**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-Q**

 

**ý  QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended****September 30, 2007**

 

**OR**

 

**o  TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from          to        **

 

| Commission  File Number |       | Registrant, State of Incorporation,  Address and Telephone Number |       | I.R.S.   Employer  Identification  No. |
|-------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------|
|                    |       |                                                              |       |                                   |
| **1-9052**              | ** ** | **DPL INC.**                                                      | ** ** | **31-1163136**                         |
|                    |       | (An Ohio Corporation)                                             |       |                                   |
| ** **              |       | 1065 Woodman Drive Dayton,  Ohio 45432                            |       |                                   |
|                    |       | 937-224-6000                                                      |       |                                   |

 

| **1-2385** | **THE DAYTON POWER AND LIGHT COMPANY** | **31-0258470** |
|------------|----------------------------------------|----------------|
| ** ** | (An Ohio Corporation)                  | ** **     |
| ** ** | 1065 Woodman Drive Dayton,  Ohio 45432 |           |
| ** ** | 937-224-6000                           |           |
| ** ** | ** **                             | ** **     |

 

Indicateby check mark whether each registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer. See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

 
|                               | Large accelerated filer | Accelerated filer | Non-accelerated filer |
|------------------------------------|-------------------------|-------------------|-----------------------|
| DPL Inc.                           | ý                  | o                 | o                     |
| The Dayton Power and Light Company | o                       | o                 | ý                |

 

Indicateby check mark whether each registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

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

 

As of October 29, 2007, each registrant had thefollowing shares of common stock outstanding:

 

| **Registrant**                         | ** ** | **Description**               | ** ** | **Shares  Outstanding** |
|----------------------------------------|------------|-------------------------------|------------|-------------------------|
| **DPL Inc.**                           |       | Common Stock, $0.01 par value |       | 113,553,444             |
| **The Dayton Power and Light Company** |       | Common Stock                  |       | 41,172,173              |

 

This combined Form 10-Q is separately filed by DPL Inc.and The Dayton Power and Light Company. Information contained herein relatingto any individual registrant is filed by such registrant on its own behalf. Eachregistrant makes no representation as to information relating to a registrantother than itself.

 

 

----

 

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

 

**Index**

 
| **Part I  Financial Information** | ** **                                                                                  |
|-----------------------------------|---------------------------------------------------------------------------------------------|
|                              |                                                                                        | **Page No.** |
| Item 1                            | Financial Statements — **DPL** and **DP&L**                                        | ** ** |
|                              |                                                                                        |   |
|                              | Condensed  Consolidated Statement of Results of Operations — **DPL**                   | 4 |
|                              |                                                                                        |   |
|                              | Condensed Consolidated Statement of Cash Flows — **DPL**                               | 5 |
|                              |                                                                                        |   |
|                              | Condensed Consolidated Balance Sheet — **DPL**                                         | 6 |
|                              |                                                                                        |   |
|                              | Condensed  Consolidated Statement of Results of Operations — **DP&L**              | 8 |
|                              |                                                                                        |   |
|                              | Condensed  Consolidated Statement of Cash Flows — **DP&L**                         | 9 |
|                              |                                                                                        |   |
|                              | Condensed  Consolidated Balance Sheet — **DP&L**                                   | 10 |
|                              |                                                                                        |   |
|                              | Notes to  Condensed Consolidated Financial Statements                                       | 12 |
|                              |                                                                                        |   |
| Item  2                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 36 |
|                              |                                                                                        |   |
|                              | Operating Statistics                                                                        | 57 |
|                              |                                                                                        |   |
| Item  3                           | Quantitative  and Qualitative Disclosures about Market Risk                                 | 57 |
|                              |                                                                                        |   |
| Item 4                            | Controls and  Procedures                                                                    | 57 |
|                              |                                                                                        |   |
| **Part II  Other Information**    |                                                                                        |
|                              |                                                                                        |   |
| Item 1                            | Legal Proceedings                                                                           | 58 |
|                              |                                                                                        |   |
| Item 1A                           | Risk Factors                                                                                | 58 |
|                              |                                                                                        |   |
| Item  2                           | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 58 |
|                              |                                                                                        |   |
| Item  3                           | Defaults Upon  Senior Securities                                                            | 59 |
|                              |                                                                                        |   |
| Item  4                           | Submission of  Matters to a Vote of Security Holders                                        | 59 |
|                              |                                                                                        |   |
| Item 5                            | Other Information                                                                           | 59 |
|                              |                                                                                        |   |
| Item 6                            | Exhibits                                                                                    | 59 |
|                              |                                                                                        |   |
| **Other**                         |                                                                                        |   |
|                              |                                                                                        |   |
| Signatures                        |                                                                                        | 60 |
|                              |                                                                                        |   |
| Certifications                    |                                                                                        |   |

 

2

----

 

**DPL Inc.** and **The Dayton Power and Light Company** filecurrent, annual and quarterly reports, proxy statements (as to **DPL Inc.**) and other information required by the SecuritiesExchange Act of 1934, as amended, with the Securities and Exchange Commission(SEC). You may read and copy any document we file at the SEC’s public referenceroom located at 100 F Street N.E., Washington, D.C. 20549, USA. Please call theSEC at (800) SEC-0330 for further information on the public reference rooms. OurSEC filings are also available to the public from the SEC’s web site athttp://www.sec.gov.

 

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

 

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

 

**Part 1 — Financial Information**

 

This report includes the combined filing of **DPL Inc. (DPL)** and **The Dayton Power and LightCompany****(DP&L). DP&L**isthe principal subsidiary of **DPL**providingapproximately 99% of **DPL’s**totalconsolidated revenue and approximately 93% of **DPL’s**totalconsolidated asset base. Throughout this report, the terms we, us, our and oursare used to refer to both **DPL** and **DP&L**, respectively and altogether, unless the contextindicates otherwise. Discussions or areas of this report that apply only to **DPL** or **DP&L** willclearly be noted in the section. Historically, **DPL**and **DP&L** have filed separate SECfilings. **DPL**and **DP&L**now file combined SEC reports on an interim and annual basis.

 

3

----

 

 

**Item 1 — Financial Statements**

 

**DPL INC.**

**CONDENSEDCONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS**

 
| $ in millions except per share amounts                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenues**                                                | ** ** | **$**                                 | **422.0**  |                                 | $          | 392.4 | ** ** | **$** | **1,145.6** |   | $ | 1,042.5 |   |
| ** **                                                  | ** ** | ** **                            |       |                                 | ** ** | ** ** |   |   |   |
| **Cost of revenues:**                                       | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fuel                                                        | ** ** | **95.9**                              |       | 99.4                                 | ** ** | **250.5** |   | 262.2 |   |
| Purchased power                                             | ** ** | **82.1**                              |       | 61.1                                 | ** ** | **217.5** |   | 123.4 |   |
| Total cost of revenues                                      | ** ** | **178.0**                             |       | 160.5                                | ** ** | **468.0** |   | 385.6 |   |
| **Gross margin**                                            | ** ** | **244.0**                             |       | 231.9                                | ** ** | **677.6** |   | 656.9 |   |
| ** **                                                  | ** ** | ** **                            |       |                                 | ** ** | ** ** |   |   |   |
| **Operating expenses:**                                     | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operation and maintenance                                   | ** ** | **67.3**                              |       | 64.4                                 | ** ** | **198.1** |   | 197.4 |   |
| Depreciation and amortization                               | ** ** | **33.9**                              |       | 39.1                                 | ** ** | **102.9** |   | 114.2 |   |
| General taxes                                               | ** ** | **29.1**                              |       | 27.5                                 | ** ** | **84.6** |   | 82.5 |   |
| Amortization of regulatory assets                           | ** ** | **2.9**                               |       | 2.4                                  | ** ** | **8.3** |   | 5.2 |   |
| Total operating expenses                                    | ** ** | **133.2**                             |       | 133.4                                | ** ** | **393.9** |   | 399.3 |   |
| **Operating income**                                        | ** ** | **110.8**                             |       | 98.5                                 | ** ** | **283.7** |   | 257.6 |   |
| ** **                                                  | ** ** | ** **                            |       |                                 | ** ** | ** ** |   |   |   |
| **Other income / (expense), net**                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net gain on settlement of executive litigation              | ** ** | **—**                            |       | —                               | ** ** | **31.0** |   | — |   |
| Investment income                                           | ** ** | **1.2**                               |       | 3.0                                  | ** ** | **9.5** |   | 13.9 |   |
| Interest expense                                            | ** ** | **(16.9**                             | )          | (24.9                                | )          | **(59.4** | ) | (77.1 | ) |
| Other income (deductions)                                   | ** ** | **2.0**                               |       | (0.2                                 | )          | **2.6** |   | 0.1 |   |
| Total other income / (expense), net                         | ** ** | **(13.7**                             | )          | (22.1                                | )          | **(16.3** | ) | (63.1 | ) |
| **Earnings from continuing operations before  income tax**  | ** ** | **97.1**                              |       | 76.4                                 |       | **267.4** |   | 194.5 |   |
| Income tax expense                                          | ** ** | **36.4**                              |       | 29.0                                 | ** ** | **101.9** |   | 73.2 |   |
| **Earnings from continuing operations**                     | ** ** | **60.7**                              |       | 47.4                                 | ** ** | **165.5** |   | 121.3 |   |
| **Earnings from discontinued operations, net of  tax**      | ** ** | **—**                            |       | 3.4                                  | ** ** | **10.0** |   | 11.0 |   |
| **Net income**                                              | ** ** | **$**                                 | **60.7**   |                                 | $          | 50.8 | ** ** | **$** | **175.5** |   | $ | 132.3 |   |
| **Average number of common shares outstanding  (millions)** | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                       | ** ** | **108.0**                             |       | 107.7                                | ** ** | **107.8** |   | 113.9 |   |
| Diluted                                                     | ** ** | **115.4**                             |       | 117.4                                | ** ** | **118.1** |   | 123.3 |   |
|                                                        | ** ** | ** **                            |       |                                 | ** ** | ** ** |   |   |   |
| **Earnings per share of common stock**                      | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic:                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Earnings from continuing operations                         | ** ** | **$**                                 | **0.56**   |                                 | $          | 0.44 | ** ** | **$** | **1.54** |   | $ | 1.06 |   |
| Earnings from discontinued operations                       | ** ** | **—**                            |       | 0.03                                 | ** ** | **0.09** |   | 0.10 |   |
| Total Basic                                                 | ** ** | **$**                                 | **0.56**   |                                 | $          | 0.47 | ** ** | **$** | **1.63** |   | $ | 1.16 |   |
|                                                        | ** ** | ** **                            |       |                                 | ** ** | ** ** |   |   |   |
| Diluted:                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Earnings from continuing operations                         | ** ** | **$**                                 | **0.53**   |                                 | $          | 0.40 | ** ** | **$** | **1.40** |   | $ | 0.98 |   |
| Earnings from discontinued operations                       | ** ** | **—**                            |       | 0.03                                 | ** ** | **0.09** |   | 0.09 |   |
| Total Diluted                                               | ** ** | **$**                                 | **0.53**   |                                 | $          | 0.43 | ** ** | **$** | **1.49** |   | $ | 1.07 |   |
|                                                        | ** ** | ** **                            |       |                                 | ** ** | ** ** |   |   |   |
| **Dividends paid per share of common stock**                | ** ** | **$**                                 | **0.26**   |                                 | $          | 0.25 | ** ** | **$** | **0.78** |   | $ | 0.75 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

4

----

** **

** **

**DPL INC.**

**CONDENSED CONSOLIDATED STATEMENTOF CASH FLOWS**

** **
| $ in millions                                                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| **Cash flows from operating activities:**                                          | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net income                                                                         | ** ** | **$**                                | **175.5**  |   | $ | 132.3 |   |
| Less: Income from discontinued operations                                          | ** ** | **(10.0**                            | )          | (11.0 | ) |
| Income from continuing operations                                                  | ** ** | **165.5**                            |       | 121.3 |   |
|                                                                               |       |                                 |       |   |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                      | ** ** | **102.9**                            |       | 114.2 |   |
| Gain on settlement of executive litigation                                         | ** ** | **(31.0**                            | )          | — |   |
| Gain on sale of aircraft                                                           | ** ** | **(6.0**                             | )          | — |   |
| Amortization of regulatory assets                                                  | ** ** | **8.3**                              |       | 5.2 |   |
| Deferred income taxes                                                              | ** ** | **12.1**                             |       | (4.7 | ) |
| Captive insurance provision                                                        | ** ** | **1.5**                              |       | — |   |
| Gain on sale of other investments                                                  | ** ** | **(3.0**                             | )          | (2.2 | ) |
| Changes in certain assets and liabilities:                                         |       |                                 |       |   |   |
| Accounts receivable                                                                | ** ** | **(39.9**                            | )          | (32.8 | ) |
| Accounts payable                                                                   | ** ** | **(0.8**                             | )          | 38.4 |   |
| Accrued taxes payable                                                              | ** ** | **5.7**                              |       | (11.8 | ) |
| Accrued interest payable                                                           | ** ** | **(11.4**                            | )          | (7.3 | ) |
| Prepayments                                                                        | ** ** | **0.4**                              |       | 6.0 |   |
| Inventories                                                                        | ** ** | **(18.8**                            | )          | (7.6 | ) |
| Deferred compensation assets                                                       | ** ** | **6.9**                              |       | 1.3 |   |
| Deferred compensation obligations                                                  | ** ** | **1.1**                              |       | (0.3 | ) |
| Other                                                                              | ** ** | **18.3**                             |       | (7.3 | ) |
| **Net cash provided by operating activities**                                      | ** ** | **211.8**                            |       | 212.4 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash flows from investing activities:**                                          | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Capital expenditures                                                               | ** ** | **(250.1**                           | )          | (283.9 | ) |
| Purchases of short-term investments and securities                                 | ** ** | **—**                           |       | (856.0 | ) |
| Sales of short-term investments and securities                                     | ** ** | **—**                           |       | 984.0 |   |
| Proceeds from the sale of peaking units, net                                       | ** ** | **151.0**                            |       | — |   |
| Proceeds from the sale of aircraft                                                 | ** ** | **7.4**                              |       | — |   |
| **Net cash used for investing activities**                                         | ** ** | **(91.7**                            | )          | (155.9 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash flows from financing activities:**                                          | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Purchase of treasury shares                                                        | ** ** | **—**                           |       | (400.0 | ) |
| Issuance of pollution control bonds                                                | ** ** | **—**                           |       | 100.0 |   |
| Pollution control bond proceeds held in trust                                      | ** ** | **—**                           |       | (100.0 | ) |
| Exercise of stock options                                                          | ** ** | **14.5**                             |       | 0.2 |   |
| Excess tax impact related to exercise of stock options                             | ** ** | **0.5**                              |       | — |   |
| Retirement of long-term debt                                                       | ** ** | **(225.0**                           | )          | — |   |
| Withdrawal of restricted funds held in trust                                       | ** ** | **10.1**                             |       | 23.1 |   |
| Dividends paid on common stock                                                     | ** ** | **(83.7**                            | )          | (85.7 | ) |
| Issuance of short-term debt, net                                                   | ** ** | **95.0**                             |       | — |   |
| Retirement of short-term debt, net                                                 | ** ** | **(95.0**                            | )          | — |   |
| **Net cash used for financing activities**                                         | ** ** | **(283.6**                           | )          | (462.4 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash and cash equivalents:**                                                     | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net change                                                                         | ** ** | **(163.5**                           | )          | (405.9 | ) |
| Balance at beginning of period                                                     | ** ** | **262.2**                            |       | 595.8 |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                                | **98.7**   |   | $ | 189.9 |   |
|                                                                               |       |                                 |       |   |   |
| **Supplemental cash flow information:**                                            | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Interest paid, net of amounts capitalized                                          | ** ** | **$**                                | **68.8**   |   | $ | 80.4 |   |
| Income taxes paid                                                                  | ** ** | **$**                                | **87.6**   |   | $ | 79.7 |   |
| Restricted funds held in trust                                                     | ** ** | **$**                                | **0.5**    |   | $ | 75.5 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

 

5

----

 

 

**DPL INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEET**

 
| $ in millions                                                                             | ** ** | **At  September 30,  2007** | ** **  | **At  December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|----------------------------|------------|
|                                                                                           |       |                        |        |                       |       |
| **ASSETS**                                                                                     | ** ** | ** **                  | ** **  | ** **                 | ** ** |
|                                                                                           |       |                        |        |                       |       |
| **Current assets:**                                                                            | ** ** | ** **                  | ** **  | ** **                 | ** ** |
| Cash and cash equivalents                                                                      | ** ** | **$**                       | **98.7**    |                       | $          | 262.2 |   |
| Restricted funds held in trust                                                                 | ** ** | **0.5**                     |        | 10.1                       |       |
| Accounts receivable, less provision for uncollectible accounts of  $1.6 and $1.4, respectively |       | **262.1**                   |        | 225.0                      |       |
| Inventories, at average cost                                                                   | ** ** | **104.2**                   |        | 85.4                       |       |
| Taxes applicable to subsequent years                                                           | ** ** | **11.9**                    |        | 48.0                       |       |
| Other current assets                                                                           | ** ** | **8.4**                     |        | 37.7                       |       |
| Total current assets                                                                           | ** ** | **485.8**                   |        | 668.4                      |       |
|                                                                                           |       |                        |        |                       |       |
| **Property:**                                                                                  | ** ** | ** **                  | ** **  | ** **                 | ** ** |
| **Held and used:**                                                                             | ** ** | ** **                  | ** **  | ** **                 | ** ** |
| Property, plant and equipment                                                                  | ** ** | **4,943.6**                 |        | 4,718.5                    |       |
| Less: Accumulated depreciation and amortization                                                | ** ** | **(2,208.5**                | )           | (2,159.2                   | )          |
| Total net property held and used                                                               | ** ** | **2,735.1**                 |        | 2,559.3                    |       |
|                                                                                           |       |                        |        |                       |       |
| **Assets held for sale:**                                                                      | ** ** | ** **                  | ** **  | ** **                 | ** ** |
| Property, plant and equipment                                                                  | ** ** | **—**                  |        | 283.5                      |       |
| Less: Accumulated depreciation and amortization                                                | ** ** | **—**                  |        | (132.3                     | )          |
| Total net property held for sale                                                               | ** ** | **—**                  |        | 151.2                      |       |
|                                                                                           |       |                        |        |                       |       |
| **Other noncurrent assets:**                                                                   | ** ** | ** **                  | ** **  | ** **                 | ** ** |
| Regulatory assets                                                                              | ** ** | **137.0**                   |        | 148.6                      |       |
| Other assets                                                                                   | ** ** | **54.2**                    |        | 84.7                       |       |
| Total other noncurrent assets                                                                  | ** ** | **191.2**                   |        | 233.3                      |       |
|                                                                                           |       |                        |        |                       |       |
| **Total Assets**                                                                               | ** ** | **$**                       | **3,412.1** |                       | $          | 3,612.2 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

 

6

----

 

** **

**DPL INC.**

**CONDENSED CONSOLIDATED BALANCE SHEET**

 
| $ in millions                                              | ** ** | **At  September 30, 2007** | ** **  | **At  December 31, 2006** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------|-------------|---------------------------|------------|
|                                                            |       |                       |        |                      |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                  | ** ** | ** **                 | ** **  | ** **                | ** ** |
|                                                            |       |                       |        |                      |       |
| **Current liabilities:**                                        | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Current portion - long-term debt                                |       | **$**                      | **100.7**   |                      | $          | 225.9 |   |
| Accounts payable                                                |       | **186.0**                  |        | 169.4                     |       |
| Accrued taxes                                                   |       | **124.8**                  |        | 155.2                     |       |
| Accrued interest                                                |       | **24.2**                   |        | 35.2                      |       |
| Other current liabilities                                       |       | **27.4**                   |        | 38.3                      |       |
| Total current liabilities                                       |       | **463.1**                  |        | 624.0                     |       |
|                                                            |       |                       |        |                      |       |
| **Noncurrent liabilities:**                                     | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Long-term debt                                                  |       | **1,451.6**                |        | 1,551.8                   |       |
| Deferred taxes                                                  |       | **371.1**                  |        | 355.2                     |       |
| Unamortized investment tax credit                               |       | **41.4**                   |        | 43.6                      |       |
| Insurance and claims costs                                      |       | **23.4**                   |        | 21.9                      |       |
| Other deferred credits                                          |       | **222.6**                  |        | 280.7                     |       |
| Total noncurrent liabilites                                     |       | **2,110.1**                |        | 2,253.2                   |       |
|                                                            |       |                       |        |                      |       |
| Cumulative preferred stock  not subject to mandatory redemption |       | **22.9**                   |        | 22.9                      |       |
|                                                            |       |                       |        |                      |       |
| Commitments and  contingencies (Note 9)                         | ** ** | **—**                 | ** **  | —                    | ** ** |
|                                                            |       |                       |        |                      |       |
| **Common shareholders’ equity:**                           | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Common stock, at par value of $0.01 per share:                  |       |                       |        |                      |       |
|                                                            |       | **September  2007**        | ** **  | **December  2006**        |       |   |   |   |   |
| Shares authorized                                               |       | 250,000,000                |        | 250,000,000               |       |   |   |   |   |
| Shares issued                                                   |       | 163,724,211                |        | 163,724,211               |       |   |   |   |   |
| Treasury shares                                                 |       | 50,170,767                 |        | 50,705,239                |       |   |   |   |   |
| Shares outstanding                                              |       | 113,553,444                |        | 113,018,972               | ** ** | **1.1** |   | 1.1 |   |
| Warrants                                                        |       | **50.0**                   |        | 50.0                      |       |
| Common stock held by employee plans                             |       | **(71.1**                  | )           | (69.0                     | )     |
| Accumulated other comprehensive loss                            |       | **(9.9**                   | )           | (6.5                      | )     |
| Retained earnings                                               |       | **845.9**                  |        | 736.5                     |       |
| Total common shareholders’ equity                          |       | **816.0**                  |        | 712.1                     |       |
|                                                            |       |                       |        |                      |       |
| **Total Liabilities and  Shareholders’ Equity**            |       | **$**                      | **3,412.1** |                      | $          | 3,612.2 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

 

7

----

 

 

 

**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS**

 
| $ in millions                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                           |       |                                  |       |                                 |       |   |   |   |   |
| **Revenues**                                   | ** ** | **$**                                 | **419.6**  |                                 | $          | 390.3 | ** ** | **$** | **1,139.1** |   | $ | 1,036.1 |   |
|                                           |       |                                  |       |                                 |       |   |   |   |   |
| **Cost of revenues:**                          | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fuel                                           | ** ** | **87.6**                              |       | 90.9                                 | ** ** | **240.2** |   | 251.0 |   |
| Purchased power                                | ** ** | **91.7**                              |       | 70.7                                 | ** ** | **228.2** |   | 134.7 |   |
| Total cost of revenues                         | ** ** | **179.3**                             |       | 161.6                                | ** ** | **468.4** |   | 385.7 |   |
|                                           |       |                                  |       |                                 |       |   |   |   |   |
| **Gross margin**                               | ** ** | **240.3**                             |       | 228.7                                | ** ** | **670.7** |   | 650.4 |   |
|                                           |       |                                  |       |                                 |       |   |   |   |   |
| **Operating expenses:**                        | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operation and maintenance                      | ** ** | **64.0**                              |       | 59.0                                 | ** ** | **195.8** |   | 172.8 |   |
| Depreciation and amortization                  | ** ** | **31.4**                              |       | 33.0                                 | ** ** | **95.2** |   | 96.8 |   |
| General taxes                                  | ** ** | **28.8**                              |       | 27.2                                 | ** ** | **83.8** |   | 80.3 |   |
| Amortization of regulatory assets              | ** ** | **2.9**                               |       | 2.4                                  | ** ** | **8.3** |   | 5.2 |   |
| Total operating expenses                       | ** ** | **127.1**                             |       | 121.6                                | ** ** | **383.1** |   | 355.1 |   |
|                                           |       |                                  |       |                                 |       |   |   |   |   |
| **Operating income**                           | ** ** | **113.2**                             |       | 107.1                                | ** ** | **287.6** |   | 295.3 |   |
|                                           |       |                                  |       |                                 |       |   |   |   |   |
| **Other income / (expense), net**              | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net gain on settlement of executive litigation | ** ** | **—**                            |       | —                               | ** ** | **35.3** |   | — |   |
| Investment income                              | ** ** | **1.3**                               |       | 1.6                                  | ** ** | **7.5** |   | 4.8 |   |
| Interest expense                               | ** ** | **(3.9**                              | **)**      | (5.5                                 | )          | **(14.1** | **)** | (17.5 | ) |
| Other income (deductions)                      | ** ** | **2.1**                               | ** ** | (0.2                                 | )          | **2.7** |   | 0.1 |   |
| Total other income / (expense), net            | ** ** | **(0.5**                              | **)**      | (4.1                                 | )          | **31.4** |   | (12.6 | ) |
| **Earnings before income tax**                 | ** ** | **112.7**                             |       | 103.0                                | ** ** | **319.0** |   | 282.7 |   |
|                                           |       |                                  |       |                                 |       |   |   |   |   |
| Income tax expense                             | ** ** | **42.1**                              |       | 39.0                                 | ** ** | **119.5** |   | 107.8 |   |
| **Net income**                                 | ** ** | **$**                                 | **70.6**   |                                 | $          | 64.0 | ** ** | **$** | **199.5** |   | $ | 174.9 |   |
|                                           |       |                                  |       |                                 |       |   |   |   |   |
| Preferred dividends                            | ** ** | **0.2**                               |       | 0.2                                  | ** ** | **0.6** |   | 0.6 |   |
|                                           |       |                                  |       |                                 |       |   |   |   |   |
| **Earnings on common stock**                   | ** ** | **$**                                 | **70.4**   |                                 | $          | 63.8 | ** ** | **$** | **198.9** |   | $ | 174.3 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

 

8

----

 

