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** **

 

** **

**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****March 31, 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                                                          |       |                                      |

 

Indicateby check mark whether each registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

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

 

Indicateby check mark whether each registrant has submitted electronically and postedon its corporate 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 check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “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             |

 

Indicateby check mark whether each registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

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

 

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

 
| **Registrant**                         | ** ** | **Description**                   | ** ** | **Shares Outstanding** |
|----------------------------------------|------------|-----------------------------------|------------|-----------------------------|
|                                   |       |                              |       |                        |
| **DPL Inc.**                           | ** ** | **Common Stock, $0.01 par value** |       | 115,962,529                 |
| ** **                             | ** ** | ** **                        | ** ** | ** **                  |
| **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 DaytonPower 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 | 32                |
|                                        |                                                                                        |              |
|                                        | Electric Sales and  Revenues                                                                | 49                |
|                                        |                                                                                        |              |
| Item 3                                      | Quantitative  and Qualitative Disclosures about Market Risk                                 | 50                |
|                                        |                                                                                        |              |
| Item 4                                      | Controls and  Procedures                                                                    | 50                |
|                                        |                                                                                        |              |
| **Part II  Other Information**    |                                                                                        |
|                                        |                                                                                        |              |
| Item 1                                      | Legal Proceedings                                                                           | 50                |
|                                        |                                                                                        |              |
| Item 1A                                     | Risk Factors                                                                                | 51                |
|                                        |                                                                                        |              |
| Item 2                                      | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 51                |
|                                        |                                                                                        |              |
| Item 3                                      | Defaults  Upon Senior Securities                                                            | 51                |
|                                        |                                                                                        |              |
| Item 4                                      | Submission  of Matters to a Vote of Security Holders                                        | 51                |
|                                        |                                                                                        |              |
| Item 5                                      | Other Information                                                                           | 51                |
|                                        |                                                                                        |              |
| Item  6                                     | Exhibits                                                                                    | 52                |
|                                        |                                                                                        |              |
| **Other**                                   |                                                                                        |
|                                        |                                                                                        |
| Signatures                                  | 53                                                                                          |
|                                        |                                                                                        |
| Certifications                              | 1                                                                                           |

 

2

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**GLOSSARY OF TERMS**

 

The following selectabbreviations or acronyms are used in this Form 10-Q:

 
| **Abbreviation or Acronym** | ** ** | **Definition**                                                                                                                                                                                                                         |
|---------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 facilities                                                                                                                               |
| DPLER                                 |       | DPL  Energy Resources, Inc., a wholly owned subsidiary of DPL which sells  retail electric energy and other energy services under contract to major  industrial and commercial customers in West Central Ohio                     |
| 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 some other form of  incentive in return for agreeing to reduce their electricity consumption upon  request by the utility.    |
| EPS                                   |       | Earnings Per Share                                                                                                                                                                                                                     |
| ESOP                                  |       | Employee Stock Ownership  Plan                                                                                                                                                                                                         |
| ESP                                   |       | Electric Security Plans,  filed with the PUCO, pursuant to Ohio law                                                                                                                                                                    |
| FERC                                  |       | Federal Energy Regulatory  Commission                                                                                                                                                                                                  |
| FGD                                   |       | Flue Gas Desulfurization                                                                                                                                                                                                               |
| FGIC                                  |       | Financial Guaranty  Insurance Company, an unaffiliated insurance company                                                                                                                                                               |
| Fitch                                 |       | Fitch Ratings, Inc.                                                                                                                                                                                                               |
| GAAP                                  |       | Generally Accepted  Accounting Principles                                                                                                                                                                                              |
| IRS                                   |       | U.S. Internal Revenue  Service                                                                                                                                                                                                         |
| KWh                                   |       | Kilowatt hours                                                                                                                                                                                                                         |
| Moody’s                          |       | Moody’s Investors  Service, Inc.                                                                                                                                                                                             |
| MVIC                                  |       | Miami  Valley Insurance Company, a wholly owned insurance subsidiary of DPL that  provides insurance sources to DPL and its subsidiaries                                                                                               |
| NOx                                   |       | Nitrogen Oxide                                                                                                                                                                                                                         |
| NYMEX                                 |       | New York Mercantile  Exchange                                                                                                                                                                                                          |
| OAQDA                                 |       | Ohio Air Quality  Development Authority                                                                                                                                                                                                |
| ODOD                                  |       | Ohio Department of  Development                                                                                                                                                                                                        |
| 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                                                                                                                       |
| PJM                                   |       | PJM Interconnection,  L.L.C., a regional transmission organization                                                                                                                                                                     |
| PUCO                                  |       | Public Utilities  Commission of Ohio                                                                                                                                                                                                   |
| RSU                                   |       | Restricted Stock Units                                                                                                                                                                                                                 |
| RTO                                   |       | Regional Transmission  Organization                                                                                                                                                                                                    |

 

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**GLOSSARYOF TERMS (cont.)**

 
| **Abbreviation or Acronym** | ** ** | **Definition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| SB 221                                |       | On  May 1, 2008, substitute Senate Bill 221, an Ohio electric energy bill,  was signed by the Governor and went into effect July 31, 2008. This new  law states that all Ohio distribution utilities must 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| S&P                               |       | Standard & Poor’s  Corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| SO2                                   |       | Sulfur Dioxide                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| The Stipulation                       |       | On  February 24, 2009, **DP&L**  filed a Stipulation and Recommendation on our rate case signed by the Staff  of the PUCO, the Office of the Ohio Consumers’ Counsel and various  intervening parties. The Stipulation may be approved, modified or rejected by  the PUCO. A final decision from the PUCO regarding the Stipulation is  expected some time in the summer of 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. |
| USEPA                                 |       | U.S. Environmental  Protection Agency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| USF                                   |       | Universal Service Fund                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| VRDNs                                 |       | Variable Rate Demand Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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** **

**DPL Inc.** 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 at 100 FStreet 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.

 

Ourpublic internet site is http://www.dplinc.com. We make available, free of charge, through our internet site, our annualreports on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, and Forms 3, 4 and 5 filed on behalf of our directors andexecutive officers, and amendments to those reports filed or furnished pursuantto the Securities Exchange Act of 1934, as amended, as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the SEC.

 

In addition, our public internet site includes otheritems related to corporate governance matters, including, among other things,our governance guidelines, charters of various committees of the Board ofDirectors and our code of business conduct and ethics applicable to allemployees, officers and directors.  Youmay obtain copies of these documents, free of charge, by sending a request, inwriting, to DPL Investor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.

** **

**Part 1 — FinancialInformation**

** **

Thisreport includes the combined 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 be clearly noted in the section.

 

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**Item 1 — Financial Statements**

 

**DPL INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF RESULTS OFOPERATIONS**

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **March 31,**     | ** ** |
| **$ in millions except per share amounts**              | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                         |       |                   |       |   |   |
| **Revenues**                                                 | ** ** | **$**                  | **415.0**  |   | $ | 416.1 |   |
|                                                         |       |                   |       |   |   |
| **Cost of revenues:**                                        | ** ** | ** **             | ** ** | ** ** | ** ** |
| Fuel                                                         | ** ** | **81.4**               |       | 61.9 |   |
| Purchased power                                              | ** ** | **59.7**               |       | 83.0 |   |
| Total cost of revenues                                       | ** ** | **141.1**              |       | 144.9 |   |
|                                                         | ** ** | ** **             |       |   |   |
| **Gross margin**                                             | ** ** | **273.9**              |       | 271.2 |   |
|                                                         |       |                   |       |   |   |
| **Operating expenses:**                                      | ** ** | ** **             | ** ** | ** ** | ** ** |
| Operation and maintenance                                    | ** ** | **77.0**               |       | 62.4 |   |
| Depreciation and amortization                                | ** ** | **35.9**               |       | 33.2 |   |
| General taxes                                                | ** ** | **32.1**               |       | 29.8 |   |
| Amortization of regulatory assets                            | ** ** | **1.9**                |       | 3.1 |   |
| Total operating expenses                                     | ** ** | **146.9**              |       | 128.5 |   |
|                                                         | ** ** | ** **             |       |   |   |
| **Operating income**                                         | ** ** | **127.0**              |       | 142.7 |   |
|                                                         |       |                   |       |   |   |
| **Other income / (expense), net**                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Investment income                                            | ** ** | **0.5**                |       | 1.7 |   |
| Interest expense                                             | ** ** | **(21.7**              | **)**      | (21.0 | ) |
| Other income (deductions)                                    | ** ** | **(0.2**               | **)**      | (0.7 | ) |
| Total other income / (expense), net                          | ** ** | **(21.4**              | **)**      | (20.0 | ) |
|                                                         | ** ** | ** **             | ** ** |   |   |
| **Earnings before income tax**                               | ** ** | **105.6**              |       | 122.7 |   |
|                                                         |       |                   |       |   |   |
| Income tax expense                                           | ** ** | **36.4**               |       | 45.4 |   |
|                                                         | ** ** | ** **             |       |   |   |
| **Net income**                                               | ** ** | **$**                  | **69.2**   |   | $ | 77.3 |   |
| ** **                                                   | ** ** | ** **             | ** ** |   |   |   |   |
| **Average number of common shares outstanding  (millions):** | ** ** | ** **             | ** ** | ** ** | ** ** |
| Basic                                                        | ** ** | **112.1**              |       | 109.3 |   |
| Diluted                                                      | ** ** | **112.7**              |       | 116.4 |   |
|                                                         |       |                   |       |   |   |
| **Earnings per share of common stock:**                      | ** ** | ** **             | ** ** | ** ** | ** ** |
| Basic                                                        | ** ** | **$**                  | **0.62**   |   | $ | 0.71 |   |
| Diluted                                                      | ** ** | **$**                  | **0.61**   |   | $ | 0.66 |   |
|                                                         |       |                   |       |   |   |
| **Dividends paid per share of common stock**                 | ** ** | **$**                  | **0.285**  |   | $ | 0.275 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**DPL INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**     | ** ** |
| **$ in millions**                                                             | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                                               |       |                   |       |   |   |
| **Cash flows from operating activities:**                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income                                                                         | ** ** | **$**                  | **69.2**   |   | $ | 77.3 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                      | ** ** | **35.9**               |       | 33.2 |   |
| Amortization of regulatory assets                                                  | ** ** | **1.9**                |       | 3.1 |   |
| Deferred income taxes                                                              | ** ** | **2.9**                |       | 4.8 |   |
| Changes in certain assets and liabilities:                                         |       |                   |       |   |   |
| Accounts receivable                                                                | ** ** | **20.8**               |       | 1.7 |   |
| Deposits and other advances                                                        | ** ** | **2.5**                |       | 0.2 |   |
| Accounts payable                                                                   | ** ** | **(44.8**              | **)**      | 5.6 |   |
| Accrued taxes payable                                                              | ** ** | **26.3**               |       | 17.0 |   |
| Accrued interest payable                                                           | ** ** | **(6.7**               | **)**      | (4.8 | ) |
| Prepayments                                                                        | ** ** | **1.5**                |       | 1.3 |   |
| Deferred regulatory costs                                                          | ** ** | **(24.3**              | **)**      | (1.7 | ) |
| Inventories                                                                        | ** ** | **(11.7**              | **)**      | 11.2 |   |
| Deferred compensation                                                              | ** ** | **(3.7**               | **)**      | (3.6 | ) |
| Other                                                                              | ** ** | **5.8**                |       | 4.4 |   |
| **Net cash provided by operating activities**                                      | ** ** | **75.6**               |       | 149.7 |   |
|                                                                               |       |                   |       |   |   |
| **Cash flows from investing activities:**                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Capital expenditures                                                               | ** ** | **(50.2**              | **)**      | (65.3 | ) |
| Maturity of short-term investment                                                  | ** ** | **5.0**                |       | — |   |
| **Net cash used for investing activities**                                         | ** ** | **(45.2**              | **)**      | (65.3 | ) |
|                                                                               |       |                   |       |   |   |
| **Cash flows from financing activities:**                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Exercise of stock options                                                          | ** ** | **—**             |       | 1.1 |   |
| Tax impact related to exercise of stock  options                                   | ** ** | **—**             |       | 0.1 |   |
| Repurchase of warrants                                                             | ** ** | **(15.9**              | **)**      | — |   |
| Retirement of long-term debt                                                       | ** ** | **(175.0**             | **)**      | — |   |
| Withdrawals of restricted funds held in  trust, net                                | ** ** | **6.7**                |       | 6.6 |   |
| Dividends paid on common stock                                                     | ** ** | **(32.1**              | **)**      | (29.9 | ) |
| Withdrawals from revolving credit facility                                         | ** ** | **150.0**              |       | — |   |
| **Net cash used for financing activities**                                         | ** ** | **(66.3**              | **)**      | (22.1 | ) |
|                                                                               |       |                   |       |   |   |
| **Cash and cash equivalents:**                                                     | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net change                                                                         | ** ** | **(35.9**              | **)**      | 62.3 |   |
| Balance at beginning of period                                                     | ** ** | **62.5**               |       | 134.9 |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                  | **26.6**   |   | $ | 197.2 |   |
|                                                                               |       |                   |       |   |   |
| **Supplemental cash flow information:**                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Interest paid, net of amounts capitalized                                          | ** ** | **$**                  | **28.4**   |   | $ | 24.7 |   |
| Income taxes (refunded)/paid, net                                                  | ** ** | **$**                  | **(5.0**   | **)** | $ | 10.2 |   |
| Non-cash financing and investing  activities:                                      |       |                   |       |   |   |
| Restricted funds held in trust                                                     | ** ** | **$**                  | **7.8**    |   | $ | 30.3 |   |
| Accruals for capital expenditures                                                  | ** ** | **$**                  | **15.9**   |   | $ | 28.1 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**DPL INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                     | ** ** | **At**             | ** **  | **At**                | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                                         | ** ** | **2009**           | ** **  | **2008**              | ** ** |
|                                                                                           |       |               |        |                  |       |
| **ASSETS**                                                                                     | ** ** | ** **         | ** **  | ** **            | ** ** |
|                                                                                           |       |               |        |                  |       |
| **Current assets:**                                                                            | ** ** | ** **         | ** **  | ** **            | ** ** |
| Cash and cash equivalents                                                                      | ** ** | **$**              | **26.6**    |                  | $          | 62.5 |   |
| Restricted funds held in trust                                                                 | ** ** | **7.8**            |        | 14.5                  |       |
| Accounts receivable, less provision for  uncollectible accounts of $1.4 and $1.1, respectively |       | **215.2**          |        | 259.9                 |       |
| Inventories, at average cost                                                                   | ** ** | **116.9**          |        | 105.1                 |       |
| Taxes applicable to subsequent years                                                           | ** ** | **43.5**           |        | 58.0                  |       |
| Other current assets                                                                           | ** ** | **22.4**           |        | 27.0                  |       |
| Total current assets                                                                           | ** ** | **432.4**          |        | 527.0                 |       |
|                                                                                           |       |               |        |                  |       |
| **Property:**                                                                                  | ** ** | ** **         | ** **  | ** **            | ** ** |
| Property, plant and equipment                                                                  | ** ** | **5,255.3**        |        | 5,227.0               |       |
| Less: Accumulated depreciation and  amortization                                               | ** ** | **(2,381.1**       | **)**       | (2,350.6              | )          |
| Total net property                                                                             | ** ** | **2,874.2**        |        | 2,876.4               |       |
|                                                                                           |       |               |        |                  |       |
| **Other noncurrent assets:**                                                                   | ** ** | ** **         | ** **  | ** **            | ** ** |
| Regulatory assets (Note 3)                                                                     | ** ** | **256.1**          |        | 233.7                 |       |
| Other deferred assets                                                                          | ** ** | **35.2**           |        | 38.0                  |       |
| Total other noncurrent assets                                                                  | ** ** | **291.3**          |        | 271.7                 |       |
|                                                                                           |       |               |        |                  |       |
| **Total Assets**                                                                               | ** ** | **$**              | **3,597.9** |                  | $          | 3,675.1 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

8

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Table of Contents

 

**DPL INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                          | ** ** | **At**             | ** ** | **At**                | ** ** |
|---------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                                              | ** ** | **2009**           | ** ** | **2008**              | ** ** |
|                                                                |       |               |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                       | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                |       |               |       |                  |       |
| **Current liabilities:**                                            | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current portion - long-term debt                                    | ** ** | **$**              | **0.7**    |                  | $          | 175.7 |   |
| Accounts payable                                                    | ** ** | **106.5**          |       | 178.3                 |       |
| Accrued taxes                                                       | ** ** | **127.4**          |       | 130.4                 |       |
| Accrued interest                                                    | ** ** | **18.5**           |       | 25.0                  |       |
| Revolving credit borrowings                                         | ** ** | **150.0**          |       | —                |       |
| Other current liabilities                                           | ** ** | **32.5**           |       | 34.5                  |       |
| Total current liabilities                                           | ** ** | **435.6**          |       | 543.9                 |       |
|                                                                |       |               |       |                  |       |
| **Noncurrent liabilities:**                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Long-term debt                                                      | ** ** | **1,376.0**        |       | 1,376.1               |       |
| Deferred taxes                                                      | ** ** | **439.5**          |       | 433.7                 |       |
| Unamortized investment tax credit                                   | ** ** | **37.2**           |       | 38.0                  |       |
| Insurance and claims costs                                          | ** ** | **18.4**           |       | 17.6                  |       |
| Other deferred credits                                              | ** ** | **266.5**          |       | 267.3                 |       |
| Total noncurrent liabilities                                        | ** ** | **2,137.6**        |       | 2,132.7               |       |
|                                                                |       |               |       |                  |       |
| **Cumulative preferred stock not subject to  mandatory redemption** | ** ** | **22.9**           |       | 22.9                  |       |
| ** **                                                          | ** ** | ** **         |       |                  |       |
| Commitments and contingencies (Note 11)                             | ** ** | ** **         |       |                  |       |
| ** **                                                          | ** ** | ** **         |       |                  |       |
| **Common shareholders’ equity:**                               | ** ** | ** **         |       |                  |       |
| Common stock, at par value of $0.01 per  share:                     | ** ** | ** **         |       |                  |       |
|                                                                     |            |                    |            |                       |            |  |  |

 
| ** **                                          | ** ** | **March 2009** | ** ** | **December 2008** | ** ** | ** **  | ** **  | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|------------------------|------------|-------------|-------------|------------|------------|
| Shares authorized                                   |       | 250,000,000         |       | 250,000,000            |       |        |        |       |       |
| Shares issued                                       |       | 163,724,211         |       | 163,724,211            |       |        |        |       |       |
| Shares outstanding                                  |       | 115,962,529         |       | 115,961,880            | ** ** | **1.2**     |        | 1.2        |       |
| Warrants                                            | ** ** | ** **          |       |                   |       | **19.8**    |        | 31.0       |       |
| Common stock held by employee plans                 | ** ** | ** **          |       |                   |       | **(22.5**   | **)**       | (27.6      | )          |
| Accumulated other comprehensive loss                | ** ** | ** **          |       |                   |       | **(43.7**   | **)**       | (44.6      | )          |
| Retained earnings                                   | ** ** | ** **          |       |                   |       | **1,047.0** |        | 1,015.6    |       |
| Total common shareholders’ equity              | ** ** | ** **          |       |                   |       | **1,001.8** |        | 975.6      |       |
|                                                |       |                |       |                   |       |        |        |       |       |
| **Total Liabilities and Shareholders’ Equity** | ** ** | ** **          |       |                   |       | **$**       | **3,597.9** |       | $          | 3,675.1 |   |
|                                                     |            |                     |            |                        |            |             |             |            |            |  |  |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

