Table of Contents

 

 

 

**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|-----------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                |
| **For the quarterly period ended****June 30,  2009** |
| ** **                                                |
| **OR**                                                    |
| ** **                                                |
| **o**                                                     | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period from                         to                        **

 

| **Commission********File Number** | ** ** | **Registrant, State of Incorporation,********Address and Telephone Number** | ** ** | **I.R.S.  Employer********Identification  No.** |
|-----------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------|
|                              |       |                                                                        |       |                                            |
| **1-9052**                        | ** ** | **DPL INC.**                                                                | ** ** | **31-1163136**                                  |
|                              |       | (An Ohio Corporation)                                                       |       |                                            |
| ** **                        |       | 1065 Woodman Drive  Dayton, Ohio 45432                                      | ** ** | ** **                                      |
|                              |       | 937-224-6000                                                                |       |                                            |
|                              |       |                                                                        |       |                                            |
| **1-2385**                        | ** ** | **THE DAYTON POWER AND LIGHT COMPANY**                                      | ** ** | **31-0258470**                                  |
| ** **                        |       | (An Ohio Corporation)                                                       | ** ** | ** **                                      |
| ** **                        |       | 1065 Woodman Drive  Dayton, Ohio 45432                                      | ** ** | ** **                                      |
| ** **                        |       | 937-224-6000                                                                | ** ** | ** **                                      |

 

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

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

 

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

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

 

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

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

 

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

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

 

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

 
| **Registrant**                         | ** ** | **Description**                   | ** ** | **Shares Outstanding** |
|----------------------------------------|------------|-----------------------------------|------------|-----------------------------|
|                                   |       |                              |       |                        |
| **DPL Inc.**                           | ** ** | **Common Stock, $0.01 par value** |       | 115,972,529                 |
| ** **                             | ** ** | ** **                        | ** ** | ** **                  |
| **The Dayton Power and Light Company** | ** ** | **Common Stock, $0.01 par value** |       | 41,172,173                  |

 

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

 

 

 

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

 

**Index**

 
| ** **                             | ** **                                                                                  | **Page No.** |
|----------------------------------------|---------------------------------------------------------------------------------------------|-------------------|
| **Glossary of Terms**                  |                                                                                        | 3                 |
| ** **                             |                                                                                        |              |
| **Part I  Financial Information** |                                                                                        |
| ** **                             |                                                                                        |              |
| Item 1                                 | Financial Statements  – **DPL** and **DP&L**                                       |              |
|                                   |                                                                                        |              |
|                                   | Condensed  Consolidated Statements of Results of Operations – **DPL**                  | 6                 |
|                                   |                                                                                        |              |
|                                   | Condensed  Consolidated Statements of Cash Flows – **DPL**                             | 7                 |
|                                   |                                                                                        |              |
|                                   | Condensed  Consolidated Balance Sheets – **DPL**                                       | 8                 |
|                                   |                                                                                        |              |
|                                   | Condensed Consolidated Statements of Results of  Operations – **DP&L**             | 10                |
|                                   |                                                                                        |              |
|                                   | Condensed Consolidated Statements of Cash Flows – **DP&L**                         | 11                |
|                                   |                                                                                        |              |
|                                   | Condensed Consolidated Balance Sheets – **DP&L**                                   | 12                |
|                                   |                                                                                        |              |
|                                   | Notes to Condensed Consolidated Financial Statements                                        | 14                |
|                                   |                                                                                        |              |
| Item 2                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 38                |
|                                   |                                                                                        |              |
|                                   | Electric Sales and Revenues                                                                 | 59                |
|                                   |                                                                                        |              |
| Item 3                                 | Quantitative  and Qualitative Disclosures about Market Risk                                 | 59                |
|                                   |                                                                                        |              |
| Item 4                                 | Controls and  Procedures                                                                    | 59                |
|                                   |                                                                                        |              |
| **Part  II  Other Information**   |                                                                                        |
|                                   |                                                                                        |              |
| Item 1                                 | Legal Proceedings                                                                           | 60                |
|                                   |                                                                                        |              |
| Item 1A                                | Risk Factors                                                                                | 60                |
|                                   |                                                                                        |              |
| Item 2                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 60                |
|                                   |                                                                                        |              |
| Item 3                                 | Defaults  Upon Senior Securities                                                            | 60                |
|                                   |                                                                                        |              |
| Item 4                                 | Submission  of Matters to a Vote of Security Holders                                        | 61                |
|                                   |                                                                                        |              |
| Item 5                                 | Other Information                                                                           | 61                |
|                                   |                                                                                        |              |
| Item 6                                 | Exhibits                                                                                    | 62                |
|                                   |                                                                                        |              |
| **Other**                              |                                                                                        |              |
|                                   | ** **                                                                                  |              |
| Signatures                             |                                                                                        | 63                |
|                                   |                                                                                        |              |
| Certifications                         |                                                                                        | 1                 |

 

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**GLOSSARYOF TERMS**

 