** **

**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED STATEMENT OF CASH FLOWS**

 
| $ in millions                                                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | ** **                           | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                          | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net income                                                                         | ** ** | **$**                                | **199.5**  | ** ** | $ | 174.9 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                 | ** ** |   |   |
|                                                                               |       |                                 | ** ** |   |   |
| Depreciation and amortization                                                      | ** ** | **95.2**                             | ** ** | 96.8 |   |
| Gain on settlement of executive litigation                                         | ** ** | **(35.3**                            | **)**      | — |   |
| Amortization of regulatory assets                                                  | ** ** | **8.3**                              | ** ** | 5.2 |   |
| Deferred income taxes                                                              | ** ** | **11.0**                             | ** ** | (13.0 | ) |
| Gain on sale of other investments                                                  | ** ** | **(3.0**                             | **)**      | — |   |
| Changes in certain assets and liabilities:                                         |       |                                 | ** ** |   |   |
| Accounts receivable                                                                | ** ** | **(40.0**                            | **)**      | (25.7 | ) |
| Accounts payable                                                                   | ** ** | **(0.5**                             | **)**      | 41.2 |   |
| Net receivable / payable from / to parent                                          | ** ** | **(0.5**                             | **)**      | (2.3 | ) |
| Accrued taxes payable                                                              | ** ** | **(3.1**                             | **)**      | 1.5 |   |
| Accrued interest payable                                                           | ** ** | **2.4**                              | ** ** | 4.8 |   |
| Prepayments                                                                        | ** ** | **0.7**                              | ** ** | 5.4 |   |
| Inventories                                                                        | ** ** | **(19.8**                            | **)**      | (7.5 | ) |
| Deferred compensation assets                                                       | ** ** | **7.1**                              | ** ** | 3.4 |   |
| Deferred compensation obligations                                                  | ** ** | **1.1**                              | ** ** | (2.5 | ) |
| Other                                                                              | ** ** | **16.5**                             | ** ** | (11.5 | ) |
| **Net cash provided by operating activities**                                      | ** ** | **239.6**                            | ** ** | 270.7 |   |
|                                                                               |       |                                 | ** ** |   |   |
| **Cash flows from investing activities:**                                          | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Capital expenditures                                                               | ** ** | **(247.8**                           | **)**      | (281.7 | ) |
| **Net cash used for investing activities**                                         | ** ** | **(247.8**                           | **)**      | (281.7 | ) |
|                                                                               |       |                                 | ** ** |   |   |
| **Cash flows from financing activities:**                                          | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Short-term loan from parent                                                        | ** ** | **105.0**                            | ** ** | — |   |
| Payment on short-term loan to parent                                               | ** ** | **(15.0**                            | **)**      | — |   |
| Issuance of pollution control bonds                                                | ** ** | **—**                           | ** ** | 100.0 |   |
| Pollution control bond proceeds held in trust                                      | ** ** | **—**                           | ** ** | (100.0 | ) |
| Withdrawal of restricted funds held in trust                                       | ** ** | **10.1**                             | ** ** | 23.1 |   |
| Dividends paid on preferred stock                                                  | ** ** | **(0.7**                             | **)**      | (0.6 | ) |
| Dividends paid on common stock to parent                                           | ** ** | **(125.0**                           | **)**      | — |   |
| **Net cash (used for)/provided by financing  activities**                          | ** ** | **(25.6**                            | **)**      | 22.5 |   |
|                                                                               |       |                                 | ** ** |   |   |
| **Cash and cash equivalents:**                                                     | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net change                                                                         | ** ** | **(33.8**                            | **)**      | 11.5 |   |
| Balance at beginning of period                                                     | ** ** | **46.1**                             | ** ** | 46.2 |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                                | **12.3**   | ** ** | $ | 57.7 |   |
|                                                                               |       |                                 | ** ** |   |   |
| **Supplemental cash flow information:**                                            | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Interest paid, net of amounts capitalized                                          | ** ** | **$**                                | **9.6**    | ** ** | $ | 10.3 |   |
| Income taxes paid                                                                  | ** ** | **$**                                | **86.8**   | ** ** | $ | 108.3 |   |
| Restricted funds held in trust                                                     | ** ** | **$**                                | **0.5**    | ** ** | $ | 75.5 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

 

9

----

 

** **

**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED BALANCE SHEET**

 
| ** **                                                                                     | ** ** | **At**            | ** **  | **At**           | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|-------------|------------------|------------|
| ** **                                                                                     | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| $ in millions                                                                             | ** ** | **2007**          | ** **  | **2006**         | ** ** |
|                                                                                           |       |              | ** **  |             |       |
| **ASSETS**                                                                                     | ** ** | ** **        | ** **  | ** **       | ** ** |
|                                                                                           |       |              | ** **  |             |       |
| **Current assets:**                                                                            | ** ** | ** **        | ** **  | ** **       | ** ** |
| Cash and cash equivalents                                                                      | ** ** | **$**             | **12.3**    | ** **       | $          | 46.1 |   |
| Restricted funds held in trust                                                                 | ** ** | **0.5**           | ** **  | 10.1             |       |
| Accounts receivable, less provision for uncollectible accounts of  $1.6 and $1.4, respectively |       | **243.0**         | ** **  | 205.6            |       |
| Inventories, at average cost                                                                   | ** ** | **102.8**         | ** **  | 83.0             |       |
| Taxes applicable to subsequent years                                                           | ** ** | **11.8**          | ** **  | 48.0             |       |
| Other current assets                                                                           | ** ** | **10.8**          | ** **  | 38.2             |       |
| Total current assets                                                                           | ** ** | **381.2**         | ** **  | 431.0            |       |
|                                                                                           |       |              | ** **  |             |       |
| **Property:**                                                                                  | ** ** | ** **        | ** **  | ** **       | ** ** |
| Property, plant and equipment                                                                  | ** ** | **4,688.3**       | ** **  | 4,450.6          |       |
| Less: Accumulated depreciation and amortization                                                | ** ** | **(2,134.3**      | **)**       | (2,079.0         | )          |
| Total net property                                                                             | ** ** | **2,554.0**       | ** **  | 2,371.6          |       |
|                                                                                           |       |              | ** **  |             |       |
| **Other noncurrent assets:**                                                                   | ** ** | ** **        | ** **  | ** **       | ** ** |
| Regulatory assets                                                                              | ** ** | **137.0**         | ** **  | 148.6            |       |
| Other assets                                                                                   | ** ** | **103.0**         | ** **  | 139.1            |       |
| Total other noncurrent assets                                                                  | ** ** | **240.0**         | ** **  | 287.7            |       |
|                                                                                           |       |              | ** **  |             |       |
| **Total Assets**                                                                               | ** ** | **$**             | **3,175.2** | ** **       | $          | 3,090.3 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

 

10

----

 

** **

**THE DAYTONPOWER AND LIGHT COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEET**

 
| ** **                                                     | ** ** | **At**            | ** **  | **At**           | ** ** |
|----------------------------------------------------------------|------------|-------------------|-------------|------------------|------------|
| ** **                                                     | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| $ in millions                                             | ** ** | **2007**          | ** **  | **2006**         | ** ** |
|                                                           |       |              |        |             |       |
| **LIABILITIES AND SHAREHOLDER’S EQUITY**                  | ** ** | ** **        | ** **  | ** **       | ** ** |
|                                                           |       |              |        |             |       |
| **Current liabilities:**                                       | ** ** | ** **        | ** **  | ** **       | ** ** |
| Current portion - long-term debt                               | ** ** | **$**             | **0.7**     |             | $          | 0.9 |   |
| Accounts payable                                               | ** ** | **182.7**         |        | 166.2            |       |
| Accrued taxes                                                  | ** ** | **120.1**         |        | 159.6            |       |
| Accrued interest                                               | ** ** | **15.3**          |        | 12.6             |       |
| Short-term debt owed to parent                                 | ** ** | **90.0**          |        | —           |       |
| Other current liabilities                                      | ** ** | **27.4**          |        | 35.4             |       |
| Total current liabilities                                      | ** ** | **436.2**         |        | 374.7            |       |
|                                                           |       |              |        |             |       |
| **Noncurrent liabilities:**                                    | ** ** | ** **        | ** **  | ** **       | ** ** |
| Long-term debt                                                 | ** ** | **784.8**         |        | 785.2            |       |
| Deferred taxes                                                 | ** ** | **367.9**         |        | 360.2            |       |
| Unamortized investment tax credit                              | ** ** | **41.4**          |        | 43.6             |       |
| Other deferred credits                                         | ** ** | **222.6**         |        | 272.5            |       |
| Total noncurrent liabilities                                   | ** ** | **1,416.7**       |        | 1,461.5          |       |
|                                                           |       |              |        |             |       |
| Cumulative preferred stock not subject to mandatory redemption | ** ** | **22.9**          |        | 22.9             |       |
|                                                           |       |              |        |             |       |
| Commitments and contingencies (Note 9)                         | ** ** | **—**        |        | —           |       |
|                                                           |       |              |        |             |       |
| **Common shareholder’s equity:**                          | ** ** | ** **        | ** **  | ** **       | ** ** |
| Common stock, at par value of $0.01 per share                  | ** ** | **0.4**           |        | 0.4              |       |
| Other paid-in capital                                          | ** ** | **783.4**         |        | 783.7            |       |
| Accumulated other comprehensive income                         | ** ** | **9.8**           |        | 15.1             |       |
| Retained earnings                                              | ** ** | **505.8**         |        | 432.0            |       |
| Total common shareholder’s equity                         | ** ** | **1,299.4**       |        | 1,231.2          |       |
|                                                           |       |              |        |             |       |
| **Total Liabilities and Shareholder’s Equity**            | ** ** | **$**             | **3,175.2** |             | $          | 3,090.3 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

 

11

----

**Notes toCondensed Consolidated Financial Statements**

 

 

**1.     Basis ofPresentation**

 

**Description of Business**

**DPLInc. (DPL)**is a regional energycompany organized in 1985 under the laws of Ohio.  **DPL’s**principal subsidiary is **The Dayton Power andLight Company (DP&L)**.  **DP&L** is a public utility incorporatedin 1911 under the laws of Ohio.  **DP&L** sells electricity to residential,commercial, industrial and governmental customers in a 6,000 square mile areaof West Central Ohio.  Electricity for **DP&L’s** 24 county service area isprimarily generated at eight coal-fired power plants and is distributed to morethan 500,000 retail customers.  **DP&L** purchases retail peak loadrequirements from DPL Energy, LLC (DPLE), one of our wholly-ownedsubsidiaries.  Principal industriesserved include automotive, food processing, paper, plastic manufacturing anddefense.  **DP&L’s** sales reflect the general economic conditions andseasonal weather patterns of the area.  **DP&L** sells any excess energy andcapacity into the wholesale market.

 

**DPL’s** othersignificant subsidiaries (all of which are wholly-owned) include DPLE, whichengages in the operation of peaking generating facilities; DPL EnergyResources, Inc. (DPLER), which sells retail electric energy under contract tomajor industrial and commercial customers in West Central Ohio; MVE, Inc.,which was primarily responsible for the management of our financial assetportfolio; and Miami Valley Insurance Company (MVIC), our captive insurancecompany that provides insurance sources to us and our subsidiaries.  **DP&L** has one significant subsidiary, DPLFinance Company, Inc., which is wholly-owned and provides financing to **DPL**, **DP&L**and other affiliated companies.

 

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

 

**Financial Statement Presentation**

We prepare consolidated financial statements inaccordance with Generally Accepted Accounting Principles (GAAP) in the UnitedStates of America.  The condensedconsolidated financial statements include the accounts of **DPL** and **DP&L**and their majority-owned subsidiaries. Investments that are not majority owned are accounted for using theequity method when our investment allows us the ability to exert significantinfluence, as defined by GAAP.  Undividedinterests in jointly-owned generation facilities are consolidated on a pro ratabasis.  All material intercompanyaccounts and transactions are eliminated in consolidation.  Interim results for the three months and ninemonths ended September 30, 2007 may not be indicative of our results that willbe realized for the full year ending December 31, 2007.

 

Pursuantto Securities and Exchange Commission (SEC) rules, certain information andfootnote disclosures normally included in the annual financial statementsprepared in accordance with GAAP have been omitted from interim reports.Therefore, these financial statements should be read along with the annualfinancial statements included in our Annual Report on Form 10-K for the yearended December 31, 2006.  In the opinionof our management, the condensed consolidated financial statements contain alladjustments (which are all of a normal recurring nature) necessary to fairlystate our financial condition as of September 30, 2007, our results ofoperations for the three months and nine months ended September 30, 2007 andour cash flows for the nine months ended September 30, 2007 in accordance withGAAP.

 

**Estimates, Judgments, Contingenciesand Reclassifications**

Thepreparation of financial statements in conformity with GAAP requires us 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 revenue and expenses of the period reported.  Werecord liabilities for probable estimated loss in accordance withStatement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting forContingencies.”  To the extent a probableloss can only be estimated by reference to a range of equally probable outcomesand no amount within the range appears to be a better estimate than any otheramount, we accrue for the lowend of the range.  Because ofuncertainties related to these matters, accruals are based on the bestinformation available at the time.  We evaluate the potential liabilityrelated to probable losses quarterly and may revise our estimates.  Judgments and uncertainties affecting theapplication of these estimates may result in materially different amounts beingreported under different conditions or circumstances that may affect ourfinancial position and results of operations. Significant items subject to such estimates and judgments include: thecarrying value of property, plant and equipment; unbilled revenues; thevaluation of derivative instruments; the valuation of insurance and claimscosts; the valuation allowances for receivables and deferred income 

 

 

12

----

 

**Notes toCondensed Consolidated Financial Statements (continued)**

 

 

taxes;regulatory assets and liabilities; reserves recorded for income tax exposures;litigation; contingencies and assets and liabilities related to employeebenefits.

 

Certain amounts from priorperiods have been reclassified to conform to the current reportingpresentation.

 

**Depreciation Expense andStudy Update**

Depreciationexpense is calculated using the straight-line method, which depreciates thecost of property over its estimated useful life.  For **DPL’s**and **DP&L’s** generation, transmission anddistribution assets, straight-line depreciation is applied on an average annualcomposite basis using group rates.  InJuly 2007, **DPL** completed a depreciation ratestudy for non-regulated generation property based on its property, plant andequipment balances as of December 31, 2005, with adjustments for subsequentscrubber additions.  The results of thedepreciation study concluded that **DPL’s**depreciation rates should be reduced due to asset lives being extended beyondpreviously estimated lives.  **DPL** adjusted the depreciation rates for its non-regulatedgeneration property, effective August 1, 2007, reducing depreciationexpense.  For the three months endedSeptember 30, 2007, the reduction in depreciation expense increased income fromcontinuing operations by $3.8 million, increased net income by approximately$2.4 million and increased earnings per share (EPS) by approximately $0.02 pershare.  For the period from August 1,2007 to December 31, 2007, the reduction in depreciation expense will increaseincome from continuing operations of approximately $9.5 million, increase netincome by approximately $5.9 million and increase EPS by approximately $0.06per share.

 

**Recently Adopted AccountingStandards**

 

***Accounting for Uncertainty in Income Taxes***

On January 1, 2007, we adopted FinancialAccounting Standards Board (FASB) Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48).  There was no significant impact toour overall results of operations, cash flows or financial position.  Thetotal amount of unrecognized tax benefits as of the date of adoption was $36.8million and we have recorded $3.5 million (net of tax) of accruedinterest.  During 2007, we recorded anadditional $1.6 million in accrued interest resulting in a total reserve foruncertain tax positions of $41.9 million as of September 30, 2007. None of the unrecognized tax benefits are due to uncertainty in the timing ofdeductibility.

 

We recognize interest and penalties relatedto unrecognized tax benefits in income taxes.

 

Our tax returns for calendar years 2004through 2006 remain open to examination by the jurisdictions in which we aresubject to taxation.

 

***Accounting for Taxes Collectedfrom Customers and Remitted to Governmental Authorities***

In January 2007, we adopted Emerging IssuesTask Force (EITF) No. 6-03 “How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement” (EITF No.6-03).  EITF No. 6-03 requires aregistrant to disclose how taxes collected from customers are presented in the financialstatements, i.e., gross or net.  **DP&L** collects certain excise taxes levied by state orlocal governments from its customers. **DP&L’s**excise taxes are accounted for on a gross basis and recorded as revenues in theaccompanying Condensed Consolidated Statement of Results of Operations for thethree and nine months ended September 30, 2007 and September 30, 2006 asfollows:

 

| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions       | ** ** | **2007**               |       | **2006**              | ** ** | **2007** |   | **2006** |   |
| State/Local excise taxes | ** ** | **$14.6**              |       | $14.3                 | ** ** | **$40.9** |   | $39.5 |   |

 

 

 

**RecentlyIssued Accounting Standards**

 

***Accounting for Fair ValueMeasurements***

In September 2006, the FASB issued Statementof Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS157) effective for fiscal years beginning after November 15, 2007.  SFAS 157 applies whenever other standardsrequire (or permit) assets or liabilities to be measured at fair value.  SFAS 157 clarifies the principle that fairvalue should be based on the assumptions market participants would use whenpricing the asset or liability.  Insupport of this principle, SFAS 157 establishes a fair value hierarchy thatprioritizes the information used to develop those standards.  The fair value hierarchy gives the highest priorityto quoted prices in active markets and the lowest priority to unobservabledata, for example, the reporting entity’s own data.  Under SFAS 157,

 

 

13

----

**Notes toCondensed Consolidated Financial Statements (continued)**

 

 

fair value measurements would be separatelydisclosed by level within the fair value hierarchy.  SFAS 157 does not expand the use of fairvalue in any new circumstances.  In February2007, the FASB issued Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement No. 115” (SFAS 159) effective for fiscal yearsbeginning after November 15, 2007.  SFAS159 permits entities to choose to measure many financial instruments andcertain warranty and insurance contracts at fair value on acontract-by-contract basis.  We arecurrently evaluating the impact of adopting SFAS 157 and SFAS 159 and have notyet determined the significance of these new rules on our overall results ofoperations, financial position or cash flows.

 

**2.     Earnings perShare**

 

Basic EPS is based on theweighted-average number of **DPL**common shares outstanding during the year. Diluted EPS is based on the weighted-average number of **DPL** common and common equivalent sharesoutstanding during the year, except in periods where the inclusion of suchcommon equivalent shares is anti-dilutive. Excluded from outstanding shares for this weighted-average computationare the unallocated shares held by **DP&L’s**Master Trust Plan for deferred compensation and unallocated shares held by **DP&L’s** Employee Stock Ownership Plan (ESOP).

 

The following table represents commonequivalent shares excluded from the calculation of diluted EPS because they wereanti-dilutive.  These shares may bedilutive in the future.

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| In millions              | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                     |       |                   |       |                  |       |   |   |   |   |
| Common equivalent shares | ** ** | **0.3**                |       | 0.4                   | ** ** | **0.1** |   | 0.4 |   |

 

 

As a result of the May 21,2007 settlement of the litigation with three former executives (see Note 10 ofthe Notes to Condensed Consolidated Financial Statements), the three formerexecutives relinquished all of their rights to certain deferred compensation,restricted stock units (RSUs), MVE incentives, stock options and reimbursementof legal fees.  There were approximately1.3 million RSUs and 3.6 million stock options relinquished and cancelled thatwere included in the dilutive share calculation through May 20, 2007.  These RSUs and stock options are no longerincluded in the dilutive share calculation.

 

The following illustratesthe reconciliation of the numerators and denominators of the basic and dilutedEPS computations for net income (including discontinued operations):

 

| ** **                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| $ in millions except per share amounts      | ** ** | **Net  Income**                      | ** ** | **Shares** | ** ** | **Per  Share** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per  Share** | ** ** |
| **Basic EPS**                                    | ** ** | **$**                                | **60.7**   | ** ** | **108.0** | ** ** | **$** | **0.56** |   | $ | 50.8 |   | 107.7 |   | $ | 0.47 |   |
|                                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive**                           | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Securities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Restricted stock units                           | ** ** | ** **                           | ** ** | **—** | ** ** | ** ** | ** ** | ** ** |   | 1.2 | ** ** | ** ** | ** ** |
| Warrants                                         | ** ** | ** **                           | ** ** | **7.1** | ** ** | ** ** | ** ** | ** ** |   | 7.3 | ** ** | ** ** | ** ** |
| Stock options, performance and restricted shares | ** ** | ** **                           | ** ** | **0.3** | ** ** | ** ** | ** ** | ** ** |   | 1.2 |   |   |   |
| ** **                                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                  | ** ** | **$**                                | **60.7**   | ** ** | **115.4** | ** ** | **$** | **0.53** |   | $ | 50.8 |   | 117.4 |   | $ | 0.43 |   |

 

 

14

----

**Notes toCondensed Consolidated Financial Statements (continued)**

 

 

| ** **                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                       | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| $ in millions except per share amounts      | ** ** | **Net  Income**                     | ** ** | **Shares** | ** ** | **Per  Share** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per  Share** | ** ** |
| **Basic EPS**                                    | ** ** | **$**                               | **175.5**  | ** ** | **107.8** | ** ** | **$** | **1.63** |   | $ | 132.3 |   | 113.9 |   | $ | 1.16 |   |
|                                             |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive**                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Securities:**                                  | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Restricted stock units                           | ** ** | ** **                          | ** ** | **0.7** | ** ** | ** ** | ** ** | ** ** |   | 1.3 |   |   |   |
| Warrants                                         | ** ** | ** **                          | ** ** | **8.7** | ** ** | ** ** | ** ** | ** ** |   | 6.9 |   |   |   |
| Stock options, performance and restricted shares | ** ** | ** **                          | ** ** | **0.9** | ** ** | ** ** |   |   |   | 1.2 |   |   |   |
| ** **                                       | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                  | ** ** | **$**                               | **175.5**  | ** ** | **118.1** | ** ** | **$** | **1.49** |   | $ | 132.3 |   | 123.3 |   | $ | 1.07 |   |

 

 

**3.     DiscontinuedOperations**

** **

| ** **                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| $ in millions                         | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                       |       | ** **                           |       |                                |       |   | ** ** |   |   |
| Investment expenses                        | ** ** | **$**                                | **—** |                                | $          | (0.3 | ) | **$** | **(0.4** | **)** | $ | (0.8 | ) |
| Income from discontinued operations        | ** ** | **—**                           |       | (0.3                                | )          | **(0.4** | **)** | (0.8 | ) |
|                                       |       | ** **                           |       |                                |       |   | ** ** |   |   |
| Gain realized from sale                    | ** ** | **—**                           |       | 5.7                                 | ** ** | **8.2** | ** ** | 18.9 |   |
| Net gain on sale                           | ** ** | **—**                           |       | 5.7                                 |       | **8.2** | ** ** | 18.9 | ** ** |
|                                       |       | ** **                           |       |                                |       |   | ** ** |   |   |
| Gain on settlement of executive litigation | ** ** | **—**                           |       | —                              | ** ** | **8.2** | ** ** | — |   |
|                                       |       | ** **                           |       |                                |       |   | ** ** |   |   |
| Earnings before income taxes               | ** ** | **—**                           |       | 5.4                                 | ** ** | **16.0** | ** ** | 18.1 |   |
| Income tax expense                         | ** ** | **—**                           |       | (2.0                                | )          | **(6.0** | **)** | (7.1 | ) |
| Earnings from discontinued operations, net | ** ** | **$**                                | **—** |                                | $          | 3.4 |   | **$** | **10.0** | ** ** | $ | 11.0 |   |

 

 

On February 13, 2005, **DPL’s** subsidiaries, MVE and MVIC, enteredinto an agreement to sell their respective interests in forty-six privateequity funds to AlpInvest/Lexington 2005, LLC, a joint venture of AlpInvestPartners and Lexington Partners, Inc. Sales proceeds and any related gains or losses were recognized during2005 as the sale of each of these funds closed.

 

During 2005, MVE entered into alternativeclosing arrangements with AlpInvest/Lexington 2005, LLC for the remaining fundswhere legal title to said funds could not be transferred until a latertime.  Pursuant to these arrangements,MVE transferred the economic aspects of the remaining private equity funds,consisting of two funds and a portion of one fund, to AlpInvest/Lexington 2005,LLC without a change in ownership of the interests.  The alternative arrangements resulted in a2005 deferred gain of $27.1 million.  **DPL**recognized $18.9 million of the deferred gain in 2006and the remaining portion of the gain, $8.2 million, was recognized in thefirst quarter ended March 31, 2007 as all legal and economic considerationsrelating to the alternative closing arrangements were satisfied.  Legal title to the final fund subject to thealternative arrangement was transferred in the third quarter ended September30, 2007.

 

As a result of the May 21, 2007 settlement ofthe litigation with three former executives (see Note 10 of the Notes toCondensed Consolidated Financial Statements), the three former executivesrelinquished all of their rights to certain deferred compensation, RSUs, MVEincentives, stock options and reimbursement of legal fees.  The reversal of accruals related to theperformance of the financial asset portfolio were recorded in discontinuedoperations.  Additionally, a portion ofthe $25 million settlement expense was allocated to discontinuedoperations.  These transactions resultedin a net gain of $8.2 million being recorded in discontinued operations relatedto the settlement of the executive litigation in the second quarter ending June30, 2007.

 

 

 

15

----

** **

**Notes to Condensed ConsolidatedFinancial Statements (continued)**

 

**4.     SupplementalFinancial Information**

** **
| **DPL Inc.**$ in millions                     | ** ** | **At  September 30, 2007** | ** **  | **At  December 31, 2006** | ** ** |
|----------------------------------------------------|------------|----------------------------|-------------|---------------------------|------------|
|                                               |       |                       |        |                      |       |
| **Accounts receivable, net:**                      | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Retail customers                                   | ** ** | **$**                      | **81.8**    |                      | $          | 65.0 |   |
| Partners in commonly-owned plants                  | ** ** | **68.9**                   |        | 51.5                      |       |
| Unbilled revenue                                   | ** ** | **64.8**                   |        | 68.7                      |       |
| PJM                                                | ** ** | **23.1**                   |        | 13.1                      |       |
| Wholesale and subsidiary customers                 | ** ** | **10.4**                   |        | 15.8                      |       |
| Other                                              | ** ** | **9.5**                    |        | 7.1                       |       |
| Refundable franchise tax                           | ** ** | **5.2**                    |        | 5.2                       |       |
| Provision for uncollectible accounts               | ** ** | **(1.6**                   | )           | (1.4                      | )          |
| **Total accounts receivable, net**                 | ** ** | **$**                      | **262.1**   |                      | $          | 225.0 |   |
|                                               |       |                       |        |                      |       |
| **Inventories, at average cost:**                  | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Fuel and emission allowances                       | ** ** | **$**                      | **69.5**    |                      | $          | 52.4 |   |
| Plant materials and supplies                       | ** ** | **34.6**                   |        | 32.6                      |       |
| Other                                              | ** ** | **0.1**                    |        | 0.4                       |       |
| **Total inventories, at average cost**             | ** ** | **$**                      | **104.2**   |                      | $          | 85.4 |   |
|                                               |       |                       |        |                      |       |
| **Other current assets:**                          | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Prepayments                                        | ** ** | **$**                      | **4.6**     |                      | $          | 13.3 |   |
| Deposits and other advances                        | ** ** | **1.0**                    |        | 17.8                      |       |
| Other                                              | ** ** | **2.8**                    |        | 6.6                       |       |
| **Total other current assets**                     | ** ** | **$**                      | **8.4**     |                      | $          | 37.7 |   |
| ** **                                         | ** ** | ** **                 | ** **  | ** **                | ** ** |
| **Property, plant and equipment:**                 | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Construction work in process                       | ** ** | **$**                      | **338.5**   |                      | $          | 376.0 |   |
| Property, plant and equipment (a)                  | ** ** | **4,605.1**                |        | 4,626.0                   |       |
| **Total property, plant and equipment**            | ** ** | **$**                      | **4,943.6** |                      | $          | 5,002.0 |   |
| ** **                                         | ** ** | ** **                 | ** **  | ** **                | ** ** |
| **Other assets:**                                  | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Unamortized loss on reacquired debt                | ** ** | **$**                      | **19.2**    |                      | $          | 20.4 |   |
| Unamortized debt expense                           | ** ** | **9.8**                    |        | 10.6                      |       |
| Master Trust assets                                | ** ** | **9.1**                    |        | 39.4                      |       |
| Investments                                        | ** ** | **9.0**                    |        | 7.0                       |       |
| Commercial activities tax benefit                  | ** ** | **6.8**                    |        | 6.8                       |       |
| Other                                              | ** ** | **0.3**                    |        | 0.5                       |       |
| **Total other assets**                             | ** ** | **$**                      | **54.2**    |                      | $          | 84.7 |   |
|                                               |       |                       |        |                      |       |
| **Accounts payable:**                              | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Trade payables                                     | ** ** | **$**                      | **59.1**    |                      | $          | 75.7 |   |
| Fuel accruals                                      | ** ** | **49.3**                   |        | 37.3                      |       |
| Other                                              | ** ** | **77.6**                   |        | 56.4                      |       |
| **Total accounts payable**                         | ** ** | **$**                      | **186.0**   |                      | $          | 169.4 |   |
|                                               |       |                       |        |                      |       |
| **Other current liabilities:**                     | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Customer security deposits                         | ** ** | **$**                      | **18.9**    |                      | $          | 19.4 |   |
| Pension and retiree benefits payable               | ** ** | **0.8**                    |        | 5.8                       |       |
| Financial transmission rights - future proceeds    | ** ** | **—**                 |        | 2.7                       |       |
| Low income payment plan obligation                 | ** ** | **3.1**                    |        | 1.9                       |       |
| Unearned revenue                                   | ** ** | **1.1**                    |        | —                    |       |
| Other                                              | ** ** | **3.5**                    |        | 8.5                       |       |
| **Total other current liabilities**                | ** ** | **$**                      | **27.4**    |                      | $          | 38.3 |   |
|                                               |       |                       |        |                      |       |
| **Other deferred credits:**                        | ** ** | ** **                 | ** **  | ** **                | ** ** |
| Asset retirement obligations - regulated property  | ** ** | **$**                      | **90.7**    |                      | $          | 86.3 |   |
| Pension liabilities                                | ** ** | **34.6**                   |        | 37.7                      |       |
| Retiree health and life benefits                   | ** ** | **28.2**                   |        | 28.5                      |       |
| Trust obligations                                  | ** ** | **20.6**                   |        | 76.2                      |       |
| SECA net revenue subject to refund                 | ** ** | **20.4**                   |        | 18.7                      |       |
| Asset retirement obligations - generation property | ** ** | **11.9**                   |        | 11.7                      |       |
| Deferred gain on sale of portfolio                 | ** ** | **—**                 |        | 8.2                       |       |
| Employee benefit reserves                          | ** ** | **4.4**                    |        | 4.1                       |       |
| Litigation and claims reserves                     | ** ** | **4.5**                    |        | 3.4                       |       |
| Customer advances in aid of construction           | ** ** | **3.4**                    |        | 3.0                       |       |
| Environmental reserves                             | ** ** | **0.1**                    |        | 0.1                       |       |
| Other                                              | ** ** | **3.8**                    |        | 2.8                       |       |
| **Total other deferred credits**                   | ** ** | **$**                      | **222.6**   |                      | $          | 280.7 |   |

