**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

Washington,D.C.  20549

 

**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

For the quarterlyperiod ended**March 31, 2005**

OR

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

**SECURITIES EXCHANGE ACT OF 1934**

 

For the transitionperiod from           to         

 

Commission FileNumber  **1-2385**

 

**THE DAYTON POWER AND LIGHT COMPANY**

*(Exactname of registrant as specified in its charter)*

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

 

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

 

YES     ý   NO     o

 

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

 

YES     o   NO     ý

 

Number of shares ofregistrant’s common stock outstanding as of April 30, 2005, all of which wereheld by DPL Inc., was 41,172,173.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

 

 

----

 

**THEDAYTON POWER AND LIGHT COMPANY**

 

**INDEX**

 
|                               | ** **     | **Page No.**                                                                                |
|------------------------------------|----------------|---------------------------------------------------------------------------------------------|
| ** **                         |           |                                                                                        |
| **Part I. Financial  Information** |           |                                                                                        |
|                               |           |                                                                                        |   |   |
|                               | Item 1.        | Financial Statements                                                                        |   |   |
|                               |           |                                                                                        |   |   |
|                               |           | Consolidated  Statement of Results of Operations                                            |   | 3 |
|                               |           |                                                                                        |   |   |
|                               |           | Consolidated  Statement of Cash Flows                                                       |   | 4 |
|                               |           |                                                                                        |   |   |
|                               |           | Consolidated Balance Sheet                                                                  |   | 5 |
|                               |           |                                                                                        |   |   |
|                               |           | Notes to  Consolidated Financial Statements                                                 |   | 7 |
|                               |           |                                                                                        |   |   |
|                               | Item  2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 15 |
|                               |           |                                                                                        |   |   |
|                               |           | Operating  Statistics                                                                       |   | 26 |
|                               |           |                                                                                        |   |   |
|                               | Item  3.       | Quantitative  and Qualitative Disclosures about Market Risk                                 |   | 26 |
|                               |           |                                                                                        |   |   |
|                               | Item 4.        | Controls and Procedures                                                                     |   | 26 |
|                               |           |                                                                                        |   |   |
| **Part II. Other Information**     |           |                                                                                        |
|                               |           |                                                                                        |   |   |
|                               | Item 1.        | Legal Proceedings                                                                           |   | 27 |
|                               |           |                                                                                        |   |   |
|                               | Item  4.       | Submission  of Matters to a Vote of Security Holders                                        |   | 27 |
|                               |           |                                                                                        |   |   |
|                               | Item 5.        | Other Information                                                                           |   | 27 |
|                               |           |                                                                                        |   |   |
|                               | Item 6.        | Exhibits                                                                                    |   | 27 |
|                               |           |                                                                                        |   |   |
| **Other**                          |           |                                                                                        |   |
|                               |           |                                                                                        |   |   |
|                               | Signatures     |                                                                                        | 28 |
|                               |           |                                                                                        |   |   |
|                               | Certifications |                                                                                        | 28 |

 

**Available Information:**

The Dayton Power andLight Company (DP&L or the Company) files current, annual and quarterlyreports and other information required by the Securities Exchange Act of 1934,as amended, with the Securities and Exchange Commission (SEC).  You may read and copy any document the Companyfiles at the SEC’s public reference room located at 450 Fifth Street, NW,Washington, D.C.  20549, USA.  Please call the SEC at (800) SEC-0330 forfurther information on the public reference rooms.  The Company’s SEC filings are also availableto the public from the SEC’s web site at http://www.sec.gov.

 

The Company’s public web siteis http://www.dplinc.com.  The Companymakes available through its web site, its annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments tothose reports filed or furnished pursuant to the Securities Exchange Act of1934, as amended, as soon as reasonably practicable after it electronicallyfiles such material with, or furnishes it to, the SEC.

 

In addition, the Company’spublic web site includes other items related to corporate governance matters,including, among other things, the Company’s governance guidelines, charters ofvarious committees of the Board of Directors and the Company’s code of businessconduct and ethics applicable to all employees, officers and directors.  You may obtain copies of these documents,free of charge, by sending a request, in writing, to DP&L InvestorRelations, 1065 Woodman Drive, Dayton, Ohio 45432.

 

2

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**PartI.  Financial Information**

 

### **Item1.  Financial Statements**

 

**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATEDSTATEMENT OF RESULTS OF OPERATIONS**

**($ in millions)**

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| **Revenues**                            |       |                              |       |   |   |
| Electric  revenues                      |       | **$**                             | **305.1**  |   | $ | 300.4 |   |
|                                    |       | ** **                        |       |   |   |
| **Operating  Expenses**                 |       | ** **                        |       |   |   |
| Fuel                                    |       | **77.7**                          |       | 62.7 |   |
| Purchased power                         |       | **29.3**                          |       | 28.5 |   |
| Operation and  maintenance              |       | **48.8**                          |       | 46.8 |   |
| Depreciation and  amortization          |       | **30.0**                          |       | 28.3 |   |
| Amortization of  regulatory assets, net |       | **0.5**                           |       | 0.1 |   |
| General taxes                           |       | **27.4**                          |       | 27.1 |   |
| Total operating  expenses               |       | **213.7**                         |       | 193.5 |   |
|                                    |       | ** **                        |       |   |   |
| **Operating  Income**                   |       | **91.4**                          |       | 106.9 |   |
|                                    |       | ** **                        |       |   |   |
| Interest expense                        |       | **(11.3**                         | **)**      | (11.8 | ) |
| Other income                            |       | **7.8**                           |       | 4.2 |   |
|                                    |       | ** **                        |       |   |   |
| **Income  Before Income Taxes**         |       | **87.9**                          |       | 99.3 |   |
|                                    |       | ** **                        |       |   |   |
| Income tax  expense                     |       | **34.6**                          |       | 37.3 |   |
| **Net  Income**                         |       | **53.3**                          |       | 62.0 |   |
| Preferred  dividends                    |       | **0.2**                           |       | 0.2 |   |
|                                    |       | ** **                        |       |   |   |
| **Earnings  on Common Stock**           |       | **$**                             | **53.1**   |   | $ | 61.8 |   |

 

See Notes to ConsolidatedFinancial Statements.

These interim statementsare unaudited.

 

3

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

**($ in millions)**

 
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| **Operating  Activities**                  |       |                              |       |   |   |
| Net income                                 |       | **$**                             | **53.3**   | ** ** | $ | 62.0 |   |
| Adjustments:                               |       | ** **                        | ** ** |   |   |
| Depreciation and  amortization             |       | **30.0**                          | ** ** | 28.3 |   |
| Amortization of  regulatory assets, net    |       | **0.5**                           | ** ** | 0.1 |   |
| Deferred income  taxes                     |       | **11.4**                          | ** ** | 12.4 |   |
| Changes in  working capital:               |       | ** **                        | ** ** |   |   |
| Accounts  receivable                       |       | **2.8**                           | ** ** | 10.0 |   |
| Accounts payable                           |       | **2.8**                           | ** ** | 1.7 |   |
| Accrued taxes  payable                     |       | **15.8**                          | ** ** | 14.6 |   |
| Accrued interest  payable                  |       | **4.7**                           | ** ** | 4.3 |   |
| Prepayments                                |       | **8.6**                           | ** ** | 7.9 |   |
| Inventories                                |       | **(8.0**                          | **)**      | (7.7 | ) |
| Deferred  compensation assets              |       | **3.6**                           | ** ** | 8.8 |   |
| Deferred  compensation obligations         |       | **0.7**                           | ** ** | (6.7 | ) |
| Other (Note 2)                             |       | **(11.2**                         | **)**      | (15.4 | ) |
| Net cash  provided by operating activities |       | **115.0**                         | ** ** | 120.3 |   |
|                                       |       | ** **                        | ** ** |   |   |
| **Investing  Activities**                  |       | ** **                        | ** ** |   |   |
| Capital  expenditures                      |       | **(42.7**                         | **)**      | (25.7 | ) |
| Net cash used  for investing activities    |       | **(42.7**                         | **)**      | (25.7 | ) |
|                                       |       | ** **                        | ** ** |   |   |
| **Financing  Activities**                  |       | ** **                        | ** ** |   |   |
| Dividends paid  on common stock            |       | **(75.0**                         | **)**      | (75.0 | ) |
| Dividends paid  on preferred stock         |       | **(0.2**                          | **)**      | (0.2 | ) |
| Net cash used  for financing activities    |       | **(75.2**                         | **)**      | (75.2 | ) |
|                                       |       | ** **                        | ** ** |   |   |
| **Cash  and temporary cash investments**   |       | ** **                        | ** ** |   |   |
| Net change                                 |       | **(2.9**                          | **)**      | 19.4 |   |
| Balance at  beginning of period            |       | **17.2**                          | ** ** | 17.2 |   |
| Balance at end  of period                  |       | **$**                             | **14.3**   | ** ** | $ | 36.6 |   |
|                                       |       | ** **                        | ** ** |   |   |
| **Cash  Paid During the Period for:**      |       | ** **                        | ** ** |   |   |
| Interest                                   |       | **$**                             | **5.8**    | ** ** | $ | 6.0 |   |
| Income taxes                               |       | **$**                             | **(2.9**   | **)** | $ | 0.4 |   |

 

See Notes to ConsolidatedFinancial Statement.

These interim statementsare unaudited.