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

 
| **Abbreviation  or Acronym** | ** ** | **Definition**                                                                                                                                                                                                                         |
|------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| CAA                          |       | Clean Air Act                                                                                                                                                                                                                          |
| CO2                          |       | Carbon Dioxide                                                                                                                                                                                                                         |
| CCEM                         |       | Customer Conservation  and Energy Management                                                                                                                                                                                           |
| CRES                         |       | Competitive Retail  Electric Service                                                                                                                                                                                                   |
| DPL                          |       | DPL Inc., the parent  company                                                                                                                                                                                                          |
| DPLE                         |       | DPL Energy, LLC, a  wholly owned subsidiary of DPL which engages in the operation of peaking  facilities                                                                                                                               |
| DPLER                        |       | DPL Energy  Resources, Inc., a wholly owned subsidiary of DPL which sells retail  electric energy and other energy services under contract to major industrial  and commercial customers in West Central Ohio                     |
| DP&L                     |       | The Dayton Power and  Light Company, the principal subsidiary of DPL and a public utility which  sells electricity to residential, commercial, industrial and governmental  customers in a 6,000 square mile area of West Central Ohio |
| DSM                          |       | Demand-Side Management.  A program under which customers typically receive a discount, rebate or some  other form of incentive in return for agreeing to reduce their electricity  consumption upon request by the utility.            |
| EITF                         |       | Emerging Issues Task  Force                                                                                                                                                                                                            |
| EPS                          |       | Earnings Per Share                                                                                                                                                                                                                     |
| ESOP                         |       | Employee Stock  Ownership Plan                                                                                                                                                                                                         |
| ESP                          |       | Electric Security  Plans, filed with the PUCO, pursuant to Ohio law                                                                                                                                                                    |
| FASB                         |       | Financial Accounting  Standards Board                                                                                                                                                                                                  |
| FERC                         |       | Federal Energy  Regulatory Commission                                                                                                                                                                                                  |
| FGD                          |       | Flue Gas  Desulfurization                                                                                                                                                                                                              |
| FGIC                         |       | Financial Guaranty  Insurance Company, an unaffiliated insurance company                                                                                                                                                               |
| Fitch                        |       | Fitch  Ratings, Inc.                                                                                                                                                                                                              |
| FSP                          |       | FASB Staff Position                                                                                                                                                                                                                    |
| GAAP                         |       | Generally Accepted  Accounting Principles                                                                                                                                                                                              |
| IRS                          |       | U.S. Internal Revenue  Service                                                                                                                                                                                                         |
| KWh                          |       | Kilowatt hours                                                                                                                                                                                                                         |
| Moody’s                 |       | Moody’s Investors  Service, Inc.                                                                                                                                                                                             |
| MVIC                         |       | Miami Valley Insurance  Company, a wholly owned insurance subsidiary of DPL that provides insurance  sources to DPL and its subsidiaries                                                                                               |
| NOx                          |       | Nitrogen Oxide                                                                                                                                                                                                                         |
| NYMEX                        |       | New York Mercantile  Exchange                                                                                                                                                                                                          |
| OAQDA                        |       | Ohio Air Quality  Development Authority                                                                                                                                                                                                |
| ODOD                         |       | Ohio Department of  Development                                                                                                                                                                                                        |
| Ohio EPA                     |       | Ohio Environmental  Protection Agency                                                                                                                                                                                                  |
| OTC                          |       | Over-The-Counter                                                                                                                                                                                                                       |
| OVEC                         |       | Ohio Valley Electric  Corporation, an electric generating company in which DP&L owns a 4.9%  equity interest                                                                                                                       |
| PJM                          |       | PJM Interconnection,  L.L.C., a regional transmission organization                                                                                                                                                                     |
| PUCO                         |       | Public Utilities  Commission of Ohio                                                                                                                                                                                                   |
| RSU                          |       | Restricted Stock Units                                                                                                                                                                                                                 |

 

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| **Abbreviation  or Acronym** | ** ** | **Definition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| RTEP                         |       | Regional Transmission  Expansion Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| RTO                          |       | Regional Transmission  Organization                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| RPM                          |       | Reliability Pricing  Model                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| SB 221                       |       | On May 1, 2008,  substitute Senate Bill 221, an Ohio electric energy bill, was signed by the  Governor and went into effect July 31, 2008. This new law states that  all Ohio distribution utilities must have filed either an electric security  plan or a market rate option to be in effect January 1, 2009. The law  also contains annual targets relating to advanced energy portfolio standards,  renewable energy, demand reduction and energy efficiency standards. |
| SCR                          |       | Selective Catalytic  Reduction                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| SEC                          |       | Securities and Exchange  Commission                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| SECA                         |       | Seams Elimination  Charge Adjustment                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| SFAS                         |       | Statement of Financial  Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| S&P                      |       | Standard &  Poor’s Ratings Service                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| SO2                          |       | Sulfur Dioxide                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| The Stipulation              |       | On February 24,  2009, **DP&L** filed a Stipulation and  Recommendation on its ESP filing pursuant to SB 221, which was signed by the  Staff of the PUCO, the Office of the Ohio Consumers’ Counsel and various  intervening parties. The PUCO approved the Stipulation on June 24, 2009.  The material terms of this Stipulation were discussed further in our Annual  Report on Form 10-K for the fiscal year ended December 31, 2008.                      |
| USEPA                        |       | U.S. Environmental  Protection Agency                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| USF                          |       | Universal Service Fund                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| VRDNs                        |       | Variable Rate Demand  Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

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**DPLInc.** and **The Dayton Powerand Light Company** file current, annual and quarterly reports, proxystatements (**DPL Inc.**only) and otherinformation required by the Securities Exchange Act of 1934, as amended, withthe SEC.  You may read and copy anydocument we file at the SEC’s public reference room located at 100 F StreetN.E., Washington, D.C. 20549, USA. Please call the SEC at (800) SEC-0330 for further information on thepublic reference room.  Our SEC filingsare also available to the public from the SEC’s web site at http://www.sec.gov.

 

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

 

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

 

Forward-looking Statements:  Certain statements contained in this reportare “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Pleasesee page 38 for more information about forward-looking statements contained inthis report.

 

**Part I – Financial Information**

 

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

 

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**Item 1 –Financial Statements**