 

----

*(a)**      **The sale of $283.5 million ofassets held for sale at December 31, 2006 was completed on April 25, 2007.*

 

 

16

----

 

**Notes to Condensed ConsolidatedFinancial Statements (continued)**

 
| **DP&L**$ in millions                     | ** ** | **At  September 30, 2007** | ** **  | **At  December 31, 2006** | ** ** |
|----------------------------------------------------|------------|---------------------------------|-------------|--------------------------------|------------|
|                                               |       |                            |        |                           |       |
| **Accounts receivable, net:**                      | ** ** | ** **                      | ** **  | ** **                     | ** ** |
| Retail customers                                   | ** ** | **$**                           | **81.8**    |                           | $          | 65.0 |   |
| Partners in commonly-owned plants                  | ** ** | **68.9**                        |        | 51.5                           |       |
| Unbilled revenue                                   | ** ** | **56.6**                        |        | 61.0                           |       |
| PJM                                                | ** ** | **23.1**                        |        | 13.9                           |       |
| Wholesale and subsidiary customers                 | ** ** | **5.3**                         |        | 8.3                            |       |
| Refundable franchise tax                           | ** ** | **3.1**                         |        | 3.1                            |       |
| Other                                              | ** ** | **5.8**                         |        | 4.2                            |       |
| Provision for uncollectible accounts               | ** ** | **(1.6**                        | **)**       | (1.4                           | )          |
| **Total accounts receivable, net**                 | ** ** | **$**                           | **243.0**   |                           | $          | 205.6 |   |
|                                               |       |                            |        |                           |       |
| **Inventories, at average cost:**                  | ** ** | ** **                      | ** **  | ** **                     | ** ** |
| Fuel and emission allowances                       | ** ** | **$**                           | **69.5**    |                           | $          | 52.4 |   |
| Plant materials and supplies                       | ** ** | **33.2**                        |        | 30.2                           |       |
| Other                                              | ** ** | **0.1**                         |        | 0.4                            |       |
| **Total inventories, at average cost**             | ** ** | **$**                           | **102.8**   |                           | $          | 83.0 |   |
|                                               |       |                            |        |                           |       |
| **Other current assets:**                          | ** ** | ** **                      | ** **  | ** **                     | ** ** |
| Prepayments                                        | ** ** | **$**                           | **6.8**     |                           | $          | 15.8 |   |
| Deposits and other advances                        | ** ** | **0.8**                         |        | 17.0                           |       |
| Other                                              | ** ** | **3.2**                         |        | 5.4                            |       |
| **Total other current assets**                     | ** ** | **$**                           | **10.8**    |                           | $          | 38.2 |   |
| ** **                                         | ** ** | ** **                      | ** **  | ** **                     | ** ** |
| **Property, plant and equipment:**                 | ** ** | ** **                      | ** **  | ** **                     | ** ** |
| Construction work in process                       | ** ** | **$**                           | **337.6**   |                           | $          | 375.2 |   |
| Property, plant and equipment                      | ** ** | **4,350.7**                     |        | 4,075.4                        |       |
| **Total property, plant and equipment**            | ** ** | **$**                           | **4,688.3** |                           | $          | 4,450.6 |   |
| ** **                                         | ** ** | ** **                      | ** **  | ** **                     | ** ** |
| **Other assets:**                                  | ** ** | ** **                      | ** **  | ** **                     | ** ** |
| Master Trust assets                                | ** ** | **$**                           | **74.5**    |                           | $          | 109.0 |   |
| Unamortized loss on reacquired debt                | ** ** | **19.2**                        |        | 20.4                           |       |
| Unamortized debt expense                           | ** ** | **8.3**                         |        | 8.6                            |       |
| Investments                                        | ** ** | **0.6**                         |        | 0.6                            |       |
| Other                                              | ** ** | **0.4**                         |        | 0.5                            |       |
| **Total other assets**                             | ** ** | **$**                           | **103.0**   |                           | $          | 139.1 |   |
|                                               |       |                            |        |                           |       |
| **Accounts payable:**                              | ** ** | ** **                      | ** **  | ** **                     | ** ** |
| Trade payables                                     | ** ** | **$**                           | **58.7**    |                           | $          | 74.7 |   |
| Fuel accruals                                      | ** ** | **46.2**                        |        | 36.7                           |       |
| Other                                              | ** ** | **77.8**                        |        | 54.8                           |       |
| **Total accounts payable**                         | ** ** | **$**                           | **182.7**   |                           | $          | 166.2 |   |
|                                               |       |                            |        |                           |       |
| **Other current liabilities:**                     | ** ** | ** **                      | ** **  | ** **                     | ** ** |
| Customer security deposits                         | ** ** | **$**                           | **18.9**    |                           | $          | 19.4 |   |
| Pension and retiree benefits payable               | ** ** | **0.8**                         |        | 5.8                            |       |
| Financial transmission rights - future proceeds    | ** ** | **—**                      |        | 2.7                            |       |
| Low income payment plan obligation                 | ** ** | **3.1**                         |        | 1.9                            |       |
| Unearned revenue                                   | ** ** | **1.1**                         |        | —                         |       |
| Other                                              | ** ** | **3.5**                         |        | 5.6                            |       |
| **Total other current liabilities**                | ** ** | **$**                           | **27.4**    |                           | $          | 35.4 |   |
|                                               |       |                            |        |                           |       |
| **Other deferred credits:**                        | ** ** | ** **                      | ** **  | ** **                     | ** ** |
| Asset retirement obligations - regulated property  | ** ** | **$**                           | **90.7**    |                           | $          | 86.3 |   |
| Pension liabilities                                | ** ** | **34.6**                        |        | 37.7                           |       |
| Retiree health and life benefits                   | ** ** | **28.2**                        |        | 28.5                           |       |
| Trust obligations                                  | ** ** | **20.6**                        |        | 76.2                           |       |
| SECA net revenue subject to refund                 | ** ** | **20.4**                        |        | 18.7                           |       |
| Asset retirement obligations - generation property | ** ** | **11.9**                        |        | 11.7                           |       |
| Employee benefit reserves                          | ** ** | **4.4**                         |        | 4.1                            |       |
| Litigation and claims reserves                     | ** ** | **4.5**                         |        | 3.4                            |       |
| Customer advances in aid of construction           | ** ** | **3.4**                         |        | 3.0                            |       |
| Environmental reserves                             | ** ** | **0.1**                         |        | 0.1                            |       |
| Other                                              | ** ** | **3.8**                         |        | 2.8                            |       |
| **Total other deferred credits**                   | ** ** | **$**                           | **222.6**   |                           | $          | 272.5 |   |

 

 

17

----

 

**Notes to Condensed ConsolidatedFinancial Statements (continued)**

 
| **DPL Inc.**                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------|------------|-------------------------------------|------------|
| $ in millions           | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| **Cash flows - other:**      | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Payroll taxes payable        | ** ** | **$**                               | **—** |   | $ | (1.7 | ) |
| Employee/director stock plan | ** ** | **3.7**                             |       | 3.8 |   |
| Lump sum retirement payment  | ** ** | **(4.9**                            | **)**      | — |   |
| Deposits and other advances  | ** ** | **16.2**                            |       | (7.9 | ) |
| Other                        | ** ** | **3.3**                             |       | (1.5 | ) |
| **Total cash flows - other** | ** ** | **$**                               | **18.3**   |   | $ | (7.3 | ) |

 
| ** **                                                                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Comprehensive income:**                                                        | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                       | ** ** | **$**                                | **60.7**   |                                | $          | 50.8 | ** ** | **$** | **175.5** |   | $ | 132.3 |   |
| Net change in unrealized gains (losses) on financial instruments                 |       | **0.2**                              |       | 0.3                                 |       | **(1.3** | **)** | 1.1 |   |
| Net change in deferred (losses) gains on cash flow hedges                        | ** ** | **(1.5**                             | **)**      | 0.1                                 | ** ** | **(5.9** | **)** | 2.9 |   |
| Net change in unrealized gains (losses) on pensions and postretirement  benefits |       | **0.5**                              |       | —                              |       | **1.6** |   | — |   |
| Deferred income taxes related to unrealized gains (losses)                       | ** ** | **0.3**                              |       | (0.4                                | )          | **2.2** |   | (3.5 | ) |
| **Comprehensive income**                                                         | ** ** | **$**                                | **60.2**   |                                | $          | 50.8 | ** ** | **$** | **172.1** |   | $ | 132.8 |   |

 

 
| **DP&L**                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------|------------|-------------------------------------|------------|
| $ in millions           | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| **Cash flows - other:**      | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Payroll taxes payable        | ** ** | **$**                               | **—** |   | $ | (2.0 | ) |
| Deposits and other advances  | ** ** | **15.6**                            |       | (10.5 | ) |
| Lump sum retirement payment  | ** ** | **(4.9**                            | **)**      | — |   |
| Other                        | ** ** | **5.8**                             |       | 1.0 |   |
| **Total cash flows - other** | ** ** | **$**                               | **16.5**   |   | $ | (11.5 | ) |

 
| ** **                                                                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Comprehensive income:**                                                        | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                       | ** ** | **$**                                | **70.6**   |                                | $          | 64.0 | ** ** | **$** | **199.5** |   | $ | 174.9 |   |
| Net change in unrealized (losses) gains on financial instruments                 |       | **(5.0**                             | **)**      | 1.2                                 |       | **(5.4** | **)** | 1.8 |   |
| Net change in deferred (losses) gains on cash flow hedges                        | ** ** | **(1.5**                             | **)**      | 0.1                                 | ** ** | **(5.9** | **)** | 2.9 |   |
| Net change in unrealized gains (losses) on pensions and  postretirement benefits | ** ** | **0.6**                              |       | —                              | ** ** | **1.7** |   | — |   |
| Deferred income taxes related to unrealized gains (losses)                       | ** ** | **2.2**                              |       | (0.8                                | )          | **4.3** |   | (3.2 | ) |
| **Comprehensive income**                                                         | ** ** | **$**                                | **66.9**   |                                | $          | 64.5 | ** ** | **$** | **194.2** |   | $ | 176.4 |   |

 

 

 

18

----

** **

**Notes tothe Condensed Consolidated Financial Statements (continued)**

** **

**5.    ****Asset****Sales**

 

**Sale of Corporate Aircraft**

On June 7, 2007, Miami Valley CTC, Inc. (indirect,wholly-owned subsidiary of **DPL**),sold its corporate aircraft and associated inventory and parts for $7.4million. The net book value of the assets sold was approximately $1.0 millionand severance and other costs of approximately $0.4 million were accrued. MiamiValley CTC, Inc. recorded a net gain on the sale of approximately $6.0 millionduring the second quarter ending June 30, 2007, which is included in **DPL’s**operation and maintenance expense.

 

**Sale of Peaking Units**

During the fourthquarter of 2006, **DPL** recorded a $71.0 millionimpairment charge that included the fair market value write-down of the peakingunit assets, accrued legal fees and other costs associated with the sale. Therewere no material costs or adjustments to the $71.0 million impairment chargeupon consummation of the sale in 2007.

 

OnApril 25, 2007, DPLE completed the sale of its Darby and Greenville electricpeaking generation facilities providing **DPL**withapproximately $151.0 million. Darby Station was sold to Columbus Southern PowerCompany, a utility subsidiary of American Electric Power Company (AEP), forapproximately $102.0 million. Greenville Station was sold to Buckeye Power,Inc. for approximately $49.0 million.

 

**6.     Pension andPostretirement Benefits**

 

We sponsor a defined benefit plan forsubstantially all full-time employees. For collective bargaining employees, thedefined benefits are based on a specific dollar amount per year of service. Forall other employees, the defined benefit plan is based primarily oncompensation and years of service. We fund pension plan benefits as accrued inaccordance with the minimum funding requirements of the Employee RetirementIncome Security Act of 1974, as amended (ERISA). In addition, we have aSupplemental Executive Retirement Plan (SERP) for certain active and retiredkey executives. Benefits under this SERP have been frozen and no additionalbenefits can be earned. We****also haveunfunded liabilities pertaining to retirement benefits for certain active,terminated and retired key executives that include The DPL Inc. SupplementalExecutive Defined Contribution Retirement Plan (SEDCRP). These liabilitiestotaled approximately $0.9 million and $0.5 million at September 30, 2007 and2006, respectively.

 

Qualified employees who retired prior to 1987and their dependents are eligible for health care and life insurance benefits. Wehave funded the union-eligible health benefit using a Voluntary EmployeeBeneficiary Association Trust.

 

19

----

 

**Notes to the Condensed Consolidated Financial Statements(continued)**

 

The net periodic benefitcosts of the pension and postretirement benefit plans for the three monthsended September 30, 2007 and 2006 were:

 

**Netperiodic benefit cost**

 
| $ in  millions                         | ** ** | **Pension** | ** ** | **Postretirement** |       |
|---------------------------------------------|------------|-------------|------------|--------------------|------------|
|                                        | ** ** | **2007**    | ** ** | **2006**           | ** ** | **2007** | ** ** | **2006** |   |
| Service cost                                | ** ** | **$**       | **0.2**    |               | $          | 1.0 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                               | ** ** | **4.0**     |       | 4.3                | ** ** | **0.4** |   | 0.5 |   |
| Expected return on assets (a)               | ** ** | **(5.5**    | **)**      | (5.5               | )          | **(0.1** | **)** | (0.2 | ) |
|                                        |       |        |       |               |       |   |   |   |   |
| Amortization of unrecognized:               |       |        |       |               |       |   |   |   |   |
| Actuarial (gain) loss                       | ** ** | **0.8**     |       | 0.9                | ** ** | **(0.2** | **)** | (0.2 | ) |
| Prior service cost                          | ** ** | **0.6**     |       | 0.7                | ** ** | **—** |   | — |   |
| Transition obligation                       | ** ** | **—**  |       | —             | ** ** | **—** |   | 0.1 |   |
| Net periodic benefit cost                   | ** ** | **0.1**     |       | 1.4                | ** ** | **0.1** |   | 0.2 |   |
| Settlement cost (b)                         | ** ** | **—**  |       | 2.6                | ** ** | **—** |   | — |   |
| Net periodic benefit cost after adjustments | ** ** | **$**       | **0.1**    |               | $          | 4.0 | ** ** | **$** | **0.1** |   | $ | 0.2 |   |

----

| *(a)*    | *The market-related value of  assets is equal to the fair value of assets at implementation with subsequent  asset gains and losses recognized in the market-value systematically over a  three-year period.*                                 |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * * | * *                                                                                                                                                                                                                                      |
| *(b)*    | *The settlement cost pertains to  a former officer (not related to our litigation settlement with three former  executives) who elected to receive a lump sum distribution in January 2007  from the Supplemental Executive Retirement Plan.* |

 

 

The net periodic benefit costs of the pensionand postretirement benefit plans for the nine months ended September 30, 2007and 2006 were:

** **

**Net periodicbenefit cost**

 
| $ in millions                          | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|---------------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **                                  | ** ** | **2007**    | ** ** | **2006**           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                                | ** ** | **$**       | **2.4**    |               | $          | 3.2 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                               | ** ** | **12.2**    |       | 12.5               | ** ** | **1.1** |   | 1.3 |   |
| Expected return on assets (a)               | ** ** | **(16.4**   | **)**      | (16.3              | )          | **(0.3** | **)** | (0.4 | ) |
|                                        |       |        |       |               |       |   |   |   |   |
| Amortization of unrecognized:               |       |        |       |               |       |   |   |   |   |
| Actuarial (gain) loss                       | ** ** | **2.6**     |       | 2.9                | ** ** | **(0.7** | **)** | (0.6 | ) |
| Prior service cost                          | ** ** | **1.8**     |       | 1.9                | ** ** | **—** |   | — |   |
| Transition obligation                       | ** ** | **—**  |       | —             | ** ** | **0.1** |   | 0.2 |   |
| Net periodic benefit cost before adjustment | ** ** | **2.6**     |       | 4.2                | ** ** | **0.2** |   | 0.5 |   |
| Settlement cost (b)                         | ** ** | **—**  |       | 2.6                | ** ** | **—** |   | — |   |
| Special termination benefit cost (c)        | ** ** | **—**  |       | 0.3                | ** ** | **—** |   | — |   |
| Net periodic benefit cost after adjustment  | ** ** | **$**       | **2.6**    |               | $          | 7.1 | ** ** | **$** | **0.2** |   | $ | 0.5 |   |

----

| *(a)*    | *The market-related value of  assets is equal to the fair value of assets at implementation with subsequent  asset gains and losses recognized in the market-value systematically over a  three-year period.*                                  |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * * | * *                                                                                                                                                                                                                                       |
| *(b)*    | *The settlement cost pertains to  a former officer (not related to our litigation settlement with three former  executives) who elected to receive a lump sum distribution in January 2007  from the Supplemental Executive Retirement Plan.*  |
| * * | * *                                                                                                                                                                                                                                       |
| *(c)*    | *In 2006, a special termination  benefit cost was recognized as a result of 16 employees who participated in a  voluntary early retirement program and retired at various dates during 2006;  this program was completed as of April 1, 2006.* |

 

 

20

----

** **

**Notes to the CondensedConsolidated Financial Statements (continued)**

 

The following estimatedbenefit payments, which reflect future service, are expected to be paid asfollows:

** **

**Estimated Future BenefitPayments**

 
| $ in millions | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|--------------------|------------|-------------|------------|--------------------|------------|
| 2007               |       | $           | 4.8        |               | $          | 0.7 |   |
| 2008               |       | $           | 19.8       |               | $          | 2.6 |   |
| 2009               |       | $           | 20.2       |               | $          | 2.6 |   |
| 2010               |       | $           | 20.7       |               | $          | 2.5 |   |
| 2011               |       | $           | 20.9       |               | $          | 2.4 |   |
| 2012 — 2016   |       | $           | 111.9      |               | $          | 10.0 |   |

 

 

**7.     Share-BasedCompensation**

 

Asa result of the May 21, 2007 settlement of the litigation with three formerexecutives (see Note 10 of the Notes to the Condensed Consolidated Financial Statements),the three former executives relinquished all of their rights to certaindeferred compensation, RSUs, MVE incentives, stock options and reimbursement oflegal fees. A portion of this settlement included the forfeitures andcancellations of RSUs and stock options of 1.3 million and 3.6 million,respectively.

 

The following tablesummarizes share-based compensation expense:

 
| ** **                                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** |       |
|--------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| $ in millions                                                       | ** ** | **September 30,**      | ** ** | **September 30,**     |       |
|                                                                     | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock options                                                            | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | 1.2 |   |
| Restricted stock units                                                   | ** ** | **(0.2**               | **)**      | 0.7                   | ** ** | **—** |   | 1.8 |   |
| Performance shares                                                       | ** ** | **0.5**                |       | 0.5                   | ** ** | **1.3** |   | 1.3 |   |
| Restricted shares                                                        | ** ** | **0.1**                |       | —                | ** ** | **0.2** |   | — |   |
| Non-employee directors’ RSUs                                        | ** ** | **0.1**                |       | —                | ** ** | **0.2** |   | — |   |
| Share-based compensation included in operations and maintenance  expense |       | **0.5**                |       | 1.2                   | ** ** | **1.7** |   | 4.3 |   |
| Income tax expense                                                       | ** ** | **(0.2**               | **)**      | (0.5                  | )          | **(0.7** | **)** | (1.7 | ) |
| Total share-based compensation, net of tax                               | ** ** | **$**                  | **0.3**    |                  | $          | 0.7 | ** ** | **$** | **1.0** |   | $ | 2.6 |   |

 

 

Share-based awards issued in**DPL’s**common stock will be distributedfrom treasury stock. **DPL** believes ithas sufficient treasury stock to satisfy all outstanding share-based awards.

 

**Determining Fair Value**

*Valuationand Amortization Method —*We estimate the fair value of stock options and RSUsusing a Black-Scholes-Merton model; performance shares are valued using a MonteCarlo simulation; restricted shares are valued at the market price on the dayof grant and the Directors’ RSUs are valued at the market price on the dayprior to the grant date. We amortize the fair value of all awards on astraight-line basis over the requisite service periods, which are generally thevesting periods.

*ExpectedVolatility —*Our expected volatility assumptions are based on the historicalvolatility of **DPL** stock. The volatility rangecaptures the high and low volatility values for each award granted based on itsspecific terms.

*ExpectedLife —*Theexpected life assumption represents the estimated period of time from grantuntil exercise and reflects historical employee exercise patterns.

*Risk-FreeInterest Rate —*The risk-free interest rate for the expected term ofthe award is based on the corresponding yield curve in effect at the time ofthe valuation for U.S. Treasury bonds having the same term as the expected lifeof the award, i.e., a five year bond rate is used for valuing an award with afive year expected life.

*Expected Dividend Yield —*The expected dividend yield isbased on **DPL’s** current dividend rate, adjustedas necessary to capture anticipated dividend changes and the 12 month average **DPL** stock price.

 

21

----

 

**Notes to the CondensedConsolidated Financial Statements (continued)**

 

*ExpectedForfeitures —*The forfeiture rate used to calculate compensation expense is based on **DPL’s** historical experience, adjusted as necessary toreflect special circumstances.

**Stock Options**

In 2000, **DPL’s** Board of Directors adopted, and **DPL’s** shareholders approved, The DPL Inc.Stock Option Plan. On April 26, 2006, **DPL’s**shareholders approved The DPL Inc. 2006 Equity and Performance Incentive Plan(EPIP). With the approval of the EPIP, no new awards will be granted under TheDPL Inc. Stock Option Plan, but shares relating to awards that are forfeited orterminated under The DPL Inc. Stock Option Plan may be granted. There arecurrently 10,000 unvested stock options outstanding under The DPL Inc. StockOption Plan that will vest as of December 21, 2007.

 

The schedule of optionactivity for the nine months ended September 30, 2007 was as follows:

 
| ** **                                | ** ** | ** **    | ** ** | **Weighted-Average** | ** ** |
|-------------------------------------------|------------|---------------|------------|----------------------|------------|
| ** **                                | ** ** | **Number of** | ** ** | **Grant Date**       | ** ** |
| $ in millions (except share amounts) | ** ** | **Options**   | ** ** | **Fair  Value**      | ** ** |
| Non-vested at January 1, 2007             |       | 10,000        |       | $                    | 0.05       |   |
| Granted in first nine months 2007         |       | —        |       | —               |       |
| Vested in first nine months 2007          |       | —        |       | —               |       |
| Forfeited in first nine months 2007       |       | —        |       | —               |       |
| Non-vested at September 30, 2007          |       | 10,000        |       | $                    | 0.05       |   |

 

Summarized stock option activity was asfollows:

 
| ** **                                | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **September 30**      | ** ** |
| ** **                                | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Options:                                  |       |                  |       |   |   |
| Outstanding at beginning of year          | ** ** | **5,091,500**         |       | 5,486,500 |   |
| Granted                                   | ** ** | **—**            |       | — |   |
| Exercised                                 | ** ** | **(520,000**          | )          | (10,000 | ) |
| Forfeited (a)                             | ** ** | **(3,620,000**        | )          | (40,000 | ) |
| Outstanding at period-end                 | ** ** | **951,500**           |       | 5,436,500 |   |
| Exercisable at period-end                 | ** ** | **941,500**           |       | 5,416,000 |   |
|                                      |       |                  |       |   |   |
| Weighted-average option prices per share: |       |                  |       |   |   |
| Outstanding at beginning of year          | ** ** | **$**                 | **21.95**  |   | $ | 21.86 |   |
| Granted                                   | ** ** | **$**                 | **—** |   | $ | — |   |
| Exercised                                 | ** ** | **$**                 | **26.83**  |   | $ | 21.00 |   |
| Forfeited                                 | ** ** | **$**                 | **20.38**  |   | $ | 15.88 |   |
| Outstanding at period-end                 | ** ** | **$**                 | **24.08**  |   | $ | 22.02 |   |
| Exercisable at period-end                 | ** ** | **$**                 | **24.07**  |   | $ | 20.98 |   |

----

| *(a)* | *As a result of the settlement  of the former executive litigation on May 21, 2007, 3.6 million outstanding  options shown above were forfeited in the second quarter of 2007 and another  approximately one million disputed options not shown above were also  forfeited.* |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

22

----

** **

**Notes to the CondensedConsolidated Financial Statements (continued)**

 

The following table reflects informationabout stock options outstanding at September 30, 2007:

 
| ** **            | ** **     | ** **      | ** ** | **Options  Outstanding** | ** ** | **Options  Exercisable** | ** ** |
|-----------------------|----------------|-----------------|------------|--------------------------|------------|--------------------------|------------|
| ** **            | ** **     | ** **      | ** ** | **Weighted-**            | ** ** | **Weighted-**            | ** ** | ** ** | ** ** | **Weighted-** |   |
| ** **            | ** **     | ** **      | ** ** | **Average**              | ** ** | **Average**              | ** ** | ** ** | ** ** | **Average** |   |
| **Range of Exercise** | ** **     | ** **      | ** ** | **Contractual**          | ** ** | **Exercise**             | ** ** | ** ** | ** ** | **Exercise** |   |
| **Prices**            | ** **     | **Outstanding** | ** ** | **Life**                 | ** ** | **Price**                | ** ** | **Exercisable** | ** ** | **Price** |   |
| $                     | 14.95 - $21.00 |            | 625,000    |                     | 3.3  years |                     | $          | 20.60 |   | 625,000 |   | $ | 20.60 |   |
| $                     | 21.01 - $29.63 |            | 326,500    |                     | 4.0  years |                     | $          | 28.83 |   | 316,500 |   | $ | 28.93 |   |

 

Thefollowing table reflects information about stock option activity during theperiod:

 

 
|                                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
|                                                                         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions                                                           | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted-average grant date fair value of options granted during the  period | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Intrinsic value of options exercised during the period                       | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **2.3** |   | $ | 0.1 |   |
| Proceeds from stock options exercised during the period                      | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **14.5** |   | $ | 0.2 |   |
| Excess tax benefit from proceeds of stock options exercised                  | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **0.5** |   | $ | — |   |
| Fair value of shares that vested during the period                           | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | 1.0 |   |
| Unrecognized compensation expense                                            | ** ** | **$**                  | **—** |                  | $          | 0.1 | ** ** | **$** | **—** |   | $ | 0.1 |   |
| Weighted-average period to recognize compensation expense (in years)         |       | **0.3**                |       | 1.3                   | ** ** | **0.3** |   | 1.3 |   |

 

Thefollowing table shows the assumptions used in the Black-Scholes-Merton model tocalculate the fair value of the non-vested stock options at the time of grant:

** **
| Number of non-vested shares          |   | 10,000             |
|--------------------------------------|--------|--------------------|
| Date of grant                        |   | December  29, 2004 |
| Expected volatility                  |   | 26.1               | % |
| Weighted-average expected volatility |   | 26.1               | % |
| Expected life (in years)             |   | 9.9                |   |
| Expected dividends                   |   | 4.7                | % |
| Weighted-average expected dividends  |   | 4.7                | % |
| Risk-free interest rate              |   | 4.3                | % |

 

 

No options were grantedduring 2006 and 2007.