 

4

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATEDBALANCE SHEET**

**($ in millions)**

 
| ** **                                                                                      | ** ** | **At  March 31,  2005** | ** **  | **At  December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|----------------------------|------------|
| **ASSETS**                                                                                      |       |                    |        |                       |       |
|                                                                                            |       |                    |        |                       |       |
| **Property**                                                                                    |       |                    |        |                       |       |
| Property, plants  and equipment                                                                 |       | **$**                   | **3,977.6** | ** **                 | $          | 3,944.6 |   |
| Less:  Accumulated depreciation and amortization                                                |       | **(1,890.7**            | **)**       | (1,864.4                   | )          |
| Net property                                                                                    |       | **2,086.9**             | ** **  | 2,080.2                    |       |
|                                                                                            |       | ** **              | ** **  |                       |       |
| **Current  Assets**                                                                             |       | ** **              | ** **  |                       |       |
| Cash and  temporary cash investments                                                            |       | **14.3**                | ** **  | 17.2                       |       |
| Accounts  receivable, less provision for uncollectible accounts of $1.0 and $3.6,  respectively |       | **151.0**               | ** **  | 153.8                      |       |
| Inventories, at average  cost (Note 2)                                                          |       | **77.9**                | ** **  | 69.8                       |       |
| Prepaid taxes                                                                                   |       | **34.8**                | ** **  | 46.4                       |       |
| Other (Note 2)                                                                                  |       | **17.2**                | ** **  | 24.8                       |       |
| Total current  assets                                                                           |       | **295.2**               | ** **  | 312.0                      |       |
|                                                                                            |       | ** **              | ** **  |                       |       |
| **Other  Assets**                                                                               |       | ** **              | ** **  |                       |       |
| Income taxes  recoverable through future revenues                                               |       | **32.4**                | ** **  | 32.5                       |       |
| Other regulatory  assets                                                                        |       | **50.9**                | ** **  | 41.5                       |       |
| Other (Note 2)                                                                                  |       | **169.0**               | ** **  | 175.2                      |       |
| Total other  assets                                                                             |       | **252.3**               | ** **  | 249.2                      |       |
|                                                                                            |       | ** **              | ** **  |                       |       |
| **Total  Assets**                                                                               |       | **$**                   | **2,634.4** | ** **                 | $          | 2,641.4 |   |

 

See Notes toConsolidated Financial Statements.

These interimstatements are unaudited.

 

5

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED BALANCE SHEET**

**($ in millions)**

(continued)

 
| ** **                                | ** ** | **At  March 31,  2005** | ** **  | **At  December 31,  2004** | ** ** |
|-------------------------------------------|------------|-------------------------|-------------|----------------------------|------------|
|                                      |       |                    |        |                       |       |
| **CAPITALIZATION  AND LIABILITIES**       |       |                    |        |                       |       |
|                                      |       |                    |        |                       |       |
| **Capitalization**                        |       |                    |        |                       |       |
| Common  shareholders’ equity         |       |                    |        |                       |       |
| Common stock                              |       | **$**                   | **0.4**     |                       | $          | 0.4 |   |
| Other paid-in  capital                    |       | **782.3**               |        | 782.9                      |       |
| Accumulated  other comprehensive income   |       | **41.4**                |        | 43.1                       |       |
| Earnings  reinvested in the business      |       | **207.8**               |        | 229.7                      |       |
| Total common  shareholders’ equity   |       | **1,031.9**             |        | 1,056.1                    |       |
|                                      |       | ** **              |        |                       |       |
| Preferred stock                           |       | **22.9**                |        | 22.9                       |       |
|                                      |       | ** **              |        |                       |       |
| Long-term debt  (Note 5)                  |       | **686.4**               |        | 686.6                      |       |
| Total  capitalization                     |       | **1,741.2**             |        | 1,765.6                    |       |
|                                      |       | ** **              |        |                       |       |
| **Current  Liabilities**                  |       | ** **              |        |                       |       |
| Accounts payable                          |       | **103.1**               |        | 107.8                      |       |
| Accrued taxes                             |       | **129.1**               |        | 124.8                      |       |
| Accrued interest                          |       | **15.5**                |        | 10.7                       |       |
| Other (Note 2)                            |       | **34.3**                |        | 22.1                       |       |
| Total current  liabilities                |       | **282.0**               |        | 265.4                      |       |
|                                      |       | ** **              |        |                       |       |
| **Deferred  Credits and Other**           |       | ** **              |        |                       |       |
| Deferred taxes                            |       | **365.7**               |        | 365.8                      |       |
| Unamortized  investment tax credit        |       | **48.6**                |        | 49.3                       |       |
| Other (Note 2)                            |       | **196.9**               |        | 195.3                      |       |
| Total deferred  credits and other         |       | **611.2**               |        | 610.4                      |       |
|                                      |       | ** **              |        |                       |       |
| **Contingencies  (Note 6)**               |       | ** **              |        |                       |       |
|                                      |       | ** **              |        |                       |       |
| **Total  Capitalization and Liabilities** |       | **$**                   | **2,634.4** |                       | $          | 2,641.4 |   |

 

See Notes to ConsolidatedFinancial Statements.

These interim statementsare unaudited.

 

6

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**Notes toConsolidated Financial Statements**

 

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

 

**Basis of Consolidation**

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

 

DP&L has prepared theunaudited consolidated financial statements in this report, pursuant to therules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations.  Theseconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto in DP&L’s 2004 AnnualReport on Form 10-K.

 

**Estimates, Judgments andReclassifications**

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

 

**Recently Issued AccountingStandards**

 

***Stock-BasedCompensation***

In December 2004, theFASB issued SFAS No.123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS123R replaces SFAS 123, “Accounting for Stock-Based Compensation”, andsupersedes Accounting Principles Board Opinion No. 25 (Opinion 25), “Accountingfor Stock Issued to Employees”.  SFAS123R will provide investors and other users of financial statements with morecomplete and neutral financial information by requiring that the compensationcost relating to share-based payment transactions be recognized in financialstatements. That cost will be measured based on the fair value of the equity orliability instruments issued. SFAS 123R covers a wide range of share-basedcompensation arrangements including share options, restricted share plans,performance-based awards, share appreciation rights, and employee sharepurchase plans. SFAS 123R establishes standards in which to account fortransactions where an entity exchanges its equity instruments for goods orservices or incurs liabilities in exchange for goods or services that are basedon the fair value of the entity’s equity instruments or settled by issuance ofequity instruments.  This statementfocuses primarily on accounting for employee services paid for by share-basedtransactions.  SFAS 123R requires apublic entity to measure the cost of employee services received and paid for byequity instruments to be based on the fair-value of such equity on the grantdate.  This cost is recognized in resultsof operations over the period in which employees are required to provideservice.  Liabilities initially incurredwill be based on the fair-value of equity instruments and then be re-measuredat each subsequent reporting date until the liability is ultimatelysettled.  The fair-value for employeeshare options and other similar instruments at the grant date will be estimatedusing option-pricing models and excess tax benefits will be recognized as anaddition to paid-in capital.  Cashretained from the excess tax benefits will be presented in the statement ofcash flows as financing cash inflows. The provisions of this Statement shall be effective for the Company nolater than January 1, 2006.  DP&L iscurrently accounting for such share-based transactions granted after January 1,2003, using SFAS 123, “Accounting for Stock-Based Compensation.”  DP&L is evaluating the effect of this newstandard on the Company’s results of operations, cash flows and financialposition.

 

7

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***InventoryCosts***

In November 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”(SFAS 151). The amendments made by SFAS 151 clarify that abnormal amounts ofidle facility expense, freight, handling costs, and wasted materials (spoilage)should be recognized as current-period charges and require the allocation offixed production overheads to inventory based on the normal capacity of theproduction facilities. The guidance is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. Earlier application ispermitted for inventory costs incurred during fiscal years beginning afterNovember 23, 2004. The Company is evaluating the impact of the adoption of SFAS151, but does not believe the impact will be significant to the Company’soverall results of operations, cash flows or financial position.

 

***Exchangeof Nonmonetary Assets***

In December 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 153, “Exchange of Nonmonetary Assets, an amendment of APB OpinionNo. 29” (SFAS 153).  The guidance in APBOpinion No. 29, “Accounting for Nonmonetary Transactions”, is based on theprinciple that exchanges of nonmonetary assets should be measured based on thefair value of the assets exchanged. The guidance in that Opinion, however,included certain exceptions to that principle. SFAS 153 amends Opinion 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. The provisions of SFAS 153 shall beeffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005.  The Company isevaluating the impact of the adoption of SFAS 153, but does not believe theimpact will be significant to the Company’s overall results of operations, cashflows or financial position.

 

***TheAmerican Jobs Creation Act of 2004***

On October 22, 2004, thePresident signed the American Jobs Creation Act of 2004 (the Act).  On December 21, 2004, the FinancialAccounting Standards Board (FASB) issued two FASB Staff Positions (FSP)regarding the accounting implications of the Act related to (1) the deductionfor qualified domestic production activities (FSP FAS 109-1) and (2) theone-time tax benefit for the repatriation of foreign earnings (FSP FAS109-2).  The guidance in the FSPs appliesto financial statements for periods ending after the date the Act wasenacted.  The Act provides a deduction upto 9 percent (when fully phased-in) of the lesser of (a) qualified productionactivities income, as defined by the Act, or (b) taxable income (after thededuction for the utilization of any net operating loss carryforwards).  This tax deduction is limited to 50 percentof W-2 wages paid by the taxpayer.  TheAct also creates a temporary incentive for U.S. corporations to repatriateaccumulated income earned abroad by providing an 85 percent dividends receiveddeduction for certain dividends from controlled foreign corporations.   DP&L reduced its tax expense by $0.5million in the first quarter of 2005 as a result of the deduction for qualifieddomestic production activities.

 

***DiscontinuedOperations***

In November, 2004, theEITF issued EITF 03-13, “Applying the Conditions in Paragraph 42 of FASBStatement No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets,* in Determining Whetherto Report Discontinued Operations.”  Thisguidance should be applied to a component of an enterprise that is eitherdisposed of or classified as held for sale in fiscal periods beginning afterDecember 15, 2004.  Operating resultsrelated to a component that is either disposed of or classified as held forsale within an enterprise’s fiscal year that includes November 30, 2004, may beclassified to reflect the consensus. The Company determined that this issue didnot have an impact on its results of operations, financial condition or cashflows.