** **

**DPL INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                   | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **$ in millions except per share  amounts**             | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| **Revenues**                                                 | ** ** | **$**                  | **361.2**  |                 | $          | 378.8 | ** ** | **$** | **776.2** |   | $ | 794.9 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| **Cost of revenues:**                                        |       |                   |       |                 |       |   |   |   |   |
| Fuel                                                         | ** ** | **75.9**               |       | 68.4                 | ** ** | **157.3** |   | 130.3 |   |
| Purchased power                                              | ** ** | **63.3**               |       | 86.1                 | ** ** | **123.0** |   | 169.1 |   |
| Total cost of revenues                                       | ** ** | **139.2**              |       | 154.5                | ** ** | **280.3** |   | 299.4 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| **Gross margin**                                             | ** ** | **222.0**              |       | 224.3                | ** ** | **495.9** |   | 495.5 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| **Operating expenses:**                                      |       |                   |       |                 |       |   |   |   |   |
| Operation and maintenance                                    | ** ** | **75.5**               |       | 69.8                 | ** ** | **152.5** |   | 132.2 |   |
| Depreciation and amortization                                | ** ** | **35.8**               |       | 34.0                 | ** ** | **71.7** |   | 67.2 |   |
| General taxes                                                | ** ** | **27.5**               |       | 32.5                 | ** ** | **59.6** |   | 62.3 |   |
| Amortization of regulatory assets                            | ** ** | **1.3**                |       | 2.4                  | ** ** | **3.2** |   | 5.5 |   |
| Total operating expenses                                     | ** ** | **140.1**              |       | 138.7                | ** ** | **287.0** |   | 267.2 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| **Operating income**                                         | ** ** | **81.9**               |       | 85.6                 | ** ** | **208.9** |   | 228.3 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| **Other income / (expense), net**                            |       |                   |       |                 |       |   |   |   |   |
| Investment income                                            | ** ** | **0.1**                |       | 0.9                  | ** ** | **0.6** |   | 2.6 |   |
| Interest expense                                             | ** ** | **(19.4**              | **)**      | (25.0                | )          | **(41.1** | **)** | (46.0 | ) |
| Other income / (deductions)                                  | ** ** | **(0.9**               | **)**      | 0.2                  | ** ** | **(1.1** | **)** | (0.5 | ) |
| Total other income / (expense), net                          | ** ** | **(20.2**              | **)**      | (23.9                | )          | **(41.6** | **)** | (43.9 | ) |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| **Earnings before income tax**                               | ** ** | **61.7**               |       | 61.7                 | ** ** | **167.3** |   | 184.4 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Income tax expense                                           | ** ** | **19.6**               |       | 14.1                 | ** ** | **56.0** |   | 59.5 |   |
| **Net income**                                               | ** ** | **$**                  | **42.1**   |                 | $          | 47.6 | ** ** | **$** | **111.3** |   | $ | 124.9 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| **Average number of common shares  outstanding (millions):** |       |                   |       |                 |       |   |   |   |   |
| Basic                                                        | ** ** | **112.2**              |       | 109.4                | ** ** | **112.2** |   | 109.4 |   |
| Diluted                                                      | ** ** | **113.2**              |       | 117.3                | ** ** | **112.9** |   | 116.8 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| **Earnings per share of common  stock:**                     |       |                   |       |                 |       |   |   |   |   |
| Basic                                                        | ** ** | **$**                  | **0.38**   |                 | $          | 0.43 | ** ** | **$** | **0.99** |   | $ | 1.14 |   |
| Diluted                                                      | ** ** | **$**                  | **0.37**   |                 | $          | 0.41 | ** ** | **$** | **0.99** |   | $ | 1.07 |   |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| **Dividends paid per share of common  stock**                | ** ** | **$**                  | **0.285**  |                 | $          | 0.275 | ** ** | **$** | **0.570** |   | $ | 0.550 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**DPLINC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **June 30,**    | ** ** |
| **$ in millions**                                                             | ** ** | **2009**             | ** ** | **2008** | ** ** |
|                                                                               |       |                 |       |   |   |
| **Cash flows from operating activities:**                                          |       |                 |       |   |   |
| Net  income                                                                        | ** ** | **$**                | **111.3**  |   | $ | 124.9 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                 |       |   |   |
| Depreciation  and amortization                                                     | ** ** | **71.7**             |       | 67.2 |   |
| Amortization  of regulatory assets                                                 | ** ** | **3.2**              |       | 5.5 |   |
| Deferred  income taxes                                                             | ** ** | **127.9**            |       | 28.5 |   |
| Changes  in certain assets and liabilities:                                        |       |                 |       |   |   |
| Accounts  receivable                                                               | ** ** | **36.8**             |       | (12.2 | ) |
| Deposits  and other advances                                                       | ** ** | **4.7**              |       | (0.1 | ) |
| Accounts  payable                                                                  | ** ** | **(44.7**            | **)**      | 36.1 |   |
| Accrued  taxes payable                                                             | ** ** | **(74.0**            | **)**      | (38.6 | ) |
| Accrued  interest payable                                                          | ** ** | **0.2**              |       | (0.8 | ) |
| Prepayments                                                                        | ** ** | **(0.2**             | **)**      | (0.1 | ) |
| Deferred  regulatory costs                                                         | ** ** | **(34.2**            | **)**      | (3.5 | ) |
| Inventories                                                                        | ** ** | **(21.9**            | **)**      | (0.9 | ) |
| Other                                                                              | ** ** | **3.9**              |       | (5.6 | ) |
| **Net cash provided by operating activities**                                      | ** ** | **184.7**            |       | 200.4 |   |
|                                                                               |       |                 |       |   |   |
| **Cash flows from investing activities:**                                          |       |                 |       |   |   |
| Capital  expenditures                                                              | ** ** | **(89.6**            | **)**      | (118.4 | ) |
| Proceeds  from sale of property                                                    | ** ** | **1.2**              |       | — |   |
| Maturity of short-term investment                                                  | ** ** | **5.0**              |       | — |   |
| **Net cash used for investing activities**                                         | ** ** | **(83.4**            | **)**      | (118.4 | ) |
|                                                                               |       |                 |       |   |   |
| **Cash flows from financing activities:**                                          |       |                 |       |   |   |
| Exercise  of stock options                                                         | ** ** | **—**           |       | 1.1 |   |
| Tax  impact related to exercise of stock options                                   | ** ** | **—**           |       | 0.1 |   |
| Repurchase  of warrants                                                            | ** ** | **(15.9**            | **)**      | — |   |
| Retirement  of long-term debt                                                      | ** ** | **(175.0**           | **)**      | (100.0 | ) |
| Withdrawals  of restricted funds held in trust, net                                | ** ** | **6.7**              |       | 20.5 |   |
| Repurchase  of pollution control bonds                                             | ** ** | **—**           |       | (90.0 | ) |
| Withdrawals  from revolving credit facility                                        | ** ** | **155.0**            |       | 90.0 |   |
| Repayment of borrowings from revolving credit  facility                            | ** ** | **(15.0**            | **)**      | — |   |
| Dividends  paid on common stock                                                    | ** ** | **(63.8**            | **)**      | (59.9 | ) |
| **Net cash used for financing activities**                                         | ** ** | **(108.0**           | **)**      | (138.2 | ) |
|                                                                               |       |                 |       |   |   |
| **Cash and cash equivalents:**                                                     |       |                 |       |   |   |
| Net  change                                                                        | ** ** | **(6.7**             | **)**      | (56.2 | ) |
| Balance  at beginning of period                                                    | ** ** | **62.5**             |       | 134.9 |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                | **55.8**   |   | $ | 78.7 |   |
|                                                                               |       |                 |       |   |   |
| **Supplemental cash flow information:**                                            |       |                 |       |   |   |
| Interest  paid, net of amounts capitalized                                         | ** ** | **$**                | **41.0**   |   | $ | 43.4 |   |
| Income  taxes paid, net of refunds                                                 | ** ** | **$**                | **8.6**    |   | $ | 70.4 |   |
| Non-cash  financing and investing activities:                                      |       |                 |       |   |   |
| Restricted  funds held in trust                                                    | ** ** | **$**                | **7.9**    |   | $ | 16.5 |   |
| Accruals  for capital expenditures                                                 | ** ** | **$**                | **22.6**   |   | $ | 36.2 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**DPL INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                      | ** ** | **At**            | ** **  | **At**                | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in  millions**                                                                         | ** ** | **2009**          | ** **  | **2008**              | ** ** |
|                                                                                            |       |              |        |                  |       |
| **ASSETS**                                                                                      |       |              |        |                  |       |
|                                                                                            |       |              |        |                  |       |
| **Current assets:**                                                                             |       |              |        |                  |       |
| Cash  and cash equivalents                                                                      | ** ** | **$**             | **55.8**    |                  | $          | 62.5 |   |
| Restricted  funds held in trust                                                                 | ** ** | **7.9**           |        | 14.5                  |       |
| Accounts  receivable, less provision for uncollectible accounts of $1.9 and $1.1,  respectively |       | **282.1**         |        | 259.9                 |       |
| Inventories,  at average cost                                                                   | ** ** | **127.0**         |        | 105.1                 |       |
| Taxes  applicable to subsequent years                                                           | ** ** | **28.3**          |        | 58.0                  |       |
| Other  current assets                                                                           | ** ** | **23.5**          |        | 26.7                  |       |
| Total  current assets                                                                           | ** ** | **524.6**         |        | 526.7                 |       |
|                                                                                            |       |              |        |                  |       |
| **Property:**                                                                                   |       |              |        |                  |       |
| Property,  plant and equipment                                                                  | ** ** | **5,293.6**       |        | 5,227.0               |       |
| Less:  Accumulated depreciation and amortization                                                | ** ** | **(2,409.7**      | **)**       | (2,350.6              | )          |
| Total  net property                                                                             | ** ** | **2,883.9**       |        | 2,876.4               |       |
|                                                                                            |       |              |        |                  |       |
| **Other noncurrent assets:**                                                                    |       |              |        |                  |       |
| Regulatory  assets (Note 3)                                                                     | ** ** | **263.8**         |        | 233.7                 |       |
| Other  deferred assets                                                                          | ** ** | **42.0**          |        | 38.3                  |       |
| Total  other noncurrent assets                                                                  | ** ** | **305.8**         |        | 272.0                 |       |
|                                                                                            |       |              |        |                  |       |
| **Total Assets**                                                                                | ** ** | **$**             | **3,714.3** |                  | $          | 3,675.1 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

