracted coal ispurchased at fixed prices although some contracts provide for periodic pricingadjustments.  Substantially all contractshave features that limit price escalations in any given year.  We do not expect to purchase SO2 allowances for 2009, however, the exact consumption ofSO2 allowances will depend on market pricesfor power, availability of our generation units and the actual sulfur contentof the coal burned.  We do not plan topurchase NOx allowances for the remainder of 2009.  Fuel costs are impacted by changes in volumeand price and are driven by a number of variables including weather,reliability of coal deliveries, scheduled outages and generation plantmix.  Based on higher volume and price,fuel costs excluding the effect of emission allowance sales are forecasted tobe 15% to 20% higher in 2009 compared to 2008.

 

Purchased power costsdepend, in part, upon the timing and extent of planned and unplanned outages ofour generating capacity.  We willpurchase power on a discretionary basis when wholesale market conditionsprovide opportunities to obtain power at a cost below our internal productioncosts.

 

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As of September 30,2009, a hypothetical increase or decrease of 10% in the prices of fuel andpurchased power could result in approximately a $30 million increase ordecrease to **DPL’s** annual netincome.

 

As of September 30,2009, a hypothetical increase or decrease of 10% in the prices of fuel andpurchased power could result in approximately a $29 million increase ordecrease to **DP&L’s** annual netincome.

 

**InterestRate Risk**

 

As a result of our normalinvesting and borrowing activities, our financial results are exposed tofluctuations in interest rates, which we manage through our regular financingactivities.  We maintain both cash ondeposit and investments in cash equivalents that may be affected by adverseinterest rate fluctuations.  **DPL** has fixed-rate long-term debt and **DP&L**has both fixed and variable-rate long-term debt.  **DP&L’s**variable-rate debt is comprised of pollution control bonds.  The variable-rate bonds bear interest basedon a prevailing rate that is reset weekly based on a comparable marketindex.  Market indices can be affected bymarket demand, supply, market interest rates and other economic conditions.

 

Thecarrying value of **DPL’s** long-termdebt was $1,376.5 million at September 30, 2009, consisting of **DP&L’s** first mortgage bonds, **DP&L’s** tax-exempt pollution controlbonds, **DPL’s** unsecured notes and revolvingcredit facilities, and **DP&L’s**capital lease.  The fair value of thisdebt was $1,348.3 million, based on current market prices or discounted cashflows using current rates for similar issues with similar terms and remainingmaturities.

 

The carrying value of **DP&L’s** long-term debt was $884.3 million at September 30,2009, consisting of **DP&L’s**first mortgage bonds, **DP&L’s**tax-exempt pollution control bonds, **DP&L’s**revolvingcredit facilities and **DP&L’s**capital lease.  The fair value of thisdebt was $846.4 million, based on current market prices or discounted cashflows using rates for similar issues with similar terms and remainingmaturities.

 

**CRITICALACCOUNTING ESTIMATES**

 

**DPL’s** and **DP&L’s**condensed consolidated financial statements are prepared in accordance withGAAP.  In connection with the preparationof these financial statements, our management is required to make assumptions,estimates and judgments that affect the reported amounts of assets, liabilities,revenues, expenses and the related disclosure of contingent liabilities.  These assumptions, estimates and judgmentsare based on our historical experience and assumptions that we believed to bereasonable at the time.  However, becausefuture events and their effects cannot be determined with certainty, thedetermination of estimates requires the exercise of judgment.  Our critical accounting estimates are thosewhich require assumptions to be made about matters that are highly uncertain.

 

Different estimates couldhave a material effect on our financial results. Judgments and uncertaintiesaffecting the application of these policies and estimates may result inmaterially different amounts being reported under different conditions orcircumstances.  Historically, however,recorded estimates have not differed materially from actual results.  Significant items subject to such judgmentsinclude: the carrying value of property, plant and equipment; unbilledrevenues; income taxes; valuation of regulatory assets and liabilities; thevaluation of insurance and claims costs; the valuation of assets andliabilities related to employee benefits; and the valuation of contingent andother obligations.  Actual results maydiffer from those estimates.  Refer toour Annual Report on Form 10-K for the fiscal year ended December 31,2008 for a complete listing of our critical accounting policies andestimates.  There have been no materialchanges to these critical accounting policies and estimates.

