** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

**For thequarterly period ended June 30, 2004**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

**For thetransition period from                 to                 **

 

**CommissionFile Number  1-2385**

 

**THEDAYTON POWER AND LIGHT COMPANY**

(Exact name ofregistrant as specified in its charter)

* *
| **OHIO**                                                                          | ** ** | **31-0258470**                        |
|-----------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                  | ** ** | (I.R.S. Employer  Identification No.) |
|                                                                              | ** ** |                                  |
| **1065  Woodman Drive, Dayton, Ohio**                                             | * *   | **45432**                             |
| (Address of  principal executive offices)                                         | * *   | (Zip Code)                            |
|                                                                              | * *   |                                  |
| Registrant’s  telephone number, including area code:   **937-224-6000** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES  o     NO  ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).

 

YES  o     NO  ý

 

Number of shares ofregistrant’s common stock outstanding as of October 31, 2004, all of which wereheld by DPL Inc., was 41,172,173.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

 

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**THEDAYTON POWER AND LIGHT COMPANY**

**INDEX**

 
| ** **   | ** **                | **Page No.**                                                                                |
|--------------|---------------------------|---------------------------------------------------------------------------------------------|
| **Part I.**  | **Financial Information** |                                                                                        |
|         | Item 1.                   | Financial Statements                                                                        |   |
|         |                      |                                                                                        |   |
|         |                      | Consolidated  Statement of Results of Operations                                            | 3 |
|         |                      |                                                                                        |   |
|         |                      | Consolidated  Statement of Cash Flows                                                       | 4 |
|         |                      |                                                                                        |   |
|         |                      | Consolidated Balance Sheet                                                                  | 5 |
|         |                      |                                                                                        |   |
|         |                      | Notes to  Consolidated Financial Statements                                                 | 7 |
|         |                      |                                                                                        |   |
|         | Item  2.                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 19 |
|         |                      |                                                                                        |   |
|         |                      | Operating  Statistics                                                                       | 29 |
|         |                      |                                                                                        |   |
|         | Item  3.                  | Quantitative  and Qualitative Disclosures about Market Risk                                 | 29 |
|         |                      |                                                                                        |   |
|         | Item 4.                   | Controls and Procedures                                                                     | 29 |
|         |                      |                                                                                        |   |
| **Part II.** | **Other Information**     |                                                                                        |
|         | Item 1.                   | Legal Proceedings                                                                           | 32 |
|         |                      |                                                                                        |   |
|         | Item  4.                  | Submission  of Matters to a Vote of Security Holders                                        | 32 |
|         |                      |                                                                                        |   |
|         | Item 5.                   | Other Information                                                                           | 32 |
|         |                      |                                                                                        |   |
|         | Item 6.                   | Exhibits and  Reports on Form 8-K                                                           | 32 |
|         |                      |                                                                                        |   |
| **Other**    |                      |
|         | Signatures                | 33                                                                                          |
|         |                      |                                                                                        |   |
|         | Certifications            |                                                                                        |

 

**Available Information:**

The Dayton Power andLight Company (DP&L or the Company) files current, annual and quarterlyreports and other information required by the Securities Exchange Act of 1934,as amended, with the Securities and Exchange Commission (SEC).  You may read and copy any document theCompany files at the SEC’s public reference room located at 450 Fifth Street,NW, Washington, DC 20549, USA.  Pleasecall the SEC at (800) SEC-0330 for further information on the public referencerooms.  The Company’s SEC filings arealso available to the public from the SEC’s web site at http://www.sec.gov.

 

The Company’s publicinternet site is http://www.dplinc.com. The Company makes available through its internet site, its annualreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form8-K, and Forms 3, 4 and 5 filed on behalf of directors and executive officersand amendments to those reports filed or furnished pursuant to the SecuritiesExchange Act of 1934, as amended, as soon as reasonably practicable after itelectronically files such material with, or furnishes it to, the SEC.

 

In addition, the Company’spublic internet site includes other items related to corporate governancematters, including, among other things, the Company’s governance guidelines,charters of various committees of the Board of Directors and the Company’s codeof business conduct and ethics applicable to all employees, officers anddirectors.  You may obtain copies ofthese documents, free of charge, by sending a request, in writing, to DPLInvestor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.

 

2

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**Part I.  Financial Information**

 

**Item 1.  FinancialStatements**

 

**THEDAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATEDSTATEMENT OF RESULTS OF OPERATIONS**

**($ inmillions)**

 
| ** **                                                                 | ** ** | **Three Months  Ended June 30,** |       | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                         | ** ** | **2003**                       |       | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                 | ** ** | ** **                       | ** ** | **(as  restated)**             | ** ** | ** ** | ** ** | **(as  restated)** | ** ** |
| **Revenues**                                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Electric                                                                   | ** ** | **$**                            | **282.8**  | ** **                     | $          | 271.4 |   | **$** | **583.2** | ** ** | $ | 567.1 |   |
|                                                                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| **Operating Expenses**                                                     |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Fuel                                                                       | ** ** | **60.5**                         | ** ** | 50.8                           |       | **123.2** | ** ** | 106.4 |   |
| Purchased  power                                                           | ** ** | **24.7**                         | ** ** | 26.5                           |       | **53.2** | ** ** | 46.5 |   |
| Operation  and maintenance                                                 | ** ** | **53.9**                         | ** ** | 48.2                           |       | **100.7** | ** ** | 84.0 |   |
| Depreciation  and amortization                                             | ** ** | **29.4**                         | ** ** | 29.3                           |       | **57.7** | ** ** | 58.4 |   |
| Amortization  of regulatory assets, net                                    | ** ** | **0.1**                          | ** ** | 10.7                           |       | **0.2** | ** ** | 22.8 |   |
| General  taxes                                                             | ** ** | **24.6**                         | ** ** | 25.4                           |       | **51.7** | ** ** | 53.7 |   |
| Total  operating expenses                                                  | ** ** | **193.2**                        | ** ** | 190.9                          |       | **386.7** | ** ** | 371.8 |   |
|                                                                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| **Operating Income**                                                       | ** ** | **89.6**                         | ** ** | 80.5                           |       | **196.5** | ** ** | 195.3 |   |
|                                                                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Other  income (deductions)                                                 | ** ** | **(1.9**                         | **)**      | 4.1                            |       | **2.3** | ** ** | 5.1 |   |
| Interest  expense                                                          | ** ** | **(10.0**                        | **)**      | (12.4                          | )          | **(21.8** | **)** | (25.2 | ) |
|                                                                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| **Income Before Income Taxes and Cumulative Effect  of Accounting Change** | ** ** | **77.7**                         | ** ** | 72.2                           |       | **177.0** | ** ** | 175.2 |   |
|                                                                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Income  tax expense                                                        | ** ** | **30.7**                         | ** ** | 26.8                           |       | **68.0** | ** ** | 66.0 |   |
|                                                                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| **Income Before Cumulative Effect of Accounting  Change**                  | ** ** | **47.0**                         | ** ** | 45.4                           |       | **109.0** | ** ** | 109.2 |   |
|                                                                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Cumulative  effect of accounting change, net of tax                        | ** ** | **—**                       | ** ** | —                         |       | **—** | ** ** | 17.0 |   |
|                                                                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| **Net Income**                                                             | ** ** | **47.0**                         | ** ** | 45.4                           |       | **109.0** | ** ** | 126.2 |   |
|                                                                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Preferred  dividends                                                       | ** ** | **—**                       | ** ** | 0.2                            |       | **0.2** | ** ** | 0.4 |   |
|                                                                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| **Earnings on Common Stock**                                               | ** ** | **$**                            | **47.0**   | ** **                     | $          | 45.2 |   | **$** | **108.8** | ** ** | $ | 125.8 |   |

 

See Notes to ConsolidatedFinancial Statements.

These interim statementsare unaudited.

 

3

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**THEDAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

**($ inmillions)**

 
| ** **                                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | ** **                     | ** ** | **(as restated)** | ** ** |
| **Operating Activities**                            | ** ** | ** **                     | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net  income                                         | ** ** | **$**                          | **109.0**  | ** ** | $ | 126.2 |   |
| Adjustments:                                        |       |                           | ** ** |   |   |
| Depreciation  and amortization                      | ** ** | **57.7**                       | ** ** | 58.4 |   |
| Amortization  of regulatory assets, net             | ** ** | **0.2**                        | ** ** | 22.8 |   |
| Deferred  income taxes                              | ** ** | **4.9**                        | ** ** | 8.2 |   |
| Cumulative  effect of accounting change, net of tax | ** ** | **—**                     | ** ** | (17.0 | ) |
| Changes  in working capital:                        |       |                           | ** ** |   |   |
| Accounts  receivable                                | ** ** | **17.6**                       | ** ** | 22.7 |   |
| Accounts  payable                                   | ** ** | **9.8**                        | ** ** | (1.6 | ) |
| Accrued  taxes payable                              | ** ** | **62.7**                       | ** ** | 30.7 |   |
| Prepayments                                         | ** ** | **(5.0**                       | **)**      | (13.8 | ) |
| Inventories                                         | ** ** | **(15.6**                      | **)**      | (1.3 | ) |
| Deferred  compensation assets                       | ** ** | **8.5**                        | ** ** | 29.0 |   |
| Deferred  compensation obligations                  | ** ** | **(4.8**                       | **)**      | (28.9 | ) |
| Other  (Note 3)                                     | ** ** | **(6.6**                       | **)**      | (5.4 | ) |
|                                                |       |                           | ** ** |   |   |
| Net  cash provided by operating activities          | ** ** | **238.4**                      | ** ** | 230.0 |   |
|                                                |       |                           | ** ** |   |   |
| **Investing Activities**                            |       |                           | ** ** |   |   |
|                                                |       |                           | ** ** |   |   |
| Capital  expenditures                               | ** ** | **(45.0**                      | **)**      | (65.7 | ) |
|                                                |       |                           | ** ** |   |   |
| Net  cash used for investing activities             | ** ** | **(45.0**                      | **)**      | (65.7 | ) |
|                                                |       |                           | ** ** |   |   |
| **Financing Activities**                            |       |                           | ** ** |   |   |
|                                                |       |                           | ** ** |   |   |
| Retirement  of long-term debt                       | ** ** | **(0.4**                       | **)**      | (0.4 | ) |
| Dividends  paid on common stock                     | ** ** | **(150.0**                     | **)**      | (112.7 | ) |
| Dividends  paid on preferred stock                  | ** ** | **(0.2**                       | **)**      | (0.4 | ) |
|                                                |       |                           | ** ** |   |   |
| Net  cash used for financing activities             | ** ** | **(150.6**                     | **)**      | (113.5 | ) |
|                                                |       |                           | ** ** |   |   |
| **Cash and temporary cash investments**             |       |                           | ** ** |   |   |
|                                                |       |                           | ** ** |   |   |
| Net  change                                         | ** ** | **42.8**                       | ** ** | 50.8 |   |
| Balance  at beginning of period                     | ** ** | **17.2**                       | ** ** | 17.1 |   |
| Balance  at end of period                           | ** ** | **$**                          | **60.0**   | ** ** | $ | 67.9 |   |
|                                                |       |                           | ** ** |   |   |
| **Cash Paid During the Period for:**                |       |                           | ** ** |   |   |
| Interest                                            | ** ** | **$**                          | **18.9**   | ** ** | $ | 23.0 |   |
| Income  taxes                                       | ** ** | **$**                          | **1.7**    | ** ** | $ | 29.4 |   |

 

See Notes to ConsolidatedFinancial Statements.

These interim statementsare unaudited.

 

4

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**THEDAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED BALANCE SHEET**

**($ inmillions)**

 
| ** **                                                                                      | ** ** | **At  June 30,  2004** | ** **  | **At  December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|-------------|----------------------------|------------|
| **ASSETS**                                                                                      |       |                   | ** **  |                       |       |
|                                                                                            |       |                   | ** **  |                       |       |
| **Property**                                                                                    |       |                   | ** **  |                       |       |
| Property,  plant and equipment                                                                  | ** ** | **$**                  | **3,922.0** | ** **                 | $          | 3,875.4 |   |
| Less:  Accumulated depreciation and amortization                                                | ** ** | **(1,825.3**           | **)**       | (1,769.1                   | )          |
|                                                                                            |       |                   | ** **  |                       |       |
| Net  property, plant and equipment                                                              | ** ** | **2,096.7**            | ** **  | 2,106.3                    |       |
|                                                                                            |       |                   | ** **  |                       |       |
| **Current Assets**                                                                              |       |                   | ** **  |                       |       |
| Cash  and temporary cash investments (Note 3)                                                   | ** ** | **60.0**               | ** **  | 17.2                       |       |
| Accounts  receivable, less provision for uncollectible accounts of $1.1 and $3.6,  respectively | ** ** | **142.8**              | ** **  | 160.4                      |       |
| Inventories,  at average cost (Note 3)                                                          | ** ** | **65.2**               | ** **  | 49.6                       |       |
| Prepaid  taxes                                                                                  | ** ** | **23.2**               | ** **  | 46.4                       |       |
| Other  (Note 3)                                                                                 | ** ** | **27.9**               | ** **  | 24.4                       |       |
|                                                                                            |       |                   | ** **  |                       |       |
| Total  current assets                                                                           | ** ** | **319.1**              | ** **  | 298.0                      |       |
|                                                                                            |       |                   | ** **  |                       |       |
| **Other Assets**                                                                                |       |                   | ** **  |                       |       |
| Income  taxes recoverable through future revenues                                               | ** ** | **41.8**               | ** **  | 43.3                       |       |
| Other  regulatory assets                                                                        | ** ** | **36.7**               | ** **  | 36.1                       |       |
| Other  (Note 3)                                                                                 | ** ** | **160.3**              | ** **  | 176.4                      |       |
|                                                                                            |       |                   | ** **  |                       |       |
| Total  other assets                                                                             | ** ** | **238.8**              | ** **  | 255.8                      |       |
|                                                                                            |       |                   | ** **  |                       |       |
| **Total Assets**                                                                                | ** ** | **$**                  | **2,654.6** | ** **                 | $          | 2,660.1 |   |

 

See Notes to ConsolidatedFinancial Statements.