 

8

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**2.  Supplemental Financial Information**

 

9

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| **$ in millions**                             | ** ** | **At  March 31,  2005** | ** ** | **At  December 31,  2004** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                               |       |                    |       |                       |       |
| **Inventories,  at average cost**                  |       |                    |       |                       |       |
| Plant materials  and supplies                      |       | **$**                   | **28.9**   | ** **                 | $          | 29.1 |   |
| Fuel and  emission allowances                      |       | **49.2**                | ** ** | 40.7                       |       |
| Other                                              |       | **(0.2**                | **)**      | —                     |       |
| Total  inventories, at average cost                |       | **$**                   | **77.9**   | ** **                 | $          | 69.8 |   |
|                                               |       | ** **              | ** ** |                       |       |
| **Other current  assets**                          |       | ** **              | ** ** |                       |       |
| Prepayments                                        |       | **$**                   | **3.9**    | ** **                 | $          | 11.2 |   |
| Deposits and  other advances                       |       | **1.9**                 | ** ** | 1.6                        |       |
| Current deferred  income taxes                     |       | **7.6**                 | ** ** | 6.8                        |       |
| Miscellaneous  work in progress                    |       | **5.1**                 | ** ** | 4.5                        |       |
| Other                                              |       | **(1.3**                | **)**      | 0.7                        |       |
| Total other  current assets                        |       | **$**                   | **17.2**   | ** **                 | $          | 24.8 |   |
|                                               |       | ** **              | ** ** |                       |       |
| **Other  deferred assets**                         |       | ** **              | ** ** |                       |       |
| Master Trust  assets                               |       | **$**                   | **101.6**  | ** **                 | $          | 106.4 |   |
| Prepaid pension                                    |       | **37.4**                | ** ** | 38.2                       |       |
| Unamortized loss  on reacquired debt               |       | **23.3**                | ** ** | 23.8                       |       |
| Unamoritized  debt expense                         |       | **5.5**                 | ** ** | 5.6                        |       |
| Other                                              |       | **1.2**                 | ** ** | 1.2                        |       |
| Total other  deferred assets                       |       | **$**                   | **169.0**  | ** **                 | $          | 175.2 |   |
|                                               |       | ** **              | ** ** |                       |       |
| **Other  current liabilities**                     |       | ** **              | ** ** |                       |       |
| Customer  security deposits and other advances     |       | **$**                   | **18.4**   | ** **                 | $          | 17.3 |   |
| Payroll taxes  payable                             |       | **(0.5**                | **)**      | —                     |       |
| Current deferred  income tax                       |       | **12.1**                | ** ** | —                     |       |
| Unearned  revenues                                 |       | **0.2**                 | ** ** | 0.3                        |       |
| Current portion -  long-term debt                  |       | **1.4**                 | ** ** | 1.5                        |       |
| Other                                              |       | **2.7**                 | ** ** | 3.0                        |       |
| Total other  current liabilities                   |       | **$**                   | **34.3**   | ** **                 | $          | 22.1 |   |
|                                               |       | ** **              | ** ** |                       |       |
| **Other  deferred credits**                        |       | ** **              | ** ** |                       |       |
| Asset retirement  obligations - regulated property |       | **$**                   | **79.2**   | ** **                 | $          | 77.5 |   |
| Trust  obligations                                 |       | **69.5**                | ** ** | 68.2                       |       |
| Retirees’ health  and life benefits           |       | **32.1**                | ** ** | 32.4                       |       |
| Environmental  reserves                            |       | **0.1**                 | ** ** | 0.1                        |       |
| Legal reserves                                     |       | **2.8**                 | ** ** | 3.3                        |       |
| Asset retirement  obligations - generation         |       | **5.2**                 | ** ** | 5.1                        |       |
| Other                                              |       | **8.0**                 | ** ** | 8.7                        |       |
| Total other  deferred credits                      |       | **$**                   | **196.9**  | ** **                 | $          | 195.3 |   |

 
| ** **                                                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **$ in millions**                                                                                  | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| **Cash  flows - Other**                                                                                 |       |                             |       |   |   |
| Payroll taxes  payable                                                                                  |       | **$**                            | **(1.4**   | **)** | $ | (11.2 | ) |
| Deposits and  other advances                                                                            |       | **0.3**                          | ** ** | (3.9 | ) |
| Deferred storm  costs                                                                                   |       | **(9.7**                         | **)**      | — |   |
| Other                                                                                                   |       | **(0.4**                         | **)**      | (0.3 | ) |
| Total cash flows  - Other                                                                               |       | **$**                            | **(11.2**  | **)** | $ | (15.4 | ) |
|                                                                                                    |       | ** **                       | ** ** |   |   |
| **Comprehensive  Income**                                                                               |       | ** **                       | ** ** |   |   |
| Net Income                                                                                              |       | **$**                            | **53.3**   | ** ** | $ | 62.0 |   |
| Net change in  unrealized gains (losses) on financial instruments, net of reclassification  adjustments |       | **(1.3**                         | **)**      | (5.6 | ) |
| Net change in  deferred gains on cash flow hedges                                                       |       | **(1.3**                         | **)**      | (0.7 | ) |
| Deferred income  taxes related to unrealized gains (losses)                                             |       | **0.9**                          | ** ** | 2.4 |   |
| Comprehensive  income                                                                                   |       | **$**                            | **51.6**   | ** ** | $ | 58.1 |   |

 

10

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

 

DP&L sponsors adefined benefit plan for substantially all its employees.  For collective bargaining employees, thedefined benefits are based on a specific dollar amount per year ofservice.  For all other employees, thedefined benefit plan is based primarily on compensation and years of service.The Company funds pension plan benefits as accrued in accordance with theminimum funding requirements of the Employee Retirement Income Security Act of1974 (ERISA).

 

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

 

The net periodic benefitcost of the pension and postretirement benefit plans for the three months endedMarch 31 were:

 

**Netperiodic benefit cost**

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

 

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

 

**EstimatedFuture Benefit Payments**

 
| **$ in millions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------|------------|-------------|------------|--------------------|------------|
| 2005                   |       | $           | 14.5       |               | $          | 2.9 |   |
| 2006                   |       | $           | 19.3       |               | $          | 3.5 |   |
| 2007                   |       | $           | 19.7       |               | $          | 3.4 |   |
| 2008                   |       | $           | 19.8       |               | $          | 3.4 |   |
| 2009                   |       | $           | 19.8       |               | $          | 3.3 |   |
| 2010 - 2014            |       | $           | 104.1      |               | $          | 13.8 |   |

 

**4.****              Stock-BasedCompensation**

 

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

 

11

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accounting forstock-based compensation granted before January 1, 2003.  If DP&L had used the fair value method ofaccounting for stock-based compensation granted prior to 2003, earnings oncommon stock would have been reported as follows:

 
| **$ in millions**                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                            | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Earnings on  common stock, as reported                                                                | ** ** | **$**                            | **53.1**   |   | $ | 61.8 |   |
| Add: Total  stock-based compensation expense determined under APB 25, net of related tax  effects     | ** ** | **—**                       |       | — |   |
| Deduct: Total  stock-based compensation expense determined under FAS 123, net of related tax  effects | ** ** | **—**                       |       | (0.7 | ) |
| Pro-forma  earnings on common stock                                                                   | ** ** | **$**                            | **53.1**   |   | $ | 61.1 |   |

 

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

 
| **$****in millions**                                                      | ** ** | **At March 31,  2005** | ** ** | **At December 31,  2004** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| First mortgage  bonds maturing:                                           |       |                   |       |                      |       |
| 2013 - 5.125%                                                             |       | **$**                  | **470.0**  | ** **                | $          | 470.0 |   |
| Pollution  control series maturing through 2027 - 6.43% (a)               |       | **104.4**              | ** ** | 104.4                     |       |
|                                                                      |       | **574.4**              |       | 574.4                     | ** ** |
| Guarantee of Air  Quality Development Obligations - 6.10% Series due 2030 |       | **110.0**              | ** ** | 110.0                     |       |
| Obligation for  capital leases                                            |       | **3.6**                | ** ** | 3.8                       |       |
| Unamortized debt  discount and premium (net)                              |       | **(1.6**               | **)**      | (1.6                      | )          |
| Total                                                                     |       | **$**                  | **686.4**  | ** **                | $          | 686.6 |   |

 

----

(a) Weightedaverage interest rates for 2005 and 2004.

 

# **The amounts of maturities and mandatory redemptions forfirst mortgage bonds and the capital leases are $1.2 million for the remainderof 2005, $1.3 million in 2006, $9.5 million in 2007, $0.7 million in 2008 and $0.7million in 2009.  Substantially allproperty of DP&L is subject to the mortgage lien securing the firstmortgage bonds.**

 

On September 29, 2003,DP&L issued $470 million principal amount of First Mortgage Bonds, 5.125%Series due 2013.  The net proceeds fromthe sale of the bonds, after expenses, were used on October 30, 2003, to (i)redeem $226 million principal amount of DP&L’s First Mortgage Bonds, 8.15%Series due 2026, at a redemption price of 104.075% of the principal amount plusaccrued interest to the redemption date and (ii) redeem $220 million principalamount of DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at aredemption price of 103.765% of the principal amount plus accrued interest tothe redemption date.  The 5.125% Seriesdue 2013 were not registered under the Securities Act of 1933, but were offeredand sold through a private placement in compliance with Rule 144A under theSecurities Act of 1933.  The bondsinclude step-up interest provisions requiring the Company to pay additionalinterest if (i) DP&L’s registration statement was not declared effective bythe SEC within 180 days from the issuance of the new bonds or (ii) the exchangeoffer was not completed within 210 days from the issuance of the newbonds.  The registration statement wasnot declared effective and the exchange offer was not timely completed and, asa result, the Company is required to pay additional interest of 0.50% until aregistration statement is declared effective at which point the additionalinterest shall be reduced by 0.25%.  Theremaining additional interest of 0.25% will continue until the exchange offeris completed.  The exchange offerregistration for these securities was filed April 26, 2005.