9

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **March 31,**     | ** ** |
| **$ in millions**              | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                |       |                   |       |   |   |
| **Revenues**                        | ** ** | **$**                  | **403.6**  |   | $ | 413.9 |   |
|                                |       |                   |       |   |   |
| **Cost of revenues:**               | ** ** | ** **             | ** ** | ** ** | ** ** |
| Fuel                                | ** ** | **78.8**               |       | 60.7 |   |
| Purchased power                     | ** ** | **59.1**               |       | 83.9 |   |
| Total cost of revenues              | ** ** | **137.9**              |       | 144.6 |   |
|                                |       |                   |       |   |   |
| **Gross margin**                    | ** ** | **265.7**              |       | 269.3 |   |
|                                |       |                   |       |   |   |
| **Operating expenses:**             | ** ** | ** **             | ** ** | ** ** | ** ** |
| Operation and maintenance           | ** ** | **73.7**               |       | 59.6 |   |
| Depreciation and amortization       | ** ** | **33.4**               |       | 30.7 |   |
| General taxes                       | ** ** | **31.9**               |       | 29.5 |   |
| Amortization of regulatory assets   | ** ** | **1.9**                |       | 3.1 |   |
| Total operating expenses            | ** ** | **140.9**              |       | 122.9 |   |
|                                |       |                   |       |   |   |
| **Operating income**                | ** ** | **124.8**              |       | 146.4 |   |
|                                |       |                   |       |   |   |
| **Other income / (expense), net**   | ** ** | ** **             | ** ** | ** ** | ** ** |
| Investment income                   | ** ** | **1.5**                |       | 1.5 |   |
| Interest expense                    | ** ** | **(8.7**               | **)**      | (6.6 | ) |
| Other income (deductions)           | ** ** | **(0.2**               | **)**      | (0.7 | ) |
| Total other income / (expense), net | ** ** | **(7.4**               | **)**      | (5.8 | ) |
|                                |       |                   |       |   |   |
| **Earnings before income tax**      | ** ** | **117.4**              |       | 140.6 |   |
|                                |       |                   |       |   |   |
| Income tax expense                  | ** ** | **40.4**               |       | 51.6 |   |
| ** **                          | ** ** | ** **             |       |   |   |
| **Net income**                      | ** ** | **77.0**               |       | 89.0 |   |
|                                |       |                   |       |   |   |
| Preferred dividends                 | ** ** | **0.2**                |       | 0.2 |   |
|                                |       |                   |       |   |   |
| **Earnings on common stock**        | ** ** | **$**                  | **76.8**   |   | $ | 88.8 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**     | ** ** |
| **$ in millions**                                                             | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                                               |       |                   |       |   |   |
| **Cash flows from operating activities:**                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income                                                                         | ** ** | **$**                  | **77.0**   |   | $ | 89.0 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                      | ** ** | **33.4**               |       | 30.7 |   |
| Amortization of regulatory assets                                                  | ** ** | **1.9**                |       | 3.1 |   |
| Deferred income taxes                                                              | ** ** | **2.6**                |       | 4.3 |   |
| Changes in certain assets and liabilities:                                         |       |                   |       |   |   |
| Accounts receivable                                                                | ** ** | **13.0**               |       | (0.3 | ) |
| Net receivable due from parent                                                     | ** ** | **(10.0**              | **)**      | (1.1 | ) |
| Deposits and other advances                                                        | ** ** | **2.5**                |       | 0.2 |   |
| Accounts payable                                                                   | ** ** | **(45.2**              | **)**      | 6.1 |   |
| Accrued taxes payable                                                              | ** ** | **26.5**               |       | 23.7 |   |
| Accrued interest payable                                                           | ** ** | **2.4**                |       | 2.7 |   |
| Prepayments                                                                        | ** ** | **2.4**                |       | 2.1 |   |
| Deferred regulatory costs                                                          | ** ** | **(24.3**              | **)**      | (1.7 | ) |
| Inventories                                                                        | ** ** | **(11.7**              | **)**      | 11.2 |   |
| Deferred compensation                                                              | ** ** | **(1.6**               | **)**      | (1.7 | ) |
| Other                                                                              | ** ** | **(2.4**               | **)**      | (0.4 | ) |
| **Net cash provided by operating activities**                                      | ** ** | **66.5**               |       | 167.9 |   |
|                                                                               |       |                   |       |   |   |
| **Cash flows from investing activities:**                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Capital expenditures                                                               | ** ** | **(48.9**              | **)**      | (65.0 | ) |
| **Net cash used for investing activities**                                         | ** ** | **(48.9**              | **)**      | (65.0 | ) |
|                                                                               |       |                   |       |   |   |
| **Cash flows from financing activities:**                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Payment of short-term debt                                                         | ** ** | **—**             |       | (20.0 | ) |
| Withdrawals of restricted funds held in  trust, net                                | ** ** | **6.7**                |       | 6.6 |   |
| Withdrawals from revolving credit facility                                         | ** ** | **150.0**              |       | — |   |
| Dividends paid on preferred stock                                                  | ** ** | **(0.2**               | **)**      | (0.2 | ) |
| Dividends paid on common stock to parent                                           | ** ** | **(175.0**             | **)**      | (80.0 | ) |
| **Net cash used for financing activities**                                         | ** ** | **(18.5**              | **)**      | (93.6 | ) |
|                                                                               |       |                   |       |   |   |
| **Cash and cash equivalents:**                                                     | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net change                                                                         | ** ** | **(0.9**               | **)**      | 9.3 |   |
| Balance at beginning of period                                                     | ** ** | **20.8**               |       | 13.2 |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                  | **19.9**   |   | $ | 22.5 |   |
|                                                                               |       |                   |       |   |   |
| **Supplemental cash flow information:**                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Interest paid, net of amounts capitalized                                          | ** ** | **$**                  | **6.8**    |   | $ | 3.1 |   |
| Income taxes (refunded)/paid, net                                                  | ** ** | **$**                  | **(5.1**   | **)** | $ | 9.9 |   |
| Non-cash financing and investing  activities:                                      |       |                   |       |   |   |
| Restricted funds held in trust                                                     | ** ** | **$**                  | **7.8**    |   | $ | 30.3 |   |
| Accruals for capital expenditures                                                  | ** ** | **$**                  | **15.9**   |   | $ | 28.1 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                     | ** ** | **At**             | ** **  | **At**                | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                                         | ** ** | **2009**           | ** **  | **2008**              | ** ** |
|                                                                                           |       |               |        |                  |       |
| **ASSETS**                                                                                     | ** ** | ** **         | ** **  | ** **            | ** ** |
|                                                                                           |       |               |        |                  |       |
| **Current assets:**                                                                            | ** ** | ** **         | ** **  | ** **            | ** ** |
| Cash and cash equivalents                                                                      | ** ** | **$**              | **19.9**    |                  | $          | 20.8 |   |
| Restricted funds held in trust                                                                 | ** ** | **7.8**            |        | 14.5                  |       |
| Accounts receivable, less provision for  uncollectible accounts of $1.0 and $1.1, respectively |       | **213.3**          |        | 225.4                 |       |
| Inventories, at average cost                                                                   | ** ** | **115.5**          |        | 103.8                 |       |
| Taxes applicable to subsequent years                                                           | ** ** | **43.4**           |        | 57.9                  |       |
| Other current assets                                                                           | ** ** | **23.7**           |        | 24.1                  |       |
| Total current assets                                                                           | ** ** | **423.6**          |        | 446.5                 |       |
|                                                                                           |       |               |        |                  |       |
| **Property:**                                                                                  | ** ** | ** **         | ** **  | ** **            | ** ** |
| Property, plant and equipment                                                                  | ** ** | **4,998.1**        |        | 4,970.9               |       |
| Less: Accumulated depreciation and  amortization                                               | ** ** | **(2,293.9**       | **)**       | (2,265.5              | )          |
| Total net property                                                                             | ** ** | **2,704.2**        |        | 2,705.4               |       |
|                                                                                           |       |               |        |                  |       |
| **Other noncurrent assets:**                                                                   | ** ** | ** **         | ** **  | ** **            | ** ** |
| Regulatory assets (Note 3)                                                                     | ** ** | **256.1**          |        | 233.7                 |       |
| Other deferred assets                                                                          | ** ** | **43.9**           |        | 50.2                  |       |
| Total other noncurrent assets                                                                  | ** ** | **300.0**          |        | 283.9                 |       |
|                                                                                           |       |               |        |                  |       |
| **Total Assets**                                                                               | ** ** | **$**              | **3,427.8** |                  | $          | 3,435.8 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                          | ** ** | **At**             | ** **  | **At**                | ** ** |
|---------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                          | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                              | ** ** | **2009**           | ** **  | **2008**              | ** ** |
|                                                                |       |               |        |                  |       |
| **LIABILITIES AND SHAREHOLDER’S EQUITY**                       | ** ** | ** **         | ** **  | ** **            | ** ** |
|                                                                |       |               |        |                  |       |
| **Current liabilities:**                                            | ** ** | ** **         | ** **  | ** **            | ** ** |
| Current portion - long-term debt                                    | ** ** | **$**              | **0.7**     |                  | $          | 0.7 |   |
| Accounts payable                                                    | ** ** | **104.2**          |        | 176.6                 |       |
| Accrued taxes                                                       | ** ** | **140.1**          |        | 128.0                 |       |
| Accrued interest                                                    | ** ** | **15.4**           |        | 12.9                  |       |
| Revolving credit borrowings                                         | ** ** | **150.0**          |        | —                |       |
| Other current liabilities                                           | ** ** | **32.2**           |        | 34.0                  |       |
| Total current liabilities                                           | ** ** | **442.6**          |        | 352.2                 |       |
|                                                                |       |               |        |                  |       |
| **Noncurrent liabilities:**                                         | ** ** | ** **         | ** **  | ** **            | ** ** |
| Long-term debt                                                      | ** ** | **883.9**          |        | 884.0                 |       |
| Deferred taxes                                                      | ** ** | **422.6**          |        | 417.8                 |       |
| Unamortized investment tax credit                                   | ** ** | **37.3**           |        | 38.0                  |       |
| Other deferred credits                                              | ** ** | **266.5**          |        | 267.4                 |       |
| Total noncurrent liabilities                                        | ** ** | **1,610.3**        |        | 1,607.2               |       |
|                                                                |       |               |        |                  |       |
| **Cumulative preferred stock not subject to  mandatory redemption** | ** ** | **22.9**           |        | 22.9                  |       |
|                                                                |       |               |        |                  |       |
| Commitments and contingencies (Note 11)                             |       |               |        |                  |       |
|                                                                |       |               |        |                  |       |
| **Common shareholder’s equity:**                               | ** ** | ** **         | ** **  | ** **            | ** ** |
| Common stock, at par value of $0.01 per  share                      | ** ** | **0.4**            |        | 0.4                   |       |
| Other paid-in capital                                               | ** ** | **780.2**          |        | 783.1                 |       |
| Accumulated other comprehensive loss                                | ** ** | **(37.8**          | **)**       | (37.5                 | )          |
| Retained earnings                                                   | ** ** | **609.2**          |        | 707.5                 |       |
| Total common shareholder’s equity                              | ** ** | **1,352.0**        |        | 1,453.5               |       |
|                                                                |       |               |        |                  |       |
| **Total Liabilities and Shareholder’s Equity**                 | ** ** | **$**              | **3,427.8** |                  | $          | 3,435.8 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

13

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**Notesto Condensed Consolidated Financial Statements**

 

**1.     Basis of Presentation**

 

**Description of Business**

 

**DPL**isa diversified regional energy company organized in 1985 under the laws ofOhio.  Our executive offices are locatedat 1065 Woodman 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.  Electricity for **DP&L’s** 24 county service area is primarily generated ateight coal-fired power plants and is distributed to more than 500,000 retailcustomers.  **DP&L** also purchases retail peak load requirements fromDPLE, one of **DPL’s** wholly ownedsubsidiaries.  Principal industriesserved include automotive, food processing, paper, plastic manufacturing anddefense.

 

**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** significantsubsidiaries (all of which are wholly owned) include DPLE, which engages in theoperation of peaking generating facilities; DPLER, which sells retail electricenergy and other energy services under contract to major industrial andcommercial customers in West Central Ohio; and MVIC, our captive insurancecompany that provides insurance services to us and our subsidiaries.

 

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

 

**Financial Statement Presentation**

We prepare consolidatedfinancial statements in accordance with GAAP in the United States ofAmerica.  The condensed consolidatedfinancial statements include the accounts of **DPL**and **DP&L** and theirmajority-owned subsidiaries.  Investmentsthat are not majority owned are accounted for using the equity method when ourinvestment allows us the ability to exert significant influence, as defined byGAAP.  Undivided interests in jointlyowned generation facilities are consolidated on a pro rata basis.  All material intercompany accounts andtransactions are eliminated in consolidation. Interim results for the three months ended March 31, 2009 may notbe indicative of our results that will be realized for the full year ending December 31,2009.

 

Pursuant to the SEC rules, certain information and footnote disclosuresnormally included in the annual financial statements prepared in accordancewith GAAP have been omitted from interim reports. Therefore, these financialstatements should be read along with the annual financial statements includedin our Annual Report on Form 10-K for the fiscal year ended December 31,2008.  In the opinion of our management,the condensed consolidated financial statements contain all adjustmentsnecessary to fairly state our financial condition as of March 31, 2009;our results of operations for the three months ended March 31, 2009; andour cash flows for the three months ended March 31, 2009 in accordancewith GAAP.  Certain amounts from priorperiods have been reclassified to conform to the current reportingpresentation.

 

**Estimates and Judgments**

The preparation of financial statements in conformity with GAAPrequires us to make estimates and judgments that affect the reported amounts ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the financial statements, and the revenue and expenses of theperiod reported.  We record liabilities for probable estimated losses inaccordance with Statement of Financial Accounting Standards No. 5 (SFAS5), “Accounting for Contingencies.”  To the extent a probable loss canonly be estimated by reference to a range of equally probable outcomes and noamount within the range appears to be a better estimate than any other amount,we accrue for the low end of the range.  Because of uncertainties relatedto these matters, accruals are based on the best information available at thetime.  We evaluate the potential liability related to probable lossesquarterly and may revise our estimates.  Judgments and uncertaintiesaffecting the application of these estimates may result in materially differentamounts being reported under different conditions or circumstances that mayaffect our financial position and results of operations.  Significantitems subject to such estimates and judgments include: the carrying value ofproperty, plant and equipment; unbilled revenues; the valuation of derivativeinstruments; the valuation of insurance and claims costs; the valuation ofallowances for receivables and deferred income taxes; regulatory assets andliabilities; reserves recorded for income tax exposures; litigation;contingencies; and assets and liabilities related to employee benefits.

 

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**Taxes Collected from Customers and Remitted to Governmental Authorities**

**DP&L** collects certain excise taxes leviedby state or local governments from its customers.  **DP&L’s**excise taxes are accounted for on a gross basis and recorded as revenues in theaccompanying Condensed Consolidated Statements of Results of Operations for thethree months ended March 31, 2009 and 2008 as follows:

 
| ** **               | ** ** | **Three  Months Ended** | ** ** |
|--------------------------|------------|-------------------------|------------|
| ** **               | ** ** | **March 31,**      | ** ** |
| **$ in  millions**  | ** ** | **2009**                | ** ** | **2008** | ** ** |
| State/Local excise taxes |       | $                       | 14.0       |   | $ | 14.4 |   |
|                          |            |                         |            |  |  |  |  |

 

**Recently Adopted Accounting Standards**

 

**Disclosures about Derivative Instruments and Hedging Activities**

We adopted Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities — an amendment to FASBStatement No. 133” (SFAS 161), on January 1, 2009.  SFAS 161 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 SFAS 133 and its related interpretations; and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows.  SFAS 161 did not have a material impact onour overall results of operations, financial position, or cash flows.  See Note 9 of Notes to Condensed ConsolidatedFinancial Statements.

 

**Participating Securities and Earnings perShare (EPS)**

We adopted Staff Position EITF 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities” (FSP EITF 03-6-1), on January 1, 2009.  FSP EITF 03-6-1 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.  FSP EITF 03-6-1 did not have a materialimpact on our overall results of operations, financial position or cash flows.

 

**Meaning of “Indexed to a Company’s Own Stock”**

We adopted EITF Issue No. 07-5, “DeterminingWhether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”(EITF 07-5), on January 1, 2009. EITF 07-5 gives guidance on when a financial instrument is considered tobe indexed to a company’s own stock to meet the criteria for paragraph 11(a) ofFASB Statement No. 133, “Accounting for Derivative Financial Instruments.”  EITF 07-5 did not have a material impact onour overall results of operations, financial position or cash flows.

 

**Recently Issued Accounting Standards**

 

**Disclosures about Pensions and OtherPostretirement Benefits**

In December 2008, the FASB issued StaffPosition SFAS 132(R)-1, “Employers’ Disclosures about Postretirement BenefitPlan Assets” FSP SFAS 132(R)-1, effective for fiscal years ending after December 15,2009.  We expect to adopt FSP SFAS132(R)-1 on December 31, 2009.  FSPSFAS 132(R)-1 requires disclosures about benefit plan assets similar to thedisclosure required in SFAS 157, “Fair Value Measurements.”  It also requires discussions on investmentallocation decisions, major categories of plan assets, and significantconcentrations of risk in plan assets for the period.  We have evaluated FSP SFAS 132(R)-1 and donot expect these new rules to have a material impact on our overallresults of operations, financial position or cash flows.

 

**Interim Disclosures about Fair Value ofFinancial Instruments**

In April 2009, the FASB issued StaffPosition SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value ofFinancial Instruments” (FSP SFAS 107-1), effective for interim periods endingafter June 15, 2009.  We expect toadopt FSP SFAS 107-1 on June 30, 2009. This FSP requires disclosure about the fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements.  Wehave evaluated FSP SFAS 107-1 and do not expect these new rules to have amaterial impact on our overall results of operations, financial position orcash flows.