8

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**DPL INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                     | ** ** | **At**            | ** ** | **At**                | ** ** |
|------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                         | ** ** | **2009**          | ** ** | **2008**              | ** ** |
|                                           |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY** |       |              |       |                  |       |
|                                           |       |              |       |                  |       |
| **Current liabilities:**                       |       |              |       |                  |       |
| Current portion - long-term debt               | ** ** | **$**             | **0.7**    |                  | $          | 175.7 |   |
| Accounts payable                               | ** ** | **116.0**         |       | 178.3                 |       |
| Accrued taxes                                  | ** ** | **91.9**          |       | 130.4                 |       |
| Accrued interest                               | ** ** | **25.4**          |       | 25.0                  |       |
| Revolving credit borrowings                    | ** ** | **140.0**         |       | —                |       |
| Other current liabilities                      | ** ** | **43.3**          |       | 34.5                  |       |
| Total current liabilities                      | ** ** | **417.3**         |       | 543.9                 |       |
|                                           |       |              |       |                  |       |
| **Noncurrent liabilities:**                    |       |              |       |                  |       |
| Long-term debt                                 | ** ** | **1,375.9**       |       | 1,376.1               |       |
| Deferred taxes                                 | ** ** | **566.5**         |       | 433.7                 |       |
| Regulatory liabilities (Note 3)                | ** ** | **123.7**         |       | 121.9                 |       |
| Unamortized investment tax credit              | ** ** | **36.6**          |       | 38.0                  |       |
| Insurance and claims costs                     | ** ** | **16.1**          |       | 17.6                  |       |
| Other deferred credits                         | ** ** | **139.4**         |       | 145.4                 |       |
| Total noncurrent liabilities                   | ** ** | **2,258.2**       |       | 2,132.7               |       |
|                                           |       |              |       |                  |       |
| **Redeemable preferred stock of subsidiary**   | ** ** | **22.9**          |       | 22.9                  |       |
| ** **                                     | ** ** | ** **        |       |                  |       |
| Commitments and contingencies (Note 11)        | ** ** | ** **        |       |                  |       |
|                                           | ** ** | ** **        |       |                  |       |
| **Common shareholders’ equity:**          | ** ** | ** **        |       |                  |       |
| Common stock, at par value of $0.01 per share: | ** ** | ** **        |       |                  |       |
|                                                |            |                   |            |                       |            |  |  |