 

In February 2004,DP&L entered into a $20 million Master Letter of Credit Agreement witha financial lending institution.  Thisagreement supports performance assurance needs in the ordinary course of business.  The

 

12

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Company has certaincontractual agreements for the sale and purchase of power, fuel and relatedenergy services that contain credit rating related clauses allowing thecounterparties to seek additional surety under certain conditions.  On February 24, 2005, the Company enteredinto an amendment to extend the term of this Agreement for one year and reducethe maximum dollar volume of letters of credit to $10 million.  As of March 31, 2005, DP&L had threeoutstanding letters of credit for a total of $3.5 million.

 

In June 2004, DP&L obtained a $100 millionunsecured revolving credit agreement that extended and replaced the Company’s previousrevolving credit agreement of $150 million. The new agreement, which expires on May 31, 2005, provides creditsupport for DP&L’s business requirements during this period and may beincreased up to $150 million.  Thefacility contains two financial covenants including maximum debt to totalcapitalization and minimum earnings before interest and taxes (EBIT) to totalinterest expense.  These covenants arecurrently met.  The Company had nooutstanding borrowings under this credit facility at March 31, 2005 or at year-end2004.  Fees associated with this creditfacility were approximately $0.6 million per year.  Changes in debt ratings, however, may affectthe applicable interest rate for DP&L’s revolving credit agreement.

 

There are nointer-company debt collateralizations or debt guarantees between DP&L andits parent.  None of the debt obligationsof DP&L are guaranteed or secured by its parent or affiliates, and nocross-collateralization exists between the Company and DPL or any affiliate.

 

**6.****              Commitments andContingencies**

 

**Contingencies**

In the normal course ofbusiness, DP&L is subject to various lawsuits, actions, proceedings, claimsand other matters asserted under laws and regulations.  DP&L believes the amounts provided in itsconsolidated financial statements, as prescribed by GAAP, are adequate in lightof the probable and estimable contingencies. However, there can be no assurances that the actual amounts required tosatisfy alleged liabilities from various legal proceedings, claims, and othermatters discussed below, and to comply with applicable laws and regulations,will not exceed the amounts reflected in DP&L’s Consolidated FinancialStatements.  As such, costs, if any, thatmay be incurred in excess of those amounts provided as of March 31, 2005 cannotbe reasonably determined.

 

**Environmental Matters**

DP&L’s facilities andoperations are subject to a wide range of environmental regulations andlaw.  In the normal course of business,the Company has investigatory and remedial activities underway at thesefacilities to comply, or to determine compliance, with such regulations.  The Company has been identified, either by agovernment agency or by a private party seeking contribution to site clean-upcosts, as a potentially responsible party (PRP) at two sites pursuant to stateand federal laws.  The Company recordsliabilities for probable estimated loss in accordance with Statement ofFinancial Accounting Standards No. 5, “Accounting for Contingencies” (SFAS5).  To the extent a probable loss canonly be estimated by reference to a range of equally probable outcomes, and noamount within the range appears to be a better estimate than any other amount,the Company accrues for the low end of the range.  Because of uncertainties related to thesematters, accruals are based on the best information available at the time.  DP&L evaluates the potential liabilityrelated to probable losses quarterly and may revise its estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on the Company’s results ofoperations and financial position.

 

**Legal Matters**

 

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

 

On August 24, 2004, the Company, DPL and MVEfiled a Complaint against Mr. Forster, Ms. Muhlenkamp andMr. Koziar in the Court of Common Pleas of Montgomery County, Ohio assertinglegal claims against them relating to the termination of the Valley PartnersAgreements, challenging the validity of the purported amendments to thedeferred compensation plans and to the employment and consulting agreementswith Messrs. Forster and Koziar and Ms. Muhlenkamp, and the propriety ofthe distributions from the plans to Messrs. Forster and Koziar andMs. Muhlenkamp, and alleging that Messrs. Forster and Koziar andMs. Muhlenkamp breached their fiduciary duties and breached their consultingand employment contracts.  The Company,DPL and MVE seek, among other things, damages in excess of $25 thousand,disgorgement of all amounts improperly withdrawn by Messrs. Forster and Koziarand Ms. Muhlenkamp from the deferred compensation plans and a court orderdeclaring that the Company, DPL and MVE have no further obligations under theconsulting and employment contracts due to those breaches.

 

13

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Defendants Forster, Koziar and Muhlenkamp have filed motionsto dismiss the Complaint and motions to stay discovery.  The Company and DPL have filed briefsopposing those motions.  In addition,pursuant to applicable statutes, regulations and agreements, the Company andDPL have been advancing certain of Defendants’ attorneys’ fees and expenseswith respect to various matters other than the litigation between Defendantsand the Company and DPL in Florida and Ohio, and believe that other requestedadvances are not required.  On February7, 2005, Mr. Forster and Ms. Muhlenkamp filed a motion in DP&L’s and DPL’sOhio litigation seeking to compel DPL, MVE and the Company to pay all attorneys’fees and expenses that have not been advanced to them.  The Company, DPL and MVE have filed a briefopposing that motion.  All of theforegoing motions are pending.

 

On March 15, 2005, Mr. Forster and Ms. Muhlenkampfiled a lawsuit in New York state court against the purchasers of the DPLprivate equity portfolio and against outside counsel to the Company and DPLconcerning purported entitlements in connection with the purchase of theportfolio.  The Company, DPL and MVE arenot defendants in that case; however, they are parties to an indemnificationagreement with respect to the purchaser defendants.  Those defendants have requested that theCompany, DPL and MVE indemnify them in connection with that litigation, and theCompany, DPL and MVE have acknowledged indemnity obligations.  On March 28, 2005, the Company, DPL and MVEfiled a Motion for Preliminary Injunction in the Company’s Ohio case,requesting that the court issue a preliminary injunction against Mr. Forsterand Ms. Muhlenkamp regarding the lawsuit.  Since certain key issues raisedby Mr. Forster and Ms. Muhlenkamp in their New York lawsuit are identical tothe issues raised in the Company’s pending Ohio lawsuit, DPL, MVE and theCompany believe that those issues should be heard and resolved in the pendingOhio lawsuit.  Mr. Forster and Ms.Muhlenkamp filed a brief opposing the preliminary injunction on April 15, 2005.  The Company, DPL and MVE filed their replybrief on April 25, 2005.  The motion ispending and has been set for hearing on May 6, 2005.

 

**Long-term Obligations andCommercial Commitments**

DP&L enters intovarious contractual and other long-term obligations that may affect theliquidity of its operations.  At March31, 2005, these include:

 
| ** **                           | ** ** | **Payment Year** | ** ** |
|--------------------------------------|------------|------------------|------------|
| **Long Term Obligations**            | ** ** | ** **       | ** ** |
| **$ in millions**               | ** ** | **2005**         | ** ** | **2006 & 2007** | ** ** | **2008 & 2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                 |       |             |       |   |   |   |   |   |   |   |   |
| Long-term debt                       |       | $                | 0.4        |   | $ | 9.0 |   | $ | — |   | $ | 673.8 |   | $ | 683.2 |   |
| Interest  payments                   |       | 32.4             |       | 74.9 |   | 74.0 |   | 336.4 |   | 517.7 |   |
| Pension and  Postretirement payments |       | 17.4             |       | 45.9 |   | 46.3 |   | 117.9 |   | 227.5 |   |
| Capital leases                       |       | 0.8              |       | 1.8 |   | 1.4 |   | 0.6 |   | 4.6 |   |
| Operating leases                     |       | 0.8              |       | 0.9 |   | — |   | — |   | 1.7 |   |
| Coal contracts* *(a)            |       | 265.3            |       | 575.3 |   | 83.7 |   | 85.5 |   | 1,009.8 |   |
| Other long-term  obligations         |       | 17.1             |       | 12.7 |   | 0.5 |   | — |   | 30.3 |   |
| Total long-term  obligations         |       | $                | 334.2      |   | $ | 720.5 |   | $ | 205.9 |   | $ | 1,214.2 |   | $ | 2,474.8 |   |

 

----

(a) DP&Loperated units.

 

Long-term debt:

Long-term debt as ofMarch 31, 2005, consists of first mortgage bonds and guaranteed air qualitydevelopment obligations and includes current maturities and unamortized debtdiscount.  (See Note 5 of Notes toConsolidated Financial Statements.)

 

Interest payments:

Interest paymentsassociated with the Long-term debt described above.

 

Pension andPostretirement payments:

As of March 31, 2005,DP&L had estimated future benefit payments as outlined in Note 3 of Notesto Consolidated Financial Statements. These estimated future benefit payments are projected through 2014.

 

Capital leases:

As of March 31, 2005, theCompany had two capital leases that expire in November 2007 and September 2010.

 

Operating leases:

As of March 31, 2005, theCompany had several operating leases with various terms and expiration dates.

 

Coal contracts:

 

14

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The Company has enteredinto various long-term coal contracts to supply portions of its coalrequirements for its generating plants. Contract prices are subject to periodic adjustment, and have featuresthat limit price escalation in any given year.

 

Other long-termobligations:

As of March 31, 2005, theCompany had various other long-term obligations including non-cancelablecontracts to purchase goods and services with various terms and expirationdates.

 

DP&L enters intovarious commercial commitments, which may affect the liquidity of itsoperations.  At March 31, 2005, theseinclude:

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

 

Credit facilities:

In June 2004, the Companyreplaced its previous $150 million revolving credit agreement with a $100million, 364 day unsecured credit facility that expires on May 31, 2005.  At March 31, 2005, there were no borrowingsoutstanding under this credit agreement. The new facility may be increased up to $150 million.