 

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**2.     Supplemental Financial Information**

 

**DPL**

 
| ** **                                          | ** ** | **At**             | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                              | ** ** | **2009**           | ** **  | **2008**              | ** ** |
|                                                |       |               |        |                  |       |
| **Accounts receivable, net:**                       | ** ** | ** **         | ** **  | ** **            | ** ** |
| Retail customers                                    | ** ** | **$**              | **76.7**    |                  | $          | 70.8 |   |
| Unbilled revenue                                    | ** ** | **74.0**           |        | 82.5                  |       |
| PJM including financial transmission rights         | ** ** | **26.0**           |        | 27.0                  |       |
| Partners in commonly-owned plants                   | ** ** | **20.5**           |        | 28.0                  |       |
| Coal sales                                          | ** ** | **10.0**           |        | 25.6                  |       |
| Refundable taxes                                    | ** ** | **—**         |        | 14.9                  |       |
| Wholesale and subsidiary customers                  | ** ** | **4.8**            |        | 9.7                   |       |
| Other                                               | ** ** | **4.6**            |        | 2.5                   |       |
| Provision for uncollectible accounts                | ** ** | **(1.4**           | **)**       | (1.1                  | )          |
| **Total accounts receivable, net**                  | ** ** | **$**              | **215.2**   |                  | $          | 259.9 |   |
|                                                |       |               |        |                  |       |
| **Inventories, at average cost:**                   | ** ** | ** **         | ** **  | ** **            | ** ** |
| Fuel and emission allowances                        | ** ** | **$**              | **80.3**    |                  | $          | 68.7 |   |
| Plant materials and supplies                        | ** ** | **36.4**           |        | 36.3                  |       |
| Other                                               | ** ** | **0.2**            |        | 0.1                   |       |
| **Total inventories, at average cost**              | ** ** | **$**              | **116.9**   |                  | $          | 105.1 |   |
|                                                |       |               |        |                  |       |
| **Other current assets:**                           | ** ** | ** **         | ** **  | ** **            | ** ** |
| Deposits and other advances                         | ** ** | **$**              | **7.9**     |                  | $          | 10.5 |   |
| Prepayments                                         | ** ** | **5.7**            |        | 7.1                   |       |
| Insurance and damage claims                         | ** ** | **4.4**            |        | 0.9                   |       |
| Current deferred income taxes                       | ** ** | **2.5**            |        | 2.2                   |       |
| Short-term investment                               | ** ** | **—**         |        | 5.0                   |       |
| Other                                               | ** ** | **1.9**            |        | 1.3                   |       |
| **Total other current assets**                      | ** ** | **$**              | **22.4**    |                  | $          | 27.0 |   |
| ** **                                          | ** ** | ** **         | ** **  | ** **            | ** ** |
| **Property, plant and equipment:**                  | ** ** | ** **         | ** **  | ** **            | ** ** |
| Construction work in process                        | ** ** | **$**              | **127.6**   |                  | $          | 153.6 |   |
| Property, plant and equipment                       | ** ** | **5,127.7**        |        | 5,073.4               |       |
| **Total property, plant and equipment**             | ** ** | **$**              | **5,255.3** |                  | $          | 5,227.0 |   |
| ** **                                          | ** ** | ** **         | ** **  | ** **            | ** ** |
| **Other deferred assets:**                          | ** ** | ** **         | ** **  | ** **            | ** ** |
| Master Trust assets                                 | ** ** | **$**              | **10.9**    |                  | $          | 13.3 |   |
| Unamortized debt expense                            | ** ** | **9.1**            |        | 9.3                   |       |
| Investments                                         | ** ** | **7.9**            |        | 8.0                   |       |
| Commercial activities tax benefit                   | ** ** | **6.8**            |        | 6.8                   |       |
| Other                                               | ** ** | **0.5**            |        | 0.6                   |       |
| **Total other deferred assets**                     | ** ** | **$**              | **35.2**    |                  | $          | 38.0 |   |
|                                                |       |               |        |                  |       |
| **Accounts payable:**                               | ** ** | ** **         | ** **  | ** **            | ** ** |
| Fuel accruals                                       | ** ** | **$**              | **49.0**    |                  | $          | 51.9 |   |
| Trade payables                                      | ** ** | **31.9**           |        | 68.7                  |       |
| Purchased power accruals                            | ** ** | **8.6**            |        | 11.8                  |       |
| Other                                               | ** ** | **17.0**           |        | 45.9                  |       |
| **Total accounts payable**                          | ** ** | **$**              | **106.5**   |                  | $          | 178.3 |   |
|                                                |       |               |        |                  |       |
| **Other current liabilities:**                      | ** ** | ** **         | ** **  | ** **            | ** ** |
| Customer security deposits                          | ** ** | **$**              | **19.7**    |                  | $          | 19.8 |   |
| Low income service plan                             | ** ** | **2.6**            |        | 2.4                   |       |
| Pension and retiree benefits payable                | ** ** | **0.8**            |        | 0.8                   |       |
| Other                                               | ** ** | **9.4**            |        | 11.5                  |       |
| **Total other current liabilities**                 | ** ** | **$**              | **32.5**    |                  | $          | 34.5 |   |
|                                                |       |               |        |                  |       |
| **Other deferred credits:**                         | ** ** | ** **         | ** **  | ** **            | ** ** |
| Pension and retiree benefits                        | ** ** | **$**              | **101.4**   |                  | $          | 100.5 |   |
| Asset retirement obligations - regulated  property  | ** ** | **97.2**           |        | 96.0                  |       |
| SECA net revenue subject to refund                  | ** ** | **20.1**           |        | 20.1                  |       |
| Asset retirement obligations - generation  property | ** ** | **13.4**           |        | 13.2                  |       |
| Deferred compensation obligations                   | ** ** | **11.3**           |        | 14.3                  |       |
| Taxes payable                                       | ** ** | **9.7**            |        | 9.8                   |       |
| Employee benefit reserves                           | ** ** | **7.7**            |        | 7.7                   |       |
| Customer advances in aid of construction            | ** ** | **3.3**            |        | 3.4                   |       |
| Litigation and claims reserve                       | ** ** | **2.3**            |        | 2.1                   |       |
| Other                                               | ** ** | **0.1**            |        | 0.2                   |       |
| **Total other deferred credits**                    | ** ** | **$**              | **266.5**   |                  | $          | 267.3 |   |

 

16

----

Table of Contents

 

**2.     Supplemental Financial Information(continued)**

** **

**DP&L**

 
| ** **                                          | ** ** | **At**             | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| **$ in  millions**                             | ** ** | **2009**           | ** **  | **2008**              | ** ** |
|                                                |       |               |        |                  |       |
| **Accounts receivable, net:**                       | ** ** | ** **         | ** **  | ** **            | ** ** |
| Retail customers                                    | ** ** | **$**              | **76.7**    |                  | $          | 70.8 |   |
| Unbilled revenue                                    | ** ** | **70.4**           |        | 74.7                  |       |
| PJM including financial transmission rights         | ** ** | **22.9**           |        | 23.3                  |       |
| Partners in commonly-owned plants                   | ** ** | **20.5**           |        | 28.0                  |       |
| Coal sales                                          | ** ** | **10.0**           |        | 25.6                  |       |
| Net receivable due from parent                      | ** ** | **10.0**           |        | —                |       |
| Wholesale and subsidiary customers                  | ** ** | **0.8**            |        | 2.6                   |       |
| Other                                               | ** ** | **3.0**            |        | 1.5                   |       |
| Provision for uncollectible accounts                | ** ** | **(1.0**           | **)**       | (1.1                  | )          |
| **Total accounts receivable, net**                  | ** ** | **$**              | **213.3**   |                  | $          | 225.4 |   |
|                                                |       |               |        |                  |       |
| **Inventories, at average cost:**                   | ** ** | ** **         | ** **  | ** **            | ** ** |
| Fuel and emission allowances                        | ** ** | **$**              | **80.3**    |                  | $          | 68.7 |   |
| Plant materials and supplies                        | ** ** | **35.0**           |        | 35.0                  |       |
| Other                                               | ** ** | **0.2**            |        | 0.1                   |       |
| **Total inventories, at average cost**              | ** ** | **$**              | **115.5**   |                  | $          | 103.8 |   |
|                                                |       |               |        |                  |       |
| **Other current assets:**                           | ** ** | ** **         | ** **  | ** **            | ** ** |
| Deposits and other advances                         | ** ** | **$**              | **7.9**     |                  | $          | 10.5 |   |
| Prepayments                                         | ** ** | **6.7**            |        | 8.9                   |       |
| Insurance and damage claims                         | ** ** | **4.5**            |        | 0.9                   |       |
| Current deferred income taxes                       | ** ** | **2.5**            |        | 2.3                   |       |
| Other                                               | ** ** | **2.1**            |        | 1.5                   |       |
| **Total other current assets**                      | ** ** | **$**              | **23.7**    |                  | $          | 24.1 |   |
| ** **                                          | ** ** | ** **         | ** **  | ** **            | ** ** |
| **Property, plant and equipment:**                  | ** ** | ** **         | ** **  | ** **            | ** ** |
| Construction work in process                        | ** ** | **$**              | **127.1**   |                  | $          | 153.0 |   |
| Property, plant and equipment                       | ** ** | **4,871.0**        |        | 4,817.9               |       |
| **Total property, plant and equipment**             | ** ** | **$**              | **4,998.1** |                  | $          | 4,970.9 |   |
| ** **                                          | ** ** | ** **         | ** **  | ** **            | ** ** |
| **Other deferred assets:**                          | ** ** | ** **         | ** **  | ** **            | ** ** |
| Master Trust assets                                 | ** ** | **$**              | **34.1**    |                  | $          | 40.4 |   |
| Unamortized debt expense                            | ** ** | **8.5**            |        | 8.6                   |       |
| Other                                               | ** ** | **1.3**            |        | 1.2                   |       |
| **Total other deferred assets**                     | ** ** | **$**              | **43.9**    |                  | $          | 50.2 |   |
|                                                |       |               |        |                  |       |
| **Accounts payable:**                               | ** ** | ** **         | ** **  | ** **            | ** ** |
| Fuel accruals                                       | ** ** | **$**              | **47.9**    |                  | $          | 50.4 |   |
| Trade payables                                      | ** ** | **30.7**           |        | 68.6                  |       |
| Purchased power accruals                            | ** ** | **8.6**            |        | 11.8                  |       |
| Other                                               | ** ** | **17.0**           |        | 45.8                  |       |
| **Total accounts payable**                          | ** ** | **$**              | **104.2**   |                  | $          | 176.6 |   |
|                                                |       |               |        |                  |       |
| **Other current liabilities:**                      | ** ** | ** **         | ** **  | ** **            | ** ** |
| Customer security deposits                          | ** ** | **$**              | **19.7**    |                  | $          | 19.8 |   |
| Low income service plan                             | ** ** | **2.6**            |        | 2.4                   |       |
| Pension and retiree benefits payable                | ** ** | **0.8**            |        | 0.8                   |       |
| Other                                               | ** ** | **9.1**            |        | 11.0                  |       |
| **Total other current liabilities**                 | ** ** | **$**              | **32.2**    |                  | $          | 34.0 |   |
|                                                |       |               |        |                  |       |
| **Other deferred credits:**                         | ** ** | ** **         | ** **  | ** **            | ** ** |
| Pension and retiree benefits                        | ** ** | **$**              | **101.4**   |                  | $          | 100.5 |   |
| Asset retirement obligations - regulated  property  | ** ** | **97.2**           |        | 96.0                  |       |
| SECA net revenue subject to refund                  | ** ** | **20.1**           |        | 20.1                  |       |
| Asset retirement obligations - generation  property | ** ** | **13.4**           |        | 13.2                  |       |
| Deferred compensation obligations                   | ** ** | **11.3**           |        | 14.3                  |       |
| Taxes payable                                       | ** ** | **9.7**            |        | 9.8                   |       |
| Employee benefit reserves                           | ** ** | **7.7**            |        | 7.7                   |       |
| Customer advances in aid of construction            | ** ** | **3.3**            |        | 3.4                   |       |
| Litigation and claims reserve                       | ** ** | **2.3**            |        | 2.1                   |       |
| Other                                               | ** ** | **0.1**            |        | 0.3                   |       |
| **Total other deferred credits**                    | ** ** | **$**              | **266.5**   |                  | $          | 267.4 |   |

 

17

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**2.     SupplementalFinancial Information (continued)**

** **

**DPL Inc.**

 
| ** **                                                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **$ in millions**                                                          | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| **Comprehensive income:**                                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net income                                                                      | ** ** | **$**                                 | **69.2**   |   | $ | 77.3 |   |
| Net change in unrealized gains (losses) on financial instruments                |       | **(0.1**                              | **)**      | (0.2 | ) |
| Net change in deferred gains (losses) on cash flow hedges                       | ** ** | **0.5**                               |       | (3.4 | ) |
| Net change in unrealized gains (losses) on pension and postretirement  benefits |       | **0.8**                               |       | 0.5 |   |
| Deferred income taxes related to unrealized gains (losses)                      | ** ** | **(0.3**                              | **)**      | 1.1 |   |
| **Comprehensive  income**                                                       | ** ** | **$**                                 | **70.1**   | ** ** | **$** | **75.3** | ** ** |

 

**DP&L**

 
| ** **                                                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **$ in millions**                                                          | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| **Comprehensive income:**                                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net income                                                                      | ** ** | **$**                                 | **77.0**   |   | $ | 89.0 |   |
| Net change in unrealized gains (losses) on financial instruments                |       | **(1.8**                              | **)**      | (8.2 | ) |
| Net change in deferred gains (losses) on cash flow hedges                       | ** ** | **0.5**                               |       | (3.4 | ) |
| Net change in unrealized gains (losses) on pension and postretirement  benefits |       | **0.8**                               |       | 0.5 |   |
| Deferred income taxes related to unrealized gains (losses)                      | ** ** | **0.2**                               |       | 4.5 |   |
| **Comprehensive income**                                                        | ** ** | **$**                                 | **76.7**   |   | $ | 82.4 |   |

 

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**3.     Regulatory Matters**

 

We apply the provisionsof FASB Statement of Financial Accounting Standards No. 71, “Accountingfor the Effects of Certain Types of Regulation” (SFAS 71) to our regulatedoperations.  This accounting standarddefines regulatory assets as the deferral of costs expected to be recovered infuture customer rates and regulatory liabilities as current cost recovery ofexpected future expenditures.

 

Regulatory liabilitiesare reflected on the condensed consolidated balance sheets under the captionentitled “Other Deferred Credits”. Regulatory assets and liabilities on the condensed consolidated balancesheets include:

 
| ** **                                         | ** ** | ** **       | ** ** | ** **       | ** ** | **At**             | ** ** | **At**                | ** ** |
|----------------------------------------------------|------------|------------------|------------|------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **Type of**      | ** ** | **Amortization** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                             | ** ** | **Recovery (a)** | ** ** | **Through**      | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **Regulatory Assets:**                             | ** ** | ** **       | ** ** | ** **       | ** ** | ** **         | ** ** | ** **            | ** ** |
| Deferred recoverable income taxes                  |       | C/B              |       | Ongoing          | ** ** | **$**              | **82.7**   |                  | $          | 81.2 |   |
| Pension benefits                                   |       | C                |       | Ongoing          | ** ** | **82.2**           |       | 83.3                  |       |
| Unamortized loss on reacquired debt                |       | C                |       | Ongoing          | ** ** | **16.8**           |       | 17.2                  |       |
| Electric Choice systems costs                      |       | F                |       | 2010             | ** ** | **6.2**            |       | 7.1                   |       |
| Regional transmission organization costs           |       | D                | ** ** | ** **       |       | **8.1**            |       | 8.5                   |       |
| Transmission, capacity and other PJM-related costs |       | D                | ** ** | ** **       |       | **23.3**           |       | —                |       |
| Deferred storm costs - 2008                        |       | D                | ** ** | ** **       |       | **13.3**           |       | 13.1                  |       |
| PJM administrative costs                           |       | F                |       | 2009             | ** ** | **—**         |       | 0.5                   |       |
| Power plant emission fees                          |       | C                |       | Ongoing          | ** ** | **5.8**            |       | 6.3                   |       |
| Rate case expenses                                 |       | F                |       | 2010             | ** ** | **0.4**            |       | 0.5                   |       |
| Settlement system costs                            |       | D                | ** ** | ** **       |       | **3.1**            |       | 3.1                   |       |
| Customer conservation and energy management costs  |       | D                | ** ** | ** **       |       | **8.4**            |       | 8.3                   |       |
| PJM integration costs                              |       | F                |       | 2015             | ** ** | **0.7**            |       | 0.7                   |       |
| Other costs                                        | ** ** | ** **       |       |             |       | **5.1**            |       | 3.9                   |       |
| **Total regulatory assets**                        | ** ** | ** **       |       |             |       | **$**              | **256.1**  |                  | $          | 233.7 |   |
|                                               |       |             |       |             |       |               |       |                  |       |
| **Regulatory Liabilities:**                        | ** ** | ** **       | ** ** | ** **       | ** ** | ** **         | ** ** | ** **            | ** ** |
| Asset retirement obligations - regulated property  | ** ** | ** **       |       |             |       | **$**              | **97.2**   |                  | $          | 96.0 |   |
| Postretirement benefits                            | ** ** | ** **       |       |             |       | **5.7**            |       | 5.8                   |       |
| SECA net revenue subject to refund                 | ** ** | ** **       |       |             |       | **20.1**           |       | 20.1                  |       |
| **Total regulatory liabilities**                   | ** ** | ** **       |       |             |       | **$**              | **123.0**  |                  | $          | 121.9 |   |

 

----

| *(a)*  | *F — Recovery of incurred costs plus rate of  return.*                          |
|--------|--------------------------------------------------------------------------------------|
|   | *C — Recovery of incurred costs only.*                                          |
|   | *B — Balance has an offsetting liability resulting  in no impact on rate base.* |
|   | *D — Recovery not yet determined.*                                              |

 

**RegulatoryAssets**

Weevaluate our regulatory assets each period and believe recovery of these assetsis probable.  We have received orrequested a return on certain regulatory assets for which we are currentlyrecovering or seeking recovery through rates.

 

Deferredrecoverable income taxes represent deferred income tax assetsrecognized from the normalization of flow-through items as the result ofamounts previously provided to customers. Since currently existing temporary differences between the financialstatements and the related tax basis of assets will reverse in subsequentperiods, deferred recoverable income taxes are amortized.

 

Pensionbenefits represent the unfunded benefit obligation relatedto the transmission and distribution areas of our electric business.  We have historically recorded these costs onthe accrual basis and this is how these costs have been historically recoveredthrough rates.  This factor, combinedwith the historical precedents from the PUCO and the FERC, makes these costsprobable of future rate recovery.

 

Unamortizedloss on reacquired debt represents costs associated with bondredemptions financed by other issues. These costs are being amortized over the life of the original issues.

 

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ElectricChoice systems costs represent costs incurred to modify the customerbilling system for unbundled rates and electric choice bills relative to othergeneration suppliers and information reports provided to the stateadministrator of the low-income payment program.  In March 2006, the PUCO issued an orderthat approved our tariff as filed.  Webegan collecting this rider immediately and expect to recover all costs overfive years.

 

Regionaltransmission organization costs represent costs incurred tojoin a RTO.  These costs are included inthe PUCO filing for other transmission, capacity and other PJM-related costsdiscussed below.

 

Transmission,capacity and other PJM-related costs represent the costsassociated with transmission, capacity, ancillary service and other PJM-relatedcharges that are incurred as a member of PJM. On February 19, 2009, the PUCO approved **DP&L’s**request to defer such costs effective July 31, 2008 consistent with the provisionsof SB 221.  Accordingly, during the threemonths ended March 31, 2009, **DP&L**deferred net RTO costs in the amount of $23.0 million.  Of this amount, $13.5 million relates to theperiod August 1, 2008 through December 31, 2008, and $9.5 million relatesto the three months ended March 31, 2009. Also included in the total deferred amount of $23.3 million is $0.3million relating to interest and operation and maintenance expenses.  On March 27, 2009, **DP&L**filed for recovery of these costs and the case is pending before the PUCO.

 

Deferredstorm costs - 2008 relate to the repair of damage caused by hurricaneforce winds in September 2008, as well as other major 2008 storms.  On January 14, 2009, the PUCO granted **DP&L** the authority to defer these costs with a returnuntil such time that **DP&L** seeksrecovery in a future rate proceeding.  Wehave yet to file for recovery of these storm costs.