These interim statementsare unaudited.

 

5

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**THEDAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATEDBALANCE SHEET**

**($ inmillions)**

(continued)

 
| ** **                               | ** ** | **At  June 30,  2004** |        | **At  December 31,  2003** | ** ** |
|------------------------------------------|------------|------------------------|-------------|----------------------------|------------|
| **CAPITALIZATION AND LIABILITIES**       |       |                   |        |                       |       |
|                                     |       |                   |        |                       |       |
| **Capitalization**                       |       |                   |        |                       |       |
| Common  shareholders’ equity        |       |                   |        |                       |       |
| Common  stock                            | ** ** | **$**                  | **0.4**     |                       | $          | 0.4 |   |
| Other  paid-in capital                   | ** ** | **781.1**              |        | 780.5                      |       |
| Accumulated  other comprehensive income  | ** ** | **34.6**               |        | 38.2                       |       |
| Earnings  reinvested in the business     | ** ** | **280.5**              |        | 321.7                      |       |
|                                     |       |                   |        |                       |       |
| Total  common shareholders’ equity  | ** ** | **1,096.6**            |        | 1,140.8                    |       |
|                                     |       |                   |        |                       |       |
| Preferred  stock                         | ** ** | **22.9**               |        | 22.9                       |       |
|                                     |       |                   |        |                       |       |
| Long-term  debt                          | ** ** | **686.6**              |        | 687.3                      |       |
|                                     |       |                   |        |                       |       |
| Total  capitalization                    | ** ** | **1,806.1**            |        | 1,851.0                    |       |
|                                     |       |                   |        |                       |       |
| **Current Liabilities**                  |       |                   |        |                       |       |
| Accounts  payable                        | ** ** | **99.2**               |        | 88.9                       |       |
| Accrued  taxes                           | ** ** | **105.9**              |        | 66.4                       |       |
| Accrued  interest                        | ** ** | **10.8**               |        | 10.2                       |       |
| Other  (Note 3)                          | ** ** | **21.8**               |        | 24.6                       |       |
|                                     |       |                   |        |                       |       |
| Total  current liabilities               | ** ** | **237.7**              |        | 190.1                      |       |
|                                     |       |                   |        |                       |       |
| **Deferred Credits and Other**           |       |                   |        |                       |       |
| Deferred  taxes                          | ** ** | **376.4**              |        | 381.7                      |       |
| Unamortized  investment tax credit       | ** ** | **50.7**               |        | 52.2                       |       |
| Other  (Note 3)                          | ** ** | **183.7**              |        | 185.1                      |       |
|                                     |       |                   |        |                       |       |
| Total  deferred credits and other        | ** ** | **610.8**              |        | 619.0                      |       |
|                                     |       |                   |        |                       |       |
| **Total Capitalization and Liabilities** | ** ** | **$**                  | **2,654.6** |                       | $          | 2,660.1 |   |

 

See Notes to ConsolidatedFinancial Statements.

These interim statementsare unaudited.

 

6

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**Notes to Consolidated FinancialStatements**

 

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

 

**Basis of Consolidation**

The Dayton Power andLight Company (DP&L or the Company) prepares its consolidated financialstatements in accordance with accounting principles generally accepted in theUnited States of America (GAAP).  The consolidatedfinancial statements include the accounts of DP&L and its othermajority-owned subsidiaries.  Investmentsthat are not majority-owned are accounted for using the equity method whenDP&L’s investment allows it the ability to exert significant influence, asdefined by GAAP.  Undivided interests injointly-owned generation facilities are consolidated on a pro-rata basis.  All material intercompany accounts andtransactions are eliminated in consolidation.

 

DP&L has prepared theunaudited consolidated financial statements in this report, pursuant to therules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations.  Theseconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto in DP&L’s 2003 AnnualReport on Form 10-K.

 

**Estimates, Judgments andReclassifications**

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and judgments that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements and the revenues and expenses of the periodreported.  Significant items subject tosuch estimates and judgments include the carrying value of property, plant andequipment; the valuation of derivative instruments; valuation allowance forreceivables and deferred income taxes; and assets and liabilities related toemployee benefits.  Actual results maydiffer from those estimates. Reclassifications have been made in certain prior years’ amounts toconform to the current reporting presentation.

 

**Recently Issued AccountingStandards**

 

***StaffPosition No. 106-1***

In December 2003, theFASB issued Staff Position No. 106-1 (FSP 106-1), “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003” (the Act). The Act provides for drug benefits for retirees over the age of 65 undera new Medicare Part D program.  Foremployers like DP&L, who currently provide retiree medical programs forcertain former employees over the age of 65, there are subsidies availablewhich are inherent in the Act.  The Actentitles these employers to a direct tax-exempt federal subsidy.  However, since the effective date of the Actwas December 2003 and because most employers have not had time to consider theaccounting considerations and there is no appropriate accounting guidance forthe federal subsidy, the FASB issued this FSP 106-1 to allow employers aone-time election to defer recognition of the impact of the Act in the employer’saccounting until formal guidance is issued. DP&L elected to defer recognition of the provisions of this Actuntil further accounting guidance is issued.

 

***StaffPosition No. 106-2***

In May 2004, theFASB issued FASB Staff Position No. 106-2 (FSP 106-2), “Accounting andDisclosure Requirements Related to the Medicare Prescription Drug, Improvementand Modernization Act of 2003”, which supersedes FSP 106-1.  FSP 106-2 provides guidance on the accountingfor the effects of the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the Act) for employers that sponsor postretirementhealth care plans that provide prescription drug benefits. It also requirescertain disclosures regarding the effect of the federal subsidy provided by theAct.  FSP 106-2 is effective for thefirst interim or annual period beginning after June 15, 2004.  The effect is not expected to be material tothe Company’s results of operations, cash flow or financial position.

 

**2.****              Restatementof Financial Statements**

 

As part of DP&L’sAudit Committee’s response to a report prepared by Taft, Stettinius &Hollister LLP and during the 2003 year-end financial closing process, theCompany identified certain adjustments to prior period financialstatements.  As a result, the Company hasrestated its consolidated financial statements for the three months and

 

7

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six months ended June 30,2003, in addition to prior periods. These adjustments increased net income by $1.1 million to $45.4 millionfor the second quarter of 2003, and increased net income by $0.9 million to$126.2 million for the six months ended June 30, 2003.  All applicable financial informationcontained in this Quarterly Report on Form 10-Q gives effect to theserestatements.  Accordingly, the financialstatements for this fiscal period described above that have been in the Company’sprior SEC filings should not be relied upon.

 

Certain captions in theJune 30, 2003 Consolidated Balance Sheet were also adjusted due to the priorperiods’ restatements. Please refer to the Company’s 2003 Annual Report on Form10-K for a more complete description of the prior period adjustments.

 

The accompanying consolidated financial data setforth below presents the Company’s Consolidated Statement of Results ofOperations for the three and six months ended June 30, 2003 on a comparativebasis showing the amounts as originally reported and as restated.

 

**Effects of Restatement on NetIncome**

 

Thefollowing table identifies the adjustments made to the consolidated financialstatements for the three and six months ended June 30, 2003:

 
| ** **                                 | ** ** | **Net Income Increase  (Decrease)** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| **($ in millions)**                   | ** ** | **2003  Second  Quarter**           | ** ** | **2003  Year  To Date** | ** ** |
| **Description  of Adjustment**             | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Supplemental Executive Retirement Plan (1) |       | 1.7                                 |       | 1.5 |   |
| Stock incentive units (2)                  |       | 0.2                                 |       | — |   |
| Sub-total pre-tax impact                   |       | 1.9                                 |       | 1.5 |   |
|                                       |       |                                |       |   |   |
| Income taxes (3)                           |       | (0.8                                | )          | (0.6 | ) |
| Total Net Income Impact                    |       | 1.1                                 |       | 0.9 |   |

 

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(1)Reflects adjustment to record a settlement of the Company’s SupplementalExecutive Retirement Plan for certain executives in 1997 and 2000 which had notbeen previously recorded, in addition to an adjustment to record the propertreatment for Company assets previously thought to be segregated and restrictedsolely for purposes of funding this plan.

 

Consolidated Statement ofResults of Operations: For the second quarter of 2003, the adjustment decreasedOperation and Maintenance expense by approximately $1.4 million and increasedOther Income by $0.2 million.  Year-to-date2003, the adjustment decreased Operation and Maintenance expense by $1.3million and increased Other Income by approximately $0.2 million.

 

Consolidated BalanceSheet: At June 30, 2003, the adjustment increased Other Assets – Other by$1.4 million, Accrued Taxes by $0.5 million and Deferred Taxes by $0.1million.

 

(2)Reflects adjustment to record outstanding stock incentive units at fair valuefollowing a change in the operation of the Management Stock Incentive Plan madeas of January 1, 2002 that allowed certain retirees to diversify stockincentive awards to investments other than DPL common stock.

 

ConsolidatedStatement of Results of Operations: For the second quarter of 2003, theadjustment decreased Operation and Maintenance expense by $0.2 million. Year-to-date2003, the adjustment had no impact.

 

ConsolidatedBalance Sheet: At June 30, 2003, the adjustment increased Other Paid-inCapital, net of Treasury Stock by $0.8 million, and decreased OtherDeferred Credits by $0.8 million.

 

(3)          Reflects income taxes related to the above non-tax adjustments.

 

ConsolidatedStatement of Results of Operations: For the second quarter of 2003, the aboveadjustments resulted in an increase of $0.8 million to income tax expense.  Year-to-date 2003, the adjustments increasedincome tax expense by $0.6 million.

 

ConsolidatedBalance Sheet: At June 30, 2003, the above adjustments resulted in an increaseof $0.5 million to Accrued Taxes and $0.1 million to Deferred Taxes.

 

8

----

** **

**THEDAYTON POWER AND LIGHT COMPANY**

**C o n s ol i d a t e d  S t a t e m e n t  o f  Re s u l t s  o f  O p e r a t i o n s**

**(unaudited)**

 
| **$ in  millions except per share amounts**                       | ** ** | **Three Months Ended  June 30, 2003** | ** ** | **Six Months Ended  June 30, 2003** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                             | ** ** | **(as  previously  reported)**        | ** ** | **(as  restated)**                  | ** ** | **(as  previously  reported)** | ** ** | **(as  restated)** | ** ** |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| **Revenues**                                                           |       |                                  |       |                                |       |   |   |   |   |
| Electric  revenues                                                     |       | $                                     | 271.4      |                                | $          | 271.4 |   | $ | 567.1 |   | $ | 567.1 |   |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| **Operating Expenses**                                                 |       |                                  |       |                                |       |   |   |   |   |
| Fuel                                                                   |       | 50.8                                  |       | 50.8                                |       | 106.4 |   | 106.4 |   |
| Purchased  power                                                       |       | 26.5                                  |       | 26.5                                |       | 46.5 |   | 46.5 |   |
| Operation  and maintenance                                             |       | 49.9                                  |       | 48.2                                |       | 85.3 |   | 84.0 |   |
| Depreciation  and amortization                                         |       | 29.3                                  |       | 29.3                                |       | 58.4 |   | 58.4 |   |
| Amortization  of regulatory assets, net                                |       | 10.7                                  |       | 10.7                                |       | 22.8 |   | 22.8 |   |
| General  taxes                                                         |       | 25.4                                  |       | 25.4                                |       | 53.7 |   | 53.7 |   |
| Total  operating expenses                                              |       | 192.6                                 |       | 190.9                               |       | 373.1 |   | 371.8 |   |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Operating  Income                                                      |       | 78.8                                  |       | 80.5                                |       | 194.0 |   | 195.3 |   |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Other  income                                                          |       | 3.9                                   |       | 4.1                                 |       | 4.9 |   | 5.1 |   |
| Interest  expense                                                      |       | (12.4                                 | )          | (12.4                               | )          | (25.2 | ) | (25.2 | ) |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Income  before income taxes and cumulative effect of accounting change |       | 70.3                                  |       | 72.2                                |       | 173.7 |   | 175.2 |   |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Income  tax expense                                                    |       | 26.0                                  |       | 26.8                                |       | 65.4 |   | 66.0 |   |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Income  before cumulative effect of accounting change                  |       | 44.3                                  |       | 45.4                                |       | 108.3 |   | 109.2 |   |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Cumulative  effect of accounting change, net of tax                    |       | —                                |       | —                              |       | 17.0 |   | 17.0 |   |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Net  Income                                                            |       | 44.3                                  |       | 45.4                                |       | 125.3 |   | 126.2 |   |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Preferred  dividends                                                   |       | 0.2                                   |       | 0.2                                 |       | 0.4 |   | 0.4 |   |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Earnings  on common stock                                              |       | $                                     | 44.1       |                                | $          | 45.2 |   | $ | 124.9 |   | $ | 125.8 |   |

 

9

----

 