 

Guarantees:

DP&L owns a 4.9%equity ownership interest in an electric generation company.  As of March 31, 2005, DP&L could beresponsible for the repayment of 4.9%, or $14.9 million, of a $305 million debtobligation and also 4.9%, or $2.9 million, of a separate $60 million debtobligation.  Both obligations mature in2006.

 

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

Certainstatements contained in this discussion are “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report which relateto events or developments that are expected to occur in the future, includingmanagement’s expectations, strategic objectives, business prospects,anticipated economic performance and financial condition and other similarmatters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs,assumptions and expectations of the Company’s future economic performance,taking into account the information currently available to management.  These statements are not statements ofhistorical fact.  Such forward-lookingstatements are subject to risks and uncertainties and investors are cautionedthat outcomes and results may vary materially from those projected due tovarious factors beyond the control of The Dayton Power and Light Company(DP&L or the Company), including but not limited to: abnormal or severe weather;unusual maintenance or repair requirements; changes in fuel costs; changes inelectricity, coal, environmental emissions, gas and other commodity prices;increased competition; regulatory changes and decisions; changes in accountingrules; financial market conditions; and general economic conditions.

 

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

 

15

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**OTHERMATTERS**

 

**Updates on Competition andRegulation**

On April 7, 2004, DPLreceived notice that the staff of the Public Utilities Commission of Ohio(PUCO) is conducting an investigation into the financial condition of theCompany as a result of previously disclosed matters raised by a Companyemployee during the 2003 year-end financial closing process (the ThobeMemorandum).  On May 27, 2004, the PUCOordered the Company to file a plan of utility financial integrity that outlinesthe actions DPL has taken or will take to insulate DP&L utility operationsand customers from its unregulated activities. The Company was required to file this plan by March 2, 2005.  On February 4, 2005, the Company filed itsprotection plan with the PUCO and will continue to cooperate with the PUCO toresolve any outstanding issues in this investigation.  On March 29, 2005, the OCC filed commentswith the PUCO on the Company’s financial plan of integrity, requesting the PUCOcontinue the investigation and monitor the Company’s progress towardimplementation of its financial plan of integrity.

 

As of March 31, 2005 fourunaffiliated marketers were registered as competitive retail electric service (CRES)providers in the Company’s service territory; to date, there has been nosignificant activity from these suppliers.  DPL Energy Resources, Inc.(DPLER), an affiliated company, is also a registered CRES provider andaccounted for nearly all load served by CRES providers within the Company’sservice territory in 2004.  In addition, several communities in theCompany’s service area have passed ordinances allowing the communities tobecome government aggregators for the purpose of offering alternative electricgeneration supplies to their citizens. To date none of these communities have aggregated.

 

There was a complaintfiled on January 21, 2004 at the PUCO concerning the pricing of the Company’sbilling services.  Additionally, onDecember 16, 2003, a complaint was filed at the PUCO alleging that the Companyhas established improper barriers to competition.  On October 13, 2004, the parties reached asettlement on the pricing of the Company’s billing services that the Companywill charge CRES providers. Additionally, on October 19, 2004, the Company entered into a settlementwith Dominion Retail, Green Mountain Energy, and the Staff of the PUCO thatresolves all matters in the competition barrier complaint.  This settlement provides that the Companywill modify the manner in which customer partial payments are applied tobilling charges and the Company will no longer offer to purchase thereceivables of CRES providers who operate in the Company’s certifiedterritory.  On February 2, 2005, the PUCOissued an Order approving both settlements with minor modifications.  This Order gives the Company the right todefer costs of approximately $18 million and later file for recovery over afive year period to begin January 1, 2006, subject to PUCO approval.  On March 4, 2005, the OCC filed a Motion forRehearing with the PUCO.  On March 23,2005 the PUCO denied the OCC Motion for Rehearing.

 

On April 4, 2005, theCompany filed a request at the PUCO to implement a rate stabilization surchargeeffective January 1, 2006.  The proposedrate surcharge request supports over $100 million in increased costs and isdesigned to partially reimburse the Company for certain costs of providingelectric service related to fuel, environmental compliance, taxes, regulatorychanges and security measures.  Thesurcharge is capped at 11% of the generation portion of the Company’srates.  The surcharge, if approved, wouldresult in approximately $76 million in additional revenue in 2006.

 

**Update on EnvironmentalConsiderations**

*Air and Water Quality*

On December 17, 2003, the USEPA proposed theInterstate Air Quality Rule (IAQR) designed to reduce and permanently capsulfur dioxide (SO2) and NOx emissions from electric utilities.  The proposed IAQR focused on states,including Ohio, whose power plant emissions are believed to be significantlycontributing to fine particle and ozone pollution in other downwind states inthe eastern United States.  OnJune 10, 2004, the USEPA issued a supplemental proposal to the IAQR, nowrenamed as the Clean Air Interstate Rule (CAIR).  The final rules were signed on March 10,2005.  Although not yet published, CAIRwill have a material effect on the Company’s operations.  The Company anticipates that Phase I of CAIRwill require the installation of flue gas desulfurization (FGD) equipment andannual operation of the currently-installed SCR.

 

On January 30, 2004, the USEPA published itsproposal to restrict mercury and other air toxics from coal-fired and oil-firedutility plants.  The final Clean AirMercury Rule (CAM-R) was signed March 15, 2005. Although not yet published, the final rules will have a material effecton the Company’s operations.  The Companyanticipates that the FGD being planned to meet the requirements of CAIR may beadequate to meet the Phase I requirements of CAM-R.  The Company expects that additional controlswill be needed to meet the Phase II requirements of CAM-R that go into effectJanuary 1, 2018.  On March 29, 2005, ninestates sued USEPA, opposing the regulatory approach taken by USEPA.  On March 31, 2005, various groups requestedthat USEPA stay implementation of CAM-R. 

 

Under the CAIR and CAM-R cap and trade programs for SO2,NOx and mercury, the Company estimates it will spend more than $500million from 2005 through 2008 to install the necessary pollutioncontrols.  If CAM-R litigation results inplant specific mercury controls, the Company’s costs may be higher.  Due to the ongoing uncertainties associatedwith the litigation of the CAM-R, the Company cannot project the final costs atthis time.

 

16

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**OVERVIEWAND FUTURE EXPECTATIONS**

 

As part of Ohio’selectric deregulation law, all of the state’s investor-owned utilities arerequired to join a Regional Transmission Organization (RTO), whose role is toadminister an electric marketplace and insure reliability.  In October 2004, the Company successfullyintegrated its 1,000 miles of high-voltage transmission into the PJMInterconnection, L.L.C. (PJM) RTO.  PJMensures the reliability of the high-voltage electric power system serving 44million people in all or parts of Delaware, Indiana, Kentucky, Maryland,Michigan, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, West Virginiaand the District of Columbia.  PJMcoordinates and directs the operation of the region’s transmission grid;administers a competitive wholesale electricity market, the world’s largest;and plans regional transmission expansion improvements to maintain gridreliability and relieve congestion.

 

In the first quarter of2005, DP&L’s operating income decreased $15.5 million or 14% from the firstquarter of 2004.  Total revenues of $305.1million in the first quarter of 2005 exceeded total revenues for the firstquarter of 2004 by $4.7 million resulting from an increase in average marketrates and ancillary revenues associated with the Company’s participation in PJM.  These increases were largely offset by adecline in electric sales volume.  Operatingexpenses of $213.7 million in the first quarter of 2005 increased by $20.2million or 10% compared to the same period in the prior year. This increase wasprimarily the result of higher fuel and purchased power costs.  DP&L’s earnings on common stock of $53.1 millionin the first quarter of 2005 decreased $8.7 million compared to the same periodin the prior year.

 

**RESULTSOF OPERATIONS**

 

**IncomeStatement Highlights**

 
| ** **                                                | ** ** | **Three Months Ended March 31, ** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|
| **$ in millions**                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                                      |       |                                   |       |   |   |
| Electric  revenues                                        |       | **$**                                  | **305.1**  | ** ** | $ | 300.4 |   |
| Less: Fuel                                                |       | **77.7**                               | ** ** | 62.7 |   |
| Purchased power                                           |       | **29.3**                               | ** ** | 28.5 |   |
| Net electric  margin (a)                                  |       | **$**                                  | **198.1**  | ** ** | $ | 209.2 |   |
|                                                      |       | ** **                             | ** ** |   |   |
| Net electric margin  as a percentage of Electric revenues |       | **64.9**                               | **%**      | 69.6 | % |
|                                                      |       | ** **                             | ** ** |   |   |
| Operating income                                          |       | **$**                                  | **91.4**   | ** ** | $ | 106.9 |   |

 

(a)          For purposes of discussing operating results, DP&L presents anddiscusses net electric margin.  Thisformat is useful to investors because it allows analysis and comparability ofoperating trends and includes the same information that is used by managementto make decisioins regarding the Company’s financial performance.

 

**Electric Revenues**

Electricrevenues increased to $305.1 million in the first quarter of 2005 from $300.4million in the first quarter of 2004 reflecting higher average rates forwholesale and retail revenues and ancillary revenues associated withparticipation in PJM.  These increaseswere offset by lower wholesale and retail sales volumes.

 

Retail revenues decreased$2.7 million in the first quarter of 2005 compared to the retail revenues inthe first quarter of 2004, primarily resulting from $3.9 million in decreasedsales volume, partially offset by $1.2 million related to higher averagerates.  The decrease in sales primarily reflectswarmer than normal

 

17

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weather as heatingdegree-days were down 2% to 2,897 for the first quarter of 2005 compared to2,949 for the same period in 2004.  Thehigher average rates were primarily the result of a difference in the balanceof sales among the various categories of customers.  Wholesale revenue decreased $8.1 million,primarily related to a $23.5 million decline in sales volume that was partiallyoffset by a $15.4 million increase related to higher average market rates.  During the first quarter of 2005, ancillaryrevenues from PJM were $15.5 million. The Company did not participate in PJM for the same period for2004.  PJM ancillary revenues primarilyconsist of compensation for use of the Company’s transmission assets, reactivesupply and regulation services.