 

PJMadministrative costs contain the administrative fees billed by PJM to usas a member of the PJM RTO.  Pursuant toa PUCO order issued on January 25, 2006, these deferred costs wererecovered over a 3-year period from retail ratepayers beginning February 2006.  Recovery of these costs was completed in January 2009.

 

Powerplant emission fees represent costs paid to the State of Ohio forenvironmental monitoring that are or will be recovered over various periodsfrom customers under an existing or future PUCO rate rider.

 

Ratecase expenses represent costs incurred in connection with theRate Stabilization Surcharge that was approved by the PUCO and implemented in January 2006.  These costs are being amortized over afive-year period.

 

Settlementsystem costs represent costs to implement a settlement systemthatreconciles the amount of energy a CRES supplier delivers to itscustomers and what its customers actually use. Based on case precedent in other utilities’ cases, the cost of thissystem is recoverable through **DP&L**’s nexttransmission rate case that will be filed at the FERC.  The timing of this case is uncertain at thistime.

 

Customerconservation and energy management costs represent costs incurred asa result of studying and developing distribution system upgrades andimplementation of advanced metering infrastructure, as well as DSM programdevelopment and various new customer programs addressing energyefficiency.  The portion of these costsrelated to energy efficiency are expected to be recovered as part of theStipulation beginning in 2009.  **DP&L** intends to file a request for the recovery of theremaining costs related to the advanced metering and smart grid infrastructurelater in 2009.

 

PJMintegration costs include infrastructure costs and other relatedexpenses incurred by PJM and reimbursed by **DP&L** tointegrate us into the RTO.  Pursuant to aFERC order, the costs are being recovered over a 10-year period beginning May 2005from wholesale customers within PJM.

 

Othercosts include consumer education advertising regarding electric deregulationas well as derivative activity related to fuel and will be recovered overvarious periods.

 

Alsoincluded in other costs are PJM transmission expansion costs which representcosts incurred as a result of PJM Regional Transmission Expansion Plan (RTEP)cost assignments.  On December 21,2007, **DP&L** filed seeking PUCO authorityto defer these RTEP costs for future recovery and was granted that authority bythe PUCO on August 8, 2008.  TheseRTEP costs were included in the PUCO filing for other transmission, capacityand other PJM-related costs discussed above.

 

20

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**RegulatoryLiabilities**

Assetretirement obligations - regulated property reflect an estimate ofamounts recovered in rates that are expected to be expended to remove existingtransmission and distribution property from service upon retirement.

 

Postretirementbenefits reflect a regulatory liability that was recordedfor the portion of the unrealized gain on our postretirement trust assetsrelated to the transmission and distribution areas of our electricbusiness.  We have historically recordedthese transactions on the accrual basis and this is how these costs havehistorically been recovered through rates. This factor, combined with the historical precedents from the PUCO andthe FERC, make it probable that these amounts will be reflected in futurerates.

 

SECA net revenue subject torefund represents our deferral of net revenues collected in 2005 and2006.  SECA revenue and expensesrepresent FERC-ordered transitional payments for the use of transmission lineswithin PJM.  A hearing was held in early2006 to determine if these transitional payments are subject to refund, but noruling has been issued.  We beganreceiving and paying these transitional payments in May 2005.

 

**4.     Ownership of Facilities**

 

We 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 and plant materials andoperating supplies, and capital additions are allocated to the owners inaccordance with their respective ownership interests.  As of March 31, 2009, we had $104 million of constructionwork in progress at such facilities.  Our share of the operating cost ofsuch facilities is included within the corresponding line in the condensedconsolidated statements of results of operations and our share of theinvestment in the facilities is included in the condensed consolidated balancesheets.

 

Our undivided ownershipinterest in such facilities at March 31, 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                              |       | 37 |   | 28 |   | 78 |   |
| East Bend  Station                     |       | 31.0                        |       | 186                              |       | 198 |   | 128 |   | 2 |   |
| Killen Station                         |       | 67.0                        |       | 402                              |       | 605 |   | 268 |   | 1 |   |
| Miami Fort Units  7&8              |       | 36.0                        |       | 368                              |       | 347 |   | 118 |   | 6 |   |
| Stuart Station                         |       | 35.0                        |       | 820                              |       | 675 |   | 229 |   | 12 |   |
| Zimmer Station                         |       | 28.1                        |       | 365                              |       | 1,057 |   | 589 |   | 4 |   |
| Transmission (at  varying percentages) |       |                        |       |                             |       | 90 |   | 52 |   | — |   |
| Total                                  |       |                        |       | 2,480                            |       | $ | 3,087 |   | $ | 1,467 |   | $ | 104 |   |

 

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**5.     Long-termDebt**

 

**DPLInc.**

 
| ** **                | ** **                                                                                    | **At**             | ** **  | **At**                | ** ** |
|---------------------------|-----------------------------------------------------------------------------------------------|--------------------|-------------|-----------------------|------------|
| ** **                | ** **                                                                                    | **March 31,** | ** **  | **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 through 2034 - 4.78% (a)                               |               | **214.4**   |                  | 214.4      |   |
| 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% (b) |               | **100.0**   |                  | 100.0      |   |
|                      |                                                                                          | ** **         | **884.4**   |                  | 884.4      |   |
|                      |                                                                                          |               |        |                  |       |   |
| 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      |   |
| DP&L -                | Obligation for capital lease                                                                  | ** **         | **0.4**     |                  | 0.6        |   |
| Unamortized debt discount | ** **                                                                                    | **(1.2**           | **)**       | (1.3                  | )          |
| Total                     | ** **                                                                                    | **$**              | **1,376.0** |                  | $          | 1,376.1 |   |

 

----

| *(a)* | *Weighted  average interest rate for quarters ended March 31, 2009 and 2008.*                                                                                                |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(b)* | *Range of  interest rates for quarters ended March 31, 2009 and December 31,  2008, respectively. These pollution control bonds were issued on  December 4, 2008.* |

 

**DP&L**

 
| ** **                | ** **                                                                                    | **At**        | ** ** | **At**           | ** ** |
|---------------------------|-----------------------------------------------------------------------------------------------|---------------|------------|------------------|------------|
| ** **                | ** **                                                                                    | **March 31,** | ** ** | **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 through 2034 - 4.78% (a)                               |          | **214.4**  |             | 214.4      |   |
| 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% (b) |          | **100.0**  |             | 100.0      |   |
|                      |                                                                                          | ** **    | **884.4**  |             | 884.4      |   |
|                      |                                                                                          |          |       |             |       |   |
| DP&L -                | Obligation for capital lease                                                                  | ** **    | **0.4**    |             | 0.6        |   |
| Unamortized debt discount | ** **                                                                                    | **(0.9**      | **)**      | (1.0             | )          |
| Total                     | ** **                                                                                    | **$**         | **883.9**  |             | $          | 884.0 |   |

 

----

| *(a)* | *Weighted  average interest rate for quarters ended March 31, 2009 and 2008.*                                                                                                |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(b)* | *Range of  interest rates for quarters ended March 31, 2009 and December 31,  2008, respectively. These pollution control bonds were issued on  December 4, 2008.* |

 

At March 31, 2009, **DPL’s** scheduled maturities of long-termdebt, including capital lease obligations, over the next five years are$0.7 million through March 31, 2010; $0.4 million from April 1,2010 through March 31, 2011; $297.4 million from April 1, 2011through March 31, 2012; $0 from April 1, 2012 through March 31,2013; and $470.0 million from April 1, 2013 through March 31, 2014.

 

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At March 31, 2009, **DP&L’s** scheduled maturities oflong-term debt, including capital lease obligations, over the next five yearsare $0.7 million through March 31, 2010; $0.4 million from April 1,2010 through March 31, 2011; $0 from April 1, 2011 through March 31,2013; and $470.0 million from April 1, 2013 through March 31, 2014.

 

**Debt and Debt Covenants**

OnNovember 21, 2006, **DP&L**entered into a $220 million unsecured revolving credit agreement replacing its$100 million facility.  This agreementhas a five-year term that expires November 21, 2011 and provides **DP&L** with the ability to increase the size of thefacility by an additional $50 million at any time.  The facility contains one financialcovenant:  **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  As of March 31, 2009, **DP&L**was in compliance with this covenantwitha ratio of 0.44 to 1.00.  As of March 31,2009,**DP&L**had $150 million outstandingunder this credit facility.  Feesassociated with this credit facility are approximately $0.7 million peryear.  Changes in credit ratings,however, may affect fees and the applicable interest rate.  This revolving credit agreement also containsa $50 million letter of credit sub-limit. **DP&L** has certain contractualagreements for the sale and purchase of power, fuel and related energy servicesthat contain credit rating related clauses allowing the counter parties to seekadditional surety under certain conditions. As of March 31, 2009, **DP&L** had nooutstanding letters of credit against the facility.

 

Duringthe second quarter ended June 30, 2007, **DPL**made a short-term loan to **DP&L** for$105 million.  **DP&L**paiddown $15 million of this loan during the third quarter ended September 30,2007, an additional $70 million during the fourth quarter ended December 31,2007, and the final $20 million during the first quarter ended March 31,2008.  This short-term loan did notviolate any covenants in our other debt instruments.  There are no other intercompany debtcollateralizations or debt guarantees between **DPL**,**DP&L**and their affiliates.  None of the debt obligations of **DPL** or **DP&L** are guaranteedor secured by affiliates and no cross-collateralization exists between anysubsidiaries.

 

OnNovember 15, 2007, the OAQDA issued $90 million of collateralized,variable rate OAQDA Revenue Bonds, 2007 Series A due November 1,2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due was insured by aninsurance policy issued by FGIC.  Duringthe first quarter of 2008, all three credit rating agencies downgradedFGIC.  These downgrades resulted inauction rate security bonds carrying substantially higher interest rates insucceeding auctions.  On April 4,2008, **DP&L** converted the 2007 Series ABonds from Auction Rate Securities to Variable Rate Demand Notes.  At that time, **DP&L**purchased these notes out of the market and placed them with the Trustee to beheld until the capital markets corrected. These notes were redeemed in December 2008 as discussed in thefollowing paragraph.

 

OnDecember 4, 2008, the OAQDA issued $100 million of collateralized,variable rate Revenue Refunding Bonds Series A and B due November 1,2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due is backed by a standbyletter of credit issued by a syndicated bank group.  **DP&L** isusing $10 million of the proceeds from these bonds to finance its portion ofthe costs of acquiring, constructing and installing certain solid wastedisposal and air quality facilities at the Conesville generation station.  The remaining $90 million was used to redeemthe 2007 Series A Bonds.

 

OnMarch 31, 2009, **DPL** paid off$175 million of 8.00% Senior Notes when the notes became due.

 

On April 21, 2009, **DP&L** entered into a new $100 millionunsecured revolving credit agreement with a syndicated bank group.  The new agreement is for a 364-day termexpiring on April 20, 2010.  Thefacility contains one financial covenant: **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  As of March 31, 2009, **DP&L**was in compliance with thiscovenant with a ratio of 0.44 to 1.00. As of April 29, 2009, **DP&L**hadno outstanding borrowings under this facility.

 

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**6.     Pensionand Postretirement Benefits**

 

Wesponsor a defined benefit plan for substantially all employees.  For collective bargaining employees, thedefined benefits are based on a specific dollar amount per year ofservice.  For all other employees, thedefined benefit plan is based primarily on compensation and years of service.We fund pension plan benefits as accrued in accordance with the minimum fundingrequirements of the Employee Retirement Income Security Act of 1974 (ERISA).  In addition, we have a Supplemental ExecutiveRetirement Plan (SERP) for certain active and retired key executives.  We****also haveunfunded liabilities related to retirement benefits for certain active,terminated and retired key executives. These liabilities totaled approximately $1.1 million at March 31,2009.

 

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

 

Thenet periodic benefit cost of the pension and postretirement benefit plans forthe three months ended March 31, 2009 and 2008 was:

 

**Net periodic benefit cost**

 
| ** **                    | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**        | ** ** | **2009**    | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                  | ** ** | **$**       | **0.9**    |               | $          | 0.8 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                 | ** ** | **4.4**     |       | 4.1                | ** ** | **0.4** |   | 0.4 |   |
| Expected return on assets (a) | ** ** | **(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            | ** ** | **0.8**     |       | 0.6                | ** ** | **—** |   | — |   |
| Net periodic benefit cost     | ** ** | **$**       | **1.6**    |               | $          | 0.2 | ** ** | **$** | **0.1** |   | $ | 0.1 |   |

 

----

| *(a)* | *The  market-related value of assets is equal to the fair value of assets at  implementation with subsequent asset gains and losses recognized in the  market-value systematically over a three-year period.* |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

**Estimated Future Benefit Payments:**

 
| **$ in millions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------|------------|-------------|------------|--------------------|------------|
| 2009                   |       | $           | 15.0       |               | $          | 2.0 |   |
| 2010                   |       | $           | 20.5       |               | $          | 2.7 |   |
| 2011                   |       | $           | 20.9       |               | $          | 2.6 |   |
| 2012                   |       | $           | 21.5       |               | $          | 2.5 |   |
| 2013                   |       | $           | 22.2       |               | $          | 2.4 |   |
| 2014 — 2018       |       | $           | 117.1      |               | $          | 9.7 |   |

 

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**7.     Share-BasedCompensation**

 

Thefollowing table summarizes share-based compensation expense:

 
| ** **                                                               | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **March 31,**               | ** ** |
| **$ in millions**                                              | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Stock options                                                            | ** ** | **$**                            | **—** |   | $ | — |   |
| Restricted stock units                                                   | ** ** | **—**                       |       | (0.1 | ) |
| Performance shares                                                       | ** ** | **0.4**                          |       | 0.1 |   |
| Restricted shares                                                        | ** ** | **0.1**                          |       | 0.1 |   |
| Non-employee directors’ RSUs                                        | ** ** | **0.1**                          |       | 0.1 |   |
| Management performance shares                                            | ** ** | **0.2**                          |       | — |   |
| Share-based compensation included in operations and maintenance  expense |       | **$**                            | 0.8        |   | $ | 0.2 |   |
| Income tax benefit                                                       | ** ** | **(0.3**                         | **)**      | (0.1 | ) |
| Total share-based compensation, net of tax                               | ** ** | **$**                            | **0.5**    |   | $ | 0.1 |   |

 

Share-basedawards issued in **DPL’s**common stock will bedistributed from treasury stock.  **DPL** believes it has sufficient treasury stock to satisfy alloutstanding share-based awards.

 

Summarizedshare-based compensation activity for the three months ended March 31,2009 and 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                          | ** ** | **—**            |       | —     | ** ** | ** ** | **—**                 |                   | —     | ** ** | ** ** | **115,357** |   | 93,298 |   |
| Dividends                        | ** ** | **—**            |       | —     | ** ** | ** ** | **—**                 |                   | —     | ** ** | ** ** | **—** |   | — |   |
| Exercised                        | ** ** | **—**            |       | (50,000    | )          | ** ** | **—**                 |                   | —     | ** ** | ** ** | **—** |   | — |   |
| Expired                          | ** ** | **—**            |       | —     | ** ** | ** ** | **—**                 |                   | —     | ** ** | ** ** | **(36,445** | **)** | (37,426 | ) |
| Forfeited                        | ** ** | **—**            |       | —     | ** ** | ** ** | **—**                 |                   | (1,603     | ) | ** ** | **—** |   | (7,253 | ) |
| Outstanding at period end        | ** ** | **836,500**           |       | 896,500    | ** ** | ** ** | **10,120**                 |                   | 21,373     | ** ** | ** ** | **235,212** |   | 190,727 |   |
| Exercisable at period end        | ** ** | **836,500**           |       | 896,500    | ** ** | ** ** | **—**                 |                   | —     | ** ** | ** ** | **—** |   | — |   |
|                             | ** ** | ** **            |       |       | ** ** | ** ** | ** **                 |                   |       | ** ** | ** ** | ** ** |   |   |   |
|                             | ** ** | ** **            |       |       | ** ** | ** ** | **Management Performance** | ** **             | ** ** | ** ** |   |   |   |
|                             | ** ** | **Restricted Shares** | ** ** | ** ** | **Shares** | ** ** | ** **                 | ** **             |       |   |   |
| ** **                       | ** ** | **2009**              | ** ** | **2008**   | ** ** | ** ** | **2009**                   | ** **             | **2008**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding at beginning of year | ** ** | **69,147**            |       | 42,200     | ** ** | ** ** | **39,144**                 |                   | —     |   |   | ** ** |   |   |   |
| Granted                          | ** ** | **—**            |       | —     | ** ** | ** ** | **48,719**                 |                   | —     |   |   | ** ** |   |   |   |
| Dividends                        | ** ** | **—**            |       | —     | ** ** | ** ** | **—**                 |                   | —     |   |   | ** ** |   |   |   |
| Exercised                        | ** ** | **(1,000**            | **)**      | (1,000     | )          | ** ** | **—**                 |                   | —     |   |   | ** ** |   |   |   |
| Expired                          | ** ** | **—**            |       | —     | ** ** | ** ** | **—**                 |                   | —     |   |   | ** ** |   |   |   |
| Forfeited                        | ** ** | **—**            |       | —     | ** ** | ** ** | **—**                 |                   | —     |   |   | ** ** |   |   |   |
| Outstanding at period end        | ** ** | **68,147**            |       | 41,200     | ** ** | ** ** | **87,863**                 |                   | —     |   |   | ** ** |   |   |   |
| Exercisable at period end        | ** ** | **—**            |       | —     | ** ** | ** ** | **—**                 |                   | —     |   |   | ** ** |   |   |   |
|                             | ** ** | ** **            |       |       | ** ** | ** ** | ** **                 |                   |       |   |   | ** ** |   |   |   |
|                             | ** ** | **Director RSUs**     | ** ** | ** ** | ** ** |       |                       |                   |       | ** ** |   |   |   |
|                             | ** ** | **2009**              | ** ** | **2008**   | ** ** | ** ** | ** **                 |                   |       |   |   | ** ** |   |   |   |
| Outstanding at beginning of year | ** ** | **15,546**            |       | 13,573     |       |       | ** **                 |                   |       |   |   | ** ** |   |   |   |
| Granted                          | ** ** | **—**            |       | —     |       |       | ** **                 |                   |       |   |   | ** ** |   |   |   |
| Dividends accrued                | ** ** | **316**               |       | 148        |       |       | ** **                 |                   |       |   |   | ** ** |   |   |   |
| Exercised and issued             | ** ** | **—**            |       | —     |       |       | ** **                 |                   |       |   |   | ** ** |   |   |   |
| Exercised and deferred           | ** ** | **(95**               | **)**      | —     |       |       | ** **                 |                   |       |   |   | ** ** |   |   |   |
| Forfeited                        | ** ** | **—**            |       | —     |       |       | ** **                 |                   |       |   |   | ** ** |   |   |   |
| Outstanding at period end        | ** ** | **15,767**            |       | 13,721     |       |       | ** **                 |                   |       |   |   | ** ** |   |   |   |
| Exercisable at period end        | ** ** | **—**            |       | —     |       |       | ** **                 |                   |       |   |   | ** ** |   |   |   |

 

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**8.****    ****Fair Value Measurements**

** **

Wefollow Statement of Financial Accounting Standards No.157, “Fair ValueMeasurements” (SFAS 157), when determining the fair value of our financialinstruments.  SFAS 157 defines fair valueas the 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 the assetor liability in an orderly transaction between market participants on themeasurement date.  SFAS 157 alsoestablishes a fair value hierarchy that requires an entity to maximize the useof observable inputs and minimize the use of unobservable inputs when measuringfair value.  The standard describes threelevels of inputs that may be used to measure fair value:

 

**Level 1**

** **

Level 1 inputs are defined as quoted prices in active markets foridentical assets or liabilities.  OurLevel 1 assets and liabilities include equity securities held in variousdeferred compensation trusts and futures contracts that are traded in an activeexchange market.