**THE DAYTON POWER AND LIGHTCOMPANY**

**C o n s ol i d a t e d   S t a t e m e n t   o f  C a s h   F l o w s**

**(unaudited)**

 
| **$ in  millions**                             | ** ** | **Six Months Ended  June 30, 2003** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **(as previously  reported)**       | ** ** | **(as restated)** | ** ** |
| ** **                                          | ** ** | ** **                          | ** ** | ** ** | ** ** |
| **Operating Activities**                            | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Net  income                                         |       | $                                   | 125.3      |   | $ | 126.2 |   |
| Adjustments:                                        |       |                                |       |   |   |
| Depreciation  and amortization                      |       | 58.4                                |       | 58.4 |   |
| Amortization  of regulatory assets, net             |       | 22.8                                |       | 22.8 |   |
| Deferred  income taxes                              |       | 8.1                                 |       | 8.2 |   |
| Cumulative  effect of accounting change, net of tax |       | (17.0                               | )          | (17.0 | ) |
| Changes  in working capital:                        |       |                                |       |   |   |
| Accounts  receivable                                |       | 22.8                                |       | 22.7 |   |
| Accounts  payable                                   |       | (1.5                                | )          | (1.6 | ) |
| Accrued  taxes payable                              |       | 30.2                                |       | 30.7 |   |
| Prepayments                                         |       | (13.8                               | )          | (13.8 | ) |
| Inventories                                         |       | (1.3                                | )          | (1.3 | ) |
| Deferred  compensation assets                       |       | 30.4                                |       | 29.0 |   |
| Deferred  compensation obligations                  |       | (28.9                               | )          | (28.9 | ) |
| Other                                               |       | (5.5                                | )          | (5.4 | ) |
| Net  cash provided by operating activities          |       | 230.0                               |       | 230.0 |   |
|                                                |       |                                |       |   |   |
| **Investing Activities**                            |       |                                |       |   |   |
| Capital  expenditures                               |       | (65.7                               | )          | (65.7 | ) |
|                                                |       |                                |       |   |   |
| Net  cash used for investing activities             |       | (65.7                               | )          | (65.7 | ) |
|                                                |       |                                |       |   |   |
| **Financing Activities**                            |       |                                |       |   |   |
| Dividends  paid on preferred stock                  |       | (0.4                                | )          | (0.4 | ) |
| Retirement  of long-term debt                       |       | (0.4                                | )          | (0.4 | ) |
| Dividends  paid on common stock                     |       | (112.7                              | )          | (112.7 | ) |
|                                                |       |                                |       |   |   |
| Net  cash used for financing activities             |       | (113.5                              | )          | (113.5 | ) |
|                                                |       |                                |       |   |   |
| **Cash and Temporary Cash Investments**             |       |                                |       |   |   |
| Net  change                                         |       | 50.8                                |       | 50.8 |   |
| Balance  at beginning of period                     |       | 17.1                                |       | 17.1 |   |
|                                                |       |                                |       |   |   |
| Balance  at end of period                           |       | $                                   | 67.9       |   | $ | 67.9 |   |
|                                                |       |                                |       |   |   |
| **Cash Paid During the Year For:**                  |       |                                |       |   |   |
| Interest                                            |       | $                                   | 23.0       |   | $ | 23.0 |   |
| Income  taxes                                       |       | $                                   | 29.4       |   | $ | 29.4 |   |

 

10

----

 

**THEDAYTON POWER AND LIGHT COMPANY**

**C o n s ol i d a t e d   B a l a n c e   S h e e t**

**(unaudited)**

 
| **$ in  millions**                                                                           | ** ** | **At June 30, 2003**          | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                        | ** ** | **(as previously  reported)** | ** ** | **(as restated)** | ** ** |
|                                                                                              |       |                          |       |   |   |
| **ASSETS**                                                                                        |       |                          |       |   |   |
|                                                                                              |       |                          |       |   |   |
| **Property**                                                                                      |       |                          |       |   |   |
| Property,  plant and equipment                                                                    |       | $                             | 3,832.5    |   | $ | 3,832.5 |   |
| Less:  Accumulated depreciation and amortization                                                  |       | (1,723.2                      | )          | (1,723.2 | ) |
| Net  property                                                                                     |       | 2,109.3                       |       | 2,109.3 |   |
| ** **                                                                                        |       |                          |       |   |   |
| **Current Assets**                                                                                |       |                          |       |   |   |
| Cash  and temporary cash investments                                                              |       | 67.9                          |       | 67.9 |   |
| Accounts  receivable, less provision for uncollectible accounts of $5.0 as reported and  restated |       | 136.6                         |       | 136.6 |   |
| Net  intercompany receivables                                                                     |       | 36.1                          |       | 36.4 |   |
| Inventories,  at average cost                                                                     |       | 55.4                          |       | 55.4 |   |
| Prepaid  taxes                                                                                    |       | 23.4                          |       | 23.4 |   |
| Other                                                                                             |       | 28.8                          |       | 28.5 |   |
| Total  current assets                                                                             |       | 348.2                         |       | 348.2 |   |
| ** **                                                                                        |       |                          |       |   |   |
| **Other Assets**                                                                                  |       |                          |       |   |   |
| Income  taxes recoverable through future revenues                                                 |       | 43.3                          |       | 43.3 |   |
| Other  regulatory assets                                                                          |       | 59.1                          |       | 59.1 |   |
| Other                                                                                             |       | 172.3                         |       | 173.0 |   |
| Total  other assets                                                                               |       | 274.7                         |       | 275.4 |   |
|                                                                                              |       |                          |       |   |   |
| Total  Assets                                                                                     |       | $                             | 2,732.2    |   | $ | 2,732.9 |   |

 

**Note-Reflects adoption of FAS 143 in 2003.**

 

11

----

** **

**THEDAYTON POWER AND LIGHT COMPANY**

**C o n s ol i d a t e d   B a l a n c e   S h e e t**

**(unaudited)**

 
| **$ in  millions**                  | ** ** | **At June 30, 2003**          | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **(as previously  reported)** | ** ** | **(as restated)** | ** ** |
|                                     |       |                          |       |   |   |
| **CAPITALIZATION AND LIABILITIES**       |       |                          |       |   |   |
|                                     |       |                          |       |   |   |
| **Capitalization**                       |       |                          |       |   |   |
| Common  shareholders’ equity        |       |                          |       |   |   |
| Common  stock                            |       | $                             | 0.4        |   | $ | 0.4 |   |
| Other  paid-in capital                   |       | 771.8                         |       | 780.9 |   |
| Accumulated  other comprehensive income  |       | 3.6                           |       | 1.3 |   |
| Earnings  reinvested in the business     |       | 407.5                         |       | 394.9 |   |
| Total  common shareholders’ equity  |       | 1,183.3                       |       | 1,177.5 |   |
|                                     |       |                          |       |   |   |
| Preferred  stock                         |       | 22.9                          |       | 22.9 |   |
|                                     |       |                          |       |   |   |
| Long-term  debt                          |       | 664.8                         |       | 664.9 |   |
|                                     |       |                          |       |   |   |
| Total  capitalization                    |       | 1,871.0                       |       | 1,865.3 |   |
|                                     |       |                          |       |   |   |
| **Current Liabilities**                  |       |                          |       |   |   |
| Accounts  payable                        |       | 81.3                          |       | 82.4 |   |
| Accrued  taxes                           |       | 104.5                         |       | 107.5 |   |
| Accrued  interest                        |       | 19.2                          |       | 19.2 |   |
| Other                                    |       | 19.2                          |       | 19.0 |   |
| Total  current liabilities               |       | 224.2                         |       | 228.1 |   |
|                                     |       |                          |       |   |   |
| **Deferred Credits and Other**           |       |                          |       |   |   |
| Deferred  taxes                          |       | 394.7                         |       | 387.1 |   |
| Unamortized  investment tax credit       |       | 53.6                          |       | 53.6 |   |
| Other                                    |       | 188.7                         |       | 198.8 |   |
| Total  deferred credits and other        |       | 637.0                         |       | 639.5 |   |
|                                     |       |                          |       |   |   |
| Contingencies                            |       |                          |       |   |   |
|                                     |       |                          |       |   |   |
| **Total Capitalization and Liabilities** |       | $                             | 2,732.2    |   | $ | 2,732.9 |   |
|                                          |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Note -Reflects adoption of FAS 143 in 2003.**

 

12

----

 

**3.****              SupplementalFinancial Information**

 
| **$ in  millions**                                 | ** ** | **At  June 30,  2004** | ** ** | **At  December 31,  2003** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **Cash and temporary cash investments**                 |       |                   | ** ** |                       |       |
| Cash  and cash equivalents                              | ** ** | **$**                  | **60.0**   | ** **                 | $          | 17.2 |   |
| Short-term  investments                                 | ** ** | **—**             | ** ** | —                     |       |
| Total  cash and temporary cash investments              | ** ** | **$**                  | **60.0**   | ** **                 | $          | 17.2 |   |
|                                                    |       |                   | ** ** |                       |       |
| **Inventories, at average cost**                        |       |                   | ** ** |                       |       |
| Plant  materials and supplies                           | ** ** | **$**                  | **28.6**   | ** **                 | $          | 29.3 |   |
| Fuel                                                    | ** ** | **34.9**               | ** ** | 19.5                       |       |
| Other                                                   | ** ** | **1.7**                | ** ** | 0.8                        |       |
| Total  inventories, at average cost                     | ** ** | **$**                  | **65.2**   | ** **                 | $          | 49.6 |   |
|                                                    |       |                   | ** ** |                       |       |
| **Other current assets**                                |       |                   | ** ** |                       |       |
| Prepayments                                             | ** ** | **$**                  | **17.1**   | ** **                 | $          | 10.8 |   |
| Deposits  and other advances                            | ** ** | **5.4**                | ** ** | 5.2                        |       |
| Current  deferred income taxes                          | ** ** | **0.9**                | ** ** | 4.3                        |       |
| Miscellaneous  work in progress                         | ** ** | **2.3**                | ** ** | 3.1                        |       |
| Other                                                   | ** ** | **2.2**                | ** ** | 1.0                        |       |
| Total  other current assets                             | ** ** | **$**                  | **27.9**   | ** **                 | $          | 24.4 |   |
|                                                    |       |                   | ** ** |                       |       |
| **Other deferred assets**                               |       |                   | ** ** |                       |       |
| Trust  assets                                           | ** ** | **$**                  | **90.5**   | ** **                 | $          | 102.9 |   |
| Prepaid  pension                                        | ** ** | **38.3**               | ** ** | 39.7                       |       |
| Unamortized  loss on reacquired debt                    | ** ** | **24.7**               | ** ** | 26.6                       |       |
| Unamortized  debt expense                               | ** ** | **5.8**                | ** ** | 5.9                        |       |
| Other                                                   | ** ** | **1.0**                | ** ** | 1.3                        |       |
| Total  other deferred assets                            | ** ** | **$**                  | **160.3**  | ** **                 | $          | 176.4 |   |
|                                                    |       |                   | ** ** |                       |       |
| **Other current liabilities**                           |       |                   | ** ** |                       |       |
| Customer  security deposits and other advances          | ** ** | **$**                  | **14.9**   | ** **                 | $          | 10.6 |   |
| Current  deferred income taxes                          | ** ** | **4.9**                | ** ** | —                     |       |
| Payroll  taxes payable                                  | ** ** | **—**             | ** ** | 10.1                       |       |
| Unearned  revenues                                      | ** ** | **0.7**                | ** ** | 1.2                        |       |
| Current  portion - long-term debt                       | ** ** | **1.1**                | ** ** | 1.1                        |       |
| Other                                                   | ** ** | **0.2**                | ** ** | 1.6                        |       |
| Total  other current liabilities                        | ** ** | **$**                  | **21.8**   | ** **                 | $          | 24.6 |   |
|                                                    |       |                   | ** ** |                       |       |
| **Other deferred credits**                              |       |                   | ** ** |                       |       |
| Asset  retirement obligations – regulated property | ** ** | **$**                  | **74.8**   | ** **                 | $          | 72.0 |   |
| Trust  obligations                                      | ** ** | **60.0**               | ** ** | 65.3                       |       |
| Retirees  health and life benefits                      | ** ** | **33.0**               | ** ** | 33.7                       |       |
| Environmental  Reserves                                 | ** ** | **0.1**                | ** ** | 0.2                        |       |
| Legal  Claims Reserves                                  | ** ** | **3.1**                | ** ** | 2.1                        |       |
| Asset  retirement obligations-generation                | ** ** | **5.1**                | ** ** | 4.9                        |       |
| Other                                                   | ** ** | **7.6**                | ** ** | 6.9                        |       |
| Total  other deferred credits                           | ** ** | **$**                  | **183.7**  | ** **                 | $          | 185.1 |   |

 

**Cash Flows**

 
| ** **                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| **$ in millions**                     | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| ** **                                 | ** ** | ** **                    | ** ** | **(as restated)** | ** ** |
| **Cash flows – Other**                |       |                          | ** ** |   |   |
| Payroll  taxes payable                     | ** ** | **$**                         | **(12.8**  | **)** | $ | (0.4 | ) |
| Customer  security deposits                | ** ** | **3.8**                       | ** ** | 0.3 |   |
| Unamortized  loss on reacquisition of debt | ** ** | **1.9**                       | ** ** | 1.8 |   |
| Unearned  revenues                         | ** ** | **(0.5**                      | **)**      | (2.5 | ) |
| Intercompany  receivables and payables     | ** ** | **0.3**                       | ** ** | (7.6 | ) |
| Other                                      | ** ** | **0.7**                       | ** ** | 3.0 |   |
| Total  cash flows – other             | ** ** | **$**                         | **(6.6**   | **)** | $ | (5.4 | ) |

 

13

----

 

**Results of Operations**

 
| ** **                                                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended June  30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **$ in  millions**                                                                                 | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                              | ** ** | ** **                       | ** ** | **(as  restated)**             | ** ** | ** ** | ** ** | **(as  restated)** | ** ** |
| **Comprehensive income**                                                                                |       |                             | ** ** | ** **                     |       |   | ** ** | ** ** |   |
| Net  income                                                                                             | ** ** | **$**                            | **47.0**   | ** **                     | $          | 45.4 | ** ** | **$** | **109.0** | ** ** | $ | 126.2 |   |
| Net  change in unrealized gains (losses) on financial instruments, net of  reclassification adjustments | ** ** | **1.8**                          | ** ** | 10.9                           | ** ** | **(3.8** | **)** | 2.8 |   |
| Net  change in deferred gains on cash flow hedges                                                       | ** ** | **(0.9**                         | **)**      | 1.3                            | ** ** | **(1.6** | **)** | 1.0 |   |
| Deferred  income taxes related to unrealized gains (losses)                                             | ** ** | **(0.6**                         | **)**      | (5.3                           | )          | **1.8** | ** ** | (1.7 | ) |
| Comprehensive  income                                                                                   | ** ** | **$**                            | **47.3**   | ** **                     | $          | 52.3 | ** ** | **$** | **105.4** | ** ** | $ | 128.3 |   |

 

**4.****              Pension andPostretirement Benefits**

 

DP&L sponsors adefined benefit plan for substantially all its employees.  For collective bargaining employees, thedefined benefits are based on a specific dollar amount per year of service.  For all other employees, the defined benefitplan is based primarily on compensation and years of service. The Company fundspension plan benefits as accrued in accordance with the minimum fundingrequirements of the Employee Retirement Income Security Act of 1974 (ERISA).