 

**Restricted Stock Units (RSUs)**

RSUs were granted to certainkey employees prior to 2001. As a result of the settlement of the formerexecutive litigation, all disputed RSUs were forfeited by the three formerexecutives. There were 22,976 RSUs outstanding as of September 30, 2007, noneof which has vested. The non-vested RSUs will be paid in cash upon vesting andwill vest as follows: 11,253 in 2008; 7,878 in 2009 and 3,845 in 2010. Non-vestedRSUs are valued quarterly at fair value using the Black-Scholes-Merton model todetermine the amount of compensation expense to be recognized. Non-vested RSUsdo not earn dividends.

 
| ** **                                 | ** ** | ** **     | ** ** | **Weighted-Average** | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------------|------------|
| ** **                                 | ** ** | **Number  of** | ** ** | **Grant  Date**      | ** ** |
| $ in millions  (except share amounts) | ** ** | **RSUs**       | ** ** | **Fair  Value**      | ** ** |
| Non-vested at January 1, 2007              |       | 49,998         |       | $                    | 1.2        |   |
| Granted in first nine months 2007          |       | —         |       | —               |       |
| Vested in first nine months 2007           |       | (20,097        | )          | (0.4                 | )          |
| Forfeited in first nine months 2007        |       | (6,925         | )          | (0.2                 | )          |
| Non-vested at September 30, 2007           |       | 22,976         |       | $                    | 0.6        |   |

 

 

23

----

** **

**Notes to the CondensedConsolidated Financial Statements (continued)**

 

Summarized RSU activity was as follows:

 
| ** **                       | ** ** | **Nine  Months Ended** | ** ** |
|----------------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **September  30,**     | ** ** |
| ** **                       | ** ** | **2007**               | ** ** | **2006** | ** ** |
| RSUs:                            |       |                   |       |   |   |
| Outstanding at beginning of year | ** ** | **1,334,339**          |       | 1,319,399 |   |
| Granted                          | ** ** | **—**             |       | — |   |
| Dividends                        | ** ** | **11,656**             |       | 35,030 |   |
| Exercised                        | ** ** | **(20,097**            | **)**      | (22,516 | ) |
| Forfeited                        | ** ** | **(1,302,922**         | **)**      | (8,978 | ) |
| Outstanding at period-end        | ** ** | **22,976**             |       | 1,322,935 |   |
| Exercisable at period-end        | ** ** | **—**             |       | — |   |

 

Compensation expense isrecognized each quarter based on the change in the market price of **DPL** common shares.

 

As of September 30, 2007 and2006, liabilities recorded for outstanding RSUs were $0.6 million and $35.7million, respectively, which are included in “Other deferred credits” on theCondensed Consolidated Balance Sheet. The decrease in the liability is due tothe executive litigation settlement and the forfeiture of 1.3 million RSUs (seeNote 10 of the Notes to Condensed Consolidated Financial Statements).

 

Thefollowing table shows the assumptions used in the Black-Scholes-Merton model tocalculate the fair value of the non-vested RSUs during the respective periods:

 
| ** **                           | ** ** | **Three  Months Ending** | ** ** | **Nine  Months Ending** | ** ** |
|--------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **September  30,**       | ** ** | **September  30,**      | ** ** |
| ** **                           | ** ** | **2007**                 | ** ** | **2006**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected volatility                  | ** ** | **13.4-16.7%**           | ** ** | 10.3-20.3%              |       | **10.6-43.5%** | ** ** | 7.3-28.6% |   |
| Weighted-average expected volatility | ** ** | **14.4%**                | ** ** | 17.1%                   |       | **16.2%** | ** ** | 22.0% |   |
| Expected life (in years)             | ** ** | **1.0-3.0**              | ** ** | 1.0-4.0                 |       | **1.0-3.0** | ** ** | 1.0-4.0 |   |
| Expected dividends                   | ** ** | **3.6%**                 | ** ** | 3.7-3.8%                |       | **3.5-3.6%** | ** ** | 3.7-3.8% |   |
| Weighted-average expected dividends  | ** ** | **3.6%**                 | ** ** | 3.8%                    |       | **3.5%** | ** ** | 3.8% |   |
| Risk-free interest rate              | ** ** | **4.0-4.1%**             | ** ** | 4.6-4.9%                |       | **4.0-5.0%** | ** ** | 4.7-5.2% |   |

 

 

**Performance Shares**

Under the EPIP, the Boardadopted a Long-Term Incentive Plan (LTIP) under which **DPL**will award a targeted number of performance shares of common stock toexecutives. Awards under the LTIP will be awarded based on a Total ShareholderReturn Relative to Peers performance. No performance shares will be earned in aperformance period if the three-year Total Shareholder Return Relative to Peersis below the threshold of the 40th percentile. Further, the LTIPawards will be capped at 200% of the target number of performance shares, ifthe Total Shareholder Return Relative to Peers is at or above the threshold ofthe 90th percentile. The Total Shareholder Return Relative to Peersis considered a market condition under FAS 123R. There is a three yearrequisite service period for each tranche of the performance shares.

 

24

----

** **

**Notes to the CondensedConsolidated Financial Statements (continued)**

** **

Theschedule of non-vested performance share activity for the nine months endedSeptember 30, 2007 follows:

 
| ** **                                | ** ** | **Number of**   | ** ** | **Weighted-Average** | ** ** |
|-------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                | ** ** | **Performance** | ** ** | **Grant Date**       | ** ** |
| $ in millions (except share amounts) | ** ** | **Shares**      | ** ** | **Fair Value**       | ** ** |
| Non-vested at January 1, 2007             |       | 110,723         |       | $                    | 2.7        |   |
| Granted in first nine months 2007         |       | 78,559          |       | 2.6                  |       |
| Vested in first nine months 2007          |       | —          |       | —               |       |
| Forfeited in first nine months 2007       |       | (34,243         | **)**      | (0.9                 | )          |
| Non-vested at September 30, 2007          |       | 155,039         |       | $                    | 4.4        |   |

 
| ** **                       | ** ** | **Nine  Months Ended** | ** ** |
|----------------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **September  30,**     | ** ** |
|                             | ** ** | **2007**               | ** ** | **2006** |   |
| Performance Shares:              |       |                   | ** ** |   |   |
| Outstanding at beginning of year | ** ** | **154,768**            | ** ** | **—** | ** ** |
| Granted                          | ** ** | **78,559**             | ** ** | 223,289 |   |
| Exercised                        | ** ** | **(22,462**            | **)**      | — |   |
| Expired                          | ** ** | **(21,583**            | **)**      | — |   |
| Forfeited                        | ** ** | **(34,243**            | **)**      | (89,655 | ) |
| Outstanding at period-end        | ** ** | **155,039**            | ** ** | 133,634 |   |
| Exercisable at period-end        | ** ** | **—**             | ** ** | — |   |

 

Thefollowing table reflects information about performance share activity duringthe period:

                
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions                                                                      | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted-average grant date fair value of performance shares granted  during the period |       | **$**                  | **0.1**    |                  | $          | — | ** ** | **$** | **2.6** |   | $ | 5.9 |   |
| Intrinsic value of performance shares exercised during the period                       | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Proceeds from performance shares exercised during the period                            | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Tax benefit from proceeds of performance shares exercised                               | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Fair value of performance shares that vested during the period                          | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Unrecognized compensation expense                                                       | ** ** | **$**                  | **2.3**    |                  | $          | 1.6 | ** ** | **$** | **2.3** |   | $ | 1.6 |   |
| Weighted-average period to recognize compensation expense (in years)                    |       | **1.3**                |       | 1.0                   | ** ** | **1.3** |   | 1.0 |   |

 

 

Thefollowing table shows the assumptions used in the Monte Carlo Simulation tocalculate the fair value of the performance shares granted during the period:

 
| ** **                           | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **September  30,**      | ** ** | **September  30,**     | ** ** |
| ** **                           | ** ** | **2007**                | ** ** | **2006**               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                 |       |                    |       |                   |       |   |   |   |   |
| Expected volatility                  |       | 15.8%                   |       | 0.0%                   |       | 15.8-17.3% |   | 20.3% |   |
| Weighted-average expected volatility |       | 15.8%                   |       | 0.0%                   |       | 16.4% |   | 20.3% |   |
| Expected life (in years)             |       | 3.0                     |       | 0.0                    |       | 3.0 |   | 3.0 |   |
| Expected dividends                   |       | 3.9%                    |       | 0.0%                   |       | 3.3-3.9% |   | 3.7% |   |
| Weighted-average expected dividends  |       | 3.9%                    |       | 0.0%                   |       | 3.3% |   | 3.7% |   |
| Risk-free interest rate              |       | 4.5-4.6%                |       | 0.0%                   |       | 4.5-4.9% |   | 4.7% |   |

 

25

----

**Notes to the CondensedConsolidated Financial Statements (continued)**

 

**Restricted Shares**

Under the EPIP, theBoard granted shares of **DPL** RestrictedShares to various executives.  TheRestricted Shares are to be registered in the executive’s name, receive dividendsas declared and paid on all **DPL** commonstock and will vest after a specified service period.

 

During the three monthsended September 30, 2007, 6,800 restricted shares were awarded.

 
| ** **                                | ** ** | **Number  of**        | ** ** | **Weighted-Average** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                | ** ** | **Restricted**        | ** ** | **Grant  Date**      | ** ** |
| $ in millions (except share amounts) | ** ** | **Shares**            | ** ** | **Fair Value**       | ** ** |
| Non-vested at January 1, 2007             |       | 19,000                |       | $                    | 0.5        |   |
| Granted in first nine months 2007         |       | 23,200                |       |                 | 0.7        |   |
| Vested in first nine months 2007          |       | —                |       |                 | —     |   |
| Forfeited in first nine months 2007       |       | —                |       |                 | —     |   |
| Non-vested at September 30, 2007          |       | 42,200                |       | $                    | 1.2        |   |
|                                      |       |                  |       |                 |       |
| ** **                                | ** ** | **Nine Months Ended** | ** ** |
| ** **                                | ** ** | **September 30,**     | ** ** |
| ** **                                | ** ** | **2007**              | ** ** | **2006**             | ** ** |
| Restricted Shares:                        |       |                  |       |                 |       |
| Outstanding at beginning of year          | ** ** | **19,000**            |       | —               |       |
| Granted                                   | ** ** | **23,200**            |       | —               |       |
| Exercised                                 | ** ** | **—**            |       | —               |       |
| Forfeited                                 | ** ** | **—**            |       | —               |       |
| Outstanding at period-end                 | ** ** | **42,200**            |       | —               |       |
| Exercisable at period-end                 |       | —                |       | —               |       |
|                                           |            |                       |            |                      |            |  |  |

 

Thefollowing table reflects information about restricted share activity during theperiod:

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions                                                                     | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted-average grant date fair value of restricted shares granted  during the period | ** ** | **$**                  | **0.2**    |                  | $          | — | ** ** | **$** | **0.7** |   | $ | — |   |
| Intrinsic value of restricted shares exercised during the period                       | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Proceeds from restricted shares exercised during the period                            | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Tax benefit from proceeds of restricted shares exercised                               | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Fair value of restricted shares that vested during the period                          | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Unrecognized compensation expense                                                      | ** ** | **$**                  | **1.0**    |                  | $          | — | ** ** | **$** | **1.0** |   | $ | — |   |
| Weighted-average period to recognize compensation expense (in years)                   |       | **2.6**                |       | —                | ** ** | **2.6** |   | — |   |

 

**Non-Employee Director RestrictedStock Units**

Under the EPIP, as partof their annual compensation for service to **DPL**and **DP&L**, each non-employee Directorreceived a $54,000 retainer in RSUs on the date of the annual meeting.  The RSUs will become non-forfeitable on April15 of the following year; but if the Director resigns, dies or retires prior tothe April 15 vesting date, the vested shares will be distributed on a pro ratabasis.  The RSUs accrue quarterlydividends in the form of additional RSUs. Upon vesting, the RSUs will become exercisable and will be distributedin **DPL** common shares, unless the Directorchooses to defer receipt of the shares until a later date.  The RSUs are valued at the closing stockprice on the day prior to the grant and the compensation expense is recognizedevenly over the vesting period.

 

 

26

----

**Notes to the CondensedConsolidated Financial Statements (continued)**

 
| ** **                                      | ** ** | **Number of** | ** ** | **Weighted-Average** | ** ** |
|-------------------------------------------------|------------|---------------|------------|----------------------|------------|
| ** **                                      | ** ** | **Director**  | ** ** | **Grant Date**       | ** ** |
| $ in millions (except for share amounts)   | ** ** | **RSUs**      | ** ** | **Fair Value**       | ** ** |
| Non-vested at January 1, 2007                   |       | —        |       | $                    | —     |   |
| Granted in first nine months 2007               |       | 14,920        |       | 0.5                  |       |
| Dividends accrued in the first nine months 2007 |       | 231           |       | —               |       |
| Vested in first nine months 2007                |       | (6,643        | )          | (0.2                 | )          |
| Forfeited in first nine months 2007             |       | (1,553        | )          | —               |       |
| Non-vested at September 30, 2007                |       | 6,955         |       | $                    | 0.3        |   |

 
| ** **                       | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **September 30,**     | ** ** |
| ** **                       | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Restricted Stock Units:          |       |                  |       |   |   |
| Outstanding at beginning of year | ** ** | **—**            |       | — |   |
| Granted                          | ** ** | **14,920**            |       | — |   |
| Dividends accrued                | ** ** | **231**               |       | — |   |
| Exercised                        | ** ** | **(142**              | **)**      | — |   |
| Forfeited                        | ** ** | **(1,553**            | **)**      | — |   |
| Outstanding at period-end        | ** ** | **13,456**            |       | — |   |
| Exercisable at period-end        |       | —                |       | — |   |

 

Thefollowing table reflects information about non-employee director RSU activityduring the period:

 
| ** **                                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions                                                                              | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted-average grant date fair value of non-employee director RSUs  granted during the period | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **0.5** |   | $ | — |   |
| Intrinsic value of non-employee director RSUs exercised during the  period                      | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Proceeds from non-employee director RSUs exercised during the period                            | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Tax benefit from proceeds of non-employee director RSUs exercised                               | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Fair value of non-employee director RSUs that vested during the  period                         | ** ** | **$**                  | **(0.1**   | **)**                 | $          | — | ** ** | **$** | **(0.2** | **)** | $ | — |   |
| Unrecognized compensation expense                                                               | ** ** | **$**                  | **0.2**    |                  | $          | — | ** ** | **$** | **0.2** |   | $ | — |   |
| Weighted-average period to recognize compensation expense (in years)                            | ** ** | **0.5**                |       | —                | ** ** | **0.5** |   | — |   |

 

27

----

**Notes to the CondensedConsolidated Financial Statements (continued)**

 

**8.     Long-Term Debtand Notes Payable**

** **
| **DPL**                                                   | ** ** | **At**            | ** **  | **At**           | ** ** |
|-----------------------------------------------------------|------------|-------------------|-------------|------------------|------------|
| ** **                                                | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| $ in millions                                        | ** ** | **2007**          | ** **  | **2006**         | ** ** |
| DP&L - First mortgage bonds maturing 2013 - 5.125%    |       | **$**             | **470.0**   |             | $          | 470.0 |   |
| DP&L - Pollution control series maturing 2036 - 4.80% |       | **100.0**         |        | 100.0            |       |
| DP&L - Pollution control series maturing 2034 - 4.80% |       | **137.8**         |        | 137.8            |       |
| DP&L - Pollution control series maturing 2034 - 4.80% |       | **41.3**          |        | 41.3             |       |
| DP&L - Pollution control series maturing 2028 - 4.70% |       | **35.3**          |        | 35.3             |       |
|                                                      | ** ** | **784.4**         |        | 784.4            |       |
|                                                      |       |              |        |             |       |
| DPL Inc. - Note to Capital Trust II 8.125% due 2031       |       | **195.0**         |        | 195.0            |       |
| DPL Inc. - Senior Notes 6.875% Series due 2011            |       | **297.4**         |        | 297.4            |       |
| DPL Inc. - Senior Notes 8.00% Series due 2009             |       | **175.0**         |        | 175.0            |       |
| DPL Inc. - Senior Notes 6.25% Series due 2008             |       | **—**        |        | 100.0            |       |
| DP&L - Obligations for capital leases                 |       | **1.5**           |        | 2.0              |       |
| Unamortized debt discount (a)                             | ** ** | **(1.7**          | **)**       | (2.0             | )          |
| Total                                                     | ** ** | **$**             | **1,451.6** |             | $          | 1,551.8 |   |

----

| *(a)* | *DP&L’s unamortized debt  discount was $(1.1) million and $(1.2) million for September 30, 2007 and  December 31, 2006, respectively.* |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **DP&L**                                               | ** ** | **At**            | ** ** | **At**           | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| $ in millions                                         | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| DP&L - First mortgage bonds maturing  2013 - 5.125%    |       | **$**             | **470.0**  |             | $          | 470.0 |   |
| DP&L - Pollution control series maturing  2036 - 4.80% |       | **100.0**         |       | 100.0            |       |
| DP&L - Pollution control series maturing  2034 - 4.80% |       | **137.8**         |       | 137.8            |       |
| DP&L - Pollution control series maturing  2034 - 4.80% |       | **41.3**          |       | 41.3             |       |
| DP&L - Pollution control series maturing  2028 - 4.70% |       | **35.3**          |       | 35.3             |       |
|                                                       | ** ** | **784.4**         |       | 784.4            |       |
|                                                       |       |              |       |             |       |
| DP&L - Obligations for capital leases                  |       | **1.5**           |       | 2.0              |       |
| Unamortized debt discount                                  |       | **(1.1**          | **)**      | (1.2             | )          |
| Total                                                      |       | **$**             | **784.8**  |             | $          | 785.2 |   |
|                                                            |            |                   |            |                  |            |  |  |  |  |

 

AtSeptember 30, 2007, **DPL’s**scheduled maturities of long-term debt, including capital lease obligations,over the next five years are $0.2 million for the remainder of 2007, $100.7million in 2008, $175.8 million in 2009, $0.6 million in 2010 and$297.4 million in 2011.

 

AtSeptember 30, 2007, **DP&L’s**scheduled maturities of long-term debt, including capital lease obligations,over the next five years are $0.2 million for the remainder of 2007, $0.7million in 2008, $0.8 million in 2009, $0.6 million in 2010 and nonein 2011.  Substantially all property of **DP&L** is subject to the mortgage liensecuring the first mortgage bonds.  

 

During the first quarterof 2006, the Ohio Department of Development (ODOD) awarded **DP&L**the ability to issue over the next three years up to $200 million of qualifiedtax-exempt financing from the ODOD’s 2005 volume cap carryforward.  The financing is to be used to partially fundthe ongoing flue gas desulfurization (FGD) capital projects.  On September 13, 2006, the Ohio Air Quality 

 

 

28

----

**Notes to the CondensedConsolidated Financial Statements (continued)**

 

 

Development Authority(OAQDA) issued $100 million of 4.80% fixed interest rate OAQDA Revenue Bonds2006 Series A due September 1, 2036.  Inturn, **DP&L** borrowed these funds from theOAQDA.  These funds were placed in escrowwith a trustee and, as of April 3, 2007, **DP&L** hasdrawn out the entirety of the funds.  **DP&L** is considering issuing in conjunction with theOAQDA another series of tax-exempt bonds to finance additional qualifying solidwaste disposal facility costs at Miami Fort, Killen, Stuart and Conesville generatingstations.

 

On November 21, 2006, **DP&L** entered into a new $220 million unsecured revolvingcredit agreement replacing its $100 million facility.  This new agreement has a five-year term thatexpires November 21, 2011 and provides **DP&L** withthe ability to increase the size of the facility by an additional $50 millionat any time.  The facility contains onefinancial covenant:  **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  As of September 30, 2007,**DP&L**had no borrowings outstanding under this facility.  Fees associated with this credit facility areapproximately $0.2 million per year. Changes in credit ratings, however, may affect fees and the applicableinterest rate.  This revolving creditagreement also contains a $50 million letter of credit sublimit.  **DP&L** hascertain contractual agreements for the sale and purchase of power, fuel andrelated energy services that contain credit rating related clauses allowing thecounter parties to seek additional surety under certain conditions.  As of September 30, 2007, **DP&L** had no outstanding letters of credit against thefacility.

 

During the second quarterending June 30, 2007, **DPL** enteredinto a short-term loan to **DP&L** for$105 million.  **DP&L**paid down $15 million of this loan during the third quarter ending September30, 2007, leaving a current outstanding loan balance of $90 million.  This short-term loan does not affect our debtcovenants.  There are no otherinter-company debt collateralizations or debt guarantees between **DPL**, **DP&L**and their subsidiaries.  None of the debtobligations of **DPL** or **DP&L** are guaranteed or secured byaffiliates and no cross-collateralization exists between any subsidiaries.

 

 

29

----

**Notes to the Condensed Consolidated Financial Statements (continued)**

 

**9.     Commitments andContingencies**

 

**Contractual Obligations andCommercial Commitments**

We enter intovarious contractual obligations and other commercial commitments that mayaffect the liquidity of our operations. At September 30, 2007, these include:

 
| ** **                           | ** ** | ** ** | ** ** | **Payment Year** | ** ** |
|--------------------------------------|------------|------------|------------|------------------|------------|
| $ in millions                   | ** ** | **Total**  | ** ** | **2007**         | ** ** | **2008-2009** | ** ** | **2010-2011** | ** ** | **Thereafter** | ** ** |
| **DPL**                              | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 1,550.0    |             | $          | — |   | $ | 275.0 |   | $ | 297.4 |   | $ | 977.6 |   |
| Interest payments                    |       | 1,026.4    |       | 23.9             |       | 170.7 |   | 144.0 |   | 687.8 |   |
| Pension and postretirement payments  |       | 219.1      |       | 5.5              |       | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital lease                        |       | 2.3        |       | 0.2              |       | 1.5 |   | 0.6 |   | — |   |
| Operating leases                     |       | 0.8        |       | 0.4              |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts (a)                   |       | 925.8      |       | 104.6            |       | 578.8 |   | 242.4 |   | — |   |
| Limestone contracts (a)              |       | 57.7       |       | 0.6              |       | 9.5 |   | 10.9 |   | 36.7 |   |
| Reserve for uncertain tax provisions |       | 41.9       |       | 41.9             |       | — |   | — |   | — |   |
| Other contractual obligations        |       | 337.2      |       | 232.8            |       | 86.5 |   | 14.5 |   | 3.4 |   |
| Total contractual obligations        |       | $          | 4,161.2    |             | $          | 409.9 |   | $ | 1,167.5 |   | $ | 756.4 |   | $ | 1,827.4 |   |
|                                 |       |       |       |             |       |   |   |   |   |   |   |
| **DP&L**                         | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 783.2      |             | $          | — |   | $ | — |   | $ | — |   | $ | 783.2 |   |
| Interest payments                    |       | 542.6      |       | 9.8              |       | 78.3 |   | 78.3 |   | 376.2 |   |
| Pension and postretirement payments  |       | 219.1      |       | 5.5              |       | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital lease                        |       | 2.3        |       | 0.2              |       | 1.5 |   | 0.6 |   | — |   |
| Operating leases                     |       | 0.8        |       | 0.4              |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts (a)                   |       | 925.8      |       | 104.6            |       | 578.8 |   | 242.4 |   | — |   |
| Limestone contracts (a)              |       | 57.7       |       | 0.6              |       | 9.5 |   | 10.9 |   | 36.7 |   |
| Reserve for uncertain tax provisions |       | 41.9       |       | 41.9             |       | — |   | — |   | — |   |
| Other contractual obligations        |       | 337.2      |       | 232.8            |       | 86.5 |   | 14.5 |   | 3.4 |   |
| Total contractual obligations        |       | $          | 2,910.6    |             | $          | 395.8 |   | $ | 800.1 |   | $ | 393.3 |   | $ | 1,321.4 |   |

----

| *(a)* | ***DP&L****-operated units* |
|-------|---------------------------------|

 

Long-termdebt:

**DPL’s** long-term debtas of September 30, 2007 consists of **DP&L’s**first mortgage bonds and tax-exempt pollution control bonds, **DPL** unsecured notes and includes current maturities andunamortized debt discounts.

 

**DP&L’s** long-term debtas of September 30, 2007 consists of first mortgage bonds, tax-exempt pollutioncontrol bonds and includes an unamortized debt discount.

 

See Note 8 of Notes toCondensed Consolidated Financial Statements.

 

Interestpayments:

Interest payments associatedwith the long-term debt described above.

 

Pensionand postretirement payments:

As of September 30, 2007, **DP&L** had estimated future benefit payments as outlinedin Note 6 of Notes to Condensed Consolidated Financial Statements.  These estimated future benefit payments areprojected through 2016.

 

Capitallease:

As of September 30, 2007, **DP&L** had a capital lease that expires in September 2010.

 

30

----

**Notes to the Condensed Consolidated Financial Statements (continued)**

 

Operating leases:

Asof September 30, 2007, **DPL** and **DP&L** had several operating leases withvarious terms and expiration dates.  Notincluded in this total is approximately $88,000 per year related toright-of-way agreements that are assumed to have no definite expiration dates.

 

Coal contracts:

**DP&L** has entered into variouslong-term coal contracts to supply portions of its coal requirements for itsgenerating plants.  Contract prices aresubject to periodic adjustment and have features that limit price escalation inany given year.

 

Limestone contract:

**DP&L** has entered into a contract to supply limestone forits generating facilities.

 

Reserve for uncertain tax positions:

OnJanuary 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes” (FIN 48).  There was no significant impact to our overallresults of operations, cash flows or financial position.  The total amountof unrecognized tax benefits as of the date of adoption was $36.8 million andwe have recorded $3.5 million (net of tax) of accrued interest.  During2007, we recorded an additional $1.6 million in accrued interest resulting in atotal reserve for uncertain tax positions of $41.9 million as of September 30,2007.  None of the amount of unrecognized tax benefits is due to uncertaintyin the timing of deductibility.

 

Other contractual obligations:

Asof September 30, 2007, **DPL** and **DP&L** had various other contractualobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

We enter intovarious commercial commitments which may affect the liquidity of ouroperations.  At September 30, 2007, theseinclude:

 

Creditfacilities: 

InNovember 2006, **DP&L** replacedits previous $100 million revolving credit agreement with a $220 millionfive-year facility that expires on November 21, 2011.  **DP&L** hasthe ability to increase the size of the facility by an additional $50 millionat any time.  At September 30, 2007,there were no outstanding borrowings under this facility.