 

**Electric Margins, Fuel andPurchased Power**

Net electric margin of $198.1million in the first quarter of 2005 decreased by $11.1 million when comparedto net electric margin of $209.2 million in the first quarter of 2004.  As a percentage of total electric revenues,net electric margin decreased by 4.7 percentage points to 64.9% from 69.6%.  This decline is primarily the result of increasedfuel and purchased power costs, partially offset by a moderate increase inelectric revenues.  Fuel costs increasedby $15.0 million or 24% for the three months ended March 31, 2005 compared tothe same period in 2004 primarily resulting from higher average fuelcosts.  Purchased power costs increasedby $0.8 million or 3% in the first quarter of 2005 compared to the same periodin 2004 primarily resulting from $13.4 million of charges associated withmoving power across PJM and $1.8 million related to higher average market ratesfor power purchases partially offset by a $14.4 million decrease reflecting alower volume of purchased power.

 

**Operation and Maintenance**

Operation and maintenanceexpense experienced a slight increase of $2.0 million or 4% for the threemonths ended March 31, 2005 compared to the same period in 2004 primarilyresulting from $1.8 million of PJM administrative fees incurred in the firstquarter of 2005 but not in the same period for 2004.

 

**Depreciation and Amortization**

Depreciation expenseincreased $1.7 million or 6% in the first quarter of 2005 compared to the firstquarter of 2004 primarily resulting from a higher plant base related topollution control facilities.

 

**Other Income**

Other income for thefirst three months ended March 31, 2005 rose $3.6 million compared to the firstthree months ended March 31, 2004.  Thisincrease primarily resulted from $12.3 million in realized gains from the saleof pollution control emission allowances in the first quarter of 2005 comparedto $5.5 million in the first quarter of 2004.

 

**Income Tax Expense**

Income tax expensedecreased $2.7 million or 7% in the first quarter of 2005 compared to the firstquarter of 2004 primarily resulting from lower income.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

DP&L’s cash andtemporary cash investments totaled $14.3 million at March 31, 2005 compared to$36.6 million at March 31, 2004.  Thisdecrease was primarily attributed to lower profitability relating to higherfuel costs.  DP&L’s cash and temporarycash investments totaled $17.2 million at December 31, 2004.

 

The Company generated netcash from operating activities of $115.1 million in the first quarter of 2005compared to $120.3 million in the first quarter of 2004.  The net cash from operating activities forthe three months ended March 31, 2005 and 2004 was primarily the result ofoperating profitability and working capital.  The decline in operating cash flow of $5.2million in the first quarter of 2005 compared to the first quarter of 2004 isprimarily the result of lower operating profitability relating to higher fuelcosts.  The tariff-based revenue fromDP&L’s business continues to be the principal source of cash from operatingactivities.  Management believes that thediversified retail customer mix of residential, commercial, and industrialclasses provides DP&L with a reasonably predictable gross cash flow.

 

Net cash flows used forinvesting activities was $42.7 million in the first quarter of 2005 and $25.7million in the first quarter of 2004 to provide funding for capitalexpenditures.

 

Net cash flows used forfinancing activities was $75.2 million in the first quarter of 2005 and $75.2million in the first quarter of 2004. Net cash flows used for financing activities for each of these periodswere to pay dividends on common stock to the parent company and for dividendspaid on preferred stock.

 

18

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The Company hasobligations to make future payments for capital expenditures, debt agreements,lease agreements, and other long-term purchase obligations, and has certaincontingent commitments such as guarantees. The Company believes its cash flows from operations, the creditfacilities (existing or future arrangements), and other short- and long-termdebt financing will be sufficient to satisfy its future working capital,capital expenditures and other financing requirements for the foreseeablefuture.  DP&L’s ability to generatepositive cash flows from operations is dependent on general economicconditions, competitive pressures, and other business and risk factorsdescribed in “Factors That May Affect Future Results.”  If the Company is unable to generatesufficient cash flows from operations, or otherwise comply with the terms ofits credit facilities, the Company may be required to refinance all or aportion of its existing debt or seek additional financing alternatives.  A discussion of each of DP&L’s criticalliquidity commitments is outlined below.

 

**Capital Requirements**

# **Construction additions were $35.2 million and $22.9 millionfor the first quarter of 2005 and 2004, respectively, and are expected toapproximate $193 million in 2005.**

# ** **

# **Planned construction additions for 2005 relate to DP&L’senvironmental compliance program, power plant equipment, and its transmissionand distribution system.  During the lastthree years, capital expenditures have been utilized to meet the Company’sstate and federal standards for Nitrogen Oxide (NOx) emissions from powerplants and to make power plant improvements.**

# ** **

Capitalprojects are subject to continuing review and are revised in light of changesin financial and economic conditions, load forecasts, legislative andregulatory developments and changing environmental standards, among otherfactors.  Over the next four years,DP&L is projecting to spend an estimated $850 million in capital projects,approximately 60% of which is to meet changing environmental standards.  The Company’s ability to complete its capitalprojects and the reliability of future service will be affected by itsfinancial condition, the availability of internal and external funds atreasonable cost, and adequate and timely return on these capitalinvestments.  DP&L expects to financeits construction additions in 2005 with internally-generated funds.

 

**Debt and Debt Covenants**

AtMarch 31, 2005, the Company’s scheduled maturities of long-term debt,including capital lease obligations, over the next five years are $1.2 million forthe remainder of 2005, $1.3 million in 2006, $9.5 million in 2007, $0.7 millionin 2008, and $0.7 million in 2009. Substantially all property of DP&L is subject to the mortgage liensecuring the first mortgage bonds.  Debtmaturities in 2005 are expected to be financed with internal funds.  Certain debt agreements contain reporting andfinancial covenants for which the Company is in compliance as of March 31, 2005and expects to be in compliance the near term.

 

OnSeptember 29, 2003, DP&L issued $470 million principal amount of FirstMortgage Bonds, 5.125% Series due 2013. The net proceeds from the sale of the bonds, after expenses, were usedon October 30, 2003, to (i) redeem $226 million principal amount of DP&L’sFirst Mortgage Bonds, 8.15% Series due 2026, at a redemption price of 104.075%of the principal amount plus accrued interest to the redemption date and (ii)redeem $220 million principal amount of DP&L’s First Mortgage Bonds, 7.875%Series due 2024, at a redemption price of 103.765% of the principal amount plusaccrued interest to the redemption date. The 5.125% Series due 2013 were not registered under the Securities Actof 1933, but were offered and sold through a private placement in compliancewith Rule 144A under the Securities Act of 1933.  The bonds include step-up interest provisionsrequiring the Company to pay additional interest if (i) DP&L’s registrationstatement was not declared effective by the SEC within 180 days from theissuance of the new bonds or (ii) the exchange offer was not completed within210 days from the issuance of the new bonds. The registration statement was not declared effective and the exchangeoffer was not timely completed and, as a result, the Company is required to payadditional interest of 0.50% until a registration statement is declaredeffective at which point the additional interest shall be reduced by0.25%.  The remaining additional interestof 0.25% will continue until the exchange offer is completed.  The exchange offer registration for thesesecurities was filed April 26, 2005.

 

Issuance of additional amountsof first mortgage bonds by DP&L is limited by the provisions of itsmortgage; however, management believes that DP&L continues to havesufficient capacity to issue first mortgage bonds to satisfy its requirementsin connection with its current refinancing and construction programs.  The amounts and timing of future financingswill depend upon market and other conditions, rate increases, levels of salesand construction plans.

 

In June 2004, the Companyobtained a $100 million unsecured revolving credit agreement that extended andreplaced its previous revolving credit agreement of $150 million.  The new agreement, which expires on May 31,

 

19

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2005, provides creditsupport for DP&L’s business requirements during this period and may beincreased up to $150 million.  Thefacility contains two financial covenants including maximum debt to totalcapitalization, and minimum earnings before interest and taxes (EBIT) to totalinterest expense.  These covenants arecurrently met.  The Company had nooutstanding borrowings under this credit facility at March 31, 2005 or at year-end2004.  Fees associated with this creditfacility are approximately $0.6 million per year.  Changes in debt ratings, however, may affectthe applicable interest rate for the Company’s revolving credit agreement.  A one-step increase in DP&L’s creditrating reduces the facility’s interest rate by 0.25% and a one-step decrease incredit rating increases the facility’s interest rate by 0.25%.

 

In February 2004, theCompany entered into a $20 million Master Letter of Credit Agreement witha financial lending institution.  Thisagreement supports performance assurance needs in the ordinary course of business.  DP&L has certain contractual agreementsfor the sale and purchase of power, fuel, and related energy services thatcontain credit rating related clauses allowing the counter parties to seekadditional surety under certain conditions. On February 24, 2005, DP&L entered into an amendment to extend theterm of this Agreement for one year and reduce the maximum dollar volume ofletters of credit to $10 million.  As ofMarch 31, 2005, the Company had three outstanding letters of credit for atotal of $3.5 million.

 

There are nointer-company debt collateralizations or debt guarantees between DP&L andits parent.  None of the debt obligationsof DP&L are guaranteed or secured by its parent or affiliates, and nocross-collateralization exists between the Company and DPL or any affiliate.