 

Qualifiedemployees who retired prior to 1987 and their dependents are eligible forhealth care and life insurance benefits. DP&L has funded the union-eligible health benefit using a VoluntaryEmployee Beneficiary Association Trust.

 

The net periodic benefit(income) cost of the pension and postretirement benefit plans for the threemonths ended June 30 were:

 

**Net periodic benefit (income)cost**

 
| ** **                         | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in  millions**            | ** ** | **2004**    | ** ** | **2003**           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | ** **  | ** ** | **(as  restated)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                      | ** ** | **$**       | **1.0**    | ** **         | $          | 0.9 | ** ** | **$** | **—** | ** ** | $ | — |   |
| Interest  cost                     | ** ** | **4.0**     | ** ** | 4.0                | ** ** | **0.5** | ** ** | 0.6 |   |
| Expected  return on assets         | ** ** | **(5.5**    | **)**      | (6.2               | )          | **(0.1** | **)** | (0.1 | ) |
| Amortization  of unrecognized:     |       |        | ** ** |               |       |   | ** ** |   |   |
| Actuarial  (gain) loss             | ** ** | **0.5**     | ** ** | —             |       | **(0.3** | **)** | (0.3 | ) |
| Prior  service cost                | ** ** | **0.7**     | ** ** | 0.7                |       | **—** | ** ** | — |   |
| Transition  obligation             | ** ** | **—**  | ** ** | —             |       | **0.1** | ** ** | — |   |
| Net  pension benefit (income) cost | ** ** | **$**       | **0.7**    | ** **         | $          | (0.6 | ) | **$** | **0.2** | ** ** | $ | 0.2 |   |

 

The net periodic benefit(income) cost of the pension and postretirement benefit plans for the sixmonths ended June 30 were:

 

14

----

 

**Net periodic benefit (income)cost**

 
| ** **                         | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in  millions**            | ** ** | **2004**    | ** ** | **2003**           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | ** **  | ** ** | **(as  restated)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                      | ** ** | **$**       | **1.9**    | ** **         | $          | 1.7 | ** ** | **$** | **—** | ** ** | $ | — |   |
| Interest  cost                     | ** ** | **8.0**     | ** ** | 8.1                | ** ** | **1.0** | ** ** | 1.1 |   |
| Expected  return on assets         | ** ** | **(10.9**   | **)**      | (12.5              | )          | **(0.3** | **)** | (0.2 | ) |
| Amortization  of unrecognized:     |       |        | ** ** |               |       |   | ** ** |   |   |
| Actuarial  (gain) loss             | ** ** | **1.0**     | ** ** | 0.1                | ** ** | **(0.5** | **)** | (0.6 | ) |
| Prior  service cost                | ** ** | **1.3**     | ** ** | 1.4                | ** ** | **—** | ** ** | — |   |
| Transition  obligation             | ** ** | **—**  | ** ** | —             | ** ** | **0.1** | ** ** | 0.1 |   |
| Net  pension benefit (income) cost | ** ** | **$**       | **1.3**    | ** **         | $          | (1.2 | ) | **$** | **0.3** | ** ** | $ | 0.4 |   |

 

**5.****              Stock-BasedCompensation**

 

DP&L accounts for DPLInc. stock options granted on or after January 1, 2003 under the fair valuemethod set forth in FASB Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (SFAS 123). This standard requires the recognition of compensation expense forstock-based awards to reflect the fair value of the award on the date ofgrant.  DP&L follows AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(APB 25) and related Accounting Principles Board and FASB interpretations inaccounting for stock-based compensation granted before January 1, 2003.  If DP&L had used the fair value method ofaccounting for stock options granted prior to 2003, earnings on common stockwould have been reported as follows:

 
| ** **                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **$ in  millions**                                                                               | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                            | ** ** | ** **                       | ** ** | **(as restated)**              | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
|                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Earnings  on common stock, as reported                                                                | ** ** | **$**                            | **47.0**   |                           | $          | 45.2 | ** ** | **$** | **108.8** |   | $ | 125.8 |   |
| Add:  Total stock-based compensation expense determined under APB 25, net of  related tax effects     |       | **—**                       |       | —                         |       | — |   | — |   |
| Deduct:  Total stock-based compensation expense determined under FAS 123, net of  related tax effects | ** ** | **(0.8**                         | **)**      | (0.5                           | )          | **(1.5** | **)** | (1.2 | ) |
| Pro-forma  earnings on common stock                                                                   | ** ** | **$**                            | **46.2**   |                           | $          | 44.7 | ** ** | **$** | **107.3** |   | $ | 124.6 |   |

 

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

 
| **$ in  millions**                                                   | ** ** | **At  June 30,  2004** | ** ** | **At  December 31,  2003** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| First  Mortgage Bonds maturing: 2013 - 5.125%                             | ** ** | **$**                  | **470.0**  | ** **                 | $          | 470.0 |   |
| Pollution  control series maturing Through 2027 - 6.43% (a)               | ** ** | **104.4**              | ** ** | 104.8                      |       |
| ** **                                                                |       | **574.4**              |       | 574.8                      | ** ** |
| Guarantee  of Air Quality Development Obligations - 6.10% Series due 2030 | ** ** | **110.0**              | ** ** | 110.0                      |       |
| Obligation  for capital lease                                             | ** ** | **3.9**                | ** ** | 4.3                        |       |
| Unamortized  debt discount and premium (net)                              | ** ** | **(1.7**               | **)**      | (1.8                       | )          |
| Total                                                                     | ** ** | **$**                  | **686.6**  | ** **                 | $          | 687.3 |   |

 

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*(a)**       Weighted average interestrates for 2004 and 2003.*

 

The amounts of maturitiesand mandatory redemptions for First Mortgage Bonds, Guaranteed Air QualityDevelopment Obligations and the Capital Lease are $0.3 million for theremainder of 2004, $1.1 million in 2005, $1.1 million in 2006, $9.3 million in2007 and $0.7 million in 2008. Substantially all property of DP&L is subject to the mortgage liensecuring the First Mortgage Bonds.

 

15

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On September 29, 2003,DP&L issued $470 million principal amount of First Mortgage Bonds, 5.125%Series due 2013.  The net proceeds fromthe sale of the bonds, after expenses, were used to (i) redeem $226 millionprincipal amount of DP&L’s First Mortgage Bonds, 8.15% Series due 2026, ata redemption price of 104.075% of the principal amount plus accrued interest tothe redemption date, and (ii) redeem $220 million principal amount of DP&L’sFirst Mortgage Bonds, 7.875% Series due 2024, at a redemption price of 103.765%of the principal amount plus accrued interest to the redemption date.  The $446 million of First Mortgage Bonds werecalled by DP&L on September 30, 2003, for redemption on October 30,2003.  The 5.125% Series due 2013 havenot been registered under the Securities Act of 1933, but were offered and soldthrough a private placement in compliance with Rule 144A under the SecuritiesAct of 1933.  The bonds include step-upinterest provisions requiring DP&L to pay additional interest if thesecurities remain unregistered after 180 days from issuance.  The sale of the bonds was not registered and,as a result, the Company is required to pay additional interest of 0.50% untilan exchange offer for these securities is registered with the SEC.

 

Issuance of additionalamounts of First Mortgage Bonds by DP&L is limited by provisions of itsmortgage; however, DP&L continues to have sufficient capacity to issueFirst Mortgage Bonds to satisfy its requirements in connection with itsrefinancing and construction programs through 2008.  The amounts and timing of future financingswill depend upon market and other conditions, rate increases, levels of salesand construction plans.

 

In December 2003,DP&L had $150 million available through a revolving credit agreement with aconsortium of banks.  The agreement,which was scheduled to expire on December 10, 2004, was terminated on June 1,2004.  The facility was to be used tosupport the Company’s business requirements and DP&L’s commercial paperprogram.  The facility contained twofinancial covenants, including maximum debt to total capitalization and minimumearnings before interest and taxes (EBIT) to interest coverage.  Fees associated with this credit facilitywere approximately $0.8 million per year. DP&L had no outstanding borrowings under the revolving creditfacility and no outstanding commercial paper balances at June 30, 2004 and2003.

 

In February 2004,DP&L entered into a $20 million Master Letter of Credit Agreement witha financial lending institution.  Thisagreement, which expires in February 2005, supports performance assuranceneeds in the ordinary course of business. As of June 30, 2004, DP&L had seven outstanding letters ofcredit totaling $10.0 million.

 

In June 2004, DP&L obtained a $100 millionunsecured revolving credit agreement that extended and replaced DP&L’srevolving credit agreement of $150 million. The new agreement, which expires on May 31, 2005, provides creditsupport for the Company’s business requirements and commercial paper programduring this period and may be increased to up to $150 million.  The facility contains two financial covenantsincluding maximum debt to total capitalization, and minimum earnings beforeinterest and taxes (EBIT) to total interest expense.  These covenants are currently met.  DP&L currently has no outstandingborrowings under this credit facility and no outstanding commercial paperbalances.  Fees associated with this creditfacility are approximately $0.6 million per year.  Changes in debt ratings, however, may affectthe applicable interest rate for DP&L’s revolving credit agreement.  DP&L’s ability to use this revolvingcredit agreement is subject to the PUCO’s annual approval which is set toexpire on November 5, 2004.  DP&L hasfiled an application to secure the PUCO’s continued authorization and thatapplication is pending.

 

The delay in filingaudited financial statements for the year ending December 31, 2003 constitutedan event of default under DP&L’s previous revolving credit facility;however, the Company obtained waivers from its lenders regarding thisevent.  The Company incurred fees ofapproximately $0.2 million to obtain these waivers. Subsequently, the Companyelected to obtain a new revolving credit facility.  The delay in filing audited financialstatements also resulted in non-compliance under the Company’s other debtagreements, although the non-compliance did not result in an immediate event ofdefault.  The Company has not receivedany default notifications from any of its lenders.  The Company’s debt agreements allow a graceperiod to cure a default after notification. Management, after consultation with legal counsel, believes all non-complianceconditions have been remedied.

 

There are no intercompanydebt collateralizations or debt guarantees between DP&L and its parent orsubsidiaries.  None of the debtobligations of DP&L are guaranteed or secured by affiliates and nocross-collateralization exists between any subsidiaries.

 

**7.****              Business SegmentReporting**

 

DP&L is a regionalenergy company providing electric services to over 500,000 retail customers inWest Central Ohio.  Assets and relatedcosts associated with DP&L’s transmission and distribution and base loadand peaking generation operations are managed and evaluated as a singleoperating segment captioned Electric.

 

16

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|                                 |       | **Three Months Ended  June 30,** |        | **Six Months Ended  June 30,** |       |
|--------------------------------------|------------|----------------------------------|-------------|--------------------------------|------------|
| **$ in  millions**              |       | **2004**                         | ** **  | **2003**                       | ** ** | **2004** | ** ** | **2003** |   |
|                                 |       |                             |        | **(as restated)**              |       |   |   | **(as restated)** |   |
| Revenues                             |       |                             |        |                           |       |   |   |   |   |
| Electric                             | ** ** | **$**                            | **282.8**   |                           | $          | 271.4 | ** ** | **$** | **583.2** |   | $ | 567.1 |   |
|                                 |       |                             |        |                           |       |   |   |   |   |
| Operating  income                    |       |                             |        |                           |       |   |   |   |   |
| Electric                             | ** ** | **$**                            | **100.4**   |                           | $          | 88.9 | ** ** | **$** | **213.0** |   | $ | 208.2 |   |
| Other  (a)                           | ** ** | **(10.8**                        | **)**       | (8.4                           | )          | **(16.5** | **)** | (12.9 | ) |
| Total  operating income              | ** ** | **$**                            | **89.6**    |                           | $          | 80.5 | ** ** | **$** | **196.5** |   | $ | 195.3 |   |
|                                 |       |                             |        |                           |       |   |   |   |   |
| Depreciation  and amortization       |       |                             |        |                           |       |   |   |   |   |
| Electric                             | ** ** | **$**                            | **29.4**    |                           | $          | 29.3 | ** ** | **$** | **57.7** |   | $ | 58.4 |   |
|                                 |       |                             |        |                           |       |   |   |   |   |
| Expenditures-construction  additions |       |                             |        |                           |       |   |   |   |   |
| Electric                             | ** ** | **$**                            | **22.1**    |                           | $          | 31.0 | ** ** | **$** | **45.0** |   | $ | 51.5 |   |
|                                 |       |                             |        |                           |       |   |   |   |   |
| Assets                               |       |                             |        |                           |       |   |   |   |   |
| Electric                             | ** ** | **$**                            | **2,592.6** |                           | $          | 2,602.7 | ** ** | **$** | **2,592.6** |   | $ | 2,602.7 |   |
| Unallocated  corporate assets        | ** ** | **62.0**                         |        | 130.2                          | ** ** | **62.0** |   | 130.2 |   |
| Total  assets                        | ** ** | **$**                            | **2,654.6** |                           | $          | 2,732.9 | ** ** | **$** | **2,654.6** |   | $ | 2,732.9 |   |
|                                      |            |                                  |             |                                |            |  |  |  |  |  |  |  |  |  |  |

 

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*(a) Includes unallocatedcorporate items.*

 

**8.****              Commitments andContingencies**

 

**Contingencies**

In the normal course ofbusiness, DP&L is subject to various lawsuits, actions, proceedings, claimsand other matters asserted under laws and regulations.  DP&L believes the amounts provided in itsconsolidated financial statements, as prescribed by GAAP, are adequate in lightof the probable and estimable contingencies. However, there can be no assurances that the actual amounts required tosatisfy alleged liabilities from various legal proceedings, claims, and othermatters discussed below, and to comply with applicable laws and regulations,will not exceed the amounts reflected in DP&L’s Consolidated FinancialStatements.  As such, costs, if any, thatmay be incurred in excess of those amounts provided as of June 30, 2004 cannotbe reasonably determined.