 

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**ELECTRICSALES AND REVENUES**

 
| ** **                                | ** ** | **DPL  Inc.**           | ** **  | **DP&L  (a)**      | ** ** |
|-------------------------------------------|------------|-------------------------|-------------|------------------------|------------|
| ** **                                | ** ** | **Three  Months Ended** | ** **  | **Nine  Months Ended** | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
| ** **                                | ** ** | **September 30,**  | ** **  | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                | ** ** | **2009**                | ** **  | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Electric  sales (millions in kWh)         |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                               | ** ** | **1,237**               |        | 1,375                  | ** ** | **3,862** |   | 4,144 | ** ** | **1,237** |   | 1,375 | ** ** | **3,862** |   | 4,144 |   |
| Commercial                                | ** ** | **961**                 |        | 1,055                  | ** ** | **2,799** |   | 3,001 | ** ** | **961** |   | 1,055 | ** ** | **2,799** |   | 3,001 |   |
| Industrial                                | ** ** | **909**                 |        | 1,099                  | ** ** | **2,522** |   | 3,062 | ** ** | **909** |   | 1,099 | ** ** | **2,522** |   | 3,062 |   |
| Other  retail                             | ** ** | **353**                 |        | 380                    | ** ** | **1,049** |   | 1,096 | ** ** | **353** |   | 380 | ** ** | **1,049** |   | 1,096 |   |
| Total  retail                             | ** ** | **3,460**               |        | 3,909                  | ** ** | **10,232** |   | 11,303 | ** ** | **3,460** |   | 3,909 | ** ** | **10,232** |   | 11,303 |   |
|                                      |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                                 | ** ** | **915**                 |        | 343                    | ** ** | **2,039** |   | 1,762 | ** ** | **897** |   | 305 | ** ** | **1,975** |   | 1,724 |   |
|                                      |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                     | ** ** | **4,375**               |        | 4,252                  | ** ** | **12,271** |   | 13,065 | ** ** | **4,357** |   | 4,214 | ** ** | **12,207** |   | 13,027 |   |
|                                      |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues ($ in thousands) |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                               | ** ** | **$**                   | **143,668** |                   | $          | 139,759 | ** ** | **$** | **419,528** |   | $ | 409,349 | ** ** | **$** | **143,668** |   | $ | 139,759 | ** ** | **$** | **419,528** |   | $ | 409,349 |   |
| Commercial                                | ** ** | **86,491**              |        | 84,402                 | ** ** | **249,133** |   | 249,073 | ** ** | **85,420** |   | 78,831 | ** ** | **247,143** |   | 232,240 |   |
| Industrial                                | ** ** | **61,218**              |        | 64,039                 | ** ** | **172,094** |   | 182,246 | ** ** | **49,569** |   | 36,955 | ** ** | **140,559** |   | 101,642 |   |
| Other  retail                             | ** ** | **25,324**              |        | 25,121                 | ** ** | **74,290** |   | 72,973 | ** ** | **20,943** |   | 19,949 | ** ** | **62,181** |   | 59,028 |   |
| Other  miscellaneous revenues             | ** ** | **2,135**               |        | 2,444                  | ** ** | **6,248** |   | 7,193 | ** ** | **2,168** |   | 2,452 | ** ** | **6,346** |   | 7,199 |   |
| Total  retail                             | ** ** | **318,836**             |        | 315,765                | ** ** | **921,293** |   | 920,834 | ** ** | **301,768** |   | 277,946 | ** ** | **875,757** |   | 809,458 |   |
|                                      |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                                 | ** ** | **30,951**              |        | 27,820                 | ** ** | **81,534** |   | 124,745 | ** ** | **47,777** |   | 61,937 | ** ** | **124,728** |   | 233,747 |   |
|                                      |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| RTO  revenues                             | ** ** | **54,547**              |        | 68,101                 | ** ** | **171,578** |   | 155,123 | ** ** | **48,668** |   | 61,583 | ** ** | **153,248** |   | 148,605 |   |
|                                      |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  revenues                           | ** ** | **3,025**               |        | 2,810                  | ** ** | **9,118** |   | 8,709 | ** ** | **—** |   | — | ** ** | **—** |   | — |   |
|                                      |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                     | ** ** | **$**                   | **407,359** |                   | $          | 414,496 | ** ** | **$** | **1,183,523** |   | $ | 1,209,411 | ** ** | **$** | **398,213** |   | $ | 401,466 | ** ** | **$** | **1,153,733** |   | $ | 1,191,810 |   |
|                                      |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Electric  customers at end of period      |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                               | ** ** | **455,318**             |        | 455,537                | ** ** | **455,318** |   | 455,537 | ** ** | **455,318** |   | 455,537 | ** ** | **455,318** |   | 455,537 |   |
| Commercial                                | ** ** | **50,026**              |        | 50,071                 | ** ** | **50,026** |   | 50,071 | ** ** | **50,026** |   | 50,071 | ** ** | **50,026** |   | 50,071 |   |
| Industrial                                | ** ** | **1,773**               |        | 1,806                  | ** ** | **1,773** |   | 1,806 | ** ** | **1,773** |   | 1,806 | ** ** | **1,773** |   | 1,806 |   |
| Other                                     | ** ** | **6,560**               |        | 6,489                  | ** ** | **6,560** |   | 6,489 | ** ** | **6,560** |   | 6,489 | ** ** | **6,560** |   | 6,489 |   |
|                                      |       |                    |        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                     | ** ** | **513,677**             |        | 513,903                | ** ** | **513,677** |   | 513,903 | ** ** | **513,677** |   | 513,903 | ** ** | **513,677** |   | 513,903 |   |