 

**Level 2**

** **

Level 2 inputs are observable inputs other than Level 1 prices such asquoted prices for similar assets or liabilities, quoted prices in markets thatare not active, or other inputs that are observable or can be corroborated byobservable market data for substantially the full term of the assets orliabilities.  Our Level 2 assets andliabilities include open-ended investment funds in the Master Trust and forwardcontracts with quoted prices from OTC markets or direct broker quotes that aretraded less frequently than exchange-traded instruments.

 

**Level 3**

** **

Level 3 inputs are unobservable inputs that are supported by little orno market activity and that are significant to the fair value of the assets orliabilities.  Our Level 3 assets andliabilities usually include asset retirement obligations that are initiallyrecognized at fair value.

 

Valuationsof assets and liabilities reflect the value of the instrument including thevalues associated with counterparty risk. With the issuance of SFAS 157, the accounting industry clarified thatthese values must also take into account a company’s own credit standing.

 

The fair value of assets measured on a recurring basis was determinedas follows:

 
| ** **             | ** ** | **Assets and Liabilities Measured at Fair Value on a Recurring Basis** | ** ** |
|------------------------|------------|------------------------------------------------------------------------|------------|
| ** **             | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| ** **             | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Based on Quoted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Fair Value at**                                                      | ** ** | **Prices in Active** | ** ** | **Other Observable** | ** ** | **Unobservable** | ** ** |
| ** **             | ** ** | **March 31, 2009**                                                | ** ** | **Market** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **$ in millions** | ** ** | **DPL**                                                                | ** ** | **DP&L (a)** | ** ** | **DPL** | ** ** | **DP&L (a)** | ** ** | **DPL** | ** ** | **DP&L (a)** | ** ** | **DPL** | ** ** | **DP&L** | ** ** |
| **Assets**             | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Master Trust Assets    |       | $                                                                      | 10.7       |   | $ | 33.9 |   | $ | — |   | $ | 23.2 |   | $ | 10.7 |   | $ | 10.7 |   | $ | — |   | $ | — |   |
| Derivative Assets      |       | 0.8                                                                    |       | 0.8 |   | — |   | — |   | 0.8 |   | 0.8 |   | — |   | — |   |
| Total                  |       | $                                                                      | 11.5       |   | $ | 34.7 |   | $ | — |   | $ | 23.2 |   | $ | 11.5 |   | $ | 11.5 |   | $ | — |   | $ | — |   |
|                   |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**        | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Derivative Liabilities |       | $                                                                      | 7.5        |   | $ | 7.5 |   | $ | 6.3 |   | $ | 6.3 |   | $ | 1.2 |   | $ | 1.2 |   | $ | — |   | $ | — |   |
| Total                  |       | $                                                                      | 7.5        |   | $ | 7.5 |   | $ | 6.3 |   | $ | 6.3 |   | $ | 1.2 |   | $ | 1.2 |   | $ | — |   | $ | — |   |

 

----

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

 

Level1 inputs are used for **DPL** stock heldby the Master Trust and for 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 and capacity swapcontracts where the quoted prices are from a relatively inactive market;forward power contracts and forward NYMEX-quality coal contracts which aretraded on the OTC market but which are valued using prices on the NYMEX forsimilar contracts on the OTC market; and open-ended funds that are in theMaster Trust valued using the end of day Net Asset Value (NAV).

 

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Thefair value of an asset retirement obligation (ARO) is estimated by discountingexpected cash outflows to their present value at the initial recording of theliability.  Cash outflows are based onthe approximate future disposal cost as determined by market information,historical information or management judgment. During the three months ended March 31, 2009, **DP&L**added a minimal amount to an asbestos removal ARO due to changes in the costand timing estimates for asbestos removal. This non-recurring fair value would be considered a Level 3 input.

 

At March 31, 2009, **DPL**had no investments in money market mutual funds classified as cash and cashequivalents in its condensed consolidated balance sheet.

 

**9.     DerivativeInstruments and Hedging Activities**

** **

EffectiveJanuary 1, 2009, we adopted Statementof Financial Accounting Standards No. 161, “Disclosures about DerivativeInstruments and Hedging Activities — an amendment to FASB Statement No. 133”(SFAS 161). SFAS 161 requires an entity to provide enhanced disclosures about: (a) howand why an entity uses derivative instruments; (b) how derivative instrumentsand related hedged items are accounted for under SFAS 133 and its relatedinterpretations; and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance and cashflows.

 

In the normal course of business, **DPL** and **DP&L** enter into various derivative financialinstruments.  We use derivativesprincipally to manage the risk of changes in market prices for commodities. Thederivatives that we use to economically hedge this risk are governed by ourrisk management policies for forward and futures contracts. Our positions arecontinually assessed within our structured hedging programs to determinewhether new or offsetting transactions are required. The objective of thehedging program is generally to mitigate financial risks while ensuring thatsufficient volumes are available to meet our requirements.  We monitor and value derivative positionsmonthly as part of our risk management processes. We use published sources forpricing when possible to mark positions to market. We rely on modeledvaluations only when no other method exists. (See Note 8 of Notes to Condensed Consolidated Financial Statements.)All of our derivative instruments are used for risk management purposes and aredesignated as a cash flow hedge or marked to market each reporting period.

 

***Cash Flow Hedges***

Aspart of our risk management processes, we identify the relationships betweenhedging instruments and hedged items, as well as the risk management objectiveand strategy for undertaking various hedge transactions. The mark-to-marketvalue of cash flow hedges, as determined by current public market prices, willcontinue to fluctuate with changes in market prices up to contract expiration.The effective portion of the hedging transaction is recognized in OtherComprehensive Income (OCI) and transferred to earnings when the hedgedforecasted transaction takes place or when the hedged forecasted transaction isno longer probable of occurring. The ineffective portion of the cash flow hedgeis recognized in earnings in the current period.  We currently use cash flow hedging with longterm power forward contracts and in 2003 we entered into an interest rate swapwhich was settled that same year. All risk components were taken into account todetermine the hedge effectiveness of the cash flow hedges.

 

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** **

The following table provides information concerning gains or lossesrecognized in OCI for the cash flow hedges:

** **
| ** **                                                     | ** ** | **For the three months ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **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 | ** ** | **(1.7**                                      | **)**      | **—** |   | (0.5 | ) | — |   |
| Net amount of any reclassification into earnings               | ** ** | **0.6**                                       | ** ** | **0.6** |   | 3.3 |   | 0.6 |   |
| Ending Accumulated Derivative (Gain) /Loss in OCI              | ** ** | **$**                                         | **(0.8**   | **)** | **$** | **(16.6** | **)** | $ | 4.3 |   | $ | (19.1 | ) |

** **

***Mark to Market***

Certainderivative contracts are entered into on a regular basis as part of our riskmanagement program but do not qualify for hedge accounting or the normalpurchase and sales exceptions under SFAS 133, as amended. Accordingly,such contracts are recorded at fair value with changes in the fair valuecharged or credited to the income statement in the period in which the changeoccurred. Contracts we enter into as part of our risk management program may besettled financially, by physical delivery or net settled with the counterparty.We currently 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 to time tosupply its generating plants.  We performa quarterly evaluation of the different coal markets to determine if these coalcontracts are considered derivative instruments under SFAS 133 “Accounting forDerivative Instruments and Hedging Activities” (SFAS 133).  **DP&L** hasconcluded that NYMEX and NYMEX look-a-like coal contracts will be consideredderivative instruments under SFAS 133 because they have been determined to bereadily convertible to cash under SFAS 133. These contracts were marked to market and are further discussed in Note8 of Notes to Condensed Consolidated Financial Statements.

 

***Regulatory Assets and Liabilities***

Portionsof the derivative contracts that are marked to market each reporting period andare related to the retail portion of **DP&L’s** loadrequirements are probable of recovery as part of the fuel clause in theStipulation and Recommendation (the Stipulation) filed with the PUCO on February 24,2009.  The Stipulation was discussed inour Annual Report on Form 10-K for the fiscal year ended December 31,2008.  Under SFAS 71, “Accounting for theEffects of Certain Types of Regulation”, if a cost is probable of recovery infuture rates; it should be deferred in a regulatory asset.  If a gain is probable of being returned tocustomers, it should be deferred in a regulatory liability.  **DP&L**believes these costs are probable of recovery. The Ohio jurisdictional retail portion of the heating oil futures andthe NYMEX-quality coal contracts will be deferred in a regulatory asset orliability account until the contracts settle. If these unrealized gains and losses are no longer deemed to be probableof recovery through our rates, they will be reclassified into earnings in theperiod such determination is made.

 

Asof March 31, 2009, DP&L had the following outstanding derivativeinstruments that were entered into to economically hedge changes in cash flowsdue to changes in the price of the underlying commodity:

 
| **Commodity**                                                     | ** ** | **Accounting Treatment** | ** ** | **Volume**        |
|-------------------------------------------------------------------|------------|--------------------------|------------|-------------------|
| FTRs                                                              |       | Mark to Market           |       | 2,613 MW          |
| Heating Oil Futures                                               |       | Mark to Market           |       | 7,266,000 Gallons |
| Long-Term Forward Power Contracts                                 |       | Cash Flow Hedge          |       | 571,200 MWH       |
| NYMEX-quality Coal Contracts (includes our partners’  share) |       | Mark to Market           |       | 1,976,250 Tons    |

 

The following table shows the fair value and balance sheetclassification of our derivative instruments.

 

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Fair Values of DerivativeInstruments

 
| ** **                                                                 | ** ** | **Asset Derivatives**         | ** ** | **Liability Derivatives**     | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                                 | ** ** | **As of March 31, 2009** | ** ** | **As of March 31, 2009** | ** ** |
| **$ in millions**                                                     | ** ** | **Balance Sheet Location**    | ** ** | **Fair Value**                | ** ** | **Balance Sheet Location** | ** ** | **Fair Value** | ** ** |
|                                                                       |       |                          |       |                          |       |   |   |   |   |
| **Derivatives designated as hedging instruments  under FAS 133**           | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long Term Power Forward Contracts                                          |       | Other Assets                  |       | $                             | 0.8        |   |   |   | $ | — |   |
| **Total Derivatives designated as hedging instruments  under FAS 133**     | ** ** | ** **                    | ** ** | $                             | **0.8**    | ** ** | ** ** | ** ** | $ | **—** | ** ** |
|                                                                       |       |                          |       |                          |       |   |   |   |   |
| **Derivatives not designated as hedging instruments  under FAS 133**       | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| FTRs                                                                       |       |                          |       | $                             | —     |   | Other Liabilities |   | $ | 0.0 |   |
| Heating Oil Futures                                                        |       |                          |       | —                        |       | Other Liabilities |   | 6.3 |   |
| NYMEX-Quality Coal Forwards                                                |       |                          |       | —                        |       | Other Liabilities |   | 1.2 |   |
| **Total Derivatives not designated as hedging  instruments under FAS 133** | ** ** | ** **                    |       | $                             | —     |   |   |   | $ | 7.5 |   |
| **Total Derivatives**                                                      | ** ** | ** **                    |       | $                             | 0.8        |   |   |   | $ | 7.5 |   |

 

The following table shows the amount and incomestatement classification of the gains and losses on our derivative instrumentsfor the three month period ending March 31, 2009.

 

**Derivatives Designated as HedgingInstruments (Cash Flow Hedges):**

** **
| **$ 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  Under FAS 133**                                      |       |                                                                                  |       |                                                                                      |             |
| Interest Rate Hedge                                                                                   |       | $                                                                                     | —     |                                                                                      | Interest Expense |                                                                                    | $          | 0.6                                                                                         |       | Interest Expense                                                                          |       | $ | — |   |
| Long Term Power Forward Contracts                                                                     |       | (1.7                                                                                  | )          | Wholesale Revenue                                                                         |             | 0.6                                                                                     |       | Wholesale Revenue                                                                           |       | —                                                                                    |       |
| **Total Effect of Derivative Instruments  Designated as Hedging Instruments on the Income Statement** |       |                                                                                  |       |
|                                                                                                  |       | $                                                                                     | (1.7       | )                                                                                         |             |                                                                                    | $          | 1.2                                                                                         |       |                                                                                      |       | $ | — |   |

 

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**Derivatives Not Designated asHedging Instruments (MTM);**

 
| **$ in millions**                                                                                    | ** ** | **Amount of Gain or   (Loss) in Regulatory  (Asset)/Liability on   Derivative per SFAS 71** | ** ** | **Location of Gain or   (Loss) Recognized in   Income on Derivative** | ** **      | **Amount of Gain or   (Loss) Recognized in   Income on Derivative** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|-----------------|---------------------------------------------------------------------|------------|
| **Derivatives Not Designated as Hedging  Instruments Under FAS 133**                                      |       |
| FTRs                                                                                                      |       | $                                                                                           | —     |                                                                  | Purchased Power |                                                                | $          | (0.0 | ) |
| Heating Oil Futures                                                                                       |       | (2.0                                                                                        | )          | Fuel Costs(1)                                                         |            | (4.1                                                                | )          |
| Heating Oil Futures                                                                                       |       | —                                                                                      |       | O&M Expense                                                       |            | (1.1                                                                | )          |
| NYMEX-Quality Coal Forwards(3)                                                                            |       | (0.7                                                                                        | )          |                                                                  |            |                                                                |       |
| NYMEX-Quality Coal Forwards                                                                               |       | 1.2                                                                                         |       | Fuel Costs(2)                                                         |            | (0.7                                                                | )          |
| ** **                                                                                                | ** ** | ** **                                                                                  | ** ** | ** **                                                            | ** **      | ** **                                                          | ** ** |
| **Total Effect of Derivative Instruments Not  Designated as Hedging Instruments on the Income Statement** | ** ** |
|                                                                                                      |       | $                                                                                           | (1.5       | )                                                                     |            |                                                                | $          | (5.9 | ) |

 

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*(1)** **Includes a MTM loss of $3.2 million on openpositions and a realized loss on settlement of closed contracts of $0.9million.*

*(2)** **Includes a MTM loss of $1.7 million on openpositions and a realized gain on settlement of closed contracts of $1.0million.*

*(3)** **A proportional share of MTM on NYMEX-quality coalforwards that will be passed to the partners of the jointly owned generatingplants when the contracts settle has been deferred in a partner account on thebalance sheet.*

 

Certain of our derivativeinstruments contain provisions that require our debt to maintain an investmentgrade credit rating from the credit rating agencies. If our debt were to fallbelow investment grade, we would be in violation of these provisions, and thecounterparties to the derivative instruments could request immediate payment ordemand immediate and ongoing full overnight collateralization of the mark tomarket loss. The aggregate fair value of all derivative instruments withcredit-risk-related contingent features that are in a liability position on March 31,2009, is $5.9 million. We have not posted collateral for this risk because ourdebt is above investment grade.

 

**10.  Earningsper Share**

 

BasicEPS is based on the weighted-average number of **DPL** common shares outstanding during the year.  Diluted EPS is based on the weighted-averagenumber of **DPL** common and common-equivalent shares outstanding during the year, except in periods where theinclusion of such common-equivalent shares is anti-dilutive.  Excluded from outstanding shares for thisweighted-average computation are shares held by **DP&L’s** Master Trust Plan for deferred compensation andunreleased shares held by **DPL’s** ESOP.

 

Thefollowing table represents common-equivalent shares excluded from thecalculation of diluted EPS because they were anti-dilutive.  These shares may be dilutive in the future.

 
| ** **               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------|------------|---------------------------------------|------------|
| **In millions**          | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                     |       |                                  |       |   |   |
| Common equivalent shares | ** ** | **0.3**                               |       | 0.3 |   |

 

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Thefollowing illustrates the reconciliation of the numerators and denominators ofthe basic and diluted earnings per share computations:

 
| ** **                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| **$ in millions except per   share amounts** | ** ** | **Net  Income**                       | ** ** | **Shares** | ** ** | **Per  Share** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per  Share** | ** ** |
| **Basic EPS**                                     | ** ** | **$**                                 | **69.2**   | ** ** | **112.1** | ** ** | **$** | **0.62** |   | $ | 77.3 |   | 109.3 |   | $ | 0.71 |   |
|                                              |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive Securities:**                | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Warrants (a)                                      | ** ** | ** **                            |       | **0.5** |   |   |   |   |   | 6.9 |   |   |   |
| Stock options and performance shares              | ** ** | ** **                            |       | **0.1** |   |   |   |   |   | 0.2 |   |   |   |
|                                              |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                   | ** ** | **$**                                 | **69.2**   | ** ** | **112.7** | ** ** | **$** | **0.61** |   | $ | 77.3 |   | 116.4 |   | $ | 0.66 |   |

 

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*(a)**      **On March 20,2009, **DPL** repurchased 7.06 millionwarrants, each at a price of $2.25. The repurchased warrants were cancelled by **DPL**on the date they were repurchased. SeeNote 12 of Notes to Condensed Consolidated Financial Statements.*

 

**11.  ContractualObligations, Commercial Commitments and Contingencies**

 

**DPL Inc. —Guarantees**

Inthe normal course of business, **DPL**enters into various agreements with itswholly-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.  Suchagreements fall outside the scope of FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” There have been no material changes to our guarantees as disclosed inour Annual Report on Form 10-K for the fiscal year ended December 31,2008.  Through March 31, 2009,neither **DPL** nor **DP&L**have incurred any losses related to the guarantees of DPLE’s obligations and webelieve it is unlikely that either **DPL**or **DP&L** would be required toperform or incur any losses in the future associated with any of the aboveguarantees of DPLE’s obligations.

 

**DP&L —Equity Ownership Interest**

**DP&L** owns a 4.9%equity ownership interest in OVEC, an electric generation company.  As of March 31, 2009, **DP&L** could be responsible for therepayment of 4.9%, or $50.9 million, of a $1,038 million debt obligation thatmatures in 2026.  This would only happenif OVEC defaulted on its debt payments. As of March 31, 2009, OVEC has not defaulted on its debt paymentobligations.

 

Otherthan the guarantees discussed above, **DPL** and **DP&L** do not have any other off-balancesheet arrangements that have or are reasonably likely to have a current orfuture material effect on our financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resources.

 

**CommercialCommitments and Contractual Obligations**

There have been no material changes, outside theordinary course of business, to our commercial commitments and to theinformation disclosed in the contractual obligations table in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2008.

 

**Contingencies**

In the normal course of business, we are subject to various lawsuits,actions, proceedings, claims and other matters asserted under laws andregulations.  We believe the amountsprovided in our Condensed Consolidated Financial Statements, as prescribed byGAAP, 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, tax examinations and other matters discussed below, and tocomply 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 March 31, 2009, cannot bereasonably determined.