 

**Environmental Matters**

DP&L and itssubsidiaries’ facilities and operations are subject to a wide range ofenvironmental regulations and law.  Inthe normal course of business, DP&L has investigatory and remedialactivities underway at these facilities to comply, or to determine compliance,with such regulations.  DP&L has beenidentified, either by a government agency or by a private party seekingcontribution to site clean-up costs, as a potentially responsible party (PRP)at a number of sites pursuant to state and federal laws.  DP&L records liabilities for probableestimated loss in accordance with FASB Statement of Financial AccountingStandards No. 5 (SFAS 5), “Accounting for Contingencies.”  To the extent a probable loss can only beestimated by reference to a range of equally probable outcomes, and no amountwithin the range appears to be a better estimate than any other amount,DP&L accrues for the low end of the range. Because of uncertainties related to these matters, accruals are based onthe best information available at the time. DP&L evaluates the potential liability related to probable lossesquarterly and may revise its estimates. Such revisions in the estimates of the potential liabilities could havea material effect on the Company’s results of operations and financialposition.

 

**Legal Matters**

On July 9, 2004, Mr.Forster and Ms. Muhlenkamp filed a lawsuit against the Company, DPL and MVE,Inc. (MVE) in the Circuit Court, Fourth Judicial Circuit, in and for DuvalCounty, Florida.  The complaint assertsthat the Company, DPL and MVE (i) wrongfully terminated Mr. Forster and Ms.Muhlenkamp by undermining their authority and responsibility to manage thecompanies and excluding them from discussions on corporate financial issues andstrategic planning after the Thobe Memorandum was distributed and (ii) breachedMr. Forster’s consulting contract and Ms. Muhlenkamp’s employment agreement bydenying them compensation and benefits allegedly provided by the terms of suchcontract and agreement upon their termination from the Company and DPL.  Mr. Forster and Ms. Muhlenkamp seek damagesof an undetermined amount.  On August 9,2004, the defendants removed the case to

 

17

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the U.S. District Courtfor the Middle District of Florida, Jacksonville Division.  On August 16, 2004, the defendants moved todismiss the litigation based on the Florida federal court’s lack ofjurisdiction over the Company, DPL and MVE, all of whom are companies based inDayton, Ohio.  In the alternative, thedefendants requested that the court transfer the case to the U.S. DistrictCourt for the Southern District of Ohio, which has jurisdiction in Dayton,Ohio.  On September 17, 2004, Mr. Forsterand Ms. Muhlenkamp opposed these motions. The court has not yet ruled on the defendants’ motions.

 

On August 24, 2004, theCompany, DPL and MVE filed a Complaint against Mr. Forster, Ms. Muhlenkamp andMr. Koziar in the Court of Common Pleas of Montgomery County, Ohio assertinglegal claims against them relating to the termination of the Valley PartnersAgreements, challenging the validity of the amendments and the propriety of thedistributions and alleging that Messrs. Forster and Koziar and Ms. Muhlenkampbreached their fiduciary duties and breached their consulting and employmentcontracts.  The Company, DPL and MVEseek, among other things, damages in excess of $25,000, disgorgement of allamounts improperly withdrawn by Messrs. Forster and Koziar and Ms. Muhlenkampfrom the deferred compensation plans and a court order declaring that theCompany, DPL and MVE have no further obligations under the consulting andemployment contracts due to those breaches. At this time, defendants Forster, Koziar and Muhlenkamp have not yetresponded to the Complaint.  The Companycontinues to evaluate all of these matters and is considering other claimsagainst Mr. Forster, Mr. Koziar and/or Ms. Muhlenkamp that include, but are notlimited to, breach of fiduciary duty or other claims relating to personal andCompany investments, the calculation of benefits under the SERP and financialreporting with respect to such benefits, and, with respect to Mr. Koziar, the fulfillmentof duties owed to the Company as its legal counsel.

 

On or about June 24,2004, the SEC commenced a formal investigation into the issues raised by theThobe Memorandum.  The Company iscooperating with the investigation.

 

On April 7, 2004, the Companyreceived notice that the staff of the PUCO is conducting an investigation intothe financial condition of DP&L as a result of the issues raised by theThobe Memorandum.  On May 27, 2004, thePUCO ordered DP&L to file a plan of utility financial integrity thatoutlines the actions DPL Inc. has taken or will take to insulate DP&Lutility operations and customers from its unregulated activities.  DP&L must file this plan within 120 daysof the filing of its Form 10-K with the SEC. The Company intends to comply with this order and to cooperate with thePUCO’s continuing investigation.

 

On May 28, 2004, the U.S.Attorney’s Office for the Southern District of Ohio, assisted by the FederalBureau of Investigation, notified the Company and DPL that it has initiated aninquiry involving the subject matters covered by the Company’s and DPL’sinternal investigation.  The Company andDPL are cooperating with this investigation.

 

Commencingon or about June 24, 2004, the Internal Revenue Service (IRS) has issued a seriesof data requests to the Company and DPL regarding issues raised in the ThobeMemorandum.  The staff of the IRS hasrequested that the Company and DPL provide certain documents, including but notlimited to, matters concerning executive/director deferred compensation plans,management stock incentive plans and MVE financial statements.  The Company and DPL are cooperating withthese requests.

 

On December 12, 2003, theOffice of Federal Contract Compliance Programs (OFCCP) notified DP&L byletter alleging it had discriminated in the hiring of meter readers during2000-2001 by utilizing credit checks to determine if applicants had paid theirelectric bills.  On February 12, 2004,DP&L and the OFCCP entered into a Conciliation Agreement whereby DP&Lagreed to distribute approximately $0.2 million in compensation to certainaffected applicants.  DP&L hascompleted these payments to the affected applicants.

 

In June 2002, acontractor’s employee received a verdict against DP&L for injuries hesustained while working at a DP&L power station.  The Court awarded the contractor’s employeecompensatory damages of approximately $0.8 million and prejudgment interest ofapproximately $0.6 million.  On April 28,2004, the appellate court upheld this verdict except the award for prejudgmentinterest.  On September 1, 2004, the OhioSupreme Court refused to hear the case, so the matter has been remanded to thetrial court for a re-determination of whether prejudgment interest should beawarded.  The trial court heard thismatter on October 15, 2004 and the decision is pending.

 

**Long-Term Obligations andCommercial Commitments**

DP&L enters intovarious contractual and other long-term obligations that may affect theliquidity of its operations. The following table outlines DP&L’sobligations at June 30, 2004:

 

18

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| ** **                                      | ** ** | **Payment Year** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| **Long-term  Obligations ($ in millions)** | ** ** | **2004**         | ** ** | **2005 &  2006** | ** ** | **2007 &  2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                            |       |             |       |   |   |   |   |   |   |   |   |
| Long-term  debt                                 |       | $                | —     |   | $ | 0.8 |   | $ | 8.6 |   | $ | 673.7 |   | $ | 683.1 |   |
| Capital  lease                                  |       | 0.3              |       | 1.4 |   | 1.4 |   | 1.5 |   | 4.6 |   |
| Operating  leases                               |       | 0.8              |       | 0.4 |   | — |   | — |   | 1.2 |   |
| Coal  contracts                                 |       | 318.9            |       | 359.4 |   | 136.5 |   | 127.7 |   | 942.5 |   |
| Other  long-term obligations                    |       | 9.9              |       | 14.8 |   | 1.0 |   | — |   | 25.7 |   |
| Total  long-term Obligations                    |       | $                | 329.9      |   | $ | 376.8 |   | $ | 147.5 |   | $ | 802.9 |   | $ | 1,657.1 |   |

 

Long-term debt:

Long-term debt as of June30, 2004 consists of first mortgage bonds and guaranteed air qualitydevelopment obligations, including current maturities.

 

Capital lease:

As of June 30, 2004, theCompany had one capital lease that expires September 2010.

 

Operating leases:

As of June 30, 2004, theCompany had several operating leases with various terms and expiration dates.

 

Coal contracts:

DP&L has entered intovarious long-term coal contracts to supply portions of its coal requirementsfor its generating plants.  Contractprices are subject to adjustment in accordance with various indices, and havefeatures that will limit price escalation in any given year.

 

Other long-termobligations:

As of June 30, 2004,DP&L had various other long-term obligations including non-cancelablecontracts to purchase goods and services with various terms and expirationdates.

 

DP&L enters intovarious commercial commitments which may affect the liquidity of its operations.

 
| ** **                                            | ** ** | **Expiring Year** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|
| **Commercial  Commitments ($ in millions)** | ** ** | **2004**          | ** ** | **2005 &  2006** | ** ** | **2007 &  2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Credit  facilities                                    |       | $                 | —     |   | $ | 100.0 |   | $ | — |   | $ | — |   | $ | 100.0 |   |
| Guarantees                                            |       | —            |       | 17.8 |   | — |   | — |   | 17.8 |   |
| Total  commercial commitments                         |       | $                 | —     |   | $ | 117.8 |   | $ | — |   | $ | — |   | $ | 117.8 |   |

 

Credit facilities:

DP&L had $150 millionavailable through a revolving credit agreement with a consortium of banks thatwas scheduled to expire on December 10, 2004.  In June 2004, the Company replaced thisfacility with a $100 million, 364 day unsecured credit facility that expires onMay 31, 2005.  At June 30, 2004, therewere no borrowings outstanding under this credit agreement.  The new facility may be increased to up to$150 million.

 

Guarantees:

DP&L owns a 4.9%equity ownership interest in an electric generation company.  As of June 30, 2004, DP&L could beresponsible for the repayment of 4.9%, or $14.9 million, of a $305 million debtobligation and also 4.9%, or $2.9 million, of a separate $60.0 million debt obligation.  Both obligations mature in 2006.

 

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Certainstatements contained in this discussion are “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report which 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 the Company’s future economic performance,taking into account the information currently available to management.  These statements are not statements ofhistorical fact.  Such forward-lookingstatements are subject to risks and uncertainties and investors are cautionedthat outcomes and results may vary materially from those projected due tovarious factors beyond the control of The Dayton Power and Light Company(DP&L or the Company), including but not limited to: abnormal or severeweather; unusual maintenance or repair requirements; changes in fuel costs;changes in electricity, coal, environmental emissions, gas and other commodityprices; 

 

19

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increasedcompetition; regulatory changes and decisions; changes in accounting rules;financial market conditions; and general economic conditions.

 

Forward-lookingstatements speak only as of the date of the document in which they aremade.  The Company disclaims anyobligation or undertaking to provide any updates or revisions to anyforward-looking statement to reflect any change in its expectations or anychange in events, conditions or circumstances on which the forward-lookingstatement is based. (See FACTORS THAT MAY AFFECT FUTURE RESULTS.)

 

**OVERVIEWAND FUTURE EXPECTATIONS**

 

In the second quarter of2004, DP&L’s operating income increased $9.1 million over the secondquarter of 2003.  Electric revenues of$282.8 million exceeded the prior year by $11.4 million primarily resultingfrom increased wholesale revenues. Operating expenses of $193.2 million in the second quarter of 2004exceeded the second quarter of 2003 by $2.3 million or 1%.  DP&L’s earnings on common stock of $47.0million in the second quarter of 2004 increased $1.8 million over the secondquarter of 2003.

 

For the six months endedJune 30, 2004, DP&L’s operating income of $196.5 million increased $1.2million over the same period of the prior year. Electric revenues of $583.2 million exceeded the same period of theprior year by $16.1 million primarily resulting from an increase in wholesalerevenues.  Operating expenses of $386.7million for the six months ended June 30, 2004 were greater than the six monthsended June 30, 2003 by $14.9 million or 4% primarily relating to increases infuel and purchased power costs and corporate expenses.  DP&L’s reported earnings on common stockof $108.8 million for the six months ended June 30, 2004 decreased $17 millionfrom the six months ended June 30, 2003.

 

The increases in fuel andpurchase power costs and corporate expenses will continue to have a negativeimpact on operating income for the balance of 2004.

 

**RESULTSOF OPERATIONS**

 

**Income Statement Highlights**

 
| ** **              | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **$ in  millions** | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **              | ** ** | ** **                       | ** ** | **(as  restated)**             | ** ** | ** ** | ** ** | **(as  restated)** | ** ** |
|                    |       |                             |       |                           |       |   |   |   |   |
| Electric  revenues      | ** ** | **$**                            | **282.8**  |                           | $          | 271.4 | ** ** | **$** | **583.2** |   | $ | 567.1 |   |
| Less:                   |       |                             |       |                           |       |   |   |   |   |
| Fuel                    | ** ** | **60.5**                         |       | 50.8                           | ** ** | **123.2** |   | 106.4 |   |
| Purchased  power        | ** ** | **24.7**                         |       | 26.5                           | ** ** | **53.2** |   | 46.5 |   |
| Net  electric margin    | ** ** | **$**                            | **197.6**  |                           | $          | 194.1 | ** ** | **$** | **406.8** |   | $ | 414.2 |   |
|                    |       |                             |       |                           |       |   |   |   |   |
| Operating  income       | ** ** | **$**                            | **89.6**   |                           | $          | 80.5 | ** ** | **$** | **196.5** |   | $ | 195.3 |   |

 

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*(a)  For purposes of discussing operating resultsDP&L presents and discusses net electric margin. This format is useful toinvestors because it allows analysis and comparability of operating trends andincludes the same information that is used by management to make decisionsregarding the Company’s financial performance.*

 

**Revenues**

Electricrevenues increased $11.4 million or 4% to $282.8 million in the second quarterof 2004 compared to $271.4 million for the second quarter of 2003 primarilyreflecting higher wholesale revenues. Wholesale revenues increased $9.1 million or 16% reflecting higheraverage market rates for wholesale sales despite a 12% decline in sales volume.  Retail revenues increased $2.3 million in thesecond quarter of 2004 over the same period of the prior year primarilyresulting from higher residential sales volume resulting from warmer weatherthat was partially offset by lower industrial revenues reflecting customersmoving to a power supplier who is a subsidiary of DPL Inc.  Cooling degree-days were up 89% to 280 forthe second quarter of 2004 compared to 148 for the same period in 2003.