 
| ** **                                           | ** ** | **June 2009** | ** ** | **December 2008** | ** ** | ** **  | ** **  | ** ** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|------------------------|------------|-------------|-------------|------------|------------|
| Shares authorized                                    |       | 250,000,000        |       | 250,000,000            |       |        |        |       |       |
| Shares issued                                        |       | 163,724,211        |       | 163,724,211            |       |        |        |       |       |
| Shares outstanding                                   |       | 115,962,529        |       | 115,961,880            | ** ** | **1.2**     |        | 1.2        |       |
| Warrants                                             | ** ** | ** **         |       |                   |       | **19.8**    |        | 31.0       |       |
| Common stock held by employee plans                  | ** ** | ** **         |       |                   |       | **(20.8**   | **)**       | (27.6      | )          |
| Accumulated other comprehensive loss                 | ** ** | ** **         |       |                   |       | **(42.5**   | **)**       | (44.6      | )          |
| Retained earnings                                    | ** ** | ** **         |       |                   |       | **1,058.2** |        | 1,015.6    |       |
| Total common shareholders’ equity               | ** ** | ** **         |       |                   |       | **1,015.9** |        | 975.6      |       |
|                                                 |       |               |       |                   |       |        |        |       |       |
| **Total Liabilities and  Shareholders’ Equity** | ** ** | ** **         |       |                   |       | **$**       | **3,714.3** |       | $          | 3,675.1 |   |
|                                                      |            |                    |            |                        |            |             |             |            |            |  |  |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **$ in millions**              | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                |       |                   |       |                 |       |   |   |   |   |
| **Revenues**                        | ** ** | **$**                  | **351.9**  |                 | $          | 376.4 | ** ** | **$** | **755.5** |   | $ | 790.3 |   |
|                                |       |                   |       |                 |       |   |   |   |   |
| **Cost of revenues:**               |       |                   |       |                 |       |   |   |   |   |
| Fuel                                | ** ** | **74.4**               |       | 65.9                 | ** ** | **153.2** |   | 126.6 |   |
| Purchased power                     | ** ** | **63.3**               |       | 87.8                 | ** ** | **122.4** |   | 171.7 |   |
| Total cost of revenues              | ** ** | **137.7**              |       | 153.7                | ** ** | **275.6** |   | 298.3 |   |
|                                |       |                   |       |                 |       |   |   |   |   |
| **Gross margin**                    | ** ** | **214.2**              |       | 222.7                | ** ** | **479.9** |   | 492.0 |   |
|                                |       |                   |       |                 |       |   |   |   |   |
| **Operating expenses:**             |       |                   |       |                 |       |   |   |   |   |
| Operation and maintenance           | ** ** | **73.6**               |       | 66.0                 | ** ** | **147.3** |   | 125.6 |   |
| Depreciation and amortization       | ** ** | **33.2**               |       | 31.5                 | ** ** | **66.6** |   | 62.2 |   |
| General taxes                       | ** ** | **27.2**               |       | 32.3                 | ** ** | **59.1** |   | 61.8 |   |
| Amortization of regulatory assets   | ** ** | **1.3**                |       | 2.4                  | ** ** | **3.2** |   | 5.5 |   |
| Total operating expenses            | ** ** | **135.3**              |       | 132.2                | ** ** | **276.2** |   | 255.1 |   |
|                                |       |                   |       |                 |       |   |   |   |   |
| **Operating income**                | ** ** | **78.9**               |       | 90.5                 | ** ** | **203.7** |   | 236.9 |   |
|                                |       |                   |       |                 |       |   |   |   |   |
| **Other income / (expense), net**   |       |                   |       |                 |       |   |   |   |   |
| Investment income                   | ** ** | **0.5**                |       | 4.2                  | ** ** | **2.0** |   | 5.7 |   |
| Interest expense                    | ** ** | **(10.0**              | **)**      | (11.2                | )          | **(18.7** | **)** | (17.8 | ) |
| Other income / (deductions)         | ** ** | **(0.7**               | **)**      | 0.1                  | ** ** | **(0.9** | **)** | (0.6 | ) |
| Total other income / (expense), net | ** ** | **(10.2**              | **)**      | (6.9                 | )          | **(17.6** | **)** | (12.7 | ) |
|                                |       |                   |       |                 |       |   |   |   |   |
| **Earnings before income tax**      | ** ** | **68.7**               |       | 83.6                 | ** ** | **186.1** |   | 224.2 |   |
|                                |       |                   |       |                 |       |   |   |   |   |
| Income tax expense                  | ** ** | **21.9**               |       | 20.3                 | ** ** | **62.3** |   | 71.9 |   |
| **Net income**                      | ** ** | **46.8**               |       | 63.3                 | ** ** | **123.8** |   | 152.3 |   |
|                                |       |                   |       |                 |       |   |   |   |   |
| Dividends on preferred stock        | ** ** | **0.2**                |       | 0.2                  | ** ** | **0.4** |   | 0.4 |   |
|                                |       |                   |       |                 |       |   |   |   |   |
| **Earnings on common stock**        | ** ** | **$**                  | **46.6**   |                 | $          | 63.1 | ** ** | **$** | **123.4** |   | $ | 151.9 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **June 30,**    | ** ** |
| **$ in millions**                                                             | ** ** | **2009**             | ** ** | **2008** | ** ** |
|                                                                               |       |                 |       |   |   |
| **Cash flows from operating  activities:**                                         |       |                 |       |   |   |
| Net income                                                                         | ** ** | **$**                | **123.8**  |   | $ | 152.3 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                 |       |   |   |
| Depreciation and amortization                                                      | ** ** | **66.6**             |       | 62.2 |   |
| Amortization of regulatory assets                                                  | ** ** | **3.2**              |       | 5.5 |   |
| Deferred income taxes                                                              | ** ** | **127.7**            |       | 27.2 |   |
| Changes in certain assets and liabilities:                                         |       |                 |       |   |   |
| Accounts receivable                                                                | ** ** | **26.9**             |       | (13.7 | ) |
| Deposits and other advances                                                        | ** ** | **4.7**              |       | (0.3 | ) |
| Accounts payable                                                                   | ** ** | **(44.8**            | **)**      | 34.5 |   |
| Accrued taxes payable                                                              | ** ** | **(87.2**            | **)**      | (37.3 | ) |
| Accrued interest payable                                                           | ** ** | **0.2**              |       | — |   |
| Prepayments                                                                        | ** ** | **0.3**              |       | 0.2 |   |
| Deferred regulatory costs                                                          | ** ** | **(34.2**            | **)**      | (3.5 | ) |
| Inventories                                                                        | ** ** | **(21.8**            | **)**      | (0.9 | ) |
| Deferred compensation                                                              | ** ** | **(1.0**             | **)**      | (5.4 | ) |
| Other                                                                              | ** ** | **(1.7**             | **)**      | (7.9 | ) |
| **Net cash provided by operating  activities**                                     | ** ** | **162.7**            |       | 212.9 |   |
|                                                                               |       |                 |       |   |   |
| **Cash flows from investing activities:**                                          |       |                 |       |   |   |
| Capital expenditures                                                               | ** ** | **(86.7**            | **)**      | (117.7 | ) |
| **Net cash used for investing  activities**                                        | ** ** | **(86.7**            | **)**      | (117.7 | ) |
|                                                                               |       |                 |       |   |   |
| **Cash flows from financing  activities:**                                         |       |                 |       |   |   |
| Payment of short-term debt                                                         | ** ** | **—**           |       | (20.0 | ) |
| Withdrawals of restricted funds held in trust, net                                 | ** ** | **6.7**              |       | 20.5 |   |
| Repurchase of pollution control bonds                                              | ** ** | **—**           |       | (90.0 | ) |
| Withdrawals from revolving credit facility                                         | ** ** | **155.0**            |       | 90.0 |   |
| Repayment of borrowings from revolving credit  facility                            | ** ** | **(15.0**            | **)**      | — |   |
| Dividends paid on common stock to parent                                           | ** ** | **(220.0**           | **)**      | (80.0 | ) |
| Dividends paid on preferred stock                                                  | ** ** | **(0.4**             | **)**      | (0.4 | ) |
| **Net cash used for financing  activities**                                        | ** ** | **(73.7**            | **)**      | (79.9 | ) |
|                                                                               |       |                 |       |   |   |
| **Cash and cash equivalents:**                                                     |       |                 |       |   |   |
| Net change                                                                         | ** ** | **2.3**              |       | 15.3 |   |
| Balance at beginning of period                                                     | ** ** | **20.8**             |       | 13.2 |   |
| **Cash and cash equivalents at end  of period**                                    | ** ** | **$**                | **23.1**   |   | $ | 28.5 |   |
|                                                                               |       |                 |       |   |   |
| **Supplemental cash flow  information:**                                           |       |                 |       |   |   |
| Interest paid, net of amounts capitalized                                          | ** ** | **$**                | **19.3**   |   | $ | 15.2 |   |
| Income taxes paid, net of refunds                                                  | ** ** | **$**                | **8.5**    |   | $ | 69.9 |   |
| Non-cash financing and investing activities:                                       |       |                 |       |   |   |
| Restricted funds held in trust                                                     | ** ** | **$**                | **7.9**    |   | $ | 16.5 |   |
| Accruals for capital expenditures                                                  | ** ** | **$**                | **22.6**   |   | $ | 36.2 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                     | ** ** | **At**            | ** **  | **At**                | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                                         | ** ** | **2009**          | ** **  | **2008**              | ** ** |
|                                                                                           |       |              |        |                  |       |
| **ASSETS**                                                                                     |       |              |        |                  |       |
|                                                                                           |       |              |        |                  |       |
| **Current assets:**                                                                            |       |              |        |                  |       |
| Cash and cash equivalents                                                                      | ** ** | **$**             | **23.1**    |                  | $          | 20.8 |   |
| Restricted funds held in trust                                                                 | ** ** | **7.9**           |        | 14.5                  |       |
| Accounts receivable, less provision for  uncollectible accounts of $1.0 and $1.1, respectively |       | **272.3**         |        | 225.4                 |       |
| Inventories, at average cost                                                                   | ** ** | **125.6**         |        | 103.8                 |       |
| Taxes applicable to subsequent years                                                           | ** ** | **28.2**          |        | 57.9                  |       |
| Other current assets                                                                           | ** ** | **24.5**          |        | 23.8                  |       |
| Total current assets                                                                           | ** ** | **481.6**         |        | 446.2                 |       |
|                                                                                           |       |              |        |                  |       |
| **Property:**                                                                                  |       |              |        |                  |       |
| Property, plant and equipment                                                                  | ** ** | **5,037.1**       |        | 4,970.9               |       |
| Less: Accumulated depreciation and amortization                                                | ** ** | **(2,320.2**      | **)**       | (2,265.5              | )          |
| Total net property                                                                             | ** ** | **2,716.9**       |        | 2,705.4               |       |
|                                                                                           |       |              |        |                  |       |
| **Other noncurrent assets:**                                                                   |       |              |        |                  |       |
| Regulatory assets (Note 3)                                                                     | ** ** | **263.8**         |        | 233.7                 |       |
| Other deferred assets                                                                          | ** ** | **52.3**          |        | 50.5                  |       |
| Total other noncurrent assets                                                                  | ** ** | **316.1**         |        | 284.2                 |       |
|                                                                                           |       |              |        |                  |       |
| **Total Assets**                                                                               | ** ** | **$**             | **3,514.6** |                  | $          | 3,435.8 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements areunaudited.*