 

**Credit Ratings**

Currently, DP&L’ssenior secured debt credit ratings are as follows:

 
| ** **                        | ** ** | **Rating** | ** ** | **Outlook**                        | ** ** | **Effective** |
|-----------------------------------|------------|------------|------------|------------------------------------|------------|---------------|
| Fitch Ratings                     |       | BBB        |       | Rating watch positive              |       | February 2005 |
|                              |       |       |       |                               |       |          |
| Moody’s Investors  Service   |       | Baa2       |       | Under review for  possible upgrade |       | February 2005 |
|                              |       |       |       |                               |       |          |
| Standard & Poor’s  Corp. |       | BBB-       |       | Positive                           |       | April 2005    |

 

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

 

**Off-Balance Sheet Arrangements**

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

 

**Long-term Obligations andCommercial Commitments**

DP&L enters intovarious contractual and other long-term obligations that may affect theliquidity of its operations.  At March31, 2005, these include:

 

20

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| ** **                           | ** ** | **Payment Year** | ** ** |
|--------------------------------------|------------|------------------|------------|
| **Long  Term Obligations**           | ** ** | ** **       | ** ** |
| **$ in millions**               | ** ** | **2005**         | ** ** | **2006 & 2007** | ** ** | **2008 & 2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                 |       |             |       |   |   |   |   |   |   |   |   |
| Long-term debt                       |       | $                | 0.4        |   | $ | 9.0 |   | $ | — |   | $ | 673.8 |   | $ | 683.2 |   |
| Interest  payments                   |       | 32.4             |       | 74.9 |   | 74.0 |   | 336.4 |   | 517.7 |   |
| Pension and  Postretirement payments |       | 17.4             |       | 45.9 |   | 46.3 |   | 117.9 |   | 227.5 |   |
| Capital leases                       |       | 0.8              |       | 1.8 |   | 1.4 |   | 0.6 |   | 4.6 |   |
| Operating leases                     |       | 0.8              |       | 0.9 |   | — |   | — |   | 1.7 |   |
| Coal contracts  (a)                  |       | 265.3            |       | 575.3 |   | 83.7 |   | 85.5 |   | 1,009.8 |   |
| Other long-term  obligations         |       | 17.1             |       | 12.7 |   | 0.5 |   | — |   | 30.3 |   |
| Total long-term  obligations         |       | $                | 334.2      |   | $ | 720.5 |   | $ | 205.9 |   | $ | 1,214.2 |   | $ | 2,474.8 |   |

 

----

(a) DP&Loperated units.

 

Long-term debt:

Long-term debt as ofMarch 31, 2005, consists of first mortgage bonds and guaranteed air qualitydevelopment obligations and includes current maturities and unamortized debtdiscount.  (See Note 5 of Notes toConsolidated Financial Statements.)

 

Interest payments:

Interest paymentsassociated with the Long-term debt described above.

 

Pension andPostretirement payments:

As of March 31, 2005,DP&L had estimated future benefit payments as outlined in Note 3 of Notesto Consolidated Financial Statements. These estimated future benefit payments are projected through 2014.

 

Capital leases:

As of March 31, 2005, theCompany had two capital leases that expire in November 2007 and September 2010.

 

Operating leases:

As of March 31, 2005, theCompany had several operating leases with various terms and expiration dates.

 

Coal contracts:

The Company has enteredinto various long-term coal contracts to supply portions of its coalrequirements for its generating plants. Contract prices are subject to periodic adjustment, and have featuresthat limit price escalation in any given year.

 

Other long-termobligations:

As of March 31, 2005, theCompany had various other long-term obligations including non-cancelablecontracts to purchase goods and services with various terms and expirationdates.

 

DP&L enters intovarious commercial commitments, which may affect the liquidity of itsoperations.  At March 31, 2005 theseinclude:

 

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

 

Credit facilities:

In June 2004, the Companyreplaced its previous $150 million revolving credit agreement with a $100million, 364 day unsecured credit facility that expires on May 31, 2005.  At March 31, 2005, there were no borrowingsoutstanding under this credit agreement. The new facility may be increased up to $150 million.

 

Guarantees:

DP&L owns a 4.9%equity ownership interest in an electric generation company.  As of March 31, 2005, DP&L could beresponsible for the repayment of 4.9%, or $14.9 million, of a $305 million debtobligation and also 4.9%, or $2.9 million, of a separate $60 million debtobligation.  Both obligations mature in2006.

 

**MARKET RISK**

 

Asa result of its operating, investing and financing activities, DP&L issubject to certain market risks, including changes in commodity prices forelectricity, coal, environmental emissions and gas; and fluctuations ininterest rates.  Commodity pricingexposure includes the impacts of weather, market demand, potential coalsupplier contract breaches or defaults, increased competition and othereconomic conditions.  For purposes ofpotential risk analysis, DP&L uses sensitivity analysis to quantify potentialimpacts of market rate changes on the results of operations.  The sensitivity analysis representshypothetical changes in market values that may or may not occur in the future.

 

**Commodity Pricing Risk**

Approximately 18 percentof DP&L’s 2005 electric revenues were from sales of excess energy andcapacity in the wholesale market.  Energyand capacity in excess of the needs of existing retail customers is sold in thewholesale market when DP&L can identify opportunities with positivemargins.  As of March 31, 2005, ahypothetical increase or decrease of 10% in annual wholesale revenues,excluding PJM services, would result in approximately a $13.3 million increaseor decrease to earnings on common stock, assuming no increase in costs.

 

Fuel (including emissionallowances) and purchased power costs as a percent of total operating costs inthe first quarter of 2005 and 2004 were 51% and 47%, respectively.  As of March 31, 2005, DP&L has contractedfor substantially all of its projected coal requirements for 2005 with anyincremental purchases made in the spot market. The prices to be paid by the Company under its long-term coal contractsare either fixed or subject to periodic adjustment.  Each contract has features that will limitprice escalations in any given year. DP&L has also covered all of its estimated 2005 emission allowancerequirements.  The Company expects its2005 annual fuel costs to exceed its 2004 annual fuel costs by approximately 15%,which is higher than anticipated.  Thisincrease is primarily the result of increased emissions allowance costs and a slightincrease in coal costs.  Purchased powercosts depend, in part, upon the timing and extent of planned and unplannedoutages of its generating capacity. DP&L will purchase power on a discretionary basis when wholesalemarket conditions provide opportunities to obtain power at a cost below theCompany’s internal production costs.  Asof March 31, 2005, a hypothetical increase or decrease of 10% in annual fueland purchased power costs, excluding PJM services, would result in approximatelya $22.7 million increase or decrease to earnings on common stock.

 

**Interest Rate Risk**

As a result of DP&L’snormal borrowing and leasing activities, the Company’s results are exposed tofluctuations in interest rates, which the Company manages through its regularfinancing activities.  DP&L maintainsa limited amount of cash on deposit or investments in cash equivalents that maybe affected by adverse interest rate

 

22

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fluctuations.  The Company’s long-term debt representspublicly held secured and unsecured instruments with fixed interest rates.  At March 31, 2005, DP&L had no short-termborrowings.

 

The carrying value of theCompany’s debt was $687.8 million at March 31, 2005, consisting of firstmortgage bonds, guaranteed air quality development obligations and capitalleases.  The fair value of this debt was$672.1 million, based on current market prices or discounted cash flows usingcurrent rates for similar issues with similar terms and remainingmaturities.  The principal cashrepayments and related weighted average interest rates by maturity date forlong-term, fixed-rate debt at March 31, 2005, are as follows:

 
| ** **                 | ** ** | **Long-term Debt**               | ** ** |
|----------------------------|------------|----------------------------------|------------|
| **Expected Maturity Date** | ** ** | **Amount  ($ in millions)** | ** ** | **Average Rate** | ** ** |
|                       |       |                             |       |   |   |
| 2005                       |       | **$**                            | **1.2**    |   | 4.7 | % |
| 2006                       |       | **1.3**                          |       | 4.8 | % |
| 2007                       |       | **9.5**                          |       | 6.1 | % |
| 2008                       |       | **0.7**                          |       | 4.3 | % |
| 2009                       |       | **0.7**                          |       | 4.3 | % |
| Thereafter                 |       | **674.4**                        |       | 5.5 | % |
| Total                      |       | **$**                            | **687.8**  |   | 5.8 | % |
|                       |       | ** **                       |       |   |   |
| Fair Value                 |       | **$**                            | **672.1**  |   |   |   |

 

Debt maturities in 2005are expected to be financed with internal funds.

 

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

 

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

 

**Regulation/Competition**

DP&L operates in arapidly changing industry with evolving industry standards and regulations. Inrecent years, a number of federal and state developments aimed at promotingcompetition triggered industry restructuring. Regulatory factors, such as changes in the policies or procedures thatset rates; changes in tax laws, tax rates, and environmental laws andregulations; changes in DP&L’s ability to recover expenditures forenvironmental compliance, fuel and purchased power costs and investments made undertraditional regulation through rates; and changes to the frequency and timingof rate increases, can affect the Company’s results of operations and financialcondition.  Additionally, financial orregulatory accounting principles or policies imposed by governing bodies canincrease DP&L’s operational and monitoring costs affecting its results ofoperations and financial condition.

 

Changes in DP&L’scustomer base, including municipal customer aggregation, could lead to theentrance of competitors in the Company’s marketplace affecting its results ofoperations and financial condition.

 

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**Economic Conditions**

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

 

During the past fewyears, the merchant energy industry in many parts of the United States hassuffered from oversupply of merchant generation and a decline in trading andmarketing activity.  These marketconditions are expected to continue for several years.  As a result of these market conditions, theCompany continues to evaluate the carrying values of certain long-livedgeneration assets.

 

**Reliance on Third Parties**

DP&L relies on manysuppliers for the purchase and delivery of inventory and components to operateits energy production, transmission and distribution functions.  Unanticipated changes in the Company’spurchase processes may affect the Company’s business and operating results. Inaddition, the Company relies on others to provide professional services, suchas, but not limited to investment management, actuarial calculations, internalaudit services, payroll processing and various consulting services.