 

20

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Forthe six months ended June 30, 2004, electric revenues increased $16.1 millionor 3% to $583.2 million compared to $567.1 million for the same period of theprior year.  Wholesale revenues increased$27.3 million for the six months ended June 30, 2004 over the same period in2003 resulting from higher average market rates for wholesale sales and a 1%increase in wholesale sales volume. Retail revenues declined $11.2 million or 2% reflecting industrial andcommercial customers moving to a power supplier who is a subsidiary of DPLInc.  Retail sales volumes increased 3%as a result of warmer weather as cooling degree-days were up 89% to 280 for thesix months ended June 30, 2004 compared to 148 for the same period in 2003.

 

**Operating Expenses**

Net electric margin of$197.6 million in the second quarter of 2004 increased by $3.5 million from$194.1 million in the second quarter of 2003. As a percentage of total electric revenues, net electric margindecreased by 1.6 percentage points to 69.9% from 71.5%.  This decline is primarily the result ofincreased fuel costs partially offset by decreased purchased power costs.  Fuel costs increased by $9.7 million or 19%in the three months ended June 30, 2004 compared to the same period in 2003primarily resulting from higher average fuel costs for both retail and wholesalesales.  Purchased power costs decreasedby $1.8 million or 7% in the second quarter of 2004 compared to the same periodin 2003 primarily resulting from a lower volume of purchased power, which waspartially offset by higher average market prices for purchased power.

 

For the six months endedJune 30, 2004, net electric margins of $406.8 million decreased by $7.4 millionor 2% from $414.2 million for the six months ended June 30, 2003.  As a percentage of total electric revenues, netelectric margins decreased by 3.2 percentage points to 69.8% from 73.0%.  This decline is primarily the result ofincreased fuel and purchased power costs. Fuel costs increased by $16.8 million or 16% for the six months endedJune 30, 2004 compared to the same period in 2003 primarily resulting fromhigher average fuel costs for both retail and wholesale sales.  Purchased power costs increased by $6.7million or 14% for the six months ended June 30, 2004 compared to the sameperiod in 2003 primarily resulting from a higher volume of purchased power andhigher average market prices.

 

Operation and maintenanceexpense increased $5.7 million or 12% to $53.9 million for the three monthsended June 30, 2004 compared to $48.2 million for the same period in 2003 as aresult of higher corporate costs and increased electric productionexpenses.  Corporate costs increasedreflecting $1.3 million in pension expense, $1.0 million in Sarbanes-Oxleyproject costs, and $0.9 million in Directors and Officers’ liability insurancepremiums.  Power production expenses were$1.9 million higher primarily for scheduled outages and ash disposal.  These increases were offset by $1.3 millionof lower deferred compensation expense.

 

For the six months endedJune 30, 2004, operation and maintenance expenses increased $16.7 million or20% to $100.7 million compared to $84.0 million for the same period in 2003 asa result of higher corporate costs and increased electric productioncosts.  Corporate costs increased primarilyresulting from higher insurance premiums for Directors and Officers’ liabilityinsurance of $4.4 million, the settlement of an outstanding jointly-heldfacility receivable in 2003 of $3.8 million, pension expense of $2.5 million,and Sarbanes-Oxley project costs of $1.5 million.  Electric production expenses increased $4.9million for the six months ended June 30, 2004 over the same period in theprior year primarily related to maintenance and repair expenses incurred forscheduled outages and ash disposal. These increases were partially offset by lower deferred compensationexpenses of $1.4 million for the six months ended June 30, 2004 compared to thesame period of the prior year.

 

Amortization ofregulatory assets decreased $10.6 million in the second quarter of 2004 anddecreased $22.6 million for the six months ended June 30, 2004 compared to thesecond quarter of 2003 and the six months ended June 30, 2003 reflecting theconclusion of the three-year transition period for cost recovery related toderegulation granted by the Public Utilities Commission of Ohio in 2000 andended December 31, 2003.

 

For the six months endedJune 30, 2004, general taxes decreased $2.0 million compared to the same periodof the prior year primarily resulting from a 2003 excise tax expense of $2.7million that did not occur in 2004.

 

**Other income (deductions)**

Other income (deductions)decreased in the second quarter of 2004 by $6.0 million compared to the secondquarter of 2003 primarily as a result of $1.6 million of non-operating incomereceived in 2003, $1.4 million of deferred compensation expense incurred in2004, and $0.9 million of 2004 revolving credit facility fees.  For the six months ended June 30, 2004, otherincome (deductions) decreased $2.8 million primarily resulting from $3.4million of deferred compensation expense in 2004, $1.6 million of non-operatingincome received in 2003, and $1.4 million of 2004 revolving credit facilityfees offset by $5.1 million of gains realized from the disposition of pollutioncontrol emission allowances.

 

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**Interest Expense**

Interest expensedecreased by $2.4 million or 19% in the second quarter of 2004 compared to thesame period in 2003 primarily resulting from lower interest of $2.9 millionrelated to the issuance of the $470 million First Mortgage Bonds 5.125% Seriesdue 2013 that have a lower interest rate than the retired debt.  This decrease was offset by lower capitalizedinterest of $1.3 million reflecting the completion of capital projects in 2003.

 

For the six months endedJune 30, 2004, interest expense declined $3.4 million or 13% compared to thesix months ended June 30, 2003, primarily reflecting lower interest of $6.2million related to the $470 million First Mortgage Bonds issuance.  This decrease was offset by $3.7 million oflower capitalized interest expense as a result of capital projects completed in2003.

 

**Income Tax Expense**

Income tax expenseincreased $3.9 million or 15% in the second quarter of 2004 and increased $2.0million or 3% for the six months ended June 30, 2004 compared to the secondquarter of 2003 and the six months ended June 30, 2003 primarily resulting fromhigher income experienced in each of the respective periods.

 

**Cumulative Effect of AccountingChange**

The cumulative effect ofaccounting change of $17.0 million for the six months ended June 30, 2003reflects the adoption of the provisions of FASB Statement of FinancialAccounting Standards No. 143, “Accounting for Asset Retirement Obligations”(SFAS 143).

 

**LIQUIDITY,CAPITAL RESOURCES AND REQUIREMENTS**

 

DP&L’s cash andtemporary cash investments totaled $60.0 million at June 30, 2004 compared to$67.9 million at June 30, 2003. DP&L’s cash and temporary cash investmentstotaled $17.2 million at December 31, 2003.

 

The Company generated netcash from operating activities of $238.4 million for the six months ended June30, 2004 compared to $230.0 million for the six months ended June 30,2003.  The net cash from operatingactivities for the six months ended June 30, 2004 was primarily the result ofoperating profitability and cash generated from working capital, specificallyrelated to cash generated from receivables and the timing of tax payments.  This increase in working capital waspartially offset by cash used to purchase coal inventory.  Operating profitability and increases inworking capital, specifically related to cash generated from receivables andthe timing of tax payments, primarily drove net cash provided from operatingactivities for the six months ended June 30, 2003.  The tariff-based revenue continues to be theprincipal source of cash from operating activities.  Management believes that the diversifiedretail customer mix of residential, commercial, and industrial classes providesDP&L with a reasonably predictable gross cash flow.

 

Net cash flows used forinvesting activities were $45.0 million for the six months ended June 30, 2004and $65.7 million for the same period of the prior year.  The net cash used in both periods was forcapital expenditures.

 

Net cash flows used forfinancing activities were $150.6 million for the six months ended June 30, 2004compared to net cash flows used for financing activities of $113.5 million forthe six months ended June 30, 2003.  Netcash flows used for financing activities for the six months ended June 30, 2004and 2003 related to the payment of dividends on common stock, retirement oflong-term debt, and dividends paid on preferred stock.

 

**Capital Requirements**

Construction additionswere $45.0 million for the six months ended June 30, 2004 and are expected toapproximate $88 million for the year compared to $51.5 million for the sixmonths ended June 30, 2003 and $98 million for the year ended 2003.  Planned construction additions for 2004relate to DP&L’s environmental compliance program, power plant equipment,its transmission and distribution system, and information systems.

 

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.  Over the next four years,DP&L is projecting to spend $800 million in capital projects, approximatelyhalf of which is to meet changing environmental standards.  DP&L’s ability to complete its capitalprojects and the reliability of future service will be affected by itsfinancial condition, the availability of internal and external funds atreasonable cost, and adequate and timely return on these capital investments.  DP&L expects to finance its constructionadditions over the next few years with internally generated funds.

 

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**Debt Obligations and Maturities**

The Company’s scheduledmaturities and mandatory redemptions for First Mortgage Bonds, Guaranteed AirQuality Development Obligations, and the Capital Lease are $0.3 million for theremainder of 2004, $1.1 million in 2005, $1.1 million in 2006, $9.3 million in2007 and $0.7 million in 2008. Substantially all property of DP&L is subject to the mortgage liensecuring the First Mortgage Bonds.

 

On September 29, 2003,DP&L issued $470 million principal amount of First Mortgage Bonds, 5.125%Series due 2013.  The net proceeds fromthe sale of the bonds, after expenses, were used to (i) redeem $226 millionprincipal amount of DP&L’s First Mortgage Bonds, 8.15% Series due 2026, ata redemption price of 104.075% of the principal amount plus accrued interest tothe redemption date, and (ii) redeem $220 million principal amount of DP&L’sFirst Mortgage Bonds, 7.875% Series due 2024, at a redemption price of 103.765%of the principal amount plus accrued interest to the redemption date.  The $446 million of First Mortgage Bonds werecalled by DP&L on September 30, 2003, for redemption on October 30,2003.  The 5.125% Series due 2013 havenot been registered under the Securities Act of 1933, but were offered and soldthrough a private placement in compliance with Rule 144A under the SecuritiesAct of 1933.  The bonds include step-upinterest provisions requiring DP&L to pay additional interest if thesecurities remain unregistered after 180 days from issuance.  The sale of the bonds was not registered and,as a result, the Company is required to pay additional interest of 0.50% untilan exchange offer for these securities is registered with the SEC.

 

Issuance of additionalamounts of First Mortgage Bonds by DP&L is limited by provisions of itsmortgage; however, DP&L continues to have sufficient capacity to issueFirst Mortgage Bonds to satisfy its requirements in connection with itsrefinancing and construction programs through 2008.  The amounts and timing of future financingswill depend upon market and other conditions, rate increases, levels of salesand construction plans.

 

In December 2003,DP&L had $150 million available through a revolving credit agreement with aconsortium of banks.  The agreement,which was scheduled to expire on December 10, 2004, was terminated on June 1,2004.  The facility was to be used tosupport the Company’s business requirements and DP&L’s commercial paperprogram.  The facility contained twofinancial covenants, including maximum debt to total capitalization and minimumearnings before interest and taxes (EBIT) to interest coverage.  Fees associated with this credit facilitywere approximately $0.8 million per year, but a two-step increase in DP&L’scredit rating would have reduced the facility’s interest rate by 0.38%.  A lower credit rating would not haveincreased the applicable interest rate. DP&L had no outstanding borrowings under the revolving creditfacility and no outstanding commercial paper balances at June 30, 2004 and2003.

 

In February 2004,DP&L entered into a $20 million Master Letter of Credit Agreement witha financial lending institution.  Thisagreement, which expires in February 2005, supports performance assuranceneeds in the ordinary course of business. DP&L has certain contractual agreements for the sale and purchase ofpower, fuel and related energy services that contain credit rating clausesallowing the counterparties to seek additional surety under certain conditions.As of June 30, 2004, DP&L had seven outstanding letters of credittotaling $10.0 million.

 

In June 2004, DP&L obtained a $100 millionunsecured revolving credit agreement that extended and replaced DP&L’srevolving credit agreement of $150 million. The new agreement, which expires on May 31, 2005, provides creditsupport for the Company’s business requirements and commercial paper programduring this period and may be increased to up to $150 million.  The facility contains two financial covenantsincluding maximum debt to total capitalization, and minimum earnings beforeinterest and taxes (EBIT) to total interest expense.  These covenants are currently met.  DP&L currently has no outstandingborrowings under this credit facility and no outstanding commercial paperbalances.  Fees associated with thiscredit facility are approximately $0.6 million per year.  Changes in debt ratings, however, may affectthe applicable interest rate for DP&L’s revolving credit agreement.  A one-step increase in DP&L’s creditrating reduces the facility’s interest rate by 0.38% and a one-step decrease incredit rating increases the facility’s interest rate by 0.38%.  DP&L’s ability to use this revolvingcredit agreement is subject to the PUCO’s annual approval which is set toexpire on November 5, 2004.  DP&L hasfiled an application to secure the PUCO’s continued authorization and thatapplication is pending.

 

The Company has received multiplecredit rating downgrades since December 31, 2003.  Currently, DP&L’s senior secured debtcredit ratings are as follows:

 
| ** **                        | ** ** | **Rating** | ** ** | **Outlook** | ** ** | **Effective** | ** ** |
|-----------------------------------|------------|------------|------------|-------------|------------|---------------|------------|
| Fitch  Ratings                    |       | BBB        |       | Negative    |       | April 2004    |       |
| Moody’s  Investors Service   |       | Baa3       |       | Negative    |       | April 2004    |       |
| Standard  & Poor’s Corp. |       | BBB-       |       | Negative    |       | March 2004    |       |

 

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

 

The delay in filingaudited financial statements for the year ending December 31, 2003constituted an event of default under DP&L’s previous revolving creditfacility; however, the Company obtained waivers from its lenders regarding thisevent.  The Company incurred fees ofapproximately $0.2 million to obtain these waivers. Subsequently, the Companyelected to obtain a new revolving credit facility.  The delay in filing audited financialstatements also resulted in non-compliance under the Company’s other debtagreements, although the non-compliance did not result in an immediate event ofdefault.  The Company has not receivedany default notifications from any of its lenders.  The Company’s debt agreements allow a graceperiod to cure a default after notification. Management, after consultation with legal counsel, believes all non-complianceconditions have been remedied.

 

**Off-Balance Sheet Arrangements**

DP&Ldoes not have any off-balance sheet arrangements that have or are reasonablylikely to have a current or future effect on DP&L’s financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources that is material to investors.