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                           | ** ** | **At**            | ** **  | **At**                | ** ** |
|------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                           | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                               | ** ** | **2009**          | ** **  | **2008**              | ** ** |
|                                                 |       |              |        |                  |       |
| **LIABILITIES AND SHAREHOLDER’S  EQUITY**       |       |              |        |                  |       |
|                                                 |       |              |        |                  |       |
| **Current liabilities:**                             |       |              |        |                  |       |
| Current portion - long-term debt                     | ** ** | **$**             | **0.7**     |                  | $          | 0.7 |   |
| Accounts payable                                     | ** ** | **114.8**         |        | 176.6                 |       |
| Accrued taxes                                        | ** ** | **91.1**          |        | 128.0                 |       |
| Accrued interest                                     | ** ** | **13.4**          |        | 12.9                  |       |
| Revolving credit borrowings                          | ** ** | **140.0**         |        | —                |       |
| Other current liabilities                            | ** ** | **43.1**          |        | 34.0                  |       |
| Total current liabilities                            | ** ** | **403.1**         |        | 352.2                 |       |
|                                                 |       |              |        |                  |       |
| **Noncurrent liabilities:**                          |       |              |        |                  |       |
| Long-term debt                                       | ** ** | **883.8**         |        | 884.0                 |       |
| Deferred taxes                                       | ** ** | **549.8**         |        | 417.8                 |       |
| Regulatory liabilities (Note 3)                      | ** ** | **123.7**         |        | 121.9                 |       |
| Unamortized investment tax credit                    | ** ** | **36.6**          |        | 38.0                  |       |
| Other deferred credits                               | ** ** | **139.3**         |        | 145.5                 |       |
| Total noncurrent liabilities                         | ** ** | **1,733.2**       |        | 1,607.2               |       |
|                                                 |       |              |        |                  |       |
| **Redeemable preferred stock**                       | ** ** | **22.9**          |        | 22.9                  |       |
|                                                 |       |              |        |                  |       |
| Commitments and contingencies (Note 11)              |       |              |        |                  |       |
|                                                 |       |              |        |                  |       |
| **Common shareholder’s equity:**                |       |              |        |                  |       |
| Common stock, at par value of $0.01 per share        | ** ** | **0.4**           |        | 0.4                   |       |
| Other paid-in capital                                | ** ** | **780.4**         |        | 783.1                 |       |
| Accumulated other comprehensive loss                 | ** ** | **(36.2**         | **)**       | (37.5                 | )          |
| Retained earnings                                    | ** ** | **610.8**         |        | 707.5                 |       |
| Total common shareholder’s equity               | ** ** | **1,355.4**       |        | 1,453.5               |       |
|                                                 |       |              |        |                  |       |
| **Total Liabilities and  Shareholder’s Equity** | ** ** | **$**             | **3,514.6** |                  | $          | 3,435.8 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements are unaudited.*

 

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**Notesto Condensed Consolidated Financial Statements**

**(unaudited)**

 

**1.     Basis of Presentation**

 

**Descriptionof Business**

**DPL**is a diversified regional energy companyorganized in 1985 under the laws of Ohio. Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio45432 – telephone (937) 224-6000.

 

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

 

**DP&L’s** sales reflect the general economicconditions and seasonal weather patterns of the area.  **DP&L**sells any excess energy and capacity into the wholesale market.

 

**DPL’s** significantsubsidiaries (all of which are wholly owned) include DPLE, which engages in theoperation of peaking generating facilities; DPLER, which sells retail electricenergy under contract to major industrial and commercial customers in WestCentral Ohio; and MVIC, our captive insurance company that provides insuranceservices to us and our subsidiaries.

 

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

 

**FinancialStatement Presentation**

We prepareconsolidated financial statements in accordance with GAAP in the United Statesof America.  The condensed consolidatedfinancial statements include the accounts of **DPL**and its wholly-owned subsidiaries, including **DP&L**.  Undivided interests in jointly ownedgeneration facilities are consolidated on a pro rata basis.  All material intercompany accounts andtransactions are eliminated in consolidation. Interim results for the three months and six months ended June 30,2009 may not be indicative of our results that will be realized for the fullyear ending December 31, 2009.

 

Pursuant to the SEC rules, certaininformation and footnote disclosures normally included in the annual financialstatements prepared in accordance with GAAP have been omitted from interimreports. Therefore, our interim financial statements in this report should beread along with the annual financial statements included in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2008.  In the opinion of our management, thecondensed consolidated financial statements in this report contain alladjustments necessary to fairly state our financial condition as of June 30,2009; our results of operations for the three months and six months ended June 30,2009; and our cash flows for the six months ended June 30, 2009 inaccordance with GAAP.  Certain amountsfrom prior periods have been reclassified to conform to the current reportingpresentation.

 

We have evaluated all subsequent eventsthrough July 29, 2009 which is the date these financial statements werefiled with the SEC.