 

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*(a)**      **DP&Lsells power to DPLER (a subsidiary of DPL). The revenues associated with these sales are classified as wholesalesales on DP&L’s financial statements and retail sales for DPL.  The kWh volumes contain all volumesdistributed on the DP&L system which include the retail sales byDPLER.  The sales for resale volumes areomitted from DP&L to avoid duplicate reporting.*

 

**Item 3. Quantitative and Qualitative Disclosures about Market Risk**

 

See the “MARKET RISK” section in Item 2 of Part Iof this report.

 

**Item 4. Controls and Procedures**

 

Our ChiefExecutive Officer (CEO) and Chief Financial Officer (CFO) are responsible forestablishing and maintaining our disclosure controls and procedures (as definedin Rule 13a — 15(e) under the Securities Exchange Act of 1934, asamended).  These controls and procedureswere designed to ensure that material information relating to us and oursubsidiaries is communicated to the CEO and CFO.  We evaluated these disclosure controls andprocedures as of the end of the period covered by this report with theparticipation of our CEO and CFO.  Basedon this evaluation, our CEO and CFO concluded that our disclosure controls andprocedures are effective: (i) to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rules and forms and (ii) to ensure that informationrequired to be disclosed by us in the reports that we submit under the ExchangeAct is accumulated and communicated to our management, including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate, to allow timely decisions regarding requireddisclosure.

 

There was nochange in our internal control over financial reporting during the three monthsended September 30, 2009 that has materially affected, or is reasonablylikely to materially affect, internal control over reporting.

 

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** **

**Part II — Other Information**

** **

**Item1**— **Legal Proceedings**

 

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  We believe the amounts provided in ourcondensed consolidated financial statements, as prescribed by GAAP, for thesematters are adequate 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, including the matters discussed below,and to comply with applicable laws and regulations will not exceed the amountsreflected in our condensed consolidated financial statements.  As such, costs, if any, that may be incurredin excess of those amounts provided as of September 30, 2009, cannot bereasonably determined.