 

Guarantees:

**DP&L** owns a 4.9% equityownership interest in an electric generation company.  As of September 30, 2007, **DP&L** could be responsible for therepayment of 4.9%, or $34.1 million, of a $695 million debt obligation thatmatures in 2026.

 

Intwo separate transactions in November and December 2006, **DPL**agreed to be a guarantor of the obligations of its wholly-owned subsidiary,DPLE regarding the sale of the Darby Electric Peaking Station to AmericanElectric Power and the sale of the Greenville Electric Peaking Station to BuckeyeElectric Power, Inc.  In both cases, **DPL** has agreed to guarantee the obligations of DPLE over amultiple year period as follows:

 
| $ in millions | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|--------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Darby              |       | **$**      | **30.6**   |     | $          | 23.0     |       | $        | 15.3       |   | $ | 7.7 |   |
|               |       | ** ** |       |     |       |     |       |     |       |
| Greenville         |       | **$**      | **14.8**   |     | $          | 11.1     |       | $        | 7.4        |   | $ | 3.7 |   |

 

 

31

----

**Notes to the Condensed Consolidated Financial Statements (continued)**

 

**Contingencies**

In the normal course of business, we are subject to various lawsuits,actions, proceedings, claims and other matters asserted under laws andregulations.  We believe the amountsprovided in our Condensed Consolidated Financial Statements, as prescribed byGAAP, are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that theactual amounts required to satisfy alleged liabilities from various legalproceedings, claims, tax examinations and other matters discussed below, and tocomply with applicable laws and regulations, will not exceed the amounts reflectedin our Condensed Consolidated Financial Statements.  As such, costs, if any, that may be incurredin excess of those amounts provided as of September 30, 2007, cannot bereasonably determined.

 

**Employees**

Approximately 53% of our employees are undera collective bargaining agreement.

 

**Environmental Matters**

**DPL**, **DP&L**and our subsidiaries’ facilities and operations are subject to a wide range ofenvironmental regulations and law.  Inthe normal course of business, we haveinvestigatory and remedial activities underway at these facilities to comply,or to determine compliance, with such regulations.  Wehave been identified, either by a government agency or by a privateparty seeking contribution to site clean-up costs, as a potentially responsibleparty (PRP) at two sites pursuant to state and federal laws.  Werecord liabilities for probable estimated loss in accordance withStatement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting forContingencies” as discussed in Note 1 of the Notes to Condensed ConsolidatedFinancial Statements.  We evaluate the potential liabilityrelated to probable losses quarterly and may revise our estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on our results of operationsand financial position.

 

On November 18, 2004, the State of New Yorkand seven other states (the States) filed suit against the American ElectricPower Corporation (AEP) and its various subsidiaries, alleging various CleanAir Act (CAA) violations at a number of AEP electric generating facilities,including Conesville Unit 4 (co-owned by AEP’s subsidiary Columbus Southern,Duke Energy’s subsidiary Cincinnati Gas & Electric, and us).  The casewas subsequently consolidated with similar cases brought by the federal EPA andother plaintiffs dating back to 1999, which cases also involved AEP electricgenerating facilities. On October 9, 2007, AEP filed before the federaldistrict court in Ohio a consent decree executed by AEP, the EPA, the Statesand the other plaintiffs.  The consent decree is a comprehensive andcomplex settlement of issues presented in the case.  It affects us onlywith respect to Conesville Unit 4, which is made subject to requirements toinstall Selective Catalytic Reduction (SCR) units and Flue Gas Desulfurization(FGD) units by December 31, 2010.   Because the co-owners hadpreviously budgeted for such installation, this portion of the settlement doesnot materially change projected costs.  AEP will also be required tooperate its power plants, including Conesville Unit 4, to meet specified annualcaps across all of the power plants covered by the consent decree.  It isexpected that AEP will be able to meet those annual cap requirements withoutmaterially affecting Conesville Unit 4’s operations beyond the requirements toinstall and operate SCR and FGD equipment.   The consent decree alsorequires the payment by AEP of a $15 million civil penalty and to incur costsof $60 million in environmental damage mitigation projects.  The share ofsuch costs that may ultimately be assigned to Conesville Unit 4 and any furthershare assigned to us as a co-owner has not been determined but is not expectedto be material. The court will provide an opportunity for public commenton the proposed consent decree.  After public comment is received, thecourt will review the proposed consent decree and has the power to accept orreject it.  **DPL** cannot predict when the courtwill issue a ruling or what that ruling may be.

 

In September 2004, the Sierra Club filed a lawsuit against **DP&L**and the other owners of the Stuart GeneratingStation in the United States District Court for the Southern District of Ohiofor alleged violations of the CAA and the Station’s operating permit.  **DP&L**, onbehalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has takenplace, expert reports have been filed by both parties and depositions ofexperts are expected to occur in the fourth quarter of 2007.  Dispositive motions are to be filed inJanuary 2008.  No trial date has beenset.  **DP&L**is unable to determine the impact of this lawsuit, if any, on its overallresults of operations, financial position or cash flows.

 

In February 2007, Ohio’s Regional Air Pollution Control Agency (RAPCA),issued a Notice of Violation (NOV) to **DP&L** withrespect to an allegedly failed performance test of one boiler in November 2006for particulate matter at **DP&L’s**Hutchings Generating Station.  On June29, 2007, the U.S. Environmental Protection Agency (US EPA) Region V, issued aNOV to **DP&L** with respect to the sameperformance test and with respect to earlier tests for particulates conductedin 1996 and 1998 for a different boiler at the same station.  Representatives from **DP&L**met with officials from US EPA Region V and RAPCA on July 24, 2007 to discussthe referenced performance tests, subsequent performance tests, and past andplanned operations at the Station.  **DP&L** is unable to predict at this time what furtheractions, if any, will be taken by the US EPA or RAPCA with respect to theseNOVs.

 

 

32

----

**Notes tothe Condensed Consolidated Financial Statements (continued)**

 

**10.Executive Litigation**

 

On May 21, 2007, we settled the litigationwith three former executives.  As part of this settlement, the threeformer executives relinquished and dismissed all their claims including thoserelated to certain deferred compensation, RSUs, MVE incentives, stock optionsand legal fees. The RSUs and stock options relinquished and forfeited were 1.3million and 3.6 million, respectively. Prior to the settlement date, **DPL** had accruedobligations of approximately $64.2 million of which **DP&L**had accrued obligations of approximately $60.3 million.  Included in theseamounts was approximately $3.1 million associated with the forfeiture of stockoptions.  In exchange for our payment of$25 million, all of these claims were settled.

 

As a result of this settlement during thesecond quarter ended June 30, 2007, **DPL**realizeda net pre-tax gain in continuing and discontinued operations of approximately$31.0 million and $8.2 million, respectively.  The net gain is comprisedof the reversal of the $64.2 million of accrued obligations less the $25million settlement.  The obligations related to the discontinuedoperations were associated with the management of **DPL’s**financial asset portfolio, which was conducted in our MVE subsidiary.  The MVE operations were discontinued in 2005with the sale of the financial asset portfolio. The $25 million settlement expense was allocated between continuing anddiscontinued operations based on the proportionate share of continuing anddiscontinued obligations.  The following table outlines the components of **DPL’s** net pre-tax gain for continuing anddiscontinued operations:

 
| **Continuing  operations:**           | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| Reversal of accrued obligations       |       | $          | 50.8       |   |
| Allocated settlement expense          |       | (19.8      | )          |
| Net gain from continuing operations   |       | $          | 31.0       |   |
|                                  |       |       |       |
| **Discontinued  operations:**         | ** ** | ** ** | ** ** |
| Reversal of accrued obligations       |       | $          | 13.4       |   |
| Allocated settlement expense          |       | (5.2       | )          |
| Net gain from discontinued operations |       | $          | 8.2        |   |

 

As a result of this settlement during thesecond quarter ended June 30, 2007, **DP&L**realizeda net pre-tax gain in continuing operations of approximately $35.3million.  Accrued obligations associated with the former executives’litigation were recorded by **DP&L** sincethe obligations were associated with our non-qualified benefit plans.  **DP&L** had noownership of **DPL’s** discontinued financial assetportfolio business, therefore these liabilities were reversed and **DP&L’s** net pre-tax gain was recorded within continuingoperations.  The following table outlinesthe components of **DP&L’s** netgain:

 
| **Continuing  operations:**         | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| Reversal of accrued obligations     |       | $60.3      |       |
| Allocated settlement expense        |       | (25.0      | )          |
| Net gain from continuing operations |       | $35.3      |       |

 

The $25 million settlement was funded fromthe sale of financial assets held in **DP&L’s**Master Trust Plan for deferred compensation. As part of this transaction during the second quarter ended June 30,2007, **DPL** and **DP&L**recorded a $3.2 million realized gain which is reflected in investment income**.**

 

**11.  Insurance Recovery Claim**

 

On April 30,2007, **DP&L** executed asettlement agreement for $14.5 million with one of our insurers, AssociatedElectric & Gas Insurance Services (AEGIS), under a fiduciary liabilitypolicy to recoup a portion of legal fees associated with our litigation againstthree former executives.  This wasrecorded as a reduction to operation and maintenance expense during the secondquarter ended June 30, 2007.

 

On May 16, 2007, **DPL**and **DP&L**notified one of our insurers,Energy Insurance Mutual Limited, under an umbrella fiduciary liability policy,of our intent to pursue a claim for additional legal fees that **DPL** and **DP&L** incurredin defending claims made by the three former executives.

 

33

----

** **

**Notes tothe Condensed Consolidated Financial Statements (continued)**

 

**12.  Regulatory Matters**

 

We apply the provisionsof Statement of Financial Accounting Standards No. 71, “Accounting for theEffects of Certain Types of Regulation,” (SFAS 71) to our regulatedoperations.  This accounting standarddefines regulatory assets/liabilities as the deferral of incurredcosts/benefits expected to be reflected in future customer rates.

 

Regulatory liabilitiesare reflected on the Condensed Consolidated Balance Sheet under the captionentitled “Other Deferred Credits”. Regulatory assets and liabilities on the Condensed Consolidated BalanceSheet include:

                                    
| $ in millions                                | ** ** | **Type of  Recovery (a)** | ** ** | **Amortization  Through** | ** ** | **At  September 30,  2007** | ** ** | **At  December 31,  2006** | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **Regulatory  Assets:**                           | ** ** | ** **                | ** ** | ** **                | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Deferred recoverable income taxes                 |       | C/B                       |       | Ongoing                   | ** ** | **$**                       | **51.9**   |                       | $          | 53.1 |   |
| Pension and postretirement benefits               |       | C                         |       | Ongoing                   | ** ** | **44.5**                    |       | 47.1                       |       |
| Electric Choice system costs                      |       | F                         |       | 2010                      | ** ** | **11.0**                    |       | 13.5                       |       |
| Regional transmission organization costs          |       | C                         |       | 2014                      | ** ** | **10.3**                    |       | 11.4                       |       |
| Deferred storm costs                              |       | C                         |       | 2008                      | ** ** | **2.7**                     |       | 5.4                        |       |
| PJM administrative costs                          |       | F                         |       | 2009                      | ** ** | **3.4**                     |       | 4.6                        |       |
| Power plant emission fees                         |       | C                         |       | Ongoing                   | ** ** | **4.4**                     |       | 4.5                        |       |
| Rate case expenses                                |       | F                         |       | 2010                      | ** ** | **0.8**                     |       | 1.0                        |       |
| Retail settlement system costs                    | ** ** | ** **                |       |                      |       | **3.1**                     |       | 3.1                        |       |
| PJM integration costs                             |       | F                         |       | 2015                      | ** ** | **1.1**                     |       | 1.4                        |       |
| Other costs                                       | ** ** | ** **                |       |                      |       | **3.8**                     |       | 3.5                        |       |
| **Total regulatory assets**                       | ** ** | ** **                |       |                      |       | **$**                       | **137.0**  |                       | $          | 148.6 |   |
|                                              |       |                      |       |                      |       |                        |       |                       |       |
| **Regulatory Liabilities:**                       | ** ** | ** **                | ** ** | ** **                | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Asset retirement obligations - regulated property | ** ** | ** **                |       |                      |       | **$**                       | **90.7**   |                       | $          | 86.3 |   |
| Postretirement benefits                           | ** ** | ** **                |       |                      |       | **7.1**                     |       | 7.6                        |       |
| SECA net revenue subject to refund                | ** ** | ** **                |       |                      |       | **20.4**                    |       | 18.7                       |       |
| **Total regulatory liabilities**                  | ** ** | ** **                |       |                      |       | **$**                       | **118.2**  |                       | $          | 112.6 |   |

----

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

*C — Recovery of incurred costs only.*

*B — Balance has an offsetting liability resulting in no impact on ratebase.*

 

**RegulatoryAssets:**

We evaluate our regulatoryassets each period and believe recovery of these assets is probable.  We have received or requested a return oncertain regulatory assets for which we are currently recovering or seekingrecovery through rates.

 

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

 

Pensionand postretirement benefits represent the unfundedbenefit obligation related to the transmission and distribution areas of ourelectric business.  We have historicallyrecorded these costs on the accrual basis, and these costs have been historicallyrecovered through rates.  This factor,combined with the historical precedents from the Public Utilities Commission ofOhio (PUCO) and the Federal Energy Regulatory Commission (FERC), makes futurerate recovery of these costs probable.

 

ElectricChoice system costs represent costs incurred to modify the customerbilling system for unbundled rates and electric choice bills relative to othergeneration suppliers and information reports provided to the stateadministrator of the low-income electric program.  In February 2005, the PUCO approved astipulation allowing us to recover certain costs incurred for modifications toour billing system from all customers in our service territory.  On March 1, 2006, the PUCO issued an orderthat allowed us to begin collecting this rider immediately.  We expect to recover all costs over fiveyears.

 

Regionaltransmission organization costs represent costs incurred tojoin a Regional Transmission Organization (RTO) that controls the receipts anddelivery of bulk power within the service area. These costs are being amortized over a 10-year period that commenced inOctober 2004.

 

34

----

 

**Notes tothe Condensed Consolidated Financial Statements (continued)**

 

Deferredstorm costs include costs incurred by us to repair damage fromthe December 2004 and January 2005 ice storms. On July 12, 2006, the PUCO approved our tariff as proposed and we beganrecovering these deferred costs over a two-year period beginning August 1, 2006.

 

PJMadministrative costs contain the administrative fees billed to us by PJMInterconnection, L.L.C. (PJM) as a member of PJM.  Pursuant to a PUCO order issued on January25, 2006, these deferred costs will be recovered over a three-year period fromretail ratepayers beginning February 2006.

 

Powerplant emission fees represent costs paid to the State of Ohio forenvironmental monitoring that are or will be recovered from customers overvarious periods under a PUCO rate rider.

 

Ratecase expenses represent costs incurred in connection with theRate Stabilization Surcharge that was approved by the PUCO and implemented inJanuary 2006.  These costs are beingamortized over a five-year period.

 

Retailsettlement system costs represent costs to implement a retailsettlement system thatreconciles the amount of energy a competitiveretail electric service (CRES) supplier delivers to its customers and what itscustomers actually use.  Based on caseprecedent in other utilities’ cases, the cost of this system is recoverablethrough our next transmission rate case that will be filed at the FERC.  The timing of this case is uncertain at thistime.

 

PJMintegration costs include infrastructure costs and other relatedexpenses incurred by PJM and reimbursed by **DP&L** tointegrate us into the RTO.  Pursuant to aFERC order, the costs are being recovered over a 10-year period beginning May2005 from wholesale customers within PJM.

 

Othercosts primarily include consumer education advertising regarding electricderegulation and will be recovered over various periods.

 

**RegulatoryLiabilities:**

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

 

Postretirementbenefits reflect a regulatory liability that was recordedfor the portion of the unrealized gain on our postretirement trust assetsrelated to the transmission and distribution areas of our electricbusiness.   We have historically recordedthese transactions on an accrual basis and these costs have historically beenrecovered through rates.  This factor,combined with the historical precedents from the PUCO and the FERC, make itprobable that these amounts will be reflected in future rates.

 

SECA (Seams Elimination Cost Adjustment) net revenue subject to refund represents thedeferral of net SECA revenue accrued in 2005 and 2006.  SECA revenue and expenses represent FERCordered transitional payments to replace the through-and-out transmission ratesthat were eliminated within the PJM/Midwest Independent Transmission SystemOperator, Inc. (MISO) region.  A hearingwas held in early 2006 to determine the amount of these transitional payments.  A hearing examiner’s recommendation of August2006 has been appealed by multiple parties including **DP&L**.  To date, no ruling by the FERC has beenissued.  We received and paid thesetransitional payments from May 2005 through March 2006.

 

**13.****        ****Ownership of Facilities**

 

**DP&L**and two otherOhio utilities have undivided ownership interests in seven electric generatingfacilities and numerous transmission facilities.  Certain expenses, primarily fuel costs forthe generating units, are allocated to the owners based on their energyusage.  The remaining expenses, as wellas investments in fuel inventory, plant materials, operating supplies andcapital additions, are allocated to the owners in accordance with theirrespective ownership interests.  As ofSeptember 30, 2007, **DP&L** had$334.0 million of construction work in progress at such facilities.

 

35

----

 

**Notes tothe Condensed Consolidated Financial Statements (continued)**

 

**DP&L’s**undividedownership interest in such jointly owned facilities at September 30, 2007 is asfollows:

 

 
| ** **                                                                                                                                                                                                                                                                                                                       | ** ** | **DP&L Share** | ** ** | **DP&L Investment**        | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                       | ** ** | **Ownership  (%)** | ** ** | **Production  Capacity  (MW)** | ** ** | **Gross Plant  in Service  ($ in millions)** | ** ** | **Accumulated  Depreciation  ($ in millions)** | ** ** | **Construction Work  in Progress  ($ in millions)** | ** ** |
| Production Units:                                                                                                                                                                                                                                                                                                                |       |               |       |                           |       |   |   |   |   |   |   |
| Beckjord Unit 6                                                                                                                                                                                                                                                                                                                  |       | 50.0               |       | 207                            |       | 63 |   | 53 |   | 7 |   |
| Conesville Unit 4                                                                                                                                                                                                                                                                                                                |       | 16.5               |       | 129                            |       | 34 |   | 27 |   | 24 |   |
| East Bend Station                                                                                                                                                                                                                                                                                                                |       | 31.0               |       | 186                            |       | 199 |   | 128 |   | 9 |   |
| Killen Station                                                                                                                                                                                                                                                                                                                   |       | 67.0               |       | 424                            |       | 568 |   | 249 |   | 12 |   |
| Miami Fort Units 7&8                                                                                                                                                                                                                                                                                                         |       | 36.0               |       | 360                            |       | 270 |   | 103 |   | 70 |   |
| Stuart Station                                                                                                                                                                                                                                                                                                                   |       | 35.0               |       | 839                            |       | 392 |   | 205 |   | 201 |   |
| Zimmer Station                                                                                                                                                                                                                                                                                                                   |       | 28.1               |       | 365                            |       | 1,055 |   | 568 |   | 11 |   |
| Transmission (at varying  percentages)                                                                                                                                                                                                                                                                                           |       |               |       | 90                             |       | 50 |   | 0 |   |
|                                                                                                                                                                                                                                                                                                                             |       |               |       |                           |       |   |   |   |   |   |   |
| **DPL’s** and **DP&L’s**  share of operating costs associated with the jointly-owned generating  facilities are included within the corresponding line on the Condensed  Consolidated Statement of Results of Operations and our share of the  investment is included in the Condensed Consolidated Balance Sheet. |       |               |       |
|                                                                                                                                                                                                                                                                                                                                  |            |                    |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

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

 

Certain statements contained in this report are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  Matters discussed in thisreport that relate to events or developments that are expected to occur in thefuture, including management’s expectations, strategic objectives, businessprospects, anticipated economic performance and financial condition and othersimilar matters constitute forward-looking statements.  Forward-looking statements are based onmanagement’s beliefs, assumptions and expectations of future economicperformance taking into account the information currently available tomanagement.  These statements are notstatements of historical fact and are typically identified by terms and phrasessuch as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,”“could,” “may,” “plan,” “project,” “predict,” “will” and similarexpressions.  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 **DPL’s** control,including but not limited to: abnormal or severe weather and catastrophicweather-related damage; unusual maintenance or repair requirements; changes infuel costs and purchased power, coal, environmental emissions, natural gas andother commodity prices; volatility and changes in markets for electricity andother energy-related commodities; increased competition and deregulation in theelectric utility industry; increased competition in the retail generationmarket; changes in interest rates; state, federal and foreign legislative andregulatory initiatives that affect cost and investment recovery, emissionlevels, rate structures or tax laws; changes in federal and/or stateenvironmental laws and regulations to which **DPL**and its subsidiaries are subject; the development of Regional TransmissionOrganizations, including PJM to which **DPL’s** operatingsubsidiary (**DP&L**) has given control of itstransmission functions; changes in **DPL’s**purchasing processes, pricing, delays, contractor and supplier performance andavailability; significant delays associated with large construction projects;growth in **DPL’s** service territory and changes indemand and demographic patterns; changes in accounting rules and the effect ofaccounting pronouncements issued periodically by accounting standard-settingbodies; financial market conditions; the outcomes of litigation and regulatoryinvestigations, proceedings or inquiries; general economic conditions; and therisks and other factors discussed in **DPL’s** and **DP&L’s**filings with the Securities and ExchangeCommission.

 

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

 

36

----

 

**BUSINESS OVERVIEW**

 

This report includes the combined filing of **DPL Inc. (DPL)** and **The Dayton Power and LightCompany****(DP&L).  DP&L**is the principalsubsidiary of **DPL**providing approximately 99% of**DPL’s**total consolidated revenue andapproximately 93% of **DPL’s**totalconsolidated asset base.  Throughout thisreport, the terms we, us, our and ours are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in the section. Historically, **DPL** and **DP&L** have filed separate SEC filings.  **DPL**and **DP&L**now file combined SEC reports on an interim and annualbasis.

 

**DPL** is a regionalelectric energy and utility company and through its principal subsidiary, **DP&L**, is primarily engaged in the generation,transmission and distribution of electricity in West Central Ohio. **DPL**and **DP&L** striveto achieve disciplined growth in energy margins while limiting volatility inboth cash flows and earnings and to achieve stable, long-term growth throughefficient operations and strong customer and regulatory relations. Morespecifically, **DPL**and**DP&L’s**strategyis to match energy supply with load or customer demand; to maximize profitswhile effectively managing exposure to movements in energy and fuel prices andto utilize the transmission and distribution assets that transfer electricityat the most efficient cost, while maintaining the highest level of customerservice and reliability.

 

We operate and manage generation assets andare exposed to a number of risks through this process. These risks include, butare not limited to, electricity wholesale price risk, fuel supply and pricerisk and power plant performance.  Weattempt to manage these risks through various means. For instance, we operate aportfolio of wholly-owned and jointly-owned generation assets that isdiversified as to fuel source, cost structure and operating characteristics. Weare focused on the operating efficiency of these power plants and maintainingtheir availability.

 

Like other electric utilities and energymarketers, **DP&L** and DPLEnergy, LLC (DPLE), one of **DPL’s**wholly-owned subsidiaries, may sell or purchase electric products on thewholesale market.  **DP&L** and DPLE compete with othergenerators, power marketers, privately and municipally-owned electric utilitiesand rural electric cooperatives when selling electricity.  The ability of **DP&L** and DPLE to sell this electricity will depend on how **DP&L’s** and DPLE’s price, terms andconditions compare to those of other suppliers.

 

We****operate andmanage****transmission and distribution assetsin a rate-regulated environment. Accordingly, this subjects us to regulatoryrisk in terms of the costs that we may recover and the investment returns thatwe may collect in customer rates. We are focused on delivering electricity andmaintaining high standards of customer service and reliability in acost-effective manner.

 

We operate in a regulated and deregulatedenvironment.  The electric utilityindustry has historically operated in a regulated environment.  However, in recent years, there have been anumber of federal and state regulatory and legislative decisions aimed atpromoting competition and providing customer choice.  Market participants have therefore creatednew business models to exploit opportunities. The marketplace is now comprised of independent power producers, energymarketers and traders, energy merchants, transmission and distributionproviders and retail energy suppliers. There have also been new market entrants and activity among thetraditional participants such as: mergers, acquisitions, asset sales andspin-offs of lines of business.  In addition,transmission systems are being operated by Regional Transmission Organizations(RTOs).

 

As part of Ohio’s electric deregulation law,all of the state’s investor-owned utilities are required to join a RTO.  The role of the RTO is to administer an electricmarketplace and ensure reliability of the transmission grid.  In October 2004, **DP&L**successfully integrated its 1,000 miles of high-voltage transmission into thePJM Interconnection, L.L.C. (PJM) RTO. PJM ensures the reliability of the high-voltage electric power systemserving 51 million people in all or parts of Delaware, Illinois, Indiana,Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania,Tennessee, Virginia, West Virginia and the District of Columbia.  PJM coordinates and directs the operation ofthe region’s transmission grid; administers the world’s largest competitivewholesale electricity market; and plans regional transmission expansionimprovements to maintain grid reliability and relieve congestion.

 

37

----

 

As a member of PJM, **DP&L**is subject to charges and costs associated with PJM operations as approved bythe Federal Energy Regulatory Commission (FERC).  As discussed below, in connection with therecovery of such costs in retail rates, **DP&L**incurssignificant administrative charges. Additionally, PJM’s role in administering the regional transmission gridand planning regional transmission expansion improvements results in periodicproposals by PJM and other stakeholder members of PJM to the FERC to allocateand charge costs associated with the transmission system to PJM’s members,including **DP&L**.  **DP&L** andother interested parties have the right to intervene and offercounter-proposals.

 

 

**UPDATES / OTHER MATTERS**

 

 

**Impact of AEP Settlement**

On November 18, 2004, the State of New Yorkand seven other states (the States) filed suit against the American ElectricPower Corporation (AEP) and various subsidiaries, alleging various Clean AirAct (CAA) violations at a number of AEP electric generating facilities,including Conesville Unit 4 (co-owned by AEP’s subsidiary Columbus Southern,Duke Energy’s subsidiary Cincinnati Gas & Electric, and us).  The casewas subsequently consolidated with similar cases brought by the federal EPA andother plaintiffs dating back to 1999, which cases also involved AEP electricgenerating facilities. On October 9, 2007, AEP filed before the federaldistrict court in Ohio a consent decree executed by AEP, the EPA, the Statesand the other plaintiffs.  The consent decree is a comprehensive andcomplex settlement of issues presented in the case.  It affects us onlywith respect to Conesville Unit 4, which is made subject to requirements toinstall Selective Catalytic Reduction (SCR) units and Flue Gas Desulfurization(FGD) units by December 31, 2010.  Because the co-owners had previouslybudgeted for such installation, this portion of the settlement does notmaterially change projected costs.  AEP will also be required to operateits power plants, including Conesville Unit 4, to meet specified annual capsacross all of the power plants covered by the consent degree.  It isexpected that AEP will be able to meet those annual cap requirements withoutmaterially affecting Conesville Unit 4’s operations beyond the requirements toinstall and operate SCR and FGD equipment. The consent decree also requires thepayment by AEP of a $15 million civil penalty and to incur costs of $60 millionin environmental damage mitigation projects.  The share of such costs thatmay ultimately be assigned to Conesville Unit 4 and any further share assignedto us as a co-owner has not been determined but is not expected to bematerial. The court will provide an opportunity for public comment on theproposed consent decree.  After public comment is received, the court willreview the proposed consent decree and has the power to accept or rejectit.  DPL cannot predict when the court will issue a ruling or what thatruling may be.