 

**Estimatesand Judgments**

The preparation of financial statements in conformity with GAAPrequires us to make estimates and judgments that affect the reported amounts ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the financial statements, and the revenue and expenses of theperiods reported.  We record liabilities for probable estimated losses inaccordance with Statement of Financial Accounting Standards No. 5 (SFAS5), “Accounting for Contingencies.”  To the extent a probable loss canonly be estimated by reference to a range of equally probable outcomes and noamount within the range appears to be a better estimate than any other amount,we accrue for the low end of the range.  Because of uncertainties relatedto these matters, accruals are based on the best information available at thetime.  We evaluate the potential liability related to probable lossesquarterly and may revise our estimates.  Judgments and uncertainties affectingthe application of these estimates may result in materially different amountsbeing reported under different conditions or circumstances that may affect ourfinancial position and results of operations.  Significant items subjectto such estimates and judgments include: the carrying value of property, plantand equipment;

 

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unbilled revenues; the valuation of derivative instruments; thevaluation of insurance and claims costs; the valuation of allowances forreceivables and deferred income taxes; regulatory assets and liabilities;reserves recorded for income tax exposures; litigation; contingencies; andassets and liabilities related to employee benefits.

 

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

**DP&L** collects certain excise taxes leviedby state or local governments from its customers.  **DP&L’s**excise taxes are accounted for on a gross basis and recorded as revenues in theaccompanying condensed consolidated statements of results of operations for thethree months and six months ended June 30, 2009 and 2008, respectively, asfollows:

** **
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------|------------|
| ** **               | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **$ in millions**   | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| State/local excise taxes | ** ** | **$**                  | **11.2**   |                 | $          | 11.7 | ** ** | **$** | **25.2** |   | $ | 26.1 |   |
|                          |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

**Recently Adopted Accounting Standards**

 

**Disclosures about Derivative Instruments and Hedging Activities**

We adopted SFAS No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities — an amendment to FASB Statement No. 133” (SFAS161), on January 1, 2009.  SFAS 161requires an entity to provide enhanced disclosures about: (a) how and whyan entity uses derivative instruments; (b) how derivative instruments andrelated hedged items are accounted for under SFAS 133 and its relatedinterpretations; and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows.  SFAS 161 did not have a materialimpact on our overall results of operations, financial position or cashflows.  See Note 9 of Notes to CondensedConsolidated Financial Statements.

 

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

We adopted Staff Position EITF 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities” (FSP EITF 03-6-1), on January 1, 2009.  FSP EITF 03-6-1 clarifies that unvestedshare-based awards that contain non-forfeitable rights to dividends or dividendequivalents (whether paid or unpaid) are participating securities and must beincluded in the computation of EPS pursuant to the two-class method.  FSP EITF 03-6-1 did not have a materialimpact on our overall results of operations, financial position or cash flows.

 

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

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

 

**Interim Disclosures about Fair Value ofFinancial Instruments**

We adopted Staff Position SFAS 107-1 and APB28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP SFAS107-1), on June 30, 2009.  This FSPrequires disclosure about the fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements. FSP SFAS 107-1 did not have a material impact on our overallresults of operations, financial position or cash flows.  See Note 8 of Notes to Condensed ConsolidatedFinancial Statements.

 

**Subsequent Events**

We adopted Statement of Financial Accounting Standards No. 165, “SubsequentEvents” (SFAS 165), on June 30, 2009. SFAS 165 incorporates the guidance in the American Institute ofCertified Public Accountants’ Auditing Standard 560 – Subsequent Events, intothe accounting guidance.  This newstandard is not expected to change current accounting practices.  SFAS165 did not have a material impact on our overall results of operations,financial position or cash flows.

 

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**Recently Issued Accounting Standards**

 

**Variable Interest Entities**

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

 

**Disclosures about Pensions and OtherPostretirement Benefits**

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

 

**FASB Codification**

In June 2009, the FASB issued SFAS No. 168, “The FASBAccounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—areplacement of FASB Statement No. 162”, effective for interim and annualperiods ending after September 15, 2009. The objective of this Statement is to replace Statement 162 and toestablish the FASB Accounting Standards Codification (Codification) as thesource of authoritative accounting principles recognized by the FASB to beapplied by nongovernmental entities in the preparation of financial statementsin conformity with GAAP.  Rules andinterpretive releases of the Securities and Exchange Commission (SEC) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants.  We have evaluated SFAS168 and do not expect these new rules to have a material impact on ouroverall results of operations, financial position or cash flows.

 

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**2.     SupplementalFinancial Information**