 

Our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008 and Quarterly Reports on Form 10-Qfor the three months ended March 31, 2009 and June 30, 2009, containdescriptions of certain legal proceedings in which we are or wereinvolved.  The information in this Item 1is limited to certain recent developments concerning our legal proceedings andshould be read in conjunction with our Annual Report on Form 10-K for thefiscal year ended December 31, 2008, and our Quarterly Reports on Form 10-Qfor the three months ended March 31, 2009 and June 30, 2009.

 

As previously reported,on May 16, 2007, **DPL** filed aclaim with Energy Insurance Mutual (EIM) to recoup legal expenses associatedwith our litigation against certain former executives.  Arbitration onthat claim occurred on May 13, 2009. Thearbitration panel issued a ruling in Phase 1 of the arbitration on September 25,2009, finding that most of the claims involving the former executives werecovered.  Further arbitration proceedings are scheduled to determine theamount of legal and fee expenses (if any) that the insurer must pay.  **DPL**has, in accordance with GAAP, previously recorded these legal expenses totaling$7.5 million to expense but has not recorded any assets for possible recoveryof these expenses.

 

Information concerningthe legal proceedings discussed in the REGULATORY UPDATES and ENVIRONMENTALUPDATES sections of Item 2 of Part I of this Quarterly Report on Form 10-Qis incorporated by reference into this Item.

 

**Item1A — Risk Factors**

 

Acomprehensive listing of risk factors that we consider to be the mostsignificant to your decision to invest in our stock is provided in our mostrecent Annual Report on Form 10-K. The information presented below amends and restates in its entirety oneof those risk factors, and should be read in conjunction with the other riskfactors and information disclosed in our most recent Annual Report on Form 10-K.  If any of these events occur, our business,financial position or results of operation could be materially affected.  The Form 10-K may be obtained asdiscussed on Page 6 of this report.

 

**RegionalTransmission Organizational Risks**

 

On October 1, 2004,in compliance with Ohio law, **DP&L** turnedover control of its transmission functions and fully integrated into PJM. The price at which **DPL** and **DP&L** can sell its generation capacity and energy is nowmore dependent upon the overall operation of the PJM market.  While **DP&L** cancontinue to make bi-lateral transactions to sell its generation through awilling-buyer and willing-seller relationship, any transactions that are notpre-arranged are subject to market conditions at PJM.  The rules governing the various regionalpower markets also change from time to time which could affect **DP&L’s** costs and revenues.  **DP&L** incursfees and costs to participate in the RTO.  We may be limited with respect to the price atwhich power may be sold from certain generating units and we may be required toexpand our transmission system according to decisions made by the RTO ratherthan our internal planning process.  While RTO transmission rates were initiallydesigned to be revenue neutral, various proposals and proceedings currentlytaking place at FERC may cause transmission rates to change from time totime.  In addition, developing rules associated with the allocation andmethodology of assigning costs associated with improved transmissionreliability, reduced transmission congestion and firm transmission rights mayhave a financial impact on **DP&L**. Likewise, in December 2006, FERC approved PJM’s RPM.  RPM becameeffective in 2007 and provides forward and locational pricing for generationcapacity.

 

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While the impact of RPMand other RTO developments on us will depend on a variety of factors, includingthe market behavior of various participants, our results of operations,financial condition and cash flows could be adversely affected.  Forexample, the PJM RPM base residual auction for the 2012/13 period cleared at aper megawatt price of $16/day for our RTO area.  Prior to this auction,the per megawatt price for the 2011/2012 period was $110/day.  Future RPM auction results will be dependentnot only on the overall supply and demand of generation and load, but may alsobe impacted by congestion as well as PJM’s business rules relating tobidding for Demand Response and Energy Efficiency resources in the RPMauctions.  We cannot predict the outcomeof future auctions but if the current auction price is sustained, our futureresults of operations, financial condition and cash flows could be adverselyimpacted.

 

SB 221includes a provision that allows electric utilities to seek and obtain deferraland recovery of  RTO relatedcharges.  If in the future, however, we are unable to defer or recover allof these costs, it could have a material adverse effect on us.