 

**Long-Term Obligations andCommercial Commitments**

DP&L enters intovarious contractual and other long-term obligations that may affect theliquidity of its operations. The following table outlines DP&L’sobligations at June 30, 2004:

 
|                                            |       | **Payment Year** |       |
|-------------------------------------------------|------------|------------------|------------|
| **Long-term  Obligations ($ in millions)** | ** ** | **2004**         | ** ** | **2005 &  2006** | ** ** | **2007 &  2008** | ** ** | **Thereafter** | ** ** | **Total** |   |
| Long-term  debt                                 |       | $                | —     |   | $ | 0.8 |   | $ | 8.6 |   | $ | 673.7 |   | $ | 683.1 |   |
| Capital  lease                                  |       | 0.3              |       | 1.4 |   | 1.4 |   | 1.5 |   | 4.6 |   |
| Operating  leases                               |       | 0.8              |       | 0.4 |   | — |   | — |   | 1.2 |   |
| Coal  contracts                                 |       | 318.9            |       | 359.4 |   | 136.5 |   | 127.7 |   | 942.5 |   |
| Other  long-term obligations                    |       | 9.9              |       | 14.8 |   | 1.0 |   | — |   | 25.7 |   |
| Total  long-term Obligations                    |       | $                | 329.9      |   | $ | 376.8 |   | $ | 147.5 |   | $ | 802.9 |   | $ | 1,657.1 |   |
|                                                 |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Long-term debt:

Long-term debt as of June30, 2004 consists of first mortgage bonds and guaranteed air qualitydevelopment obligations, including current maturities.

 

Capital lease:

As of June 30, 2004, theCompany had one capital lease that expires September 2010.

 

Operating leases:

As of June 30, 2004, theCompany had several operating leases with various terms and expiration dates.

 

Coal contracts:

DP&L has entered intovarious long-term coal contracts to supply portions of its coal requirementsfor its generating plants.  Contractprices are subject to adjustment in accordance with various indices, and havefeatures that will limit price escalation in any given year.

 

Other long-termobligations:

As of June 30, 2004,DP&L had various other long-term obligations including non-cancelablecontracts to purchase goods and services with various terms and expirationdates.

 

DP&L enters intovarious commercial commitments which may affect the liquidity of itsoperations.

 
| ** **                                            | ** ** | **Expiring Year** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|
| **Commercial  Commitments ($ in millions)** | ** ** | **2004**          | ** ** | **2005 &  2006** | ** ** | **2007 &  2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Credit  facilities                                    |       | $                 | —     |   | $ | 100.0 |   | $ | — |   | $ | — |   | $ | 100.0 |   |
| Guarantees                                            |       | —            |       | 17.8 |   | — |   | — |   | 17.8 |   |
| Total  commercial commitments                         |       | $                 | —     |   | $ | 117.8 |   | $ | — |   | $ | — |   | $ | 117.8 |   |

 

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Credit facilities:

DP&L had $150 millionavailable through a revolving credit agreement with a consortium of banks thatwas scheduled to expire on December 10, 2004.  In June 2004, the Company replaced thisfacility with a $100 million, 364 day unsecured credit facility that expires onMay 31, 2005.  At June 30, 2004, therewere no borrowings outstanding under this credit agreement.  The new facility may be increased to up to$150 million.

 

Guarantees:

DP&L owns a 4.9%equity ownership interest in an electric generation company.  As of June 30, 2004, DP&L could beresponsible for the repayment of 4.9%, or $14.9 million, of a $305 million debtobligation and also 4.9%, or $2.9 million, of a separate $60.0 million debtobligation.  Both obligations mature in2006.

 

**MARKETRISK**

 

DP&L’s financialresults are subject to certain market risks, including changes in electricity,coal, environmental emissions, gas and other commodity prices; the effect ofweather, increased competition and economic conditions in the sales area onretail sales volume; and adverse economic conditions.

 

Approximately 24 percentof DP&L’s second quarter 2004 revenues were from sales of energy and capacityin the wholesale market.  Energy andcapacity in excess of the needs of existing retail customers is sold in thewholesale market when DP&L can identify opportunities with positivemargins.  In the second quarter of 2004,sales of excess wholesale energy and capacity contributed $6.6 million in netelectric margins.  This compares to netelectric margins from wholesale energy and capacity sales of $7.0 million in2003.  This decrease in net electricmargins resulted from lower average market prices for wholesale sales andincreased average market prices for fuel and purchased power.  Wholesale sales per megawatt hour in thesecond quarter of 2004 and 2003 were $34.62 and $28.73, respectively.  Wholesale fuel costs per megawatt hour forthe second quarter of 2004 and 2003 were $18.30 and $13.45, respectively andwholesale purchased power costs per megawatt hour for the second quarter of2004 and 2003 were $40.10 and $30.25, respectively.

 

For the six months endedJune 30, 2004, approximately 22 percent of DP&L’s revenues were from salesof energy and capacity in the wholesale market. Energy and capacity in excess of the needs of existing retail customersis sold in the wholesale market when DP&L can identify opportunities withpositive margins.  For the six monthsended June 30, 2004, sales of excess wholesale energy and capacity contributed$12.4 million in net electric margin. This compares to net electric margins from wholesale energy and capacitysales of $17.1 million in 2003.  Thisdecrease in net electric margin resulted from increased average market pricesfor fuel and purchased power. Wholesale fuel costs per megawatt houryear-to-date 2004 and 2003 were $17.11 and $12.93, respectively and wholesalepurchased power costs per megawatt hour year-to-date 2004 and 2003 were $36.32and $31.06, respectively.

 

Fuel and purchased powercosts represented 44% and 46% of total operating costs in the first quarter of2004 and for the six months ended June 30, 2004, respectively.  DP&L has contracted for all of itsprojected coal needs for 2004, at an estimated cost per Btu increase ofapproximately 15% over average 2003 levels. Purchased power costs depend, in part, upon the timing and extent ofplanned and unplanned outages of its generating capacity.  DP&L will purchase power on adiscretionary basis when wholesale market conditions provide opportunities toobtain power at a cost below the Company’s internal production costs.

 

The carrying value ofDP&L’s debt was $687.7 million at June 30, 2004, consisting of DP&L’sFirst Mortgage Bonds, Guaranteed Air Quality Development Obligations and theCapital Lease. The fair value of this debt was $647.1 million, based on currentmarket prices or discounted cash flows using current rates for similar issueswith similar terms and remaining maturities. The principal cash repayments and related weighted average interestrates by maturity date for long-term, fixed rate debt at June 30, 2004 are asfollows:

 
| **Expected  Maturity** | ** ** | **Long-term Debt**       | ** ** |
|------------------------|------------|--------------------------|------------|
| **Date**               | ** ** | **Amount**               | ** ** | **Average Rate** | ** ** |
| ** **             | ** ** | **($ in millions)** | ** ** | ** ** | ** ** |
| 2004                   |       | $                        | 0.3        |   | 2.9 | % |
| 2005                   |       | 1.1                      |       | 4.1 | % |
| 2006                   |       | 1.1                      |       | 4.1 | % |
| 2007                   |       | 9.3                      |       | 6.1 | % |
| 2008                   |       | 0.7                      |       | 2.9 | % |
| Thereafter             |       | 675.2                    |       | 5.8 | % |
| Total                  |       | $                        | 687.7      |   | 5.8 | % |
|                   |       |                     |       |   |   |
| Fair  Value            |       | $                        | 647.1      |   |   |   |

 

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The fair value offinancial instruments held was $91.2 million and $103.5 million at June 30,2004 and December 31, 2003 respectively. The market risk related to these financial instruments were estimated asthe potential increase/decrease in fair value of approximately $9 million atJune 30, 2004, resulting from a hypothetical 10% increase/decrease in the valueof the underlying securities.

 

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

 

This quarterly report andother documents that DP&L files with the Securities and Exchange Commission(SEC) and other regulatory agencies, as well as other oral or writtenstatements the Company may make from time to time, contain information based onmanagement’s beliefs and include forward-looking statements (within the meaningof the Private Securities Litigation Reform Act of 1995) that involve a numberof known and unknown risks, uncertainties and assumptions. Theseforward-looking statements are not guarantees of future performance, and thereare a number of factors including, but not limited to, those listed below,which could cause actual outcomes and results to differ materially from theresults contemplated by such forward-looking statements. DP&L does notundertake any obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.These forward-looking statements are identified by terms and phrases such as “anticipate”,“believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”,“plan”, “project”, “predict”, “will”, and similar expressions.

 

**Regulation/Competition**

DP&L operates in arapidly changing industry with evolving industry standards and regulations. Inrecent years a number of federal and state developments aimed at promotingcompetition triggered industry restructuring. Regulatory factors, such as changes in the policies or procedures thatset rates; changes in tax laws, tax rates, and environmental laws andregulations; changes in DP&L’s ability to recover expenditures forenvironmental compliance, fuel costs, purchased power costs and investmentsmade under traditional regulation through rates; and changes to the frequencyand timing of rate increases, can affect the Company’s results of operationsand financial condition.  Additionally,financial or regulatory accounting principles or policies imposed by governingbodies can increase DP&L’s operational and monitoring costs affecting itsresults of operations and financial condition.

 

Changes in DP&L’scustomer base, including aggregation, could lead to the entrance of competitorsin the Company’s marketplace affecting its results of operations and financialcondition.

 

**Economic Conditions**

Economic pressures, aswell as changing market conditions and other factors related to physical energyand financial trading activities, which include price, basis, credit,liquidity, volatility, capacity, transmission, and interest rates can have asignificant effect on DP&L’s operations and the operations of its retail,industrial and commercial customers.

 

**Reliance on Third Parties**

DP&L relies on manysuppliers for the purchase and delivery of inventory and components to operateits energy production, transmission and distribution functions.  Unanticipated changes in DP&L’s purchaseprocesses may affect the Company’s business and operating results.  In addition, the Company relies on others toprovide professional services, such as, but not limited to investmentmanagement, actuarial calculations, internal audit services, payroll processingand various consulting services.

 

**Operating Results Fluctuations**

Future operating resultscould be affected and are subject to fluctuations based on a variety offactors, including but not limited to: unusual weather conditions; catastrophic weather-related damage;unscheduled generation outages; unusual maintenance or repairs; changes in coalcosts, gas supply costs, or availability constraints; environmental compliance,including costs of compliance with existing and future environmental requirements;and electric transmission system constraints.

 

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**Employees**

A majority of the Company’semployees are under a collective bargaining agreement.  If the Company is unable to negotiate futurecollective bargaining agreements, the Company could experience work stoppages,which may affect its business and operating results.

 

**Regulatory Uncertainties andLitigation**

In the normal course ofbusiness, the Company is subject to various lawsuits, actions, proceedings,claims and other matters asserted under laws and regulations.  Additionally, the Company is subject todiverse and complex laws and regulations, including those relating to corporategovernance, public disclosure and reporting and taxation, which are rapidlychanging and subject to changes in the future. As described under Item 3 –Legal Proceedings, in the Company’s Form 10-K for the year ended December 31,2003, the Company is also currently involved in various litigation in which theoutcome is uncertain.  Compliance withthese rapid changes may substantially increase costs to DP&L’sorganizations and could affect its future operating results.

 

**Internal Controls**

As described under Item 1 – Business - RecentDevelopments, in the Company’s Form 10-K for the year ended December 31, 2003,a review by independent counsel to DP&L’s Audit Committee of the Board ofDirectors of the Company has identified recommendations for improvementrelating to some of the concerns raised by the Company’s Controller including,among other things, internal controls. In addition, as further described under Item 9A - Controls andProcedures, during their year-end review, the Company’s independent auditorsidentified and reported to management and the Audit Committee of the Board ofDirectors two material weaknesses and certain other matters involving internalcontrol deficiencies considered to be reportable conditions under standardsestablished by the Public Company Accounting Oversight Board (PCAOB).  The material weaknesses include conditionsrelated to (1) the Company’s process for recognizing an adjustment to theCompany’s income tax provision to reflect a deductibility limitation underSection 162(m) with respect to executive deferred compensation distributionsmade during 2003 and (2) lack of effective communication in internal reportingof certain investment income that may lead to improper accounting of suchtransactions in accordance with generally accepted accounting principles.

 

The reportable conditions that are not believedto be a material weakness include conditions related to payroll processing, thequality and change control process for the preparation of SEC filings,management’s assessment of the Company’s internal controls, executive traveland entertainment expense reporting, the lack of a comprehensive controllerfunction and segregation of duties for certain accounting transactions andactivities.

 

The Company’s failure totimely improve any deficiencies in its internal controls and procedures couldresult in errors in its consolidated financial statements, adversely affect itsability to operate its business and hamper management’s ability to report onthe effectiveness of its internal controls. The Company has taken steps to correct the internal control deficienciesidentified and will further develop and enhance the Company’s internal controlpolicies, procedures, systems and staff to allow it to mitigate the risk thatmaterial accounting errors might go undetected and be included in itsconsolidated financial statements.  TheCompany cannot assure that any new policies or procedures that the Companyimplements to remedy the material weaknesses and/or reportable conditions willbe successful in the near term.

 

The Company is currentlyundertaking a thorough review of its internal controls as part of the Company’spreparation for compliance with the requirements under Section 404 of theSarbanes-Oxley Act of 2002 and the Company is using this review to furtherassist in identifying and correcting any control deficiencies.  As expected, this review has revealed somecontrol weaknesses, which the Company has reported to the Audit Committee. TheCompany has since taken steps to strengthen its internal controls in these areas,including increasing segregation of duties, writing policies where necessary,adding checks at key decision points and increasing supervisor review oftransactions.  These actions have beensuccessful in eliminating a large percentage of the deficiencies noted, butadditional remediation activities continue. Corrected control deficiencies are being retested by management toassure that remediation efforts were successful, and the Company’s auditorswill perform independent testing of the Company’s internal controls as part oftheir year-end review.  At this time, theCompany has not completed its review of the existing controls and theireffectiveness.  Unless the materialweaknesses described above, or any identified during this review, are remedied,there can be no assurances that the Company will be able to assert that itsinternal control over financial reporting is effective, pursuant to the rulesadopted by the SEC under Section 404, when those rules take effect.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

DP&L’s consolidatedfinancial statements are prepared in accordance with generally acceptedaccounting principles in the United States (GAAP).  In connection with the preparation of thesefinancial statements, DP&L’s management

 

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is required to makeassumptions, estimates and judgments that affect the reported amounts ofassets, liabilities, revenues, expenses and the related disclosure ofcontingent liabilities.  Theseassumptions, estimates and judgments are based on management’s historicalexperience and assumptions that are believed to be reasonable at the time.  However, because future events and theireffects cannot be determined with certainty, the determination of estimatesrequires the exercise of judgment. DP&L’s critical accounting policies are those which requireassumptions to be made about matters that are highly uncertain.