 

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**Environmental Matters**

**DPL**, **DP&L** and our subsidiaries’ facilitiesand operations are subject to a wide range of environmental regulations andlaws.  In the normal course of business, we have investigatory and remedialactivities underway at these facilities to comply, or to determine compliance,with such regulations.  We have been identified, either by agovernment agency or by a private party seeking contribution to site clean-upcosts, as a potentially responsible party (PRP) at two sites pursuant to stateand federal laws.  We record liabilities for probableestimated loss in accordance with SFAS 5 as discussed in Note 1 of Notes toCondensed Consolidated Financial Statements. We evaluate the potentialliability related to probable losses quarterly and may revise ourestimates.  Such revisions in theestimates of the potential liabilities could have a material effect on ourresults of operations, financial position or cash flows.

 

**12.  Common Shareholders’ Equity**

 

In February 2000, **DPL** enteredinto a series of recapitalization transactions which included the issuance of31.6 million warrants 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** entered into a $15.9 million agreement with a holder ofsome of the outstanding warrants to purchase 7,060,000 such warrants at a priceof $2.25 each.  The repurchased warrantswere cancelled by **DPL**on the datethey were repurchased.

 

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

Thisreport includes the combined filing of DPL Inc.**(DPL)**and The Dayton Power and Light Company **(DP&L).  DP&L**is the principalsubsidiary of **DPL**providing approximately 97% of**DPL’s**total consolidated revenue andapproximately 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**, respectivelyand 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.

 

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 and other commodity prices; volatility and changes inmarkets for electricity and other energy-related commodities; performance ofour suppliers; increased competition and deregulation in the electric utilityindustry; increased competition in the retail generation market; changes ininterest rates; state, federal and foreign legislative and regulatoryinitiatives that affect cost and investment recovery, emission levels, ratestructures or tax laws; changes in federal and/or state environmental laws andregulations to which **DPL** and itssubsidiaries are subject; the development and operation of RegionalTransmission Organizations (RTOs), including PJM Interconnection, L.L.C. (PJM)to which **DPL’s** operating subsidiary (**DP&L**) has given control of its transmission functions;changes in our purchasing processes, pricing, delays, contractor and supplierperformance and availability; significant delays associated with largeconstruction projects; growth in our service territory and changes in demand anddemographic patterns; changes in accounting rules and the effect ofaccounting pronouncements issued periodically by accounting standard-settingbodies; financial market conditions; the outcomes of litigation and regulatoryinvestigations, proceedings or inquiries; general economic conditions; and therisks and other factors discussed in **DPL’s** and **DP&L’s**filings with the SEC.

 

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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.

 

Thefollowing discussion should be read in conjunction with the accompanyingfinancials and related footnotes included in **Part 1 —Financial Information**.

 

**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 and our telephone number is (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.  Electricity for **DP&L’s** 24 county service area is primarily generated ateight coal-fired power plants and is distributed to more than 500,000 retailcustomers.  **DP&L** also purchases retail peak load requirements fromDPLE, one of **DPL’s** wholly ownedsubsidiaries.  Principal industries servedinclude 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** significant subsidiaries (all of which arewholly owned) include DPLE, which engages in the operation of peakinggenerating facilities; DPLER, which sells retail electric energy under contractto major industrial and commercial customers in West Central Ohio; and MVIC,our captive insurance company that provides insurance sources to us and oursubsidiaries.

 

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

 

Inaddition to the issues disclosed in our Annual Report on Form 10-K for thefiscal year ended December 31, 2008, which we believe are likely to have asignificant impact on our results of operations and financial condition, wehave identified certain additional issues that we believe may have asignificant impact on our results of operations and financial condition in thefuture.  The following issues mentionedbelow are not meant to be exhaustive but to provide insight on matters that arelikely to have an effect on our results of operations and financial conditionin the future:

 

·                  **Emissions**

Rules issuedby the USEPA and Ohio EPA that require substantial reductions in SO2, NOx, and mercury emissionsimpact our business and operations.  We are installing (and haveinstalled) emission control technology and are taking other measures to complywith required reductions in the emissions.

 

In addition to the requirements related toemissions of SO2,NOx and mercury noted above, there is a growing concern nationally andinternationally about global climate change and the contribution of emissionsof greenhouse gases, including most significantly, CO2.  This concern has led toincreased interest in legislation at the federal level and 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.  On April 17, 2009, the USEPA also made a declaration that CO2 andfive other greenhouse gases are a danger to public health and welfare.  The USEPA has not yet identified thespecifics of how these newly designated pollutants will be regulated. Increased pressure for carbondioxide emissions reduction is also coming from investor organizations and theinternational community.  If legislation or regulations are passed at thefederal or state levels that impose mandatory reductions of CO2 andother greenhouse gases on generation facilities, the cost to**DPL** and**DP&L**of such reductions could be material.

 

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·                  **Transmission, Capacity, Ancillary Service andother PJM-related Costs**

OnFebruary 19, 2009, the PUCO approved **DP&L’s**request to defer costs associated with its transmission, capacity, ancillaryservice and other PJM-related charges incurred as a member of PJM consistentwith the provisions of SB 221.  As aresult, at March 31, 2009, we have recorded a net regulatory asset in theamount of $23.3 million. See Note 3 of Notes to Condensed ConsolidatedFinancial Statements.  On March 28,2009, **DP&L** filed for recovery of thesePJM-related costs and the case is pending before the PUCO.

 

**UPDATES / OTHER MATTERS**

 

**Competition and Regulation Updates**

 

**Ohio Matters Updates**

 

***Ohio RetailRates***

Incompliance with SB 221, **DP&L**filedits electric security plan at the PUCO on October 10, 2008.  On February 24, 2009, **DP&L** filed the Stipulation that, among other things,extends the Company’s rate plan through 2012, provides for recovery of the Ohiojurisdictional retail portion of fuel and purchased power costs beginning January 2010,provides for recovery of certain SB 221 compliance costs, and requires **DP&L** to refile its Smart Grid and Advanced MeteringInfrastructure business cases by September 1, 2009.  The terms of the Stipulation were discussedin greater detail in our Annual Report on Form 10-K for the fiscal yearended December 31, 2008.  The caseis pending before the PUCO.

 

Asa member of PJM, **DP&L** incurs costs and receivesrevenues from the RTO related to its transmission and generation assets, aswell as its load obligations for retail customers.  SB 221 included a provision that would allowOhio electric utilities to seek and obtain a reconcilable rider to recoverRTO-related costs and credits.  On February 19,2009, the PUCO approved **DP&L’s**request to defer costs associated with its transmission, capacity, ancillaryservice and other PJM-related charges incurred as a member of PJM.  On March 28, 2009 **DP&L**filed for recovery of these RTO-related costs. Through this filing, **DP&L**proposes to eliminate seven retail riders related to transmission and ancillaryservices and replace them with a single retail rider that would incorporate allcharges and credits from the RTO as well as the amounts approved fordeferral.  If approved as filed, the newrate will be effective some time in the summer of 2009 and will be reconciledon an annual basis.  This case is pendingbefore the PUCO.

 

**Environmental Updates**

 

**DPL**,**DP&L**and our subsidiaries’ facilities and operations are subject to a wide range ofenvironmental regulations and laws by federal, state and local authorities.

 

Aswell as imposing continuing compliance obligations, these laws and regulationsauthorize the imposition of substantial penalties for noncompliance, includingfines, injunctive relief and other sanctions. In the normal course of business,we have investigatory and remedial activities underway at these facilities tocomply, or to determine compliance, with such regulations.  We recordliabilities for probable estimated loss in accordance with Statement ofFinancial Accounting Standards No. 5 “Accounting for Contingencies” (SFAS5), as discussed in Note 1 of Notes to Condensed Consolidated FinancialStatements. **  DPL,** through its wholly ownedcaptive insurance subsidiary MVIC, has an actuarially calculated reserve forenvironmental matters.  We evaluate thepotential liability related to probable losses quarterly and mayrevise our estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on our results of operations,financial position or cash flows.

 

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***EnvironmentalRegulation and Litigation Related to Air Quality***

Inresponse to a U.S. Supreme Court’s decision that the USEPA has the authority toregulate CO2 emissions from motor vehicles, the USEPA madea 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.

 

Pursuantto the Clean Air Interstate Rule (CAIR) previously discussed in our Annual Report on Form 10-K for thefiscal year ended December 31, 2008, the Ohio EPA initiated anEarly Reduction Credit (ERC) program for annual NOx emission allowances for2008 and 2009.  **DP&L**qualified and filed for the maximum number of ERCs that were initiallyallocable to **DP&L**.  **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 did qualify.  **DP&L** is expected to be allocated approximately 28% moreERCs than its initial allocation.

 

**FINANCIAL OVERVIEW**

 

As more fullydiscussed in later sections of this Form 10-Q, the following were thesignificant financial themes and events for the three months ended March 31,2009:

 

·                  During the three months ended March 31,2009, **DP&L** realized total gains of $20.7million from sales of coal to various counterparties in connection with both **DP&L** and partner-operated generation facilities.  The gains realized from coal sales during thesimilar period in 2008 amounted to $3.2 million.  Net gains realized from coal sales arerecorded as a component of fuel costs and reflected in operating income.

 

·                  During the three months ended March 31,2009, **DP&L** realized total gains of $2.2million from sales of excess emission allowances to various counterpartiescompared to total gains of $26.5 million realized during the similar period in2008.  Net gains realized from emissionallowance sales are also recorded as a component of fuel costs and reflected inoperating income.

 

·                  On February 19, 2009, the PUCO approved **DP&L’s** request to defer the net costs associated withtransmission, capacity, ancillary service and other PJM-related charges thatare incurred as a member of PJM, consistent with the provisions of SB 221.  Accordingly, during the three months ended March 31,2009, **DP&L** deferred RTO costs in theamount of $23.0 million.  Of this amount,$13.5 million relates to the period August 1, 2008 through December 31,2008, and $9.5 million relates to the three months ended March 31,2009.  These RTO costs were capitalizedas a regulatory asset resulting in a favorable impact to **DP&L’s**operating income.  Also included in thetotal deferred amount of $23.3 million is $0.3 million relating to interest andoperation and maintenance expenses.  SeeNote 3 of Notes to Condensed Consolidated Financial Statements.

 

·                  **DPL’s** revenues for the threemonths ended March 31, 2009 decreased slightly by $1.1 million over thesame period in 2008.  **DPL’s** net fuel costs increased 32% primarily due to anoverall higher average cost of fuel consumed during the three months ended March 31,2009 compared to the similar period in 2008, combined with the impact of thechange in gains realized from the sale of coal and emission allowances duringthe three months ended March 31, 2009 compared to the similar period in2008.  **DPL’s**  purchased power costs decreased 28% primarilyas a result of the deferral of RTO costs as discussed above combined with theimpact of lower market rates and volumes and partially offset by increased RTOcharges.  Operation and maintenanceexpenses increased 23% over the same period in 2008 due to various factorswhich are discussed in later sections of this Item 2.

 

·                  **DP&L’s** revenues for the threemonths ended March 31, 2009 decreased by $10.3 million, or 2%, over thesame period in 2008.  **DP&L’s** net fuel costs increased 30% over the same periodin 2008 primarily due to an overall higher average cost of fuel consumed duringthe three months ended March 31, 2009 compared to the similar period in2008, combined with the impact of the change in gains realized from the sale ofcoal and emission allowances during the three months ended March 31, 2009compared to the similar period in 2008.  **DP&L’s**  purchasedpower costs decreased 30% primarily as a result of the deferral of RTO costs asdiscussed above combined with the impact of lower market rates and volumes andpartially offset by increased RTO charges. Operation and maintenance expenses increased 24% over the same period in2008 due to various factors which are discussed in later sections of this Item2.

 

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**RESULTS OFOPERATIONS — DPL**

 

**DPL’s**results of operationsinclude the results of its subsidiaries, including the results of **DP&L**.  **DP&L**provides approximately 97% of the total revenues of**DPL. **Allmaterial intercompany accounts and transactions have been eliminated inconsolidation.  A separate specificdiscussion of the results of operations for **DP&L**is presented elsewhere in this report.

 

**Income Statement Highlights****—****DPL**

** **
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **March 31,**     | ** ** |
| **$ in millions**                   | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                     |       |                   |       |   |   |
| **Revenues:**                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Retail                                   | ** ** | **$**                  | **320.3**  |   | $ | 318.1 |   |
| Wholesale                                | ** ** | **30.9**               |       | 57.1 |   |
| RTO revenues                             | ** ** | **25.5**               |       | 24.9 |   |
| RTO capacity revenues                    | ** ** | **35.4**               |       | 13.2 |   |
| Other revenues                           | ** ** | **2.9**                |       | 2.8 |   |
| Total revenues                           | ** ** | **$**                  | **415.0**  |   | $ | 416.1 |   |
|                                     |       |                   |       |   |   |
| **Cost of revenues:**                    | ** ** | ** **             | ** ** | ** ** | ** ** |
| Fuel costs                               | ** ** | **$**                  | **104.3**  |   | $ | 91.6 |   |
| Gains from sale of coal                  | ** ** | **(20.7**              | **)**      | (3.2 | ) |
| Gains from sale of emission allowances   | ** ** | **(2.2**               | **)**      | (26.5 | ) |
| Net fuel                                 | ** ** | **81.4**               |       | 61.9 |   |
|                                     |       |                   |       |   |   |
| Purchased power                          | ** ** | **15.7**               |       | 35.6 |   |
| RTO charges                              | ** ** | **30.6**               |       | 35.3 |   |
| RTO capacity charges                     | ** ** | **36.4**               |       | 12.1 |   |
| Deferral of RTO related charges          | ** ** | **(23.0**              | **)**      | — |   |
| Total purchased power                    | ** ** | **59.7**               |       | 83.0 |   |
|                                     |       |                   |       |   |   |
| Total cost of revenues                   | ** ** | **$**                  | **141.1**  |   | $ | 144.9 |   |
|                                     |       |                   |       |   |   |
| Gross margins (a)                        | ** ** | **$**                  | **273.9**  |   | $ | 271.2 |   |
|                                     |       |                   |       |   |   |
| Gross margin as a percentage of revenues | ** ** | **66.0**               | **%**      | 65.2 | % |
|                                     |       |                   |       |   |   |
| **Operating income**                     | ** ** | **$**                  | **127.0**  |   | $ | 142.7 |   |
|                                     |       |                   |       |   |   |
| **Earnings per share of common stock**   | ** ** | ** **             | ** ** | ** ** | ** ** |
| Basic EPS from operations                | ** ** | **$**                  | **0.62**   |   | $ | 0.71 |   |
| Diluted EPS from operations              | ** ** | **$**                  | **0.61**   |   | $ | 0.66 |   |

 

----

*(a)**       **Forpurposes of discussing operating results, we present and discuss gross margins.This format is useful to investors because it allows analysis and comparabilityof operating trends and includes the same information that is used bymanagement to make decisions regarding our financial performance.*

 

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**DPL —Revenues**

Retail customers, especiallyresidential and commercial customers, consume more electricity on warmer andcolder days. Therefore,**DPL’s**retail sales volume is impacted by the number of heating and cooling degreedays occurring during a year.  Since**DPL**plans to utilize its internal generating capacity to supply its retailcustomers’ needs first, increases in retail demand will decrease the volume ofinternal generation available to be sold in the wholesale market and viceversa.

 

Thewholesale market covers a multi-state area and settles on an hourly basisthroughout the year. Factors impacting**DPL’s**wholesale sales 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.

 

Thefollowing table provides a summary of changes in revenues from the priorperiod:

 
| ** **                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **March 31,**     | ** ** |
| **$ in millions**            | ** ** | **2009 vs. 2008**      | ** ** |
|                              |       |                   |       |
| **Retail**                        | ** ** | ** **             | ** ** |
| Rate                              |       | $                      | 29.8       |   |
| Volume                            |       | (27.0                  | )          |
| Other miscellaneous               |       | (0.6                   | )          |
| **Total retail change**           | ** ** | **$**                  | **2.2**    | ** ** |
|                              |       |                   |       |
| **Wholesale**                     | ** ** | ** **             | ** ** |
| Rate                              |       | $                      | (5.3       | ) |
| Volume                            |       | (20.9                  | )          |
| **Total wholesale change**        | ** ** | **$**                  | **(26.2**  | **)** |
|                              |       |                   |       |
| **RTO capacity & other** | ** ** | ** **             | ** ** |
| RTO capacity and other revenues   | ** ** | **$**                  | **22.9**   | ** ** |
| ** **                        | ** ** | ** **             | ** ** |
| **Total revenues change**         | ** ** | **$**                  | **(1.1**   | **)** |

 

Forthe three months ended March 31, 2009, revenues decreased $1.1 million to$415.0 million from $416.1 million in the same period of the prior year. This decrease was primarily the result of lower retail and wholesale salesvolume, and lower wholesale average rates, partially offset by an increase inRTO capacity and other RTO revenues and by higher average retail rates.

 

·                  Retail revenues increased$2.2 million resulting primarily from a 10% increase in average retail ratesdue largely to the incremental effect of the recovery of costs under theenvironmental investment rider (EIR) as well as the expiration of certainstatutory and settlement rate discounts in 2009, partially offset by a 9%decrease in sales volume driven largely by the economic recession and milderweather conditions.  This resulted in a favorable $29.8 million retailprice variance and an unfavorable $27.0 million retail sales volume variance.

 

·                  Wholesale revenues decreased$26.2 million for the three months ended March 31, 2009 primarily as aresult of a 15% decrease in wholesale average rates, combined with a 37%decrease in sales volume which was partially due to unplanned outages.  This resulted in an unfavorable $5.3 millionwholesale price variance and an unfavorable $20.9 million wholesale volumevariance.

 

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·                  RTO capacity and otherrevenues, consisting primarily of compensation for use of **DPL’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, increased $22.9million compared to the same period in 2008. This increase to RTO capacity and other RTO revenues was primarily theresult of additional revenue of $22.2 million that was realized from the PJMcapacity auction compared to the same period in 2008.

 

## **DPL— Cost of Revenues**

Forthe three months ended March 31, 2009:

 

·                  Fuel costs, which includecoal, gas, oil, and emission allowance costs, increased $19.5 million, or 32%,compared to the same period in 2008, primarily due to a 23% increase in theaverage cost of fuel consumed per kilowatt-hour due largely to increased coalprices.  Also contributing to theincrease were the lower gains realized in the first three months of 2009compared to 2008 from the sale of **DP&L’s**excess emission allowances.  In the firstthree months of 2009, **DP&L**realized $2.2 million in gains from the sale of excess emission allowancescompared to $26.5 million during the same period in 2008.  These increases were, however, partially offsetby $20.7 million of gains realized in 2009 from the sale of coal.  During the same period in 2008, gainsrealized from the sale of coal amounted to $3.2 million.

 

·                  Purchased power decreased$23.3 million in the three months ended March 31, 2009 compared to thesame period in 2008.  The net decrease inpurchased power primarily results from a deferral in 2009 of $23.0 millionrelating to **DPL’s** transmission, capacity andother PJM-related charges which were incurred as a member of PJM.  Approval to defer these costs was obtainedfrom the PUCO on February 19, 2009 and these deferred RTO costs have beenrecorded as a regulatory asset at March 31, 2009.  See Note 3 of Notes to Condensed ConsolidatedFinancial Statements.  Also contributingto the decrease in purchased power were decreases of $4.3 million and $15.6million relating to lower average market rates and lower volumes of purchasedpower, respectively.  The above decreaseswere partially offset by a $19.6 million increase in RTO capacity and other RTOcharges over the same period in 2008.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned andunplanned outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

## **DPL— Gross Margins**

Forthe three months ended March 31, 2009, gross margin of $273.9 millionincreased by $2.7 million, or 1%, from $271.2 million in the same period in2008.  As a percentage of total revenues,gross margin was 66% in 2009 compared to 65% in 2008.  These gross margin results primarily reflectthe impact of revenues and cost of revenues discussed above.