 

Asa member of PJM, **DP&L** and DPLE are subject tocertain additional risks including those associated with the allocation amongPJM members of losses caused by unreimbursed defaults of other participants inPJM markets and those associated with complaint cases filed against PJM thatmay seek refunds of revenues previously earned by PJM members including **DP&L** and DPLE.

 

**Item2 — Unregistered Sales of Equity Securities and Use of Proceeds**

 

None

 

**Item3 — Defaults Upon Senior Securities**

 

None

 

**Item4 — Submission of Matters to a Vote of Security Holders**

 

None

 

**Item5 — Other Information**

 

None

 

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**Item6 — Exhibits**

** **
| **DPL Inc.** | ** ** | **DP&L** | ** ** | **Number** | ** ** | **Exhibit**                                                                                              | ** ** | **Location**                                                                               |
|--------------|------------|--------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|
| X            |       |         |       | 10(a)*     |       | Form of DPL Inc. Restricted Stock Agreement                                                         |       | Exhibit 10(d) to Form 10-Q filed July 30,  2009 (File No. 1-9052) |
|         |       |         |       |       |       |                                                                                                     |       |                                                                                       |
| X            |       |         |       | 10(b)*     |       | Form of DPL Inc. 2009 Career Grant and Matching  Restricted Stock Agreement                         |       | Filed herewith as Exhibit 10(b)                                                       |
|         |       |         |       |       |       |                                                                                                     |       |                                                                                       |
| X            |       |         |       | 31(a)      |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 31(a)                                                       |
|         |       |         |       |       |       |                                                                                                     |       |                                                                                       |
| X            |       |         |       | 31(b)      |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 31(b)                                                       |
|         |       |         |       |       |       |                                                                                                     |       |                                                                                       |
|         |       | X            |       | 31(c)      |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 31(c)                                                       |
|         |       |         |       |       |       |                                                                                                     |       |                                                                                       |
|         |       | X            |       | 31(d)      |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 31(d)                                                       |
|         |       |         |       |       |       |                                                                                                     |       |                                                                                       |
| X            |       |         |       | 32(a)      |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 32(a)                                                       |
|         |       |         |       |       |       |                                                                                                     |       |                                                                                       |
| X            |       |         |       | 32(b)      |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 32(b)                                                       |
|         |       |         |       |       |       |                                                                                                     |       |                                                                                       |
|         |       | X            |       | 32(c)      |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 32(c)                                                       |
|         |       |         |       |       |       |                                                                                                     |       |                                                                                       |
|         |       | X            |       | 32(d)      |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 32(d)                                                       |

 

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* Management contract orcompensatory plan

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, DPL Inc. and The Dayton Power and Light Company has duly causedthis report to be signed on their behalf by the undersigned, thereunto dulyauthorized.

 

 
| ** ** | ** **            | ** ** | **   DPL Inc.**                                                      |
|------------|-----------------------|------------|-------------------------------------------------------------------------------------|
| ** ** | ** **            | ** ** | **   The Dayton Power and Light  Company**                           |
|       |                  |       | **   **(Registrants)                                                 |
|       |                  |       |                                                                                |
|       |                  |       |                                                                                |
| Date:      | October 28, 2009 |       | **   **/s/ Paul M. Barbas                                            |
|       |                  |       | **   **Paul M. Barbas                                                |
|       |                  |       |    President  and Chief Executive Officer                            |
|       |                  |       | **   **(principal executive officer)                                 |
|       |                  |       |                                                                                |
|       |                  |       |                                                                                |
|       | October 28, 2009 |       | **   **/s/ Frederick J. Boyle                                        |
|       |                  |       | **   **Frederick J. Boyle                                            |
|       |                  |       | **   **Senior Vice President, Chief Financial  Officer and Treasurer |
|       |                  |       | **   **(principal financial officer)                                 |
|       |                  |       |                                                                                |
|       |                  |       |                                                                                |
|       | October 28, 2009 |       | **   **/s/ Joseph W. Mulpas                                          |
|       |                  |       | **   **Joseph W. Mulpas                                              |
|       |                  |       | **   **Vice President, Controller and Chief  Accounting Officer      |
|       |                  |       | **   **(principal accounting officer)                                |

 

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