 

Different estimates couldhave a material effect on its financial results.  Judgments and uncertainties affecting theapplication of these policies and estimates may result in materially differentamounts being reported under different conditions or circumstances.  Significant items subject to such judgmentsinclude the carrying value of property, plant and equipment; the valuation ofderivative instruments; valuation allowance for receivables and deferred incometaxes; the valuation of reserves related to current litigation; and assets andliabilities related to employee benefits.

 

There have been nosignificant changes to the critical accounting policies as disclosed inDP&L’s Form 10-K as of December 31, 2003.

 

**Recently Issued AccountingPronouncements**

A discussion of recentlyissued accounting pronouncements is described in Note 1 of Notes toConsolidated Financial Statements and such discussion is incorporated byreference in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations and made a part hereof.

 

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**THE DAYTON POWER AND LIGHTCOMPANY**

**OPERATING STATISTICS**

** **
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** **  | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------|-------------|--------------------------------|------------|
| ** **                           | ** ** | **2004**                         | ** **  | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Electric**                         |       |                             |        |                           |       |   |   |   |   |
| ** **                           | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales  (millions of kWh)             |       |                             |        |                           |       |   |   |   |   |
| Residential                          | ** ** | **1,090**                        |        | 949                            | ** ** | **2,621** |   | 2,495 |   |
| Commercial                           | ** ** | **936**                          |        | 902                            |       | **1,840** | ** ** | 1,788 |   |
| Industrial                           | ** ** | **1,139**                        |        | 1,118                          | ** ** | **2,177** |   | 2,141 |   |
| Other  retail                        | ** ** | **357**                          |        | 354                            | ** ** | **690** |   | 687 |   |
| Total  retail                        | ** ** | **3,522**                        |        | 3,323                          | ** ** | **7,328** |   | 7,111 |   |
| Wholesale                            | ** ** | **1,039**                        |        | 1,178                          | ** ** | **2,021** |   | 2,010 |   |
|                                 |       |                             |        |                           |       |   |   |   |   |
| Total                                | ** ** | **4,561**                        |        | 4,501                          | ** ** | **9,349** |   | 9,121 |   |
|                                 |       |                             |        |                           |       |   |   |   |   |
| Revenues  ($ in thousands)      |       |                             |        |                           |       |   |   |   |   |
| Residential                          | ** ** | **$**                            | **98,587**  |                           | $          | 88,027 | ** ** | **$** | **224,579** |   | $ | 214,220 |   |
| Commercial                           | ** ** | **59,666**                       |        | 60,061                         | ** ** | **117,263** |   | 120,191 |   |
| Industrial                           | ** ** | **32,886**                       |        | 42,284                         | ** ** | **63,716** |   | 83,903 |   |
| Other  retail                        | ** ** | **24,856**                       |        | 23,313                         | ** ** | **47,664** |   | 46,183 |   |
| Total  retail                        | ** ** | **215,995**                      |        | 213,685                        | ** ** | **453,222** |   | 464,497 |   |
| Wholesale                            | ** ** | **66,786**                       |        | 57,769                         | ** ** | **129,960** |   | 102,622 |   |
|                                 |       |                             |        |                           |       |   |   |   |   |
| Total                                | ** ** | **$**                            | **282,781** |                           | $          | 271,454 | ** ** | **$** | **583,182** |   | $ | 567,119 |   |
|                                 |       |                             |        |                           |       |   |   |   |   |
| Electric  customers at end of period | ** ** | **507,395**                      |        | 505,198                        | ** ** | **507,395** |   | 505,198 |   |

 

**Item 3.  Quantitativeand Qualitative Disclosures about Market Risk**

 

See the “Market Risk”section of Item 2.

 

**Item 4.  Controlsand Procedures**

For the period covered bythis report, the Company carried out an evaluation, under the supervision andwith the participation of the Company’s management, including the Company’sChief Executive Officer and interim Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures.  Based on thatevaluation, the Chief Executive Officer and the interim Chief Financial Officerconcluded that the Company’s disclosure controls and procedures are effectiveto ensure that information required to be disclosed by the Company in thereports that it files or submits under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized and reported. There are inherentlimitations to the effectiveness of any system of disclosure controls andprocedures.  Even effective disclosurecontrols and procedures can only provide reasonable assurance of achievingtheir control objectives.

 

Attached as Exhibits 31.1and 31.2 to this quarterly report are certifications of the Chief ExecutiveOfficer and the interim Chief Financial Officer required in accordance withRule 13a-14 of the Exchange Act.  Thisportion of the Company’s quarterly report includes the information concerningthe controls evaluation referred to in the certifications and should be read inconjunction with the certifications for a more complete understanding of thetopics presented.

 

There were no changes inthe Company’s internal control over financial reporting that occurred duringthe last quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financialreporting.  However, during theiryear-end review, KPMG LLP (KPMG), the Company’s independent accountants,identified and reported to management and the Audit Committee of DPL’s Board ofDirectors two material weaknesses and certain other matters involving internalcontrol deficiencies considered to be reportable conditions under standardsestablished by the Public Company Accounting Oversight Board (PCAOB).  Reportable conditions are matters coming tothe attention of the auditors that, in their judgment, relate to significantdeficiencies in the design or operation of internal control and could adverselyaffect the organization’s ability to record, process, summarize and reportfinancial data consistent with the assertions of management in the financialstatements.  A

 

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material weakness is areportable condition in which the design or operation of one or more internalcontrol components does not reduce to a relatively low level the risk that errorsor fraud in amounts that would be material in relation to the financialstatements being audited may occur and not be detected within a timely periodby employees in the normal course of performing their assigned functions.

 

The two materialweaknesses identified are:

 

(1)   Anineffective process for recognizing an adjustment to the Company’s income taxprovision to reflect a deductibility limitation under Section 162(m) forexecutive deferred compensation distributions made during 2003, including, withoutlimitation, insufficient supporting documentation submitted to the Company’stax department for purposes of calculating the income tax provision and thelack of effective communication between and among senior management, counseland the Company’s tax and compensation experts. Absent review of specific deferred compensation records by the Company’soutside auditors, income tax balances for 2003 may have been improperly statedat December 31, 2003.  Managementconcurred with KPMG’s observations relating to income tax reporting ofexecutive compensation.  The Companyfurther evaluated its internal processes relating to executive compensation andhas implemented internal control improvements in this area; and

 

(2)   A complexand manual process for accounting and reporting transactions in DPL’s financialasset portfolio, including, (i) separate reporting structures for MVEaccounting and corporate accounting that do not allow for a review of theentire process, (ii) the lack of a complete accounting manual for financialasset portfolio accounting that contemplates all investment transactions thatoccur on a regular basis and (iii) ineffective communication between the MVEand corporate accounting groups that does not ensure that all investmentportfolio transactions are identified, accumulated and reported in accordancewith generally accepted accounting principles. Specifically, in 2003 private equity fund distributions in the form ofstock of underlying investments were initially accounted for by management entirelyas return of capital transactions.  Alarge element of each distribution should have been accounted for as incomerather than a return of capital.  As aresult, results for the third quarter 2003 were required to be revised.  Similar transactions in prior years were alsoaccounted for inappropriately and were revised. Management concurred with KPMG’s observations relating to investmentportfolio accounting and acknowledged the need for improvement.  DPL further evaluated its accountingprocesses relating to its investment portfolio and has implemented internalcontrol improvements in this area.

 

The reportable conditionsthat are not believed to be material weaknesses are conditions related to:  (i) payroll processing and the fact that theCompany has two separate payroll processes, one for the majority of personneland one for the Company’s senior executives, (ii) the lack of a quality andchange control process for the preparation and submission of SEC filings onForm 10-K and Form 10-Q, (iii) the lack of significant progress made bymanagement in assessing the Company’s internal controls in preparation forSarbanes-Oxley Section 404 implementation and KMPG’s belief that the Companywill identify control weaknesses requiring remediation, (iv) the Company’sprocess for executive travel and entertainment expense reporting andreimbursement and the lack of sufficient supporting documentation for reportedbusiness expenses of certain executives to support deductibility for taxpurposes, (v) the lack of a comprehensive controller function to monitor theaccounting function in the Company and (vi) inadequate segregation of dutiesfor certain accounting transactions and activities processed at the executivelevel, including payroll, benefit plans, other compensation plans, time andexpense reporting by senior management and preparation and submission of SECfilings.

 

The material weaknessesand reportable conditions identified above, if unaddressed, could result inerrors in the Company’s consolidated financial statements.

 

Management concurred withKPMG’s observations relating to payroll processing (particularly those relatingto executive compensation), external reporting processes, and executive traveland entertainment expense reporting.  TheCompany further evaluated these areas and implemented appropriate internalcontrol improvements.

 

Management acknowledgedKPMG’s observations relating to Sarbanes-Oxley Section 404 implementation andincreased resources dedicated to this effort. Additionally, the Company has improved its communications both withinthe organization and with KPMG regarding the status of the implementationprocess, project scope, preliminary results and remediation efforts.  Management also acknowledged the need for amore comprehensive controller function. The Company reviewed the accounting processes performed outside thecorporate controller’s area and reassigned responsibility for these processesas deemed appropriate for improved internal controls.  Finally, management concurred with KPMG’sobservations regarding segregation of duties related to specific activitiesperformed by the prior interim chief financial officer and acknowledged thatimprovements were needed in

 

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this area.  The Company plans to use the Sarbanes-OxleySection 404 implementation process to further assist in identifying andreassigning responsibility for activities that require additional segregationof duties.

 

The Company will continueto evaluate the material weaknesses and reportable conditions and will take allnecessary action to correct the internal control deficiencies identified. TheCompany will also further develop and enhance its internal control policies,procedures, systems and staff to allow it to mitigate the risk that materialaccounting errors might go undetected and be included in its consolidatedfinancial statements.  The Company iscurrently undertaking a thorough review of its internal controls as part of theCompany’s preparation for compliance with the requirements under Section 404 ofthe Sarbanes-Oxley Act of 2002 and the Company is using this review to furtherassist in identifying and correcting any control deficiencies.  As expected, this review has revealed controlweaknesses, which the Company has reported to the Audit Committee.  The Company has since taken steps tostrengthen its internal controls in these areas, including increasingsegregation of duties, writing policies where necessary, adding checks at keydecision points and increasing supervisor review of transactions.  These actions have been successful ineliminating a large percentage of the deficiencies noted, but additionalremediation activities continue. Corrected control deficiencies are being retested by management to assurethat remediation efforts were successful, and the Company’s auditors willperform independent testing of the Company’s internal controls as part of theiryear-end review.  At this time, theCompany has not completed its review of the existing controls and theireffectiveness.  Unless the materialweaknesses described above, and any identified during this review, areremedied, there can be no assurances that the Company will be able to assertthat its internal control over financial reporting is effective in themanagement report to be included in the Annual Report for the year endedDecember 31, 2004, pursuant to the rules adopted by the SEC under Section 404.

 

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** **

**Part II.  Other Information**

 

**Item 1.  LegalProceedings**

 

Therewere no significant changes to the Legal Proceedings reported in DP&L’sForm 10-K as of December 31, 2003.  Adiscussion of legal proceedings is described in Item 3-Legal Proceedings andNote 16 of Notes to Consolidated Financial Statements of DP&L’s Form 10-Kfor the year ended December 31, 2003 and such discussions are incorporated byreference and made a part hereof.

 

**Item 4.** **Submission of Matters to aVote of Security Holders**

 

There were no submissionsto the security holders in the second quarter.

 

**Item 5.** **Other Information**

 

There were nosignificant changes to the Recent Developments reported in Item 1-Business orto the Subsequent Events discussed in Note 18 of Notes to ConsolidatedFinancial Statements in DP&L’s Form 10-K as of December 31, 2003 and suchdiscussions are incorporated by reference and made a part hereof.

 

**Item 6. Exhibits and Reports on Form 8-K**

 

(a)                                The following exhibit is filedherewith:

 

Exhibits 31.1 and 31.2 –Officer’s Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of2002

 

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

 

(b)                               Reportson Form 8-K.

 

OnMay 3, 2004, The Dayton Power and Light Company filed a Form 8-K providing,under Item 7, the Code of Regulations of The Dayton Power and Light Company.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |             | **THE  DAYTON POWER AND LIGHT COMPANY**                                                                               |                |
|--------|------------------|-----------------------------------------------------------------------------------------------------------------------|---------------------|
|   |             | (Registrant)                                                                                                          |                |
|   |             |                                                                                                                  |                |
|   |             |                                                                                                                  |                |
| Date:  | November 5, 2004 | /s/ James V. Mahoney                                                                                                  |                |
|   |             | James V. Mahoney  President and Chief Executive Officer  (principal executive officer)                                |                |
|   |             |                                                                                                                  |                |
|   |             |                                                                                                                  |                |
|   | November 5, 2004 | /s/ Pamela Holdren                                                                                                    |                |
|   |             | Pamela Holdren  Treasurer and Interim Chief Financial Officer  (principal financial and principal accounting officer) |                |
|   |             |                                                                                                                  |                |
|   |             |                                                                                                                  |                |
|   | November 5, 2004 |                                                                                                                  | /s/ Daniel L. Thobe |   |   |
|   |             | Daniel L. Thobe  Corporate Controller                                                                                 |                |
|        |                  |                                                                                                                       |                     |  |  |

 

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