 

**Depreciation Expense and Study Update**

InJuly 2007, DPL completed a depreciation rate study for non-regulated generationproperty based on its property, plant and equipment balances as of December 31,2005, with adjustments for subsequent scrubber additions.  The results of the depreciation study concludedthat **DPL’s** depreciation rates should bereduced due to asset lives being extended beyond previously estimatedlives.  **DPL**adjusted the depreciation rates for its non-regulated generation property,effective August 1, 2007, reducing depreciation expense.  For the three months ended September 30,2007, the reduction in depreciation expense increased income from continuingoperations by $3.8 million, increased net income by approximately $2.4 millionand increased earnings per share (EPS) by approximately $0.02 per share.  For the period from August 1, 2007 toDecember 31, 2007, the reduction in depreciation expense will increase incomefrom continuing operations of approximately $9.5 million, increase net incomeby approximately $5.9 million and increase EPS by approximately $0.06 pershare.

 

**Updates on Competition and Regulation**

 

**Ohio Matters**

SinceJanuary 2001, **DP&L’s** electriccustomers have been permitted to choose their retail electric generationsupplier.  **DP&L**continues to have the exclusive right to provide delivery service in its statecertified territory.  The PublicUtilities Commission of Ohio (PUCO) maintains jurisdiction over **DP&L’s** delivery of electricity, the standard offersupply service that customers receive if they do not choose an alternativeretail electricity supplier and other rates and charges associated with theprovision of retail electric service.

 

As of September 30, 2007, four unaffiliatedmarketers were registered as Competitive Retail Electric Service (CRES)providers in **DP&L’s** serviceterritory.  While there has been somecustomer switching to date, it represented less than approximately 0.20 percentof sales through the third quarter ending September 30, 2007.  DPL EnergyResources, Inc. (DPLER), an affiliated company, is also a registered CRESprovider and accounted for nearly all of the total kWh supplied by CRESproviders within **DP&L’s**service territory in 2006 and 2007.  In addition, several communities in **DP&L’s** service area have passedordinances allowing the communities to 

 

38

----

 

become government aggregators for the purposeof offering alternative electric generation supplies to their citizens.  To date, none of these communities haveaggregated their generation load.

 

**DP&L** agreed toimplement a Voluntary Enrollment Program (VEP) that would provide customerswith an option to choose a competitive supplier to provide their retailgeneration service should switching not reach 20% in each customer class.  The 20% threshold has never beenreached.  Customers who elected toparticipate in the program have been grouped together and collectively bid outto CRES providers.  Four rounds ofbidding were conducted for the 2007 program resulting in no bids beingreceived.  **DP&L**has completed its obligations under this residential program.

 

On April 4, 2005, **DP&L** filed a request at the PUCO toimplement a new rate stabilization surcharge (RSS) effective January 1,2006 to recover cost increases associated with environmental capital, related operationsand maintenance costs and fuel expenses. **DP&L** entered into asettlement agreement that extended **DP&L’s**rate stabilization period through December 31, 2010 and allowed forrecovery of certain fuel and environmental investment costs.  The PUCO adopted the settlement, but ruledthat the environmental rider will be by-passable by all customers who takeservice from alternate generation suppliers. Applications for rehearing were denied and the case was appealed to theOhio Supreme Court by the Ohio Consumers’ Counsel.  On September 5, 2007, the Ohio Supreme Courtaffirmed the PUCO’s approval of the settlement agreement but remanded oneaspect of the order, that the RSS tariff should be part of the Company’sgeneration tariffs instead of distribution tariffs.  The Company will file to modify its tariffsaccordingly and does not believe this tariff change will impact its futurerevenues.

 

On September 25, 2007, Senate Bill 221 wasintroduced in the Ohio Legislature.  Thebill codifies, in draft form, the governor’s proposed energy policy.  As currently drafted, the bill states thatthe standard service offer currently in effect will continue until adistribution utility files either an energy security plan or a market-basedalternative by which the retail price will be set by a periodic competitive bidprocess.  In order to file a market-basedalternative, the utility has the burden of proof to demonstrate that there iseffective competition in its service territory. The PUCO will establish rules for filing an energy security plan whichmay allow for adjustments to the standard offer for environmental compliancecosts, cost of fuel and purchased power, construction costs of new generatingfacilities or an index price.  Once autility’s energy security plan is approved by the PUCO, the utility is requiredto file an infrastructure improvement plan that will specify the initiativesthe utility will take to rebuild, upgrade or replace its distributioninfrastructure.  The proposed billestablishes a goal that by 2025, twenty-five percent of the generation used tosupply standard offer generation service in the state will come from advancedenergy resources which may include: renewable energy sources, clean coaltechnology, advanced nuclear generation, fuel cells and co-generation.  It creates a federal energy advocate thatwill evaluate the costs and benefits associated with Regional TransmissionOrganizations on behalf of the state.  Itpromotes construction of advanced energy projects by providing low interestloans and grants; promotes energy efficiency and advanced meteringinfrastructure investments and directs the PUCO to develop reliabilityperformance targets.  The outcome of thisproceeding and its financial impact on the Company cannot be determined at thistime.

 

**Federal Matters**

On April 19, 2007, the FERC issued an Order with regard to theallocation of costs associated with new planned transmission facilities. FERC ordered that the cost of new, high-voltage facilities be socialized acrossthe PJM region and the costs of new facilities at lower voltages be assigned tothe load centers that benefit from the new facilities.  The methodologyfor identifying beneficiaries was set for hearing.  On September 14, 2007,**DP&L**, along with the majority ofother stakeholders in PJM, filed a proposed settlement regarding the costallocation methodology for the new facilities at lower voltages.  In addition, on April 19, 2007, the FERCissued an Order relating to the allocation of costs associated with existingtransmission facilities, upholding the existing PJM rate design.  TheseOrders are subject to rehearing and the appeal process.  The financialimpact of the Order to socialize new, high-voltage facilities will be passed onas costs are incurred by utilities constructing such projects and will bereflected in PJM charges to **DP&L**. Over time, this Order is likely to increase PJM charges to **DP&L**.  Although the impact of cost allocation couldbe material, management believes these costs should be recoverable throughretail rates.

 

As a member of PJM, the value of **DP&L’s**generation capacity will be affected by changes in and the clearing results ofthe PJM capacity construct.  The new construct introduces a newReliability Pricing Model (RPM) that changes the way generation capacity ispriced and planned for by PJM. PJM held its first RPM auction duringApril 2007 for the 2007/2008 planning year and held its second RPM auctionduring July 2007 for the 2008/2009 planning year.  A third auction washeld in October 2007 for the 2009/2010 planning year.  **DP&L** doesnot expect a material impact on its results of operations, financial positionor cash flows due to the outcome of these three auctions.

 

39

----

 

**ENVIRONMENTAL CONSIDERATIONS**

 

**DPL**, **DP&L** and our subsidiaries’ facilitiesand operations are subject to a wide range of environmental regulations andlaws by federal, state and local authorities.  The environmental issuesthat may impact us include:

 

•                  The CAA and state laws and regulations(including State Implementation Plans) require compliance, obtaining permitsand reporting as to air emissions.

•                  Litigation with the federaland certain state governments and certain special interest groups regardingwhether modifications to or maintenance of certain coal-fired generating plantsrequired additional permitting or pollution control technology, and/or whetheremissions from coal-fired generating plants cause or contribute to globalclimate changes.

•                  Rules issued by the US andstate EPA that require substantial reductions in SO2, mercury andNOx emissions.  DPL is installing (andhas installed) emission control technology and is taking other measures tocomply with required reductions.

•                  The Federal Clean Water Act,which prohibits the discharge of pollutants into waters of the United Statesexcept pursuant to appropriate permits. In July 2004, the US EPA adopted a newClean Water Act rule to reduce the number of fish and other aquatic organismskilled at once-through cooled power plants.

•                  Solid and hazardous wastelaws and regulations, which govern the management and disposal of certainwastes. The majority of solid waste created from the combustion of coal andfossil fuels is fly ash and other coal combustion byproducts, which the EPA hasdetermined are not hazardous waste subject to Resource Conservation andRecovery Act (RCRA).

 

As well as imposing continuing complianceobligations, these laws and regulations authorize the imposition of substantialpenalties for noncompliance, including fines, injunctive relief and othersanctions. In the normal course of business, we have investigatory and remedial activities underway at thesefacilities to comply, or to determine compliance, with such regulations.  We record liabilities for probableestimated loss in accordance with Statement of Financial Accounting StandardsNo. 5 (SFAS 5), “Accounting for Contingencies” as discussed in Note 1 of theNotes to Condensed Consolidated Financial Statements.  **DPL,**through its captive insurance subsidiaryMiami Valley Insurance Company (MVIC), has an actuarial calculated reserve forenvironmental matters.   We****evaluatethe potential liability related to probable losses quarterly and mayrevise our estimates.  Such revisions in the estimates of the potentialliabilities could have a material effect on our results of operations,financial position or cash flows.

 

In addition to the requirements related toemissions of sulfur dioxide, nitrogen oxides and mercury noted above, there isa growing concern nationally and internationally about global climate changeand the contribution of emissions of greenhouse gases, including mostsignificantly, carbon dioxide.  This concern has led to increasedinterest in legislation at the federal level, actions at the state level, aswell as litigation relating to greenhouse gas emissions, including a recentU.S. Supreme Court decision holding that the EPA has the authority to regulatecarbon dioxide emissions from motor vehicles under theCAA.  Increased pressure for carbon dioxide emissions reduction alsois coming from investor organizations and the international community.  If legislation or regulations are passed atthe federal or state levels imposing mandatory reductions of carbon dioxide andother greenhouse gases on generation facilities, the cost to **DPL** and **DP&L** ofsuch reductions could be significant.

 

40

----

 

 

**FINANCIAL OVERVIEW**

 

As more fully discussed in later sections of this Form10-Q, the following were the significant themes and events for the three monthsand nine months ended September 30, 2007:

 

•                  For the three months endedSeptember 30, 2007, **DPL’s**basic anddiluted EPS of $0.56 and $0.53, respectively, increased over the basic anddilutive EPS for the same period of the prior year by $0.09 and $0.10,respectively.

 

•                  For the nine months endedSeptember 30, 2007, **DPL’s**basic anddiluted EPS of $1.63 and $1.49, respectively, increased over the basic anddilutive EPS for the same period of the prior year by $0.47 and $0.42,respectively.

 

•                  **DPL’s** revenues forthe three months and nine months ended September 30, 2007 increased 8% and 10%,respectively, compared to the same periods in 2006 primarily due to weatherdriven retail sales volume, increase in average retail rates and the revenuerealized from the PJM capacity auctions.  **DPL’s**purchased power costs for the three and nine months ended September 30, 2007increased****$21.0 million and $94.1 million,respectively, over the same periods in 2006.

 

•                  **DPL’s** cash flowsfrom operations were $211.8 million and $212.4 million for the nine monthsended September 30, 2007 and 2006, respectively.

 

•                  **DP&L’s** revenues forthe three and nine months ended September 30, 2007 increased 8% and 10%,respectively, compared to the same periods in 2006 primarily due to weatherdriven retail sales volume, increase in average retail rates and the revenuerealized from the PJM capacity auctions. **DP&L’s** purchased power costs forthe three and nine months ended September 30, 2007 increased $21.0 million and$93.5 million, respectively, over the same periods in 2006.

 

•                  **DP&L’s** cash flowsfrom operations for the nine months ended September 30, 2007 of $239.6 millionwere 11% lower than the cash flows from operations of $270.7 million for thesame period in 2006 primarily due to changes in working capital.

 

 

41

----

 

**RESULTS OF OPERATIONS — DPL Inc.**

 

**DPL’s**results of operations include the results ofits subsidiaries, including the consolidated results of **DP&L**and all of **DP&L’s** consolidatedsubsidiaries.  **DP&L**providesapproximately 99% of the total revenues of **DPL. **All material intercompany accountsand transactions have been eliminated in consolidation.  A separate specific discussion of the resultsof operations for **DP&L** ispresented elsewhere in this report.

 

**FinancialHighlights****—****DPL**

 

 

| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions                        | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                      |       |                   |       |                  |       |   |   |   |   |
| **Revenues:**                             |       |                   |       |                  |       |   |   |   |   |
| Retail                                    | ** ** | **$**                  | **326.2**  |                  | $          | 307.2 | ** ** | **$** | **915.7** |   | $ | 848.7 |   |
| Wholesale                                 | ** ** | **52.9**               |       | 61.8                  | ** ** | **140.0** |   | 129.7 |   |
| RTO ancillary (a)                         | ** ** | **39.9**               |       | 20.6                  | ** ** | **81.4** |   | 55.7 |   |
| Other revenues, net of fuel costs         | ** ** | **3.0**                |       | 2.8                   | ** ** | **8.5** |   | 8.4 |   |
| Total revenues                            | ** ** | **422.0**              |       | 392.4                 | ** ** | **1,145.6** |   | 1,042.5 |   |
|                                      |       |                   |       |                  |       |   |   |   |   |
| Less: Fuel                                | ** ** | **95.9**               |       | 99.4                  | ** ** | **250.5** |   | 262.2 |   |
|  Purchased power (a)                 | ** ** | **82.1**               |       | 61.1                  | ** ** | **217.5** |   | 123.4 |   |
| Gross margins (b)                         | ** ** | **$**                  | **244.0**  |                  | $          | 231.9 | ** ** | **$** | **677.6** |   | $ | 656.9 |   |
|                                      |       |                   |       |                  |       |   |   |   |   |
| Gross margins as a percentage of revenues | ** ** | **57.8**               | %          | 59.1                  | %          | **59.1** | **%** | 63.0 | % |
|                                      |       |                   |       |                  |       |   |   |   |   |
| **Operating income**                      | ** ** | **$**                  | **110.8**  |                  | $          | 98.5 | ** ** | **$** | **283.7** |   | $ | 257.6 |   |
|                                      |       |                   |       |                  |       |   |   |   |   |
| **Basic Earnings per share:**             |       |                   |       |                  |       |   |   |   |   |
| Continuing operations                     | ** ** | **$**                  | **0.56**   |                  | $          | 0.44 | ** ** | **$** | **1.54** |   | $ | 1.06 |   |
| Discontinued operations                   | ** ** | **—**             |       | 0.03                  | ** ** | **0.09** |   | 0.10 |   |
| Net income                                | ** ** | **$**                  | **0.56**   |                  | $          | 0.47 | ** ** | **$** | **1.63** |   | $ | 1.16 |   |

----

*(a)**             **RTOancillary revenues include PJM capacity revenues of $13.3 million and $17.6million for the three and nine months ended September 30, 2007,respectively.  Purchased power includesPJM capacity charges of $12.2 million and $16.2 million for the three and ninemonths ended September 30, 2007, respectively. For the same periods of the prior year, PJM capacity revenues andcharges were immaterial.*

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

 

**DPL — Revenues**

Retail customers,especially residential and commercial customers, consume more electricity onwarmer and colder days. Therefore, **DPL’s** retailsales volume is impacted by the number of heating and cooling degree daysoccurring during a year.  Since **DPL** plans to utilize its internal generating capacity tosupply its retail customers’ needs first, increases in retail demand willdecrease the volume of internal generation available to be sold in thewholesale market and vice versa.

 

The wholesalemarket covers a multi-state area and settles on an hourly basis throughout theyear. Factors impacting **DPL’s** wholesalesales volume each hour of the year include wholesale market prices; **DPL’s** retail demand; retail demand elsewhere throughout theentire wholesale market area; **DPL** and non-**DPL** plants’ availability to sell into the wholesale marketand weather conditions across the multi-state region. **DPL’s**plan is to make wholesale sales when market prices allow for the economicoperation of its generation facilities not being utilized to meet its retaildemand.

 

 

42

----

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions         | ** ** | **2007 vs. 2006**      | ** ** | **2007 vs. 2006**     | ** ** |
|                       |       |                   |       |                  |       |
| **Retail**                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| Rate                       | ** ** | **$**                  | 13.1       |                  | $          | 31.0 |   |
| Volume                     | ** ** | 6.4                    |       | 36.9                  |       |
| Other miscellaneous        | ** ** | (0.5                   | )          | (0.9                  | )          |
| **Total retail change**    | ** ** | **$**                  | 19.0       |                  | $          | 67.0 |   |
|                       |       |                   |       |                  |       |
| **Wholesale**              | ** ** |                   | ** ** | ** **            | ** ** |
| Rate                       | ** ** | **$**                  | 0.9        |                  | $          | 10.5 |   |
| Volume                     | ** ** | (9.8                   | )          | (0.2                  | )          |
| **Total wholesale change** | ** ** | **$**                  | (8.9       | )                     | $          | 10.3 |   |
|                       |       |                   |       |                  |       |
| **Other**                  | ** ** |                   | ** ** | ** **            | ** ** |
| RTO services               | ** ** | **$**                  | 19.3       |                  | $          | 25.7 |   |
| Other                      | ** ** | 0.2                    |       | 0.1                   |       |
| **Total other change**     | ** ** | **$**                  | 19.5       |                  | $          | 25.8 |   |
| ** **                 | ** ** |                   | ** ** | ** **            | ** ** |
| **Total revenues change**  | ** ** | **$**                  | 29.6       |                  | $          | 103.1 |   |

 

For the three months ended September 30,2007, revenues increased $29.6 million, or 8%, to $422.0 million from $392.4million for the same period in the prior year.  This increase wasprimarily the result of higher average rates for retail and wholesale sales,higher retail sales volume and an increase in RTO ancillary revenue. Retail revenues increased $19.0 million, or 6%, resulting from a 4% increase inaverage retail rates primarily relating to the environmental investment riderand a 2% increase in weather driven sales volume as total degree days increased5%.  These increases resulted in a $13.1million rate variance and a $6.4 million sales volume variance.   Wholesale revenues decreased $8.9 million,or 14%, primarily resulting from a 16% decrease in wholesale sales volume, partiallyoffset by a 2% increase in average market rates.  The decrease in sales volume resulted in a$9.8 million unfavorable volume variance and increase in average market ratesresulted in a $0.9 million favorable rate variance.  For the three months ended September 30,2007, RTO ancillary revenues increased $19.3 million primarily resulting from$13.3 million realized from the PJM capacity auction and $6.0 million of PJMtransmission loss credits. RTO ancillary revenues primarily consist ofcompensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves and capacity payments under the new RPM construct.  RTO ancillary revenues from the PJM capacityauction are substantially offset by RTO ancillary charges for PJM capacitycharges included in purchase power. Other RTO ancillary revenues are partially offset by other RTO ancillarycharges in purchased power.

 

For the nine months ended September 30, 2007,revenues increased $103.1 million, or 10% to $1,145.6 million from $1,042.5million for the same period in the prior year.  This increase wasprimarily the result of higher average rates for retail and wholesale sales,higher retail sales volume and an increase in RTO ancillary revenue. Retail revenues increased $67.0 million resulting from a 4% increase in weatherdriven sales volume as total degree days increased 14% and a 4% increase inaverage retail rates primarily relating to the environmental investment andstorm recovery riders.  These increases resulted in a $36.9 million salesvolume variance and a $31.0 million rate variance.  Wholesale revenues increased $10.3 million,or 8%, primarily resulting from an 8% increase in average market rates. Theincrease in average market rates resulted in a $10.5 million favorable ratevariance.  For the nine months endedSeptember 30, 2007, RTO ancillary revenues increased $25.7 million compared tothe same period in 2006 primarily resulting from $17.6 million realized from thePJM capacity auction, $8.7 million of PJM transmission losses and congestioncredits and $2.3 million from the sale of financial transmission rights (FTRs),partially offset by an adjustment of $2.8 million for Seams Elimination CostAdjustment (SECA).  RTO ancillary revenues primarily consist ofcompensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves and capacity payments under the new RPM construct.  RTO ancillary revenues from the PJM capacityauction are substantially offset by RTO ancillary charges for PJM capacitycharges included in purchase power. Other RTO ancillary revenues are partially offset by other RTO ancillarycharges in purchased power.

 

43

----

 

## **DPL — Margins, Fuel andPurchased Power**

For the three months endedSeptember 30, 2007, gross margin of $244.0 million increased $12.1 million, or5%, from $231.9 million during the same period of 2006.  As a percentage of total revenues, grossmargin decreased to 57.8% in the third quarter of 2007 compared to 59.1% in thethird quarter of 2006.  This resultprimarily reflects the favorable impact of the increase in retail revenues andlower fuel costs, offset by increased purchased power costs.  Fuel costs, which include coal, natural gas,oil and emission allowance costs, decreased by $3.5 million, or 4%, in thethird quarter of 2007 compared to the same period in 2006 due to lower averagefuel prices, partially offset by a 1% increase in generation output.  Purchased power increased $21.0 million inthe third quarter of 2007 compared to the same period in 2006 primarilyresulting from a $19.5 million increase due to higher average market rates and$12.2 million related to RTO ancillary charges for PJM capacity chargespartially offset by decreased costs of $10.4 million relating to a 22% decreasein purchased power volume.  The decrease in purchased power volume wasprimarily the result of increased production at our generating facilities.  The RTO ancillary charges for PJM capacitycharges are substantially offset by RTO ancillary revenues for PJM capacityresulting in minimal impact to gross margin.

 

For the nine months endedSeptember 30, 2007, gross margin of $677.6 million increased $20.7 million, or3%, from $656.9 million during the same period of 2006.  As a percentage of total revenues, grossmargin decreased to 59.1% in 2007 compared to 63.0% in 2006.  This result primarily reflects the favorableimpact of both retail and wholesale revenues discussed above and lower fuelcosts offset by increased purchased power costs.  Fuel costs, which include coal, natural gas,oil and emission allowance costs, decreased by $11.7 million, or 4%, for thenine months ended September 30, 2007 compared to the same period in 2006.  This decrease was primarily due to a 4%decrease in generation output and a decrease in average fuel prices.  Purchased power increased $94.1 million forthe nine months ended September 30, 2007 compared to the same period in 2006reflecting $58.8 million of increased charges relating to higher purchasedpower volume, an $18.2 million increase due to higher average market rates and$16.2 million related to RTO ancillary charges for PJM capacity charges.  The increase in purchased power volume wasprimarily the result of increased sales volume and partner operated generatingfacilities being less available compared to the prior year due to planned andunplanned outages.  In addition, we purchase power when market prices arebelow the marginal costs associated with our higher cost generatingfacilities.  The RTO ancillary charges for PJM capacity charges are substantiallyoffset by RTO ancillary revenues for PJM capacity resulting in minimal impactto gross margin.

 

**DPL**—**Operationand Maintenance**

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions                                   | ** ** | **2007 vs. 2006**      | ** ** | **2007 vs. 2006**     | ** ** |
| Power production costs                               |       | $                      | 6.3        |                  | $          | 19.7 |   |
| Legal costs                                          |       | (0.8                   | )          | 3.2                   |       |
| Mark-to-market adjustments for deferred compensation |       | (0.8                   | )          | 2.9                   |       |
| Service operations                                   |       | 0.2                    |       | 2.2                   |       |
| Insurance claims reserves                            |       | —                 |       | (3.1                  | )          |
| Pension expense                                      |       | (3.8                   | )          | (4.5                  | )          |
| Gain on sale of corporate aircraft                   |       | —                 |       | (6.0                  | )          |
| Insurance settlement                                 |       | —                 |       | (14.5                 | )          |
| Other, net                                           |       | 1.8                    |       | 0.8                   |       |
| **Total operation and maintenance expense**          |       | $                      | 2.9        |                  | $          | 0.7 |   |

 

For the quarter ended September 30, 2007,operation and maintenance expense increased $2.9 million, or 5%, compared tothe same period in 2006 primarily resulting from increased power productionmaintenance costs of $4.0 million that were largely related to boiler and turbinemaintenance and other power production operating costs of $2.3 million.  These increases were offset in part by a $3.8million decrease in pension expense resulting primarily from a $1.1 million2007 actuarial study adjustment and the recognition of $2.6 million in 2006 fora lump sum distribution to a former officer.

 

For the nine months ended September 30,2007, operation and maintenance expense remained relatively flat, increasing$0.7 million, compared to the prior year. This variance was primarily comprised of increased power productionmaintenance costs of $15.1 million that were mostly related to boiler andturbine maintenance and other power production operating costs of $4.6 million;increased legal costs of $3.2 million primarily related to the litigation withthe three former executives; $2.9 million in mark-to-market adjustments relatedto deferred compensation assets and increased service operations costs of $2.2million primarily related to overhead line 

 

 

44

----

 

restoration activities.  These increases were nearly offset by a $14.5million insurance settlement reimbursing us for legal fees relating to thelitigation with the three former executives; a gain on the sale of thecorporate aircraft of $6.0 million; and a $4.5 million decrease in pensionexpense resulting primarily from a $1.1 million 2007 actuarial study adjustmentand the recognition of $2.6 million in 2006 for a lump sum distribution to aformer officer.

 

**DPL — Depreciation and Amortization**

For the threemonths and nine months ended September 30, 2007, depreciation and amortizationexpense decreased $5.2 million and $11.3 million,respectively, compared to the same periods in 2006, primarily reflecting the absence of depreciation for the peakingunits sold during the first quarter of 2007 and the impact of lowerdepreciation rates for generation property which were put into effect on August1, 2007, reducing expense by $3.8 million. This decrease was partially offset by higher costs related to increasedplant balances primarily resulting from the installation of pollution controlequipment.

 

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

Forthe nine months ended September 30, 2007, amortization of regulatory assetsincreased $3.1 million, compared to the same period in 2006, primarily for theamortization of incremental 2004/2005 severe storm costs that began on August1, 2006.

 

**DPL — Net Gain onSettlement of Executive Litigation**

On May 21, 2007, we settled the litigationwith the three former executives.  Inexchange for a payment of $25 million, the three former executives relinquishedand dismissed all of their claims including those related to deferredcompensation, restricted stock units (RSUs), MVE incentives, stock options andlegal fees.  As a result of thissettlement, during the second quarter ended June 30, 2007, **DPL**realized a net pre-tax gain incontinuing operations of approximately $31.0 million.  See Note 10 of Notes to CondensedConsolidated Financial Statements.

 

## **DPL — Investment Income**

For the three months endedSeptember 30, 2007, investment income decreased $1.8 million to $1.2 millionfrom $3.0 million for the same period in 2006. This decrease was primarily due to lower interest income relating tolower cash and short-term investment balances in 2007 compared to 2006.

 

For the nine months endedSeptember 30, 2007, investment income decreased $4.4 million to $9.5 millionfrom $13.9 million for the same period in 2006. This decrease was primarily the result of lower interest income relatingto lower cash and short-term investment balances in 2007, compared to 2006,partially offset by $3.2 million in realized gains from the sale of financialassets held in **DP&L’s** Master Trust Plan fordeferred compensation used for the settlement payment to the three formerexecutives.

 

**DPL**—**InterestExpense**

For the three monthsended September 30, 2007, interest expense decreased $8.0 million, or 32%,compared to the same period in 2006 primarily from $4.6 million less interestassociated with the redemption of **DPL** debt ($225million, 8.25% Senior Notes) and $4.0 million of greater capitalized interestprimarily related to increased pollution control capital expenditures.  These decreases were partially offset by $1.0million of interest expense associated with **DP&L’s**new $100 million, 4.8% Series pollution control bonds issued September 13,2006.

 

For the nine monthsended September 30, 2007, interest expense decreased $17.7 million, or 23%,compared to 2006 primarily from $10.8 million less interest from the redemptionof **DPL** debt ($225 million, 8.25% SeniorNotes) and $9.7 million of increased capitalized interest primarily related toincreased pollution control capital expenditures.  These decreases were partially offset by $3.4million of interest expense associated with **DP&L’s**new $100 million, 4.8% Series pollution control bonds issued September 2006 and$1.1 million of interest expense associated with **DP&L’s**short-term borrowing of $95 million from its unsecured revolving credit agreementof $220 million.