 

**Operating Results Fluctuations**

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

 

A majority of the Company’semployees are under a collective bargaining agreement expiring at the end of October2005.  If the Company is unable tonegotiate this or future collective bargaining agreements, the Company couldexperience work stoppages, which may affect its business and operating results.

 

**Regulatory Uncertainties and Litigation**

In the normal course ofbusiness, the Company is subject to various lawsuits, actions, proceedings,claims and other matters asserted under laws and regulations.  Additionally, the Company is subject todiverse and complex laws and regulations, including those relating to corporategovernance, public disclosure and reporting and taxation, which are rapidlychanging and subject to additional changes in the future. As further described inPart II, Item 1 – Legal Proceedings, the Company is also currently involved invarious litigation in which the outcome is uncertain.  Compliance with these rapid changes maysubstantially increase costs to DP&L’s organizations and could affect itsfuture operating results.

 

**Internal Controls**

DP&L’s internalcontrols, accounting policies and practices, and internal information systems areintended to enable the Company to capture and process transactions in a timelyand accurate manner in compliance with accounting principles generally acceptedin the United States of America, laws and regulations, taxation requirements,and federal securities laws and regulations.  DP&L implemented corporate governance,internal control and accounting rules issued in connection with theSarbanes-Oxley Act of 2002.  The Company’sinternal controls and policies are being closely monitored by management, aswell as the Board of Directors, for continued compliance with Section 404 ofthe Act.  While DP&L believes thesecontrols, policies, practices and systems are adequate to ensure data integrity,unanticipated and unauthorized actions of employees, temporary lapses ininternal controls due to shortfalls in oversight, or resource constraints,could lead to improprieties and undetected errors that could impact the Company’sfinancial condition or results of operations.

 

**Environmental Compliance**

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

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

DP&L’s consolidatedfinancial statements are prepared in accordance with generally acceptedaccounting principles in the United States (GAAP). In connection with thepreparation of these financial statements, DP&L’s management is required tomake assumptions, estimates and judgments that affect the reported amounts ofassets, liabilities, revenues, expenses and the related disclosure ofcontingent liabilities. These assumptions, estimates and judgments are based onmanagement’s historical experience and assumptions that are believed to bereasonable at the time. However, because future events and their effects cannotbe determined with certainty, the determination of

 

24

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estimates requires theexercise of judgment. DP&L’s critical accounting policies are those whichrequire assumptions to be made about matters that are highly uncertain.

 

Different estimates couldhave a material effect on its 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 subjectto such judgments include the carrying value of property, plant and equipment;the valuation of derivative instruments; valuation allowance for receivablesand deferred income taxes; the valuation of reserves related to currentlitigation; and assets and liabilities related to employee benefits.

 

There have been nosignificant changes to the critical accounting policies as disclosed inDP&L’s Form 10-K as of December 31, 2004.

 

**Recently Issued AccountingPronouncements**

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

 

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**THEDAYTON POWER AND LIGHT COMPANY**

**OPERATINGSTATISTICS**

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** **  |
|--------------------------------------|------------|-----------------------------------|-------------|
| ** **                           | ** ** | ** **                        | ** **  | ** ** | ** ** |
| ** **                           | ** ** | **2005**                          | ** **  | **2004** | ** ** |
| **Electric**                         |       |                              |        |   |   |
|                                 |       |                              |        |   |   |
| Sales (millions  of kWh)             |       |                              |        |   |   |
| Residential                          | ** ** | **1,535**                         |        | 1,531 |   |
| Commercial                           | ** ** | **885**                           |        | 904 |   |
| Industrial                           | ** ** | **1,010**                         |        | 1,038 |   |
| Other retail                         | ** ** | **331**                           |        | 333 |   |
| Other  miscellaneous revenues        | ** ** | **—**                        |        | — |   |
| Total retail                         | ** ** | **3,761**                         |        | 3,806 |   |
|                                 |       |                              |        |   |   |
| Wholesale                            | ** ** | **617**                           |        | 982 |   |
|                                 |       |                              |        |   |   |
| Total sales                          | ** ** | **4,378**                         |        | 4,788 |   |
|                                 |       |                              |        |   |   |
| Revenues ($ in  thousands)      |       |                              |        |   |   |
| Residential                          | ** ** | **$**                             | **125,932** |   | $ | 125,992 |   |
| Commercial                           | ** ** | **57,174**                        |        | 57,597 |   |
| Industrial                           | ** ** | **29,784**                        |        | 30,830 |   |
| Other retail                         | ** ** | **18,884**                        |        | 18,933 |   |
| Other  miscellaneous revenues        | ** ** | **2,782**                         |        | 3,875 |   |
| Total retail                         | ** ** | **234,556**                       |        | 237,227 |   |
|                                 |       |                              |        |   |   |
| Wholesale                            | ** ** | **55,062**                        |        | 63,174 |   |
|                                 |       |                              |        |   |   |
| PJM ancillary revenues               | ** ** | **15,501**                        |        | — |   |
|                                 |       |                              |        |   |   |
| Total revenues                       | ** ** | **$**                             | **305,119** |   | $ | 300,401 |   |
|                                 |       |                              |        |   |   |
| Electric  customers at end of period | ** ** | **511,180**                       |        | 507,659 |   |

 

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

# ** **

See the “Market Risk”section of Item 2.

 

**Item 4.  Controlsand Procedures**

The Company’s managementevaluated, with the participation of the Chief Executive Officer and ChiefFinancial Officer, the effectiveness of the Company’s disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures were effectiveas of the end of the period covered by this report.  There has been nochange in the Company’s internal control over financial reporting that occurredduring the quarter covered by this report that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PartII.  Other Information**

 

**Item 1. Legal Proceedings**

 

On August 24, 2004, the Company, DPL and MVEfiled a Complaint against Mr. Forster, Ms. Muhlenkamp andMr. Koziar in the Court of Common Pleas of Montgomery County, Ohioasserting legal claims against them relating to the termination of the ValleyPartners Agreements, challenging the validity of the purported amendments tothe deferred compensation plans and to the employment and consulting agreementswith Messrs. Forster and Koziar and Ms. Muhlenkamp, and the propriety ofthe distributions from the plans to Messrs. Forster and Koziar andMs. Muhlenkamp, and alleging that Messrs. Forster and Koziar andMs. Muhlenkamp breached their fiduciary duties and breached theirconsulting and employment contracts.  TheCompany, DPL and MVE seek, among other things, damages in excess of $25thousand, disgorgement of all amounts improperly withdrawn by Messrs. Forsterand Koziar and Ms. Muhlenkamp from the deferred compensation plans and acourt order declaring that the Company, DPL and MVE have no further obligationsunder the consulting and employment contracts due to those breaches.

 

Defendants Forster, Koziar and Muhlenkamp have filedmotions to dismiss the Complaint and motions to stay discovery.  The Company and DPL have filed briefsopposing those motions.  In addition,pursuant to applicable statutes, regulations and agreements, the Company andDPL have been advancing certain of Defendants’ attorneys’ fees and expenseswith respect to various matters other than the litigation between Defendantsand the Company and DPL in Florida and Ohio, and believe that other requestedadvances are not required.  On February7, 2005, Mr. Forster and Ms. Muhlenkamp filed a motion in DP&L’s and DPL’sOhio litigation seeking to compel DPL, MVE and the Company to pay all attorneys’fees and expenses that have not been advanced to them.  The Company, DPL and MVE have filed a briefopposing that motion.  All of theforegoing motions are pending.  

 

On March 15, 2005, Mr. Forster and Ms. Muhlenkampfiled a lawsuit in New York state court against the purchasers of the DPLprivate equity portfolio and against outside counsel to the Company and DPLconcerning purported entitlements in connection with the purchase of theportfolio.  The Company, DPL and MVE arenot defendants in that case; however, they are parties to an indemnificationagreement with respect to the purchaser defendants.  Those defendants have requested that theCompany, DPL and MVE indemnify them in connection with that litigation, and theCompany, DPL and MVE have acknowledged indemnify obligations.  On March 28, 2005, the Company, DPL and MVEfiled a Motion for Preliminary Injunction in the Company’s Ohio case,requesting that the court issue a preliminary injunction against Mr. Forsterand Ms. Muhlenkamp regarding the lawsuit.  Since certain key issues raisedby Mr. Forster and Ms. Muhlenkamp in their New York lawsuit are identical tothe issues raised in the Company’s pending Ohio lawsuit, DPL, MVE and theCompany believe that those issues should be heard and resolved in the pendingOhio lawsuit.  Mr. Forster and Ms.Muhlenkamp filed a brief opposing the preliminary injunction on April 15,2005.  The Company, DPL and MVE filedtheir reply brief on April 25, 2005.  Themotion is pending and has been set for hearing on May 6, 2005.

 

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

 

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

 

**Item 5. Other Information**

 

None

 

**Item 6.  Exhibits**

 

(a)                                  The following exhibits arefiled herewith:

 

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

 

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

 

27

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**SIGNATURES**

 

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

 
| ** ** | ** **  | **THE DAYTON POWER AND LIGHT COMPANY** |
|------------|-------------|----------------------------------------|
|       |        | (Registrant)                           |
|       |        |                                   |
|       |        |                                   |
| Date:      | May 5, 2005 | /s/ James V. Mahoney                   |
|       |        |                                   | James V. Mahoney  President and Chief Executive Officer  (principal executive officer) |
|       |        |                                   |
|       |        |                                   |
|       |        | /s/ John J.  Gillen                    |
|       |        |                                   | John J. Gillen  Senior Vice President and Chief Financial Officer (principal financial and  principal accounting   officer) |
|       |        |                                   |
|       |        |                                   |
|       |        | /s/ Daniel L.  Thobe                   |
|       |        |                                   | Daniel L. Thobe |
|       |        |                                   | Corporate Controller |

 

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