 

**DPL****—****Operationand Maintenance**

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **March 31,**     | ** ** |
| **$ in millions**                                   | ** ** | **2009 vs. 2008**      | ** ** |
| Generating facilities operating and maintenance expenses |       | $                      | 4.5        |   |
| Outside services                                         |       | 3.5                    |       |
| Low-income payment program                               |       | 2.1                    |       |
| ESOP                                                     |       | 1.4                    |       |
| Pension                                                  |       | 1.4                    |       |
| Other, net                                               |       | 1.7                    |       |
| **Total operation and maintenance expense**              |       | $                      | 14.6       |   |

 

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During thethree months ended March 31, 2009, operation and maintenance expenseincreased $14.6 million, or 23%, compared to the same period in 2008.  This variance was primarily the result of:

 

·                  an increase in operating and maintenanceexpenses for generating facilities largely due to costs associated withunplanned outages at a jointly-owned production unit as well as the operationof FGD and SCR equipment, and related gypsum disposal,

 

·                  an increase in outside services primarilyassociated with non-recurring costs relating to energy management activities,

 

·                  an increase in the USF rate rider relatedto assistance for low-income retail customers,

 

·                  an increase in the ESOP benefit expense,and

 

·                  higher pension costs due primarily to adecline in the values of pension plan assets.

 

**DPL —Depreciation and Amortization**

Forthe three months ended March 31, 2009, depreciation and amortizationexpense increased $2.7 million compared to the same period in 2008 primarily asa result of higher asset balances at the generating stations.  These higher balances were due largely to thecompletion of the FGD projects in 2008.

 

**DPL —General Taxes**

Forthe three months ended March 31, 2009, general taxes increased $2.3million compared to the same period in 2008, primarily as a result of higherproperty taxes due mainly to capital improvements which have led to higherassessed property values, combined with increased tax rates.

 

**DPL —****Amortization of Regulatory Assets**

Forthe three months ended March 31, 2009, the amortization of regulatoryassets was $1.2 million lower than that of the same period in 2008, primarilyreflecting $1.0 million for the 2008 amortization of incremental costs incurredin 2004 and 2005 for severe storms. These storm costs were fully amortized in the third quarter of 2008.

 

**DPL**—**InterestExpense**

Forthe three months ended March 31, 2009, interest expense increased $0.7million compared to the same period in 2008 primarily due to $4.4 million oflower capitalized interest in 2009 compared to 2008.  The lower capitalized interest was duelargely to the completion of the FGD projects at Stuart generation station.  This increase was partially offset by:

 

·                  a $1.6million reduction in interest expense due to the redemption in May 2008 of**DPL’s** $100 million 6.25% Senior Notes,and

 

·                  lower rates of interest onthe $100 million Revenue Refunding Bonds issued in December 2008, ascompared to the $90 million Revenue Bonds which were issued in November 2007and redeemed in December 2008.  SeeNote 5 of Notes to Condensed Consolidated Financial Statements.

 

## **DPL— Income Tax Expense**

Forthe three months ended March 31, 2009, income taxes decreased $9.0million, or 20%, compared to the same period in 2008, primarily reflecting adecrease in pre-tax book income combined with a decrease in the effective taxrate resulting from the phase-out of the Ohio Franchise Tax.

 

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**RESULTS OFOPERATIONS — DP&L**

 

**IncomeStatement Highlights — DP&L**

** **
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **March 31,**     | ** ** |
| **$ in millions**                   | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                     |       |                   |       |   |   |
| **Revenues:**                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Retail                                   | ** ** | **$**                  | **308.1**  |   | $ | 282.8 |   |
| Wholesale                                | ** ** | **41.0**               |       | 93.0 |   |
| RTO revenues                             | ** ** | **24.5**               |       | 24.9 |   |
| RTO capacity revenues                    | ** ** | **30.0**               |       | 13.2 |   |
| Total revenues                           | ** ** | **$**                  | **403.6**  |   | $ | 413.9 |   |
|                                     |       |                   |       |   |   |
| **Cost of revenues:**                    | ** ** | ** **             | ** ** | ** ** | ** ** |
| Fuel costs                               | ** ** | **$**                  | **101.7**  |   | $ | 90.4 |   |
| Gains from sale of coal                  | ** ** | **(20.7**              | **)**      | (3.2 | ) |
| Gains from sale of emission allowances   | ** ** | **(2.2**               | **)**      | (26.5 | ) |
| Net fuel                                 | ** ** | **78.8**               |       | 60.7 |   |
|                                     |       |                   |       |   |   |
| Purchased power                          | ** ** | **15.6**               |       | 36.5 |   |
| RTO charges                              | ** ** | **30.1**               |       | 35.3 |   |
| RTO capacity charges                     | ** ** | **36.4**               |       | 12.1 |   |
| Deferral of RTO related charges          | ** ** | **(23.0**              | **)**      | — |   |
| Total purchased power                    | ** ** | **59.1**               |       | 83.9 |   |
|                                     |       |                   |       |   |   |
| Total cost of revenues                   | ** ** | **137.9**              |       | 144.6 |   |
|                                     |       |                   |       |   |   |
| Gross margins (a)                        | ** ** | **$**                  | **265.7**  |   | $ | 269.3 |   |
|                                     |       |                   |       |   |   |
| Gross margin as a percentage of revenues | ** ** | **65.8**               | **%**      | 65.1 | % |
|                                     |       |                   |       |   |   |
| **Operating Income**                     | ** ** | **$**                  | **124.8**  |   | $ | 146.4 |   |

 

----

*(a)**       **Forpurposes of discussing operating results, we present and discuss gross margins.This format is useful to investors because it allows analysis and comparabilityof operating trends and includes the same information that is used bymanagement to make decisions regarding our financial performance.*

 

**DP&L —Revenues**

Retailcustomers, especially residential and commercial customers, consume moreelectricity on warmer and colder days. Therefore,**DP&L’s** retail sales volume is impacted by the number ofheating and cooling degree days occurring during a year.  Since**DP&L** plans to utilize its internalgenerating capacity to supply its retail customers’ needs first, increases inretail demand will decrease the volume of internal generation available to besold in the wholesale market and vice 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.

 

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Thefollowing table provides a summary of changes in revenues from the priorperiod:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **March 31,**     | ** ** |
| **$ in millions**              | ** ** | **2009 vs. 2008**      | ** ** |
|                                |       |                   |       |
| **Retail**                          | ** ** | ** **             | ** ** |
| Rate                                |       | $                      | 49.9       |   |
| Volume                              |       | (24.0                  | )          |
| Other miscellaneous                 |       | (0.6                   | )          |
| **Total retail change**             | ** ** | **$**                  | **25.3**   | ** ** |
|                                |       |                   |       |
| **Wholesale**                       | ** ** | ** **             | ** ** |
| Rate                                |       | $                      | (14.8      | ) |
| Volume                              |       | (37.2                  | )          |
| **Total wholesale change**          | ** ** | **$**                  | **(52.0**  | **)** |
|                                |       |                   |       |
| **RTO capacity and other**          | ** ** | ** **             | ** ** |
| RTO capacity and other RTO revenues | ** ** | **$**                  | **16.4**   | ** ** |
| ** **                          | ** ** | ** **             | ** ** |
| **Total revenues change**           | ** ** | **$**                  | **(10.3**  | **)** |

 

Forthe three months ended March 31, 2009, revenues decreased $10.3 million,or 2%, to $403.6 million from $413.9 million in the same period of the prioryear.  This decrease was primarily the result of lower retail andwholesale sales volumes, and lower wholesale average rates, partially offset byhigher average retail rates and an increase in RTO capacity and other RTOrevenues.

 

·                  Retail revenues increased $25.3 million, or9%, primarily as a result of a 10% increase in average retail rates due largelyto the incremental effect of the recovery of costs under the EIR as well as theexpiration of certain statutory and settlement rate discounts in 2009 combinedwith the impact of customers switching their generation service to **DP&L** from DPLER, an affiliated CRES provider.  Prior to this switching, **DP&L**was already providing distribution services to these customers.  These retail revenue increases were partiallyoffset by a 9% decrease in sales volume driven largely by the economicrecession and milder weather conditions.

 

·                  The net decrease of $52.0 million inwholesale revenues was primarily a result of a combination of the effect ofcustomer switching discussed under retail revenues above, a 40% decrease inwholesale sales volume which was partially due to unplanned outages and adecrease in the average wholesale rates.

 

·                  RTO capacity and other RTO 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 $16.4million compared to the same period in 2008. This increase primarily resulted from additional revenue of $16.8million that was realized from the PJM capacity auction compared to the sameperiod in 2008.

 

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## **DP&L— Cost of Revenues**

Forthe three months ended March 31, 2009:

 

·                  Fuel costs, which include coal, gas, oil, andemission allowance costs, increased $18.1 million, or 30%, compared to the sameperiod in 2008, primarily due to a 22% increase in the average cost of fuelconsumed per kilowatt-hour due largely to increased coal prices. Alsocontributing to this increase were the lower gains realized in the first threemonths of 2009 compared to the same period in 2008 from the sale of **DP&L’s** excess emission allowances.  In the first three months of 2009, **DP&L** realized $2.2 million in gains from the sale ofexcess emission allowances compared to $26.5 million in the same period in2008.  These increases were, however,partially offset by $20.7 million of gains realized in the first three monthsof 2009 from the sale of coal.  In thesame period in 2008, gains realized from the sale of coal amounted to $3.2million.

 

·                  Purchased power decreased $24.8 million inthe three months ended March 31, 2009 compared to the same period in2008.  The net decrease in purchasedpower primarily results from a deferral in 2009 of $23.0 million relating to **DP&L’s** transmission, capacity and other PJM-relatedcharges which were incurred as a member of PJM. Approval to defer these costs was obtained from the PUCO on February 19,2009 and these deferred RTO costs have been recorded as a regulatory asset at March 31,2009.  See Note 3 of Notes to CondensedConsolidated Financial Statements.  Alsocontributing to the decrease in purchased power were decreases of $4.6 millionand $16.3 million relating to lower average market rates and lower volumes ofpurchased power, respectively.  The abovedecreases were partially offset by a $19.1 million increase in RTO capacity andother RTO charges over the same period in 2008. We purchase power to satisfyretail sales volume when generating facilities are not available due to plannedand unplanned outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

## **DP&L— Gross Margins**

Forthe three months ended March 31, 2009, gross margin of $265.7 millionslightly decreased by $3.6 million, or 1%, from $269.3 million in the sameperiod of the prior year.  As apercentage of total revenues, gross margin was 66% in 2009 compared to 65% in2008.  These gross margin results primarilyreflect the impact of revenues and cost of revenues discussed above.

 

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

** **
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **March 31,**     | ** ** |
| **$ in millions**                                   | ** ** | **2009 vs. 2008**      | ** ** |
| Generating facilities operating and maintenance expenses |       | $                      | 4.5        |   |
| Outside services                                         |       | 3.6                    |       |
| Low-income payment program                               |       | 2.1                    |       |
| ESOP                                                     |       | 1.4                    |       |
| Pension                                                  |       | 1.4                    |       |
| Other, net                                               |       | 1.1                    |       |
| **Total operation and maintenance expense**              |       | $                      | 14.1       |   |

 

For the three months ended March 31,2009, operation and maintenance expense increased $14.1 million, or 24%, comparedto the same period in 2008.  Thisvariance was primarily the result of:

 

·                  an increase in operating and maintenanceexpenses for generating facilities largely due to costs associated withunplanned outages at a jointly-owned production unit as well as the operationof FGD and SCR equipment, and related gypsum disposal,

 

·                  an increase in outside services primarilyassociated with non-recurring costs relating to energy management activities,

 

·                  an increase in the USF rate rider relatedto assistance for low-income retail customers,

 

·                  an increase in the ESOP benefit expense,and

 

·                  higher pension costs due primarily to adecline in the values of pension plan assets.

 

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**DP&L— Depreciation and Amortization**

Forthe three months ended March 31, 2009, depreciation and amortizationexpense increased $2.7 million compared to the same period in 2008 primarily asa result of higher asset balances at the generating stations.  These higher balances were due largely to thecompletion of the FGD projects in 2008.

 

**DP&L— General Taxes**

Forthe three months ended March 31, 2009, general taxes increased $2.4million compared to the same period in 2008, primarily as a result of higherproperty taxes due mainly to capital improvements which have led to higherassessed property values, combined with increased tax rates.

 

**DP&L—****Amortization of Regulatory Assets**

Forthe three months ended March 31, 2009, the amortization of regulatoryassets was $1.2 million lower than that of the same period in 2008, primarilyreflecting $1.0 million for the 2008 amortization of incremental costs incurredin 2004 and 2005 for severe storms. These storm costs were fully amortized in the third quarter of 2008.

 

**DP&L**—**Interest Expense**

Forthe three months ended March 31, 2009, interest expense increased $2.1million compared to the same period in 2008 primarily due to $4.4 million oflower capitalized interest in 2009 compared to 2008.  The lower capitalized interest was due largelyto the completion of the FGD projects at Stuart generation station.  This increase was partially offset by lowerrates of interest on the $100 million Revenue Refunding Bonds issued in December 2008,as compared to the $90 million Revenue Bonds which were issued in November 2007and redeemed in December 2008.  SeeNote 5 of Notes to Condensed Consolidated Financial Statements.

 

## **DP&L— Income Tax Expense**

Forthe three months ended March 31, 2009, income taxes decreased $11.2million, or 22%, compared to the same period in 2008, primarily reflecting adecrease in pre-tax book income combined with a decrease in the effective taxrate resulting from the phase-out of the Ohio Franchise Tax.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL REQUIREMENTS**

 

**DPL’s**financial condition,liquidity and capital requirement, includes the consolidated results of **DP&L** and **DPL’s**other subsidiaries.  All materialintercompany accounts and transactions have been eliminated in consolidation.

 

**DPL’sCash Position**

**DPL’s** cash and cash equivalents totaled $26.6 million at March 31,2009, compared to $62.5 million at December 31, 2008, a decrease of $35.9million.  The decrease in cash and cashequivalents was primarily attributed to the retirement of $175 million oflong-term debt, $50.2 million of capital expenditures, $32.1 million ofdividends paid on common stock, and $15.9 million used to repurchaseoutstanding stock warrants, partially offset by a $150 million cash borrowingfrom the Company’s revolving credit facility, cash generated from operatingactivities of $75.6 million, $6.7 million of restricted funds drawn to fundpollution control capital expenditures and $5.0 million of cash from thematurity of short-term investments.  At March 31,2009, **DPL** had $7.8 million in restricted fundsheld in trust that will be used to fund pollution control capital expenditures.

 

**DP&L’sCash Position**

**DP&L’s** cash and cash equivalents totaled $19.9 million at March 31,2009, compared to $20.8 million at December 31, 2008, a decrease of $0.9million.  The decrease in cash and cashequivalents was primarily attributed to $175 million in dividends paid oncommon stock to our parent **DPL** and $48.9million used for capital expenditures. These cash outflows were partiallyoffset by a $150 million borrowing from the revolving credit facility, $66.5million in cash generated from operating activities, and net withdrawals of$6.7 million from restricted funds to pay for pollution control upgrades.  At March 31, 2009, **DP&L**had $7.8 million in restricted funds held in trust that will be used to fundpollution control capital expenditures.

 

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**Operating Activities**

 

Forthe three months ended March 31, 2009 and 2008, cash flows from operationswere as follows:

 

**Net Cash provided by Operating Activities**

 
| ** **             | ** ** | **Three Months Ended** | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **March 31,**     | ** ** |
| **$ in millions** | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                   |       |                   |       |   |   |
| **DPL**                | ** ** | **$**                  | **75.6**   |   | $ | 149.7 |   |
|                   |       |                   |       |   |   |
| **DP&L**           | ** ** | **$**                  | **66.5**   |   | $ | 167.9 |   |

 

Thetariff-based revenue from our energy business continues to be the principalsource of cash from operating activities. Management believes that the diversified retail customer mix ofresidential, commercial and industrial classes coupled with the rate reliefapproved by the PUCO for 2006 through 2010 provides us with a reasonablypredictable gross cash flow from operations.

 

**DPL’s Cash provided by Operating Activities**

**DPL** generated net cash from operating activitiesof $75.6 million and $149.7 million in the three month periods ended March 31,2009 and 2008, respectively.  The netcash provided by operating activities for 2009 and 2008 was primarily theresult of cash received from utility customers, partially offset by cash usedfor fuel, purchased power, operating expenditures, interest and taxes.  The fluctuations in working capital resultfrom the timing of payments made and cash receipts from our utility customers.

 

**DP&L’s Cash provided by Operating Activities**

**DP&L** generated net cash fromoperating activities of $66.5 million and $167.9 million in the three monthperiods ended March 31, 2009 and 2008, respectively.  The net cash provided by operating activitiesfor 2009 and 2008 was primarily the result of cash received from utilitycustomers, partially offset by cash used for fuel, purchased power, operatingexpenditures, interest and taxes.  Thefluctuations in working capital result from the timing of payments made andcash receipts from our utility customers.

 

**Investing Activities**

 

Forthe three months ended March 31, 2009 and 2008, cash flows used forinvesting activities were as follows:

 

**Net Cash used for InvestingActivities**

 
| ** **             | ** ** | **Three Months Ended** | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **March 31,**     | ** ** |
| **$ in millions** | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                   |       |                   |       |   |   |
| **DPL**                | ** ** | **$**                  | **(45.2**  | **)** | $ | (65.3 | ) |
| ** **             | ** ** | ** **             | ** ** | ** ** | ** ** |
| **DP&L**           | ** ** | **$**                  | **(48.9**  | **)** | $ | (65.0 | ) |

 

**DPL’s Cash used for Investing Activities**

**DPL’s**net cash used forinvesting activities was $45.2 million and $65.3 million in the three monthperiods ended March 31, 2009 and 2008, respectively.  Net cash flows used for investing activitiesduring both of these periods were primarily related to capital expenditures.

 

**DP&L’s Cash used for Investing Activities**

**DP&L’s** net cash used for investingactivities were $48.9 million and $65.0 million in the three month periodsended March 31, 2009 and 2008, respectively.  Net cash flows used for investing activitiesduring both these periods were primarily related to capital expenditures.