 

**DPL**—**OtherIncome (Deductions)**

For the three months ended September 30,2007, other income of $2.0 million increased from $0.2 million of otherdeductions for the same period of the prior year primarily resulting from therecognition of a $2.1 million deferred credit related to a litigationsettlement (which was not part of the executive litigation settlement).

 

For the nine months ended September 30, 2007,other income of $2.6 million increased $2.5 million from $0.1 million for thesame period of the prior year primarily resulting from the recognition of a$2.1 million deferred credit related to a litigation settlement (which was notpart of the executive litigation settlement).

 

 

45

----

 

## **DPL — Income Tax Expense**

For the three months and nine months endedSeptember 30, 2007, income taxes increased $7.4 million and $28.7 million,respectively, compared to the same periods in 2006, primarily reflecting anincrease in pre-tax book income.

 

**DPL — Discontinued Operations**

For the three months ended September 30,2007, there was no activity relating to discontinued operations resulting in a$3.4 million decrease compared to the same period in 2006.  During the prior year we recognized $3.4million of earnings from discontinued operations which was comprised of apre-tax gain of $5.7 million less associated expenses and taxes relating to therecognition of a deferred gain associated with the financial asset portfolio.

 

For the nine months ended September 30, 2007,discontinued operations decreased $1.0 million compared to the same period in2006. During the first nine months we recognized $10.0 million of earnings fromdiscontinued operations which was comprised of the net (pre-tax) gain of $8.2 millionrealized from the settlement of the litigation with the three former executivesless associated income taxes and a (pre-tax) gain of $8.2 million relating tothe recognition of deferred gains from the financial asset portfolio lessassociated taxes and expenses. During the prior year we recognized $11.0million of earnings from discontinued operations which was comprised of apre-tax gain of $18.9 million less associated expenses and taxes relating tothe recognition of a deferred gain associated with the financial assetportfolio.

 

See Note 3 and Note 10 of the Notes toCondensed Consolidated Financial Statements.

 

 

**RESULTS OF OPERATIONS — The DaytonPower and Light Company**

 

**Financial Highlights — DP&L**

** **

| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions                        | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                      |       |                   |       |                  |       |   |   |   |   |
| **Revenues:**                             |       |                   |       |                  |       |   |   |   |   |
| Retail                                    | ** ** | **$**                  | **285.7**  |                  | $          | 272.2 | ** ** | **$** | **804.7** |   | $ | 748.9 |   |
| Wholesale                                 | ** ** | **94.0**               |       | 97.5                  | ** ** | **253.0** |   | 231.5 |   |
| RTO ancillary (a)                         | ** ** | **39.9**               |       | 20.6                  | ** ** | **81.4** |   | 55.7 |   |
| Total revenues                            | ** ** | **419.6**              |       | 390.3                 | ** ** | **1,139.1** |   | 1,036.1 |   |
|                                      |       |                   |       |                  |       |   |   |   |   |
| Less: Fuel                                | ** ** | **87.6**               |       | 90.9                  | ** ** | **240.2** |   | 251.0 |   |
|  Purchased power (a)                 | ** ** | **91.7**               |       | 70.7                  | ** ** | **228.2** |   | 134.7 |   |
| Gross margins (b)                         | ** ** | **$**                  | **240.3**  |                  | $          | 228.7 | ** ** | **$** | **670.7** |   | $ | 650.4 |   |
|                                      |       |                   |       |                  |       |   |   |   |   |
| Gross margins as a percentage of revenues | ** ** | **57.3**               | %          | 58.6                  | **%**      | **58.9** | % | 62.8 | % |
|                                      |       |                   |       |                  |       |   |   |   |   |
| **Operating income**                      | ** ** | **$**                  | **113.2**  |                  | $          | 107.1 | ** ** | **$** | **287.6** |   | $ | 295.3 |   |

----

*(a)**      **RTOancillary revenues include PJM capacity revenues of $13.3 million and $17.6million for the three and nine months ended September 30, 2007,respectively.  Purchased power includesPJM capacity charges of $12.2 million and $16.2 million for the three and ninemonths ended September 30, 2007, respectively. For the same periods of the prior year, PJM capacity revenues andcharges were immaterial.*

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

 

 

46

----

 

**DP&L — Revenues**

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

 

The wholesalemarket covers a multi-state area and settles on an hourly basis throughout theyear. Factors impacting **DP&L’s**wholesale sales volume each hour of the year include wholesale market prices; **DP&L’s** retail demand, retail demand elsewhere throughoutthe entire wholesale market area; **DP&L**andnon-**DP&L** plants’ availability to sellinto the wholesale market and weather conditions across the multi-state region.**DP&L’s** plan is to make wholesalesales when market prices allow for the economic operation of its generationfacilities that are not being utilized to meet its retail demand.

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions         | ** ** | **2007 vs. 2006**      | ** ** | **2007 vs. 2006**     | ** ** |
|                       |       |                   |       |                  |       |
| **Retail**                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| Rate                       | ** ** | **$**                  | 8.5        |                  | $          | 24.2 |   |
| Volume                     | ** ** | 5.7                    |       | 32.5                  |       |
| Other miscellaneous        | ** ** | (0.7                   | )          | (0.9                  | )          |
| **Total retail change**    | ** ** | **$**                  | 13.5       |                  | $          | 55.8 | ** ** |
|                       |       |                   |       |                  |       |
| **Wholesale**              | ** ** |                   |       |                  | ** ** |
| Rate                       |       | $                      | 12.0       |                  | $          | 21.9 |   |
| Volume                     |       | (15.5                  | )          | (0.4                  | )          |
| **Total wholesale change** | ** ** | **$**                  | (3.5       | )                     | $          | 21.5 | ** ** |
|                       |       |                   |       |                  |       |
| **RTO ancillary**          | ** ** |                   |       |                  | ** ** |
| RTO services               |       | $                      | 19.3       |                  | $          | 25.7 |   |
| ** **                 | ** ** |                   |       |                  | ** ** |
| **Total revenues change**  | ** ** | **$**                  | 29.3       |                  | $          | 103.0 | ** ** |

 

For the three months ended September 30,2007, revenues increased $29.3 million, or 8%, to $419.6 million from $390.3million for the same period in the prior year.  This increase wasprimarily the result of higher average rates for retail and wholesale sales,higher retail sales volume and an increase in RTO ancillary revenue. Retail revenues increased $13.5 million, or 5%, resulting from a 3% increase inaverage retail rates primarily relating to the environmental investment riderand a 2% increase in weather driven sales volume as total degree days increased5%. These increases resulted in an $8.5 million rate variance and a $5.7million sales volume variance.  Wholesale revenues decreased $3.5 million, or 4%, primarily resultingfrom a 16% decrease in wholesale sales volume, partially offset by a 15%increase in average market rates.  Thedecrease in sales volume resulted in a $15.5 million unfavorable volumevariance and increase in average market rates resulted in a $12.0 millionfavorable rate variance.  For the threemonths ended September 30, 2007, the RTO ancillary revenues increased $19.3million primarily resulting from $13.3 million realized from the PJM capacityauction and $6.0 million of PJM transmission loss credits. RTO ancillaryrevenues primarily consist of compensation for use of **DP&L’s** transmission assets, regulationservices, reactive supply and operating reserves and capacity payments underthe new RPM construct.  RTO ancillaryrevenues from the PJM capacity auction are substantially offset by RTOancillary charges for PJM capacity charges included in purchase power.  Other RTO ancillary revenues are partiallyoffset by other RTO ancillary charges in purchased power.

 

For the nine months ended September 30, 2007,revenues increased $103.0 million, or 10%, to $1,139.1 million from $1,036.1million for the same period in the prior year.  This increase was theresult of higher average rates for retail and wholesale sales, higher retailsales volume and an increase in RTO ancillary revenue.  Retail revenues increased $55.8 millionresulting from a 4% increase in weather driven sales volume as total degreedays increased 14% and a 3% increase in average retail rates primarily relatingto the environmental investment and storm cost recovery riders.  These increases resulted in a $32.5 millionsales volume variance and a $24.2 million rate variance.  Wholesale revenues increased $21.5 million,or 9%, primarily resulting from a 9% increase in average market rates. Theincrease in average market rates resulted in a $21.9 million favorable ratevariance.  For the nine months ended September 30, 2007, the RTO ancillaryrevenues increased $25.7 million compared to the same period in 2006 primarilyresulting from $17.6 million realized from the PJM capacity auction, $8.7million of PJM transmission losses and congestion credits and $2.3 million fromthe sale of financial transmission rights (FTRs), partially offset by anadjustment of $2.8 million for Seams Elimination 

 

 

47

----

 

Cost Adjustment (SECA).  RTO ancillaryrevenues primarily consist of compensation for use of **DP&L’s** transmission assets, regulationservices, reactive supply and operating reserves and capacity payments underthe new RPM construct.  RTO ancillaryrevenues from the PJM capacity auction are substantially offset by RTOancillary charges for PJM capacity charges included in purchase power.  Other RTO ancillary revenues are partiallyoffset by other RTO ancillary charges in purchased power.

 

## **DP&L — Margins, Fueland Purchased Power**

For the three months endedSeptember 30, 2007, gross margin of $240.3 million increased $11.6 million, or5%, from $228.7 million during the same period of 2006.  As a percentage of total revenues, grossmargin decreased to 57.3% in the third quarter of 2007 compared to 58.6% in thethird quarter of 2006.  This resultprimarily reflects the favorable impact of the increase in retail revenues andlower fuel costs, offset by increased purchased power costs.  Fuel costs, which include coal, natural gas,oil and emission allowance costs, decreased by $3.3 million, or 4%, in thethird quarter of 2007 compared to the same period in 2006 due to lower averagefuel prices, partially offset by a 1% increase in generation output.  Purchased power increased $21.0 million inthe third quarter of 2007, compared to the same period in 2006, primarilyresulting from a $17.2 million increase due to higher average market rates and$12.2 million related to RTO ancillary charges for PJM capacity charges,partially offset by a decrease of $8.2 million related to a 14% decrease inpurchased power volume.  The decrease in purchased power volume wasprimarily the result of increased production at our generatingfacilities.  The RTO ancillary charges for PJM capacity charges aresubstantially offset by RTO ancillary revenues for PJM capacity resulting inminimal impact to gross margin.

 

For the nine months endedSeptember 30, 2007, gross margin of $670.7 million increased $20.3 million, or3%, from $650.4 million during the same period of 2006.  As a percentage of total revenues, grossmargin decreased to 58.9% in 2007 compared to 62.8% in 2006.  This result primarily reflects the favorableimpact of both retail and wholesale revenues discussed above and lower fuelcosts offset by increased purchased power costs.  Fuel costs, which include coal, natural gas,oil and emission allowance costs, decreased by $10.8 million, or 4%, for thenine months ended September 30, 2007, compared to the same period in 2006,primarily due to a 4% decrease in generation output and a decrease in averagefuel prices.  Purchased power costsincreased $93.5 million for the nine months ended September 30, 2007, comparedto the same period in 2006, reflecting $62.6 million of increased chargesrelated to higher purchased power volume, a $13.8 million increase due tohigher average market rates and $16.2 million related to RTO ancillary chargesfor PJM capacity charges.  The increasein purchased power volume was primarily the result of increased sales volumeand partner operated generating facilities being less available compared to theprior year due to planned and unplanned outages.  In addition, we purchasepower when market prices are below the marginal costs associated with ourhigher cost generating facilities.  The RTO ancillary charges for PJM capacitycharges are substantially offset by RTO ancillary revenues for PJM capacityresulting in minimal impact to gross margin.

 

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

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| $ in millions                                   | ** ** | **2007 vs. 2006**      | ** ** | **2007 vs. 2006**     | ** ** |
| Power production costs                               |       | $                      | 6.3        |                  | $          | 19.7 |   |
| Service operations                                   |       | 0.3                    |       | 2.2                   |       |
| Low-income payment program                           |       | 0.2                    |       | 1.7                   |       |
| Mark-to-market adjustments for deferred compensation |       | (0.3                   | )          | 1.4                   |       |
| Pension expense                                      |       | (3.7                   | )          | (4.3                  | )          |
| Other, net                                           |       | 2.2                    |       | 2.3                   |       |
| **Total operation and maintenance expense**          |       | $                      | 5.0        |                  | $          | 23.0 |   |

 

For the quarter endedSeptember 30, 2007, operation and maintenance expense increased $5.0 million,or 8%, compared to the same period in 2006 primarily resulting from increasedpower production maintenance costs of $4.0 million that were largely related toboiler and turbine maintenance and other power production operating costs of$2.3 million.  These increases wereoffset in part by a $3.7 million decrease in pension expense resultingprimarily from a $1.1 million 2007 actuarial study adjustment and therecognition of $2.6 million in 2006 for a lump sum distribution to a formerofficer.

 

For the nine months ended September 30,2007, operation and maintenance expense increased $23.0 million, or 13%,compared to the prior year.  Thisvariance was primarily comprised of increased power production maintenancecosts of $15.2 million that were mostly related to boiler and turbinemaintenance, and other power production operating costs of $4.5 million;increased service operations costs of $2.2 million primarily related tooverhead line restoration activities; $1.7 million of increased costsassociated with the low-income payment program; and $1.4 million inmark-to-market adjustments related to deferred compensation assets.  These 

 

 

48

----

 

increases were partially offset by a $4.3million decrease in pension expense resulting primarily from a $1.1 million2007 actuarial study adjustment and the recognition of $2.6 million in 2006 fora lump sum distribution to a former officer.

 

**DP&L — Depreciation and Amortization**

## **For the three months and ninemonths ended September 30, 2007, depreciation and amortization expensedecreased $1.6 million and $1.6 million, respectively, compared to the sameperiods in 2006, primarily reflecting the impact of lower depreciation ratesfor generation property which were put into effect on August 1, 2007, reducingexpense by $3.8 million.  This decreasewas partially offset by higher costs related to increased plant balancesprimarily resulting from the installation of pollution control equipment.**

 

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

Forthe nine months ended September 30, 2007, amortization of regulatory assetsincreased $3.1 million, compared to the same period in 2006, primarily for theamortization of incremental 2004/2005 severe storm costs that began on August1, 2006.

 

## **DP&L — InvestmentIncome**

For the nine months endedSeptember 30, 2007, investment income increased $2.7 million to $7.5 millionfrom $4.8 million for the same period in 2006. This increase was primarily the result of $3.2 million in realized gainsfrom the sale of financial assets held in **DP&L’s**Master Trust Plan for deferred compensation used for the settlement payment tothe three former executives.

 

**DP&L**—**Other Income (Deductions)**

For the three months ended September 30,2007, other income of $2.1 million increased from $0.2 million of otherdeductions for the same period of the prior year primarily resulting from therecognition of a $2.1 million deferred credit related to a litigationsettlement (which was not part of the executive litigation settlement).

 

For the nine months endedSeptember 30, 2007, other income of $2.7 increased $2.6 million from $0.1million from the same period of the prior year primarily resulting from therecognition of a $2.1 million deferred credit related to a litigationsettlement (which was not part of the executive litigation settlement).

 

**DP&L — Net Gain on Settlement of Executive Litigation**

On May 21, 2007, we settled the litigationwith the three former executives.  Inexchange for a payment of $25 million, the three former executives relinquishedand dismissed all of their claims including those related to deferredcompensation, RSUs, MVE incentives, stock options and legal fees.  As a result of this settlement, during thesecond quarter ended June 30, 2007, **DP&L**realizeda net pre-tax gain in continuing operations of $35.3 million.  See Note 10 of Notes to CondensedConsolidated Financial Statements.

 

**DP&L**—**Interest Expense**

For the three months endedSeptember 30, 2007, interest expense decreased $1.6 million compared to thesame period of 2006, primarily related to $4.0 million of increased capitalizedinterest resulting from pollution control capital expenditures at thegenerating plants, partially offset by increased interest of $1.0 millionrelated to the $100 million 4.8% Series pollution control bonds issued inSeptember 2006 and $1.6 million in interest to **DPL**on a short-term loan of $90 million.

 

For the nine months endedSeptember 30, 2007, interest expense decreased $3.4 million compared to thesame period of 2006, primarily related to $9.7 million of increased capitalizedinterest resulting from pollution control capital expenditures at thegenerating plants, partially offset by increased interest of $3.4 millionrelated to the $100 million, 4.8% Series pollution control bonds issued inSeptember 2006; $1.6 million in interest to **DPL**on a short-term loan of $90 million and $1.1 million of interest related to the$95 million draw on our revolving credit facility.

 

## **DP&L — Income TaxExpense**

For the three months and nine months endedSeptember 30, 2007, income taxes increased $3.1 million and $11.7 millioncompared to the same periods in 2006, primarily reflecting an increase inpre-tax book income.

 

 

49

----

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL REQUIREMENTS**

 

**DPL’s**financial condition, liquidity and capitalrequirements, includes the consolidated results of **DP&L** and all of **DP&L’s**consolidated subsidiaries. All material intercompany accounts and transactionshave been eliminated in consolidation.

 

**DPL’s Cash Position**

**DPL’s** cash and cashequivalents totaled $98.7 million at September 30, 2007, compared to $262.2million at December 31, 2006, a decrease of $163.5 million. In addition, **DPL** had restricted funds held in trust at September 30, 2007of $0.5 million in comparison to $10.1 million at December 31, 2006. Thedecrease in cash and cash equivalents was primarily attributed to theretirement of the $225.0 million **DPL** 8.25%Senior Notes, $250.1 million in capital expenditures and $83.7 million individends paid on common stock. The decrease was partially offset by $211.8million generated from operating activities; $158.4 million from the sale ofpeaking units and the corporate aircraft; $15.0 million from the exercise ofstock options, including tax effects, and $10.1 million of restricted fundsdrawn to fund pollution control capital expenditures.

 

**DP&L’s Cash Position**

**DP&L’s** cash and cashequivalents totaled $12.3 million at September 30, 2007, compared to $46.1million at December 31, 2006, a decrease of $33.8 million. The decrease in cashand cash equivalents was primarily attributed to $247.8 million in capitalexpenditures and $125.0 million in dividends paid on common stock to our parent**DPL**. These cash outflows were largelyoffset by $239.6 million in cash generated from operating activities, $90.0million in a net short-term loan owed to our parent **DPL**,and $10.1 million in restricted funds drawn to fund pollution control capitalexpenditures at our generating plants.

 

**Operating Activities**

 

For the nine months endedSeptember 30, 2007 and 2006, cash flows from operations were as follows:

 

**NetCash provided by Operating Activities**

 

| $ in millions | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------|------------|------------|------------|------------|------------|
|               |       |       |       |       |       |
| **DPL**            | ** ** | **$**      | **211.8**  |       | $          | 212.4 |   |
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **DP&L**       | ** ** | **$**      | **239.6**  |       | $          | 270.7 |   |

 

 

The tariff-based revenuefrom our energy business continues to be the principal source of cash fromoperating activities. Management believes that the diversified retail customermix of residential, commercial and industrial classes, coupled with the raterelief approved by the PUCO for 2006 and beyond, provides us with a reasonablypredictable cash flow from operations.

 

**DPL’s Cash provided byOperating Activities**

**DPL** generated net cash from operating activitiesof $211.8 million and $212.4 million for the nine months ended September 30,2007 and 2006, respectively. The net cash provided by operating activities forthe nine months ended September 30, 2007 was primarily the result of operatingprofitability, partially offset by cash used for working capital. The net cashprovided by operating activities for the nine months ended September 30, 2006was primarily the result of operating profitability, partially offset by cashused for working capital, specifically taxes.

 

**DP&L’s Cash providedby Operating Activities**

**DP&L** generated net cash fromoperating activities of $239.6 million and $270.7 million in the nine monthsended September 30, 2007 and 2006, respectively. The net cash provided byoperating activities for the nine months ended September 30, 2007 was primarilythe result of operating profitability, partially offset by an increase in cashused for working capital. The net cash provided by operating activities for thenine months ended September 30, 2006 was primarily the result of operatingprofitability.

 

 

50

----

 

**Investing Activities**

 

For the nine months endedSeptember 30, 2007 and 2006, cash flows from investing activities were asfollows:

 

**NetCash used for Investing Activities**

 

| $ in millions | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------|------------|------------|------------|------------|------------|
|               |       |       |       |       |       |
| **DPL**            | ** ** | **$**      | **(91.7**  | **)**      | $          | (155.9 | ) |
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **DP&L**       | ** ** | **$**      | **(247.8** | **)**      | $          | (281.7 | ) |

 

 

**DPL’s Cash used forInvesting Activities**

**DPL’s**net cash used forinvesting activities was $91.7 million and $155.9 million for the nine monthsended September 30, 2007 and 2006, respectively. Net cash used for investingactivities for the nine months endedSeptember 30, 2007 was related to capital expenditures that werepartially offset by proceeds from the sale of two peaking units and corporate aircraft.Net cash used for investing activities for the nine months ended September 30,2006 was related to capital expenditures, partially offset by the net sale ofshort-term investments and securities.

 

**DP&L’s Cash used forInvesting Activities**

**DP&L’s** net cash used for investingactivities was $247.8 million and $281.7 million for the nine months endedSeptember 30, 2007 and 2006, respectively. Net cash used for investingactivities for both years was related to capital expenditures.

 

**Financing Activities**

 

For the nine months endedSeptember 30, 2007 and 2006, cash flows from financing activities were asfollows:

 

**NetCash (used for)/provided by Financing Activities**

 

| $ in millions | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |
| **DPL**            | ** ** | **$**    | **(283.6** | **)**    | $          | (462.4 | ) |
|               |       |     | ** ** |     |       |
| **DP&L**       | ** ** | **$**    | **(25.6**  | **)**    | $          | 22.5 |   |

 

 

**DPL’s Cash (used for)/providedby Financing Activities**

**DPL’s**net cash used forfinancing activities for the nine months ended September 30, 2007 were $283.6million compared to the same period of 2006 of $462.4 million. Net cashused for financing activities for the nine months ended September 30, 2007 wasthe result of cash used to redeem the $225 million 8.25% Senior Notes on March1, 2007 and to pay dividends to stockholders of $83.7 million, partially offsetby cash received from the exercise of stock options of $14.5 million and $10.1million of restricted funds held in trust. Net cash used for financingactivities for the nine months ended September 30, 2006 was the result of cashused to repurchase $400.0 million of common stock and pay dividends to commonshareholders of $85.7 million, partially offset by the receipt of $23 millionof restricted funds held in trust.

 

**DP&L’s Cash (usedfor)/provided by Financing Activities**

**DP&L’s** net cash used for financingactivities for the nine months ended September 30, 2007 was $25.6 millioncompared to cash provided from financing activities of $22.5 million for thenine months ended September 30, 2006. Net cash used for financing activitiesfor 2007 was the result of cash used to pay common stock dividends to ourparent **DPL** of $125.0 million and preferreddividends to third parties of $0.7 million, partially offset by $90.0 millionfor a net short-term loan from our parent **DPL** and $10.1million of restricted funds held in trust. Net cash provided by financingactivities of $22.5 million for the nine months ended September 30, 2006 wasprimarily the result of $23.1 million of draws from funds held by the trusteeto finance our solid waste pollution control capital expenditures, partiallyoffset by $0.6 million for dividends on preferred stock.

 

 

51

----

 

**DPL** and **DP&L** have obligations to make future payments forcapital expenditures, debt agreements, lease agreements and other long-termpurchase obligations. We also have certain contingent commitments such asguarantees. We believe our cash flows from operations, the credit facilities(existing or future arrangements), the senior notes and other short- andlong-term debt financing will be sufficient to satisfy our future workingcapital, capital expenditures and other financing requirements for theforeseeable future. Our ability to generate positive cash flows from operationsis dependent on general economic conditions, competitive pressures and otherbusiness and risk factors described in Item 1a of our fiscal 2006 Form 10-K andPart II, Item 1a, of this Form 10-Q. If we are unable to generate sufficientcash flows from operations, or otherwise comply with the terms of our creditfacilities, the senior notes and other long-term debt, we may be required torefinance all or a portion of our existing debt or seek additional financingalternatives. A discussion of each of our critical liquidity commitments isoutlined below.

 

**Capital Requirements**

**DPL’s** constructionadditions were $275.4 million and $260.0 million for the nine months endedSeptember 30, 2007 and 2006, respectively, and are expected to approximate $360million in 2007.

 

**DP&L’s**construction additions were $273.5 million and $258.2 million for the ninemonths ended September 30, 2007 and 2006, respectively, and are expected toapproximate $360 million in 2007.

 

Planned construction additions for 2007 relate to **DP&L’s** environmental complianceprogram, power plant equipment and its transmission and distribution system.

 

Capital projects are subject to continuousreview and are revised in light of changes in financial and economicconditions, load forecasts, legislative and regulatory developments andchanging environmental standards. For the remainder of 2007, 2008 and 2009, **DPL,** through its subsidiary **DP&L,**is projecting to spend an estimated $705 millionin capital projects, approximately 40% of which are to meet changingenvironmental standards. In our Form 10-Q, as of June 30, 2007, we reported ourestimated capital spending to be approximately $675 million. This increase isdue primarily to increases in capital projects at **DPL**operated generating plants. Our ability to complete capital projects and thereliability of future service will be affected by our financial condition, theavailability of internal funds and the reasonable cost of external funds. Weexpect to finance our construction additions in 2007 with a combination of cashon hand, short-term financing, tax-exempt debt and cash flows from operations.

 

**Debt and Debt Covenants**

**DP&L**is considering issuing in conjunction with the Ohio Air Quality DevelopmentAuthority (OAQDA) another series of tax-exempt bonds to finance the remainingsolid waste disposal facility costs at Miami Fort, Killen, Stuart andConesville generating stations.

 

OnNovember 21, 2006, **DP&L**entered into a new $220 million unsecured revolving credit agreement replacingits $100 million facility. This new agreement has a five year term that expireson November 21, 2011 and provides**DP&L** withthe ability to increase the size of the facility by an additional $50 millionat any time. The facility contains one financial covenant: **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00. Thiscovenant is currently met. As of September 30, 2007, **DP&L**had no outstanding borrowings under this facility. Fees associated with thiscredit facility are approximately $0.2 million per year, however, changes incredit ratings may affect fees and the applicable interest rate. This revolvingcredit agreement also contains a $50 million letter of credit sublimit. As ofSeptember 30, 2007, **DP&L** had no outstanding letters of credit against thefacility. **DP&L** has certain contractualagreements for the sale and purchase of power, fuel and related energy servicesthat contain credit rating related clauses allowing the counter parties to seekadditional surety under certain conditions.

 

Issuance of additionalamounts of first mortgage bonds by **DP&L**is limited by the provisions of its mortgage. However, management believes that**DP&L** continues to havesufficient capacity to issue first mortgage bonds to satisfy its requirementsin connection with its construction programs. The amounts and timing of futurefinancings will depend upon market and other conditions, rate increases, levelsof sales and construction plans.

 

During the second quarter of2007, **DPL** entered into a short-term loan to **DP&L** for $105 million. **DP&L**paid down $15 million of this loan during the third quarter, leaving a currentoutstanding loan balance of $90 million. This short-term loan does not affectour debt covenants. There are no other inter-company debt collateralizations ordebt guarantees between **DPL**, **DP&L** and their subsidiaries. None ofthe debt obligations of **DPL** or **DP&L** are guaranteed or secured byaffiliates and no cross-collateralization exists between any subsidiaries.

 

 

 

52

----

 

 

There was no change to ourdebt covenants as described in our Form 10-K as of December 31, 2006.

 

**Credit Ratings**

Currently,**DPL’s** senior unsecured and **DP&L’s** senior secured debt credit ratings are asfollows:

 
| ** **                       | ** ** | **DPL Inc.** | ** ** | **DP&L** | ** ** | **Outlook** | ** ** | **Effective** | ** ** |
|----------------------------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|
|                             |       |         |       |         |       |        |       |          |       |
| Fitch Ratings                    |       | BBB+         |       | A+           |       | Stable      |       | March 2007    |       |
| Moody’s Investors Service   |       | Baa3         |       | A3           |       | Positive    |       | June 2006     |       |
| Standard & Poor’s Corp. |       | BBB-         |       | BBB+         |       | Stable      |       | February 2007 |       |

 

**Off-Balance Sheet Arrangements**

**DPL** and **DP&L** do not have any off-balance sheetarrangements that have or are reasonably likely to have a current or futureeffect on our financial condition, revenues or expenses, results of operations,liquidity, capital expenditures or capital resources that are material toinvestors.

 

**Contractual Obligations andCommercial Commitments**

We enter intovarious contractual obligations and other commercial commitments that mayaffect the liquidity of our operations. At September 30, 2007, these include:

 
| ** **                           | ** ** | ** ** | ** ** | **Payment Year** | ** ** |
|--------------------------------------|------------|------------|------------|------------------|------------|
| $ in millions                   | ** ** | **Total**  | ** ** | **2007**         | ** ** | **2008-2009** | ** ** | **2010-2011** | ** ** | **Thereafter** | ** ** |
| **DPL**                              | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 1,550.0    |             | $          | — |   | $ | 275.0 |   | $ | 297.4 |   | $ | 977.6 |   |
| Interest payments                    |       | 1,026.4    |       | 23.9             |       | 170.7 |   | 144.0 |   | 687.8 |   |
| Pension and postretirement payments  |       | 219.1      |       | 5.5              |       | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital lease                        |       | 2.3        |       | 0.2              |       | 1.5 |   | 0.6 |   | — |   |
| Operating leases                     |       | 0.8        |       | 0.4              |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts (a)                   |       | 925.8      |       | 104.6            |       | 578.8 |   | 242.4 |   | — |   |
| Limestone contracts (a)              |       | 57.7       |       | 0.6              |       | 9.5 |   | 10.9 |   | 36.7 |   |
| Reserve for uncertain tax provisions |       | 41.9       |       | 41.9             |       | — |   | — |   | — |   |
| Other contractual obligations        |       | 337.2      |       | 232.8            |       | 86.5 |   | 14.5 |   | 3.4 |   |
| Total contractual obligations        |       | $          | 4,161.2    |             | $          | 409.9 |   | $ | 1,167.5 |   | $ | 756.4 |   | $ | 1,827.4 |   |
|                                 |       |       |       |             |       |   |   |   |   |   |   |
| **DP&L**                         | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 783.2      |             | $          | — |   | $ | — |   | $ | — |   | $ | 783.2 |   |
| Interest payments                    |       | 542.6      |       | 9.8              |       | 78.3 |   | 78.3 |   | 376.2 |   |
| Pension and postretirement payments  |       | 219.1      |       | 5.5              |       | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital lease                        |       | 2.3        |       | 0.2              |       | 1.5 |   | 0.6 |   | — |   |
| Operating leases                     |       | 0.8        |       | 0.4              |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts (a)                   |       | 925.8      |       | 104.6            |       | 578.8 |   | 242.4 |   | — |   |
| Limestone contracts (a)              |       | 57.7       |       | 0.6              |       | 9.5 |   | 10.9 |   | 36.7 |   |
| Reserve for uncertain tax provisions |       | 41.9       |       | 41.9             |       | — |   | — |   | — |   |
| Other contractual obligations        |       | 337.2      |       | 232.8            |       | 86.5 |   | 14.5 |   | 3.4 |   |
| Total contractual obligations        |       | $          | 2,910.6    |             | $          | 395.8 |   | $ | 800.1 |   | $ | 393.3 |   | $ | 1,321.4 |   |

----

*(a)  **DP&L**-operatedunits*

 

Long-term debt:

**DPL’s** long-term debt, as of September 30, 2007,consists of **DP&L’s** firstmortgage bonds and tax-exempt pollution control bonds, **DPL** unsecured notes and includes currentmaturities and unamortized debt discounts.

 

**DP&L’s** long-term debt, as ofSeptember 30, 2007, consists of first mortgage bonds, tax-exempt pollutioncontrol bonds and includes an unamortized debt discount.

 

SeeNote 8 of Notes to Condensed Consolidated Financial Statements.

 

 

53

----

 

Interestpayments:

Interest payments associatedwith the long-term debt described above.

 

Pensionand postretirement payments:

As of September 30, 2007, **DP&L** had estimated future benefitpayments as outlined in Note 6 of Notes to Condensed Consolidated FinancialStatements. These estimated future benefit payments are projected through 2016.

 

Capitallease:

Asof September 30, 2007, **DP&L**had a capital lease that expires in September 2010.

 

Operatingleases:

Asof September 30, 2007, **DPL** and **DP&L** had several operating leases withvarious terms and expiration dates. Not included in this total is approximately$88,000 per year related to right-of-way agreements that are assumed to have nodefinite expiration dates.

 

Coalcontracts:

**DP&L** has entered into variouslong-term coal contracts to supply portions of its coal requirements for itsgenerating plants. Contract prices are subject to periodic adjustment and havefeatures that limit price escalation in any given year.

 

Limestonecontracts:

**DP&L** has entered into a contract to supply limestone forits generating facilities.

 

Reservefor uncertain tax positions:

OnJanuary 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes” (FIN 48).  There was no significant impact to our overallresults of operations, cash flows or financial position.  The total amountof unrecognized tax benefits as of the date of adoption was $36.8 million andwe have recorded $3.5 million (net of tax) of accrued interest.  During 2007,we recorded an additional $1.6 million in accrued interest resulting in a totalreserve for uncertain tax positions of $41.9 million as of September 30,2007.  None of the unrecognized tax benefits are due to uncertainty in thetiming of deductibility.

 

Othercontractual obligations:

Asof September 30, 2007, **DPL** and **DP&L** had various other contractualobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

We enter intovarious commercial commitments which may affect the liquidity of ouroperations. At September 30, 2007, these include:

 

Credit facilities:

InNovember 2006, **DP&L** replacedits $100 million revolving credit agreement with a $220 million five-yearfacility that expires on November 21, 2011. **DP&L**has the ability to increase the size of the facility by an additional $50million at any time. At September 30, 2007, there were no outstandingborrowings under this facility.

 

Guarantees:

**DP&L** owns a 4.9% equity ownership interest inan electric generation company. As of September 30, 2007, **DP&L** could be responsible for therepayment of 4.9%, or $34.1 million, of a $695 million debt obligation thatmatures in 2026.

 

Intwo separate transactions in November and December 2006, **DPL**agreed to be a guarantor of the obligations of its wholly-owned subsidiary,DPLE, regarding the sale of the Darby Electric Peaking Station to AmericanElectric Power and the sale of the Greenville Electric Peaking Station toBuckeye Electric Power, Inc. In both cases, **DPL**has agreed to guarantee the obligations of DPLE over a multiple year period asfollows:

 
| $ in millions | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Darby              |       | $        | 30.6       |     | $          | 23.0     |       | $        | 15.3       |   | $ | 7.7 |   |
|               |       |     |       |     |       |     |       |     |       |
| Greenville         |       | $        | 14.8       |     | $          | 11.1     |       | $        | 7.4        |   | $ | 3.7 |   |

 

 

54

----

 

**MARKET RISK**

 

As a result of ouroperating, investing and financing activities, we are subject to certain marketrisks including changes in commodity prices for electricity, coal,environmental emissions and natural gas as well as fluctuations in interestrates. Commodity pricing exposure includes the impacts of weather, marketdemand, increased competition and other economic conditions. For purposes ofpotential risk analysis, we use sensitivity analysis to quantify potentialimpacts of market rate changes on the results of operations. The sensitivityanalysis represents hypothetical changes in market values that may or may notoccur in the future.

 

**Commodity Pricing Risk**

Approximately12% of **DPL’s** and 22% of **DP&L’s** electric revenues for the ninemonths ended September 30, 2007 were from sales of excess energy and capacityin the wholesale market. Energy and capacity in excess of the needs of existingretail customers are sold on the wholesale market when we can identifyopportunities with positive margins. As of September 30, 2007, ahypothetical increase or decrease of 10% in **DPL’s**annual wholesale revenues could result in approximately a $12 million increaseor decrease to annual net income, assuming no increases or decreases in fueland purchased power costs. As of September 30, 2007, a hypothetical increase ordecrease of 10% in **DP&L’s**annual wholesale revenues could result in approximately a $21 million increaseor decrease to annual net income, assuming no increases or decreases in fueland purchased power costs.

 

**DPL’s** fuel (including coal, natural gas, oil and emissionallowances) and purchased power costs as a percent of total operating costs inthe nine months ended September 30, 2007 and 2006 were 54% and 49%,respectively. **DP&L’s** fuel (including coal,natural gas, oil and emission allowances) and purchased power costs as apercent of total operating costs were 55% and 52% in the nine months endedSeptember 30, 2007 and 2006, respectively. We have substantially all of thetotal expected coal volume needed to meet our retail and firm wholesale salesrequirements for 2007 under contract. The majority of our contracted coal ispurchased at fixed prices. Some contracts provide for periodic adjustment andsome are priced based on market indices. Substantially all contracts havefeatures that limit price escalations in any given year. Our consumption of SO2 allowancesshould decline in 2007 due to planned emission control upgrades. We do notexpect to purchase SO2 allowances for 2007. The consumption of SO2 allowances willdepend on market prices for power, availability of our generation units, thetiming of emission control equipment upgrade completion and the actual sulfurcontent of the coal burned. **DP&L** doesnot plan to purchase NOx allowances for 2007. Fuel costs are impactedby changes in volume and price and are driven by a number of variablesincluding weather, reliability of coal deliveries, scheduled outages andgeneration plant mix. Fuel costs are forecasted to be flat in 2007 compared to2006.

 

Purchased power costsdepend, in part, upon the timing and extent of planned and unplanned outages ofour generating capacity. We will purchase power on a discretionary basis whenwholesale market conditions provide opportunities to obtain power at a costbelow our internal production costs. As of September 30, 2007, a hypotheticalincrease or decrease of 10% in **DPL’s**annual fuel and purchased power costs could result in approximately a $34million decrease or increase to annual net income, assuming no increases ordecreases in sales revenues. As of September 30, 2007, a hypothetical increaseor decrease of 10% in **DP&L’s**annual fuel and purchased power costs could result in approximately a $35million decrease or increase to annual net income, assuming no increases ordecreases in sales revenues.

 

**Interest Rate Risk**

Asa result of our normal borrowing and leasing activities, our results areexposed to fluctuations in interest rates, which we manage through our regularfinancing activities. We maintain both cash on deposit and investments in cashequivalents that may be affected by adverse interest rate fluctuations. Ourlong-term debt represents publicly and privately held secured and unsecurednotes and debentures with fixed interest rates. At September 30, 2007, we hadno outstanding borrowings under our revolving credit facility.

 

The carrying value of **DPL’s** debt was $1,552.3 million at September 30, 2007,consisting of **DP&L’s** firstmortgage bonds, **DP&L’s**tax-exempt pollution control bonds, our unsecured notes and **DP&L’s** capital lease. The fair value ofthis debt was $1,564.8 million, based on current market prices or discountedcash flows using current rates for similar issues with similar terms andremaining maturities. The principal cash repayments and related weightedaverage interest rates by maturity date for long-term, fixed-rate debt atSeptember 30, 2007, are as follows:

 

 

55

----

 

| ** **            | ** ** | **DPL’s****Long-term Debt**                                                                                                   | ** ** |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Expected Maturity** | ** ** | **Amount**                                                                                                                         | ** ** | ** ** | ** ** |
| **Date**              | ** ** | **($ in millions)**                                                                                                           | ** ** | **Average Rate** | ** ** |
|                  |       |                                                                                                                               |       |   |   |
| 2007                  |       | $                     0.2 |       | 6.5% |   |
| 2008                  |       | 100.7                                                                                                                              |       | 6.3% |   |
| 2009                  |       | 175.8                                                                                                                              |       | 8.0% |   |
| 2010                  |       | 0.6                                                                                                                                |       | 6.9% |   |
| 2011                  |       | 297.4                                                                                                                              |       | 6.9% |   |
| 2012                  |       | —                                                                                                                             |       | —    |   |
| Thereafter            |       | 977.6                                                                                                                              |       | 5.6% |   |
| Total                 |       | $              1,552.3                                       |       | 6.2% |   |
|                  |       |                                                                                                                               |       |   |   |
| Fair Value            |       | $              1,564.8                                       |       |   |   |

 

The carrying value of **DP&L’s**debt was $785.5 million at September 30, 2007, consisting of our first mortgagebonds, our tax-exempt pollution control bonds and our capital lease. The fairvalue of this debt was $777.0 million, based on current market prices ordiscounted cash flows using current rates for similar issues with similar termsand remaining maturities. The principal cash repayments and related weightedaverage interest rates by maturity date for long-term, fixed-rate debt atSeptember 30, 2007, are as follows:

 

| ** **            | ** ** | **DP&L’s****Long-term Debt**                                                                                              | ** ** |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Expected Maturity** | ** ** | **Amount**                                                                                                                         | ** ** | ** ** | ** ** |
| **Date**              | ** ** | **($ in millions)**                                                                                                           | ** ** | **Average Rate** | ** ** |
|                  |       |                                                                                                                               |       |   |   |
| 2007                  |       | $                     0.2 |       | 6.5% |   |
| 2008                  |       | 0.7                                                                                                                                |       | 6.9% |   |
| 2009                  |       | 0.8                                                                                                                                |       | 6.9% |   |
| 2010                  |       | 0.6                                                                                                                                |       | 6.9% |   |
| 2011                  |       | —                                                                                                                             |       | —    |   |
| 2012                  |       | —                                                                                                                             |       | —    |   |
| Thereafter            |       | 783.2                                                                                                                              |       | 5.0% |   |
| Total                 |       | $                  785.5                 |       | 5.0% |   |
|                  |       |                                                                                                                               |       |   |   |
| Fair Value            |       | $                  777.0                 |       |   |   |

 

Debt maturities for **DPL** and **DP&L**in 2007 are expected to be financed with a combination of short-termborrowings, tax-exempt pollution control bonds and internal funds.

 

**CRITICAL ACCOUNTING ESTIMATES**

 

**DPL’s** and **DP&L’s** condensed consolidated financialstatements are prepared in accordance with GAAP. In connection with the preparationof these financial statements, our management is required to make assumptions,estimates and judgments that affect the reported amounts of assets,liabilities, revenues, expenses and the related disclosure of contingentliabilities. These assumptions, estimates and judgments are based on ourhistorical experience and assumptions that we believed to be reasonable at thetime. However, because future events and their effects cannot be determinedwith certainty, the determination of estimates requires the exercise ofjudgment. Our critical accounting estimates are those which require assumptionsto be made about matters that are highly uncertain.

 

Different estimates couldhave a material effect on our financial results. Judgments and uncertaintiesaffecting the application of these policies and estimates may result inmaterially different amounts being reported under different conditions orcircumstances. Significant items subject to such judgments include: thecarrying value of property, plant and equipment; unbilled revenues; thevaluation of insurance and claims costs; valuation allowances for receivablesand deferred income taxes; the valuation of reserves related to currentlitigation and assets and liabilities related to employee benefits. Actual resultsmay differ from those estimates. Refer to our 2006 Annual Report filed on Form10-K for a complete listing of our critical accounting policies and estimates.

 

**Recently Issued Accounting Pronouncements**

A discussion of recentlyissued accounting pronouncements is described in Note 1 of the Notes to theCondensed Consolidated Financial Statements and such discussion is incorporatedby reference in this Management’s Discussion and Analysis of FinancialCondition and Results of Operations and made a part hereof.

 

56

----

** **

**OPERATINGSTATISTICS**

 
| ** **                                  | ** ** | **DPL Inc.**                           | ** **  | **DP&L  (a)**                     | ** ** |
|---------------------------------------------|------------|----------------------------------------|-------------|---------------------------------------|------------|
| ** **                                  | ** ** | **Three  Months Ended  September 30,** | ** **  | **Nine  Months Ended  September 30,** | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
| ** **                                  | ** ** | **2007**                               | ** **  | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Electric sales  (millions in kWh)           |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                 | ** ** | **1,505**                              |        | 1,432                                 | ** ** | **4,276** |   | 3,939 | ** ** | **1,505** |   | 1,432 | ** ** | **4,276** |   | 3,939 |   |
| Commercial                                  | ** ** | **1,101**                              |        | 1,075                                 | ** ** | **3,038** |   | 2,906 | ** ** | **1,101** |   | 1,075 | ** ** | **3,038** |   | 2,906 |   |
| Industrial                                  | ** ** | **1,139**                              |        | 1,169                                 | ** ** | **3,233** |   | 3,254 | ** ** | **1,139** |   | 1,169 | ** ** | **3,233** |   | 3,254 |   |
| Other retail                                | ** ** | **397**                                |        | 380                                   | ** ** | **1,111** |   | 1,069 | ** ** | **397** |   | 380 | ** ** | **1,111** |   | 1,069 |   |
| Total retail                                | ** ** | **4,142**                              |        | 4,056                                 | ** ** | **11,658** |   | 11,168 | ** ** | **4,142** |   | 4,056 | ** ** | **11,658** |   | 11,168 |   |
|                                        |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                                   | ** ** | **967**                                |        | 1,149                                 | ** ** | **2,645** |   | 2,649 | ** ** | **967** |   | 1,149 | ** ** | **2,645** |   | 2,649 |   |
|                                        |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                       | ** ** | **5,109**                              |        | 5,205                                 | ** ** | **14,303** |   | 13,817 | ** ** | **5,109** |   | 5,205 | ** ** | **14,303** |   | 13,817 |   |
|                                        |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues   ($ in thousands) |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                 | ** ** | **$**                                  | **148,419** |                                  | $          | 137,317 | ** ** | **$** | **410,736** |   | $ | 369,412 | ** ** | **$** | **148,419** |   | $ | 137,317 | ** ** | **$** | **410,736** |   | $ | 369,412 |   |
| Commercial                                  | ** ** | **85,619**                             |        | 79,651                                | ** ** | **241,381** |   | 223,950 | ** ** | **80,085** |   | 73,672 | ** ** | **226,960** |   | 207,192 |   |
| Industrial                                  | ** ** | **64,525**                             |        | 64,147                                | ** ** | **185,014** |   | 181,639 | ** ** | **34,720** |   | 35,214 | ** ** | **101,244** |   | 98,586 |   |
| Other retail                                | ** ** | **25,049**                             |        | 22,927                                | ** ** | **70,879** |   | 65,161 | ** ** | **19,907** |   | 22,779 | ** ** | **57,974** |   | 65,074 |   |
| Other miscellaneous  revenues               | ** ** | **2,570**                              |        | 3,222                                 | ** ** | **7,701** |   | 8,615 | ** ** | **2,581** |   | 3,235 | ** ** | **7,747** |   | 8,646 |   |
| Total retail                                | ** ** | **$**                                  | **326,182** |                                  | $          | 307,264 | ** ** | **$** | **915,711** |   | $ | 848,777 | ** ** | **$** | **285,712** |   | $ | 272,217 | ** ** | **$** | **804,661** |   | $ | 748,910 |   |
|                                        |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                                   | ** ** | **52,892**                             |        | 61,762                                | ** ** | **139,995** |   | 129,704 | ** ** | **94,025** |   | 97,438 | ** ** | **253,032** |   | 231,469 |   |
|                                        |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| RTO ancillary  revenues                     | ** ** | **39,833**                             |        | 20,652                                | ** ** | **81,389** |   | 55,695 | ** ** | **39,833** |   | 20,652 | ** ** | **81,389** |   | 55,695 |   |
|                                        |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other revenues,  net of fuel costs          | ** ** | **3,052**                              |        | 2,733                                 | ** ** | **8,545** |   | 8,356 | ** ** | **—** |   | — | ** ** | **—** |   | — |   |
|                                        |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                       | ** ** | **$**                                  | **421,959** |                                  | $          | 392,411 | ** ** | **$** | **1,145,640** |   | $ | 1,042,532 | ** ** | **$** | **419,570** |   | $ | 390,307 | ** ** | **$** | **1,139,082** |   | $ | 1,036,074 |   |
|                                        |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Electric  customers at end of period        |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                 | ** ** | **455,801**                            |        | 456,134                               | ** ** | **455,801** |   | 456,134 | ** ** | **455,801** |   | 456,134 | ** ** | **455,801** |   | 456,134 |   |
| Commercial                                  | ** ** | **49,665**                             |        | 49,158                                | ** ** | **49,665** |   | 49,158 | ** ** | **49,665** |   | 49,158 | ** ** | **49,665** |   | 49,158 |   |
| Industrial                                  | ** ** | **1,813**                              |        | 1,828                                 | ** ** | **1,813** |   | 1,828 | ** ** | **1,813** |   | 1,828 | ** ** | **1,813** |   | 1,828 |   |
| Other                                       | ** ** | **6,425**                              |        | 6,349                                 | ** ** | **6,425** |   | 6,349 | ** ** | **6,425** |   | 6,349 | ** ** | **6,425** |   | 6,349 |   |
|                                        |       |                                   |        |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                       | ** ** | **513,704**                            |        | 513,469                               | ** ** | **513,704** |   | 513,469 | ** ** | **513,704** |   | 513,469 | ** ** | **513,704** |   | 513,469 |   |

 

(a)              **DP&L** sells power to DPLER (a subsidiary of **DPL**). These sales are classified as wholesale on **DP&L’s** financial statements and retail sales for **DPL**. The kWh volumes contain all volumes distributed on the **DP&L** system which include the retail sales by DPLER. Thesales for resale volumes are omitted to avoid duplicate reporting.

 

**Item 3.  Quantitative andQualitative Disclosures about Market Risk**

 

 

See the “Market Risk” section of Item 2.

 

 

**Item 4.  Controls and Procedures**

 

Our Chief Executive Officer (CEO) and ChiefFinancial Officer (CFO) are responsible for establishing and maintaining ourdisclosure controls and procedures. These controls and procedures were designed to ensure that materialinformation relating to us and our subsidiaries is communicated to the CEO andCFO.  We evaluated these disclosurecontrols and procedures as of the end of the period covered by this report withthe participation of our CEO and CFO. Based on this evaluation, our CEO and CFO concluded that our disclosurecontrols and procedures are effective: (i) to ensure that information requiredto be disclosed by us in the reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms and (ii) to ensure that informationrequired to be disclosed by us in the reports that we submit under the ExchangeAct is accumulated and communicated to our management, including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate, to allow timely decisions regarding requireddisclosure.  There was no change in ourinternal control over financial reporting during the most recently completedquarter ended September 30, 2007 that has materially affected, or is reasonablylikely to materially affect, internal control over reporting.

 

57

----

 

**PART II**

** **

 

**Item 1 — Legal Proceedings**

 

In the normal course of business, we aresubject to various lawsuits, actions, proceedings, claims and other mattersasserted under laws and regulations.  Webelieve the amounts provided in our Condensed Consolidated FinancialStatements, as prescribed by GAAP, for these matters are adequate in light ofthe 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 regulationswill not exceed the amounts reflected in our Condensed Consolidated FinancialStatements.  As such, costs, if any, thatmay be incurred in excess of those amounts provided as of September 30, 2007,cannot be reasonably determined.

 

Certain legal proceedings in which we areinvolved are discussed in Part I, Item 1—Environmental Considerations, Item1—Competition and Regulation, Item 3 and Note 15 to the Consolidated FinancialStatements included therein of our Annual Report on Form 10-K for the fiscal yearended December 31, 2006.  The followingdiscussion is limited to recent developments concerning our legal proceedingsand should be read in conjunction with the earlier report.

 

**Environmental**

In September 2004, theSierra Club filed a lawsuit against **DP&L**andthe other owners of the Stuart Generating Station in the United States DistrictCourt for the Southern District of Ohio for alleged violations of the Clean AirAct (CAA) and the Station’s operating permit. **DP&L**, on behalf of all co-owners,is leading the defense of this matter.  Asizable amount of discovery has taken place, expert reports have been filed byboth parties and depositions of experts are expected to occur in the fourthquarter of 2007.  Dispositive motions areto be filed in January 2008.  No trialdate has been set.  **DP&L**is unable to determine the impact of this lawsuit, if any, on its overallresults of operations, financial position or cash flows.

 

 

**Item 1a — Risk Factors**

 

A comprehensive listingof risk factors that we consider to be the most significant to your decision toinvest in our stock is provided in our most recent Annual Report on Form 10-Kand is incorporated herein by reference. The Form 10-K may be obtained as discussed in section, ‘Website Accessto Reports.’  If any of the listed eventsoccur, our business, financial position or results of operation could bematerially affected.  The following riskfactors included in our 2006 Form 10-K for year ended December 31, 2006 havebeen updated as follows:

 

**Reliance on Third Parties**

We rely on many third party suppliers and contractors in our energyproduction, transmission and distribution functions including: the purchase anddelivery of coal and other inventory; the construction of capital assets andwaste disposal management associated with our production processes (such asbottom ash, fly ash and gypsum). Unanticipated changes in our purchasing processes, supplieravailability, supplier performance and pricing may affect our business andoperating results.  In addition, we relyon others to provide professional services, such as, but not limited to,actuarial calculations, internal audit services, payroll processing and variousconsulting services.

 

**Employees**

Approximately 53% of our employees are under a collective bargainingagreement.  If we are unable to negotiatefuture collective bargaining agreements, we could experience work stoppageswhich may affect our business and operating results.

 

 

**Item 2 — Unregistered Sale of Equity Securities and Use ofProceeds**

 

None

 

58

----

 

 

**Item 3 — Defaults Upon Senior Securities**

 

None

 

 

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

 

None

 

 

**Item 5 — Other Information**

 

None

 

 

**Item 6 — Exhibits**

** **
| **DPL Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                         | ** ** | **Location**                     | ** ** |
|--------------|------------|--------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| X            |       | X            |       | 31(a)               |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit  31(a) |       |
|         |       |         |       |                |       |                                                                                                |       |                             |       |
| X            |       | X            |       | 31(b)               |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit  31(b) |       |
|         |       |         |       |                |       |                                                                                                |       |                             |       |
| X            |       | X            |       | 32(a)               |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit  32(a) |       |
|         |       |         |       |                |       |                                                                                                |       |                             |       |
| X            |       | X            |       | 32(b)               |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit  32(b) |       |

 

59

----

 

 

**SIGNATURES**

 

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, DPLInc. and The Dayton Power and Light Company has duly caused this report to besigned on their behalf by the undersigned, thereunto duly authorized.

** **

 

 
| ** ** | **DPL Inc.**                            |
|------------|-----------------------------------------|
| ** ** | **The Dayton Power and Light  Company** |
|       | (Registrants)                           |

 

 

 

 
| Date:  | October 31, 2007 |   | /s/ Paul M. Barbas                                                                                |
|--------|------------------|--------|---------------------------------------------------------------------------------------------------|
|   |             |   | Paul M. Barbas   President and Chief Executive Officer   (principal executive officer)            |
|   |             |   |                                                                                              |
|   | October 31, 2007 |   | /s/ John J. Gillen                                                                                |
|   |             |   | John J. Gillen  Senior Vice President and Chief Financial Officer   (principal financial officer) |
|   |             |   |                                                                                              |
|   | October 31, 2007 |   | /s/ Frederick J. Boyle                                                                            |
|   |             |   | Frederick J. Boyle   Vice President and Chief Accounting Officer                                  |
|   |             |   | (principal accounting officer)                                                                    |
|   |             |   |                                                                                              |
|   |             |   |                                                                                              |

 

60

----