 

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**Financing Activities**

 

Forthe three months ended March 31, 2009 and 2008, cash flows used forfinancing activities were as follows:

 

**Net Cash used for FinancingActivities**

 
| ** **             | ** ** | **Three Months Ended** | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **March 31,**     | ** ** |
| **$ in millions** | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                   |       |                   |       |   |   |
| **DPL**                | ** ** | **$**                  | **(66.3**  | **)** | $ | (22.1 | ) |
| ** **             | ** ** | ** **             | ** ** | ** ** | ** ** |
| **DP&L**           | ** ** | **$**                  | **(18.5**  | **)** | $ | (93.6 | ) |

 

**DPL’s Cash used for Financing Activities**

**DPL’s**net cash used forfinancing activities in the three months ended March 31, 2009 was $66.3 million compared to $22.1million during the same period of the prior year.  Net cash flows used for financing activitiesin the three months ended March 31, 2009 were primarily the result of cashused to retire $175 million of long-term debt, to pay dividends of $32.1million to stockholders, and to repurchase $15.9 million of outstanding stockwarrants, partially offset by a borrowing of $150 million from the Company’srevolving credit facility and $6.7 million from the restricted funds held intrust.  Net cash flows used for financingactivities in the three months ended March 31, 2008 were primarily theresult of cash used to pay dividends of $29.9 million to stockholders,partially offset by a withdrawal of $6.6 million from the restricted funds heldin trust.

 

**DP&L’s Cash used for Financing Activities**

**DP&L’s** net cash used for financingactivities in the three months ended March 31, 2009 was $18.5 millioncompared to $93.6 million during the same period of the prior year.  Net cash flows used for financing activitiesin the three months ended March 31, 2009 were primarily the result of cashused to pay common stock dividends of $175 million to our parent **DPL**, partially offset by a borrowing of $150 million fromthe revolving credit facility and $6.7 million from the restricted funds heldin trust.  Net cash flows used forfinancing activities for the three months ended March 31, 2008 wereprimarily the result of cash used to pay common stock dividends of $80 millionto our parent **DPL** and a short-term loanrepayment also to**DPL**of $20 million, partiallyoffset by a $6.6 million withdrawal from restricted funds held in trust.

 

**DPL** and **DP&L** have obligations to make future payments forcapital expenditures, debt agreements, lease agreements and other long-termpurchase obligations, and have certain contingent commitments such asguarantees.  We believe our cash flowsfrom operations, the credit facilities (existing or future arrangements), thesenior notes and other short- and long-term debt financing, will be sufficientto satisfy our future working capital, capital expenditures and other financingrequirements for the foreseeable future. Our ability to generate positive cash flows is dependent on generaleconomic conditions, competitive pressures and other business and risk factorsdescribed in Item 1a of our Annual Report on Form 10-K for the fiscal yearended December 31, 2008.  If we areunable to generate sufficient cash flows, or otherwise comply with the terms ofour credit facilities, the senior notes and other long-term debt, we may berequired to refinance all or a portion of our existing debt or seek additionalfinancing alternatives.  A discussion ofeach of our critical liquidity commitments is outlined below.

 

**Revolving Credit Facility**

On April 21, 2009, **DP&L** entered into a new $100 millionunsecured revolving credit agreement with a syndicated bank group.  The new agreement is for a 364-day termexpiring on April 20, 2010.  Thefacility contains one financial covenant: **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00. As of March 31,2009,**DP&L**was in compliancewith this covenant with a ratio of 0.44 to 1.00.  As of April 29, 2009, **DP&L** had no outstanding borrowingsunder this facility.

 

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**Capital Requirements**

**DPL’s**construction additions were $29.8 million and $46.4 million during thethree month periods ended March 31, 2009 and 2008, respectively.  **DPL** is expectedto spend approximately $150 million in 2009 on construction additions.  Planned construction additions for 2009relate to **DP&L’s** environmentalcompliance program, power plant equipment, and its transmission anddistribution system.

 

**DP&L’s**construction additions were $29.2 million and $46.1 million during thethree month periods ended March 31, 2009 and 2008, respectively.  **DP&L**is****expected to spend approximately $147 million in 2009 onconstruction additions.  Plannedconstruction additions for 2009 relate to **DP&L’s**environmental compliance program, power plant equipment, and its transmissionand distribution system.

 

Capitalprojects are subject to continuing review and are revised in light of changesin financial and economic conditions, load forecasts, legislative andregulatory developments and changing environmental standards, among otherfactors.  **DPL,** through its subsidiary **DP&L,**isprojecting to spend an estimated $475 million in capital projects for theperiod of 2009 through 2011.  Our abilityto complete capital projects and the reliability of future service will beaffected by our financial condition, the availability of internal funds, andthe reasonable cost of external funds. We expect to finance our construction additions with a combination ofcash on hand, short-term financing, long-term debt, and cash flows fromoperations.

 

**Debt**

OnMarch 31, 2009, **DPL** paid off$175 million of 8.00% Senior Notes, when the notes became due.

 

**Debt Covenants**

Therehave been no material changes to our debt covenants as disclosed in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2008.  We are in compliance with all of our debtcovenants.

 

**Credit Ratings**

The following table outlines the debt credit ratingsand outlook of each company, along with the effective dates of each rating andoutlook.  In April 2009, Standard &Poor’s Corporation revised its ratings and outlook for both **DPL** and **DP&L.**

 
| ** **                            | ** ** | **DPL Inc.(a)** | ** ** | **DP&L(b)** | ** ** | **Outlook** | ** ** | **Effective**   | ** ** |
|---------------------------------------|------------|----------------------|------------|-----------------|------------|-------------|------------|-----------------|------------|
|                                  |       |                 |       |            |       |        |       |            |       |
| Fitch Ratings                         |       | BBB+                 |       | A+              |       | Positive    |       | April 2008 |       |
| Moody’s Investors Service        |       | Baa2                 |       | A2              |       | Positive    |       | July 2008  |       |
| Standard & Poor’s Corp. |       | BBB+                 |       | A               |       | Stable      |       | April 2009 |       |

 

----

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

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

 

**Off-Balance Sheet Arrangements**

 

**DPL Inc. - Guarantees**

Inthe normal course of business, **DPL**enters into various agreements with ourwholly owned generating subsidiary DPLE to provide 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.  Suchagreements fall outside the scope of FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” There have been no material changes to our guarantees as disclosed inour Annual Report on Form 10-K for the fiscal year ended December 31,2008.

 

**CommercialCommitments and Contractual Obligations**

There have been no material changes, outside theordinary course of business, to our commercial commitments and to theinformation disclosed in the contractual obligations table in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2008.

 

See Note 11 of Notes to Condensed ConsolidatedFinancial Statements.

 

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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, and fluctuations in interest rates.  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.  There have been no materialchanges to our market risks as disclosed in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008.

 

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

 

**Commodity Pricing Risk**

In2008 and during the three months ended March 31, 2009, the coal market hasexperienced unprecedented price volatility. The coal market has increasingly been influenced by international ratherthan solely domestic supply and consumption, and coal prices have been decreasingsince the second half of 2008.  While wehave all of the total expected coal volume needed to meet our retail and firmwholesale sales requirements for 2009 under contract, sales requirements maychange, particularly for retail load.  Tothe extent we are not able to hedge against price volatility, our results ofoperations, financial position or cash flows could be materially affected.

 

Approximately 7% of **DPL’s**and 10% of **DP&L’s** total grossrevenues for the three months ended March 31, 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 March 31,2009, a hypothetical increase or decrease of 10% in **DPL’s** annual wholesale revenues could result in approximatelyan $8 million increase or decrease to net income, assuming no increases in fueland purchased power costs.  As of March 31,2009, a hypothetical increase or decrease of 10% in **DP&L’s** annual wholesale revenues could result inapproximately an $11 million increase or decrease to net income, assuming noincreases in fuel and purchased power costs.

 

**DPL’s** fuel (including coal, gas, oil and emissionallowances) and purchased power costs as a percent of total gross operating costs(before effect of the RTO costs deferral) in the three months ended March 31,2009 and 2008 were 31% and 36%, respectively. **DP&L’s** fuel (includingcoal, gas, oil and emission allowances) and purchased power costs as a percentof total operating costs were 31% and 36%, respectively, for the three monthperiods ending March 31, 2009 and 2008. We have substantially all of the total expected coal volume needed tomeet our retail and firm wholesale sales requirements for 2009 undercontract.  The majority of our contractedcoal is purchased at fixed prices.  Somecontracts provide for periodic adjustment and some are priced based on marketindices.  Substantially all contractshave features that limit price escalations in any given year.  Our consumption of SO2 allowances should decline in2009 due to emission control upgrades. We do not expect to purchase SO2 allowances for 2009.  The exact consumption of SO2 allowances will depend onmarket prices for power, availability of our generation units and the actualsulfur content of the coal burned.  **DP&L** does not plan to purchase NOx allowances for2009.  Fuel costs are impacted by changesin volume and 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 gains from the sale of emission allowance sales areforecasted to be 20% to 30% higher in 2009 compared to 2008.

 

Purchasedpower costs depend, in part, upon the timing and extent of planned andunplanned outages of our generating capacity. We will purchase power on a discretionary basis when wholesale marketconditions provide opportunities to obtain power at a cost below our internalproduction costs. As of March 31, 2009, a hypothetical increase ordecrease of 10% in **DPL’s** annualfuel and purchased power costs could result in approximately a $32 millionincrease or decrease to net income.  Asof March 31, 2009, a hypothetical increase or decrease of 10% in **DP&L’s** annual fuel and purchased powercosts could result in approximately a $31 million increase or decrease to netincome.

 

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**Interest Rate Risk**

As a result of our normal investing and borrowing activities, ourfinancial results are exposed to fluctuations in interest rates, which wemanage through our regular financing activities.  We maintain both cash on deposit and investmentsin cash equivalents that may be affected by adverse interest ratefluctuations.  **DPL**has fixed-rate long-term debt and **DP&L** hasboth fixed and variable-rate long-term debt. **DP&L’s** variable-rate debt iscomprised of pollution control bonds. The variable-rate bonds bear interest based on a prevailing rate that isreset weekly based on a comparable market index.  Market indices can be affected by marketdemand, supply, market interest rates and other economic conditions.

 

The carrying value of **DPL’s** debt was $1,376.7 million at March 31,2009, consisting of **DP&L’s**first mortgage bonds, **DP&L’s**tax-exempt pollution control bonds, our unsecured notes and **DP&L’s** capital lease.  The fair value of this debt as of March 31,2009 was $1,314.3 million, based on market prices or discounted cash flowsusing rates for similar issues with similar terms and remaining maturities.

 

The carrying value of **DP&L’s** debt was $884.6 million at March 31, 2009,consisting of **DP&L’s** firstmortgage bonds, **DP&L’s**tax-exempt pollution control bonds and **DP&L’s**capital leases.  The fair value of thisdebt as of March 31, 2009 was $833.5 million, based on market prices ordiscounted cash flows using rates for similar issues with similar terms andremaining maturities.

 

**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 contingentliabilities.  These assumptions,estimates and judgments are based on our historical experience and assumptionsthat we believed to be reasonable at the time. However, because future events and their effects cannot be determinedwith certainty, the determination of estimates requires the exercise ofjudgment.  Our critical accountingestimates are those which require assumptions to be made about matters that arehighly uncertain.

 

Differentestimates could have a material effect on our financial results. Judgments anduncertainties affecting the application of these policies and estimates mayresult in materially different amounts being reported under differentconditions or circumstances. Historically, however, recorded estimates have not differed materiallyfrom actual results.  Significant itemssubject to such judgments include: the carrying value of property, plant andequipment; unbilled revenues; income taxes; valuation of regulatory assets andliabilities; the valuation of insurance and claims costs; the valuation ofassets and liabilities related to employee benefits; and the valuation ofcontingent and other obligations.  Actualresults may differ from those estimates. Refer to our 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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**ELECTRIC SALES AND REVENUES**

 
| ** **                                | ** ** | **DPL**                | ** **  | **DP&L (a)**       | ** ** |
|-------------------------------------------|------------|------------------------|-------------|------------------------|------------|
| ** **                                | ** ** | **Three Months Ended** | ** **  | **Three Months Ended** | ** ** |
| ** **                                | ** ** | **March 31,**     | ** **  | **March 31,**     | ** ** |
| ** **                                | ** ** | **2009**               | ** **  | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Electric sales (millions  of kWh)         |       |                   |        |                   |       |   |   |   |   |
| Residential                               | ** ** | **1,601**              |        | 1,680                  | ** ** | **1,601** |   | 1,680 |   |
| Commercial                                | ** ** | **916**                |        | 959                    | ** ** | **916** |   | 959 |   |
| Industrial                                | ** ** | **760**                |        | 967                    | ** ** | **760** |   | 967 |   |
| Other retail                              | ** ** | **338**                |        | 347                    | ** ** | **338** |   | 347 |   |
| Total retail                              | ** ** | **3,615**              |        | 3,953                  | ** ** | **3,615** |   | 3,953 |   |
|                                      |       |                   |        |                   |       |   |   |   |   |
| Wholesale                                 | ** ** | **571**                |        | 899                    | ** ** | **540** |   | 899 |   |
|                                      |       |                   |        |                   |       |   |   |   |   |
| Total                                     | ** ** | **4,186**              |        | 4,852                  | ** ** | **4,155** |   | 4,852 |   |
|                                      |       |                   |        |                   |       |   |   |   |   |
| Operating revenues ($ in  thousands) |       |                   |        |                   |       |   |   |   |   |
| Residential                               | ** ** | **$**                  | **160,251** |                   | $          | 155,669 | ** ** | **$** | **160,251** |   | $ | 155,669 |   |
| Commercial                                | ** ** | **80,555**             |        | 78,904                 | ** ** | **80,623** |   | 74,272 |   |
| Industrial                                | ** ** | **53,841**             |        | 58,137                 | ** ** | **45,086** |   | 31,386 |   |
| Other retail                              | ** ** | **23,720**             |        | 22,831                 | ** ** | **20,165** |   | 18,896 |   |
| Other miscellaneous revenues              | ** ** | **1,975**              |        | 2,576                  | ** ** | **1,992** |   | 2,559 |   |
| Total retail                              | ** ** | **320,342**            |        | 318,117                | ** ** | **308,117** |   | 282,782 |   |
|                                      |       |                   |        |                   |       |   |   |   |   |
| Wholesale                                 | ** ** | **30,904**             |        | 57,071                 | ** ** | **41,078** |   | 93,055 |   |
|                                      |       |                   |        |                   |       |   |   |   |   |
| RTO revenues                              | ** ** | **60,912**             |        | 38,053                 | ** ** | **54,413** |   | 38,054 |   |
|                                      |       |                   |        |                   |       |   |   |   |   |
| Other revenues                            | ** ** | **2,862**              |        | 2,857                  | ** ** | **—** |   | — |   |
|                                      |       |                   |        |                   |       |   |   |   |   |
| Total                                     | ** ** | **$**                  | **415,020** |                   | $          | 416,098 | ** ** | **$** | **403,608** |   | $ | 413,891 |   |
|                                      |       |                   |        |                   |       |   |   |   |   |
| Electric customers at end  of period      |       |                   |        |                   |       |   |   |   |   |
| Residential                               | ** ** | **457,328**            |        | 457,650                | ** ** | **457,328** |   | 457,650 |   |
| Commercial                                | ** ** | **50,181**             |        | 49,954                 | ** ** | **50,181** |   | 49,954 |   |
| Industrial                                | ** ** | **1,798**              |        | 1,812                  | ** ** | **1,798** |   | 1,812 |   |
| Other                                     | ** ** | **6,520**              |        | 6,471                  | ** ** | **6,520** |   | 6,471 |   |
|                                      |       |                   |        |                   |       |   |   |   |   |
| Total                                     | ** ** | **515,827**            |        | 515,887                | ** ** | **515,827** |   | 515,887 |   |

 

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*(a)**      **DP&Lsells power to DPLER (a subsidiary of DPL). The revenues associated with thesesales are classified as wholesale sales on DP&L’s financial statements andretail sales for DPL. The kWh volumes contain all volumes distributed on theDP&L system which include the retail sales by DPLER. The sales for resalevolumes are omitted from DP&L to avoid duplicate reporting.*

 

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

 

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

 

**Item 4.  Controls and Procedures**

 

Our ChiefExecutive Officer (CEO) and Chief Financial Officer (CFO) are responsible forestablishing and maintaining our disclosure controls and procedures.  These controls and procedures were designedto ensure that material information relating to us and our subsidiaries iscommunicated to the CEO and CFO.  Weevaluated these disclosure controls and procedures as of the end of the periodcovered by this report with the participation of our CEO and CFO.  Based on this evaluation, our CEO and CFOconcluded that our disclosure controls and procedures are effective: (i) toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and forms;and (ii) to ensure that information required to be disclosed by us in thereports that we submit under the Exchange Act is accumulated and communicatedto our management, including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate, to allowtimely decisions regarding required disclosure.

 

There was nochange in our internal control over financial reporting during the three monthsended March 31, 2009 that has materially affected, or is reasonably likelyto materially affect, internal control over reporting.

 

**PART II**

 

**Item 1 - Legal Proceedings**

 

Inthe normal course of business, we are subject to various lawsuits, actions,proceedings, claims and other matters asserted under laws and regulations.  We believe the amounts provided in 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 discussed below, and to comply withapplicable laws and regulations will not exceed the amounts reflected in ourCondensed Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amountsprovided as of March 31, 2009, cannot be reasonably determined.

 

Part I,Item 1 – ENVIRONMENTAL CONSIDERATIONS and Item I – COMPETITION AND REGULATIONand Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31,2008, and Note 18 to the Consolidated Financial Statements included therein,contain descriptions of certain legal proceedings in which we are or wereinvolved.  The information in this Item 1of our Quarterly Report on Form 10-Q is limited to certain recentdevelopments concerning our legal proceedings and should be read in conjunctionwith our Annual Report on Form 10-K. Information concerning the legal proceedings discussed in Item 2 –UPDATES/OTHER MATTERS of Part I of this Quarterly Report on Form 10-Qis incorporated by reference into this Item.

 

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**Item 1a – 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 Form 10-K may be obtained as discussed on Page 5 of thisreport.  If any of these events occur,our business, financial position or results of operation could be materiallyaffected.

 

**Item 2 – Unregistered Sale of Equity Securities andUse of Proceeds**

 

None

 

**Item 3 – Defaults Upon Senior Securities**

 

None

 

**Item 4 – Submission of Matters to a Vote of SecurityHolders**

 

None

 

**Item 5 – Other Information**

 

None

 

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**Item 6 – Exhibits**

** **
| ** **   | ** ** | ** **   | ** ** | **Exhibit** | ** ** | ** **                                                                                          | ** ** | ** **                       |
|--------------|------------|--------------|------------|-------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|
| **DPL Inc.** | ** ** | **DP&L** | ** ** | **Number**  | ** ** | **Exhibit**                                                                                         | ** ** | **Location**                     |
| 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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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, DPL Inc. and TheDayton Power and Light Company have duly caused this report to be signed ontheir behalf by the undersigned, thereunto duly authorized.

 
|   |                 |   | **DPL  Inc.**                                                                                                                |
|--------|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------|
|   |                 |   | **The  Dayton Power and Light Company**                                                                                      |
|   |                 |   | (Registrants)                                                                                                                |
|   |                 |   |                                                                                                                         |
|   |                 |   |                                                                                                                         |
| Date:  | April 29,  2009 |   | /s/  Paul M. Barbas                                                                                                          |
|   |                 |   | Paul  M. Barbas  President and Chief Executive Officer  (principal executive officer)                                        |
|   |                 |   |                                                                                                                         |
|   |                 |   |                                                                                                                         |
|   | April 29, 2009  |   | /s/ Frederick J. Boyle                                                                                                       |
|   |                 |   | Frederick J. Boyle  Senior Vice President, Chief Financial Officer,  Treasurer and Controller  (principal financial officer) |

 

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