** **
| ** **                                          | ** ** | **At**            | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| **DPL Inc.**                                        | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                              | ** ** | **2009**          | ** **  | **2008**              | ** ** |
|                                                |       |              |        |                  |       |
| **Accounts receivable, net:**                       |       |              |        |                  |       |
| Unbilled  revenue                                   | ** ** | **$**             | **75.6**    |                  | $          | 82.5 |   |
| Retail  customers                                   | ** ** | **67.1**          |        | 70.8                  |       |
| Partners  in commonly-owned plants                  | ** ** | **23.4**          |        | 28.0                  |       |
| PJM  including financial transmission rights        | ** ** | **20.3**          |        | 27.0                  |       |
| Coal  sales                                         | ** ** | **9.2**           |        | 25.6                  |       |
| Wholesale  and subsidiary customers                 | ** ** | **6.5**           |        | 9.7                   |       |
| Refundable  tax                                     | ** ** | **79.9**          |        | 14.9                  |       |
| Other                                               | ** ** | **2.0**           |        | 2.5                   |       |
| Provision  for uncollectible accounts               | ** ** | **(1.9**          | **)**       | (1.1                  | )          |
| **Total accounts receivable, net**                  | ** ** | **$**             | **282.1**   |                  | $          | 259.9 |   |
|                                                |       |              |        |                  |       |
| **Inventories, at average cost:**                   |       |              |        |                  |       |
| Fuel  and emission allowances                       | ** ** | **$**             | **89.4**    |                  | $          | 68.7 |   |
| Plant  materials and supplies                       | ** ** | **37.4**          |        | 36.3                  |       |
| Other                                               | ** ** | **0.2**           |        | 0.1                   |       |
| **Total inventories, at average cost**              | ** ** | **$**             | **127.0**   |                  | $          | 105.1 |   |
|                                                |       |              |        |                  |       |
| **Other current assets:**                           |       |              |        |                  |       |
| Prepayments                                         | ** ** | **$**             | **6.4**     |                  | $          | 6.8 |   |
| Deposits  and other advances                        | ** ** | **5.8**           |        | 10.5                  |       |
| Insurance  and damage claims                        | ** ** | **3.7**           |        | 0.9                   |       |
| Current  deferred income taxes                      | ** ** | **2.8**           |        | 2.2                   |       |
| Short-term  investment                              | ** ** | **—**        |        | 5.0                   |       |
| Other                                               | ** ** | **4.8**           |        | 1.3                   |       |
| **Total other current assets**                      | ** ** | **$**             | **23.5**    |                  | $          | 26.7 |   |
|                                                |       |              |        |                  |       |
| **Property, plant and equipment:**                  |       |              |        |                  |       |
| Property,  plant and equipment                      | ** ** | **$**             | **5,147.0** |                  | $          | 5,073.4 |   |
| Construction  work in process                       | ** ** | **146.6**         |        | 153.6                 |       |
| **Total property, plant and equipment**             | ** ** | **$**             | **5,293.6** |                  | $          | 5,227.0 |   |
|                                                |       |              |        |                  |       |
| **Other deferred assets:**                          |       |              |        |                  |       |
| Master  Trust assets                                | ** ** | **$**             | **11.5**    |                  | $          | 13.3 |   |
| Unamortized  debt expense                           | ** ** | **8.8**           |        | 9.3                   |       |
| Investments                                         | ** ** | **7.6**           |        | 8.0                   |       |
| Unamortized  contracted costs                       | ** ** | **6.3**           |        | —                |       |
| Commercial  activities tax benefit                  | ** ** | **6.1**           |        | 6.8                   |       |
| Other                                               | ** ** | **1.7**           |        | 0.9                   |       |
| **Total other deferred assets**                     | ** ** | **$**             | **42.0**    |                  | $          | 38.3 |   |
|                                                |       |              |        |                  |       |
| **Accounts payable:**                               |       |              |        |                  |       |
| Trade  payables                                     | ** ** | **$**             | **48.6**    |                  | $          | 68.7 |   |
| Fuel  accruals                                      | ** ** | **39.3**          |        | 51.9                  |       |
| Purchased  power accruals                           | ** ** | **10.1**          |        | 11.8                  |       |
| Other                                               | ** ** | **18.0**          |        | 45.9                  |       |
| **Total accounts payable**                          | ** ** | **$**             | **116.0**   |                  | $          | 178.3 |   |
|                                                |       |              |        |                  |       |
| **Other current liabilities:**                      |       |              |        |                  |       |
| Customer  security deposits                         | ** ** | **$**             | **19.8**    |                  | $          | 19.8 |   |
| Unrealized  losses on derivatives                   | ** ** | **13.1**          |        | 7.6                   |       |
| Low  income service plan                            | ** ** | **3.0**           |        | 2.4                   |       |
| Pension  and retiree benefits payable               | ** ** | **0.8**           |        | 0.8                   |       |
| Other                                               | ** ** | **6.6**           |        | 3.9                   |       |
| **Total other current liabilities**                 | ** ** | **$**             | **43.3**    |                  | $          | 34.5 |   |
|                                                |       |              |        |                  |       |
| **Other deferred credits:**                         |       |              |        |                  |       |
| Pension  and retiree benefits                       | ** ** | **$**             | **95.3**    |                  | $          | 94.7 |   |
| Asset  retirement obligations - generation property | ** ** | **13.4**          |        | 13.2                  |       |
| Deferred  compensation obligations                  | ** ** | **12.1**          |        | 14.3                  |       |
| Litigation  and claims reserve                      | ** ** | **2.1**           |        | 2.1                   |       |
| Employee  benefit reserves                          | ** ** | **7.6**           |        | 7.7                   |       |
| Customer  advances in aid of construction           | ** ** | **3.3**           |        | 3.4                   |       |
| Taxes  payable                                      | ** ** | **—**        |        | 9.8                   |       |
| Obligations  for contracted costs                   | ** ** | **3.7**           |        | —                |       |
| Other                                               | ** ** | **1.9**           |        | 0.2                   |       |
| **Total other deferred credits**                    | ** ** | **$**             | **139.4**   |                  | $          | 145.4 |   |

 

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**2.     Supplemental FinancialInformation (continued)**

** **
| ** **                                          | ** ** | **At**            | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| **DP&L**                                        | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                              | ** ** | **2009**          | ** **  | **2008**              | ** ** |
|                                                |       |              |        |                  |       |
| **Accounts receivable, net:**                       |       |              |        |                  |       |
| Unbilled  revenue                                   | ** ** | **$**             | **71.6**    |                  | $          | 74.7 |   |
| Retail  customers                                   | ** ** | **67.1**          |        | 70.8                  |       |
| Partners  in commonly-owned plants                  | ** ** | **23.4**          |        | 28.0                  |       |
| PJM  including financial transmission rights        | ** ** | **18.9**          |        | 23.3                  |       |
| Coal  sales                                         | ** ** | **9.2**           |        | 25.6                  |       |
| Wholesale  customers                                | ** ** | **1.4**           |        | 2.6                   |       |
| Refundable  tax                                     | ** ** | **79.9**          |        | —                |       |
| Other                                               | ** ** | **1.8**           |        | 1.5                   |       |
| Provision  for uncollectible accounts               | ** ** | **(1.0**          | **)**       | (1.1                  | )          |
| **Total accounts receivable, net**                  | ** ** | **$**             | **272.3**   |                  | $          | 225.4 |   |
|                                                |       |              |        |                  |       |
| **Inventories, at average cost:**                   |       |              |        |                  |       |
| Fuel  and emission allowances                       | ** ** | **$**             | **89.4**    |                  | $          | 68.7 |   |
| Plant  materials and supplies                       | ** ** | **36.0**          |        | 35.0                  |       |
| Other                                               | ** ** | **0.2**           |        | 0.1                   |       |
| **Total inventories, at average cost**              | ** ** | **$**             | **125.6**   |                  | $          | 103.8 |   |
|                                                |       |              |        |                  |       |
| **Other current assets:**                           |       |              |        |                  |       |
| Prepayments                                         | ** ** | **$**             | **7.6**     |                  | $          | 8.6 |   |
| Deposits  and other advances                        | ** ** | **5.8**           |        | 10.5                  |       |
| Insurance  and damage claims                        | ** ** | **3.7**           |        | 0.9                   |       |
| Current  deferred income taxes                      | ** ** | **2.6**           |        | 2.3                   |       |
| Other                                               | ** ** | **4.8**           |        | 1.5                   |       |
| **Total other current assets**                      | ** ** | **$**             | **24.5**    |                  | $          | 23.8 |   |
|                                                |       |              |        |                  |       |
| **Property, plant and equipment:**                  |       |              |        |                  |       |
| Property,  plant and equipment                      | ** ** | **$**             | **4,890.8** |                  | $          | 4,817.9 |   |
| Construction  work in process                       | ** ** | **146.3**         |        | 153.0                 |       |
| **Total property, plant and equipment**             | ** ** | **$**             | **5,037.1** |                  | $          | 4,970.9 |   |
|                                                |       |              |        |                  |       |
| **Other deferred assets:**                          |       |              |        |                  |       |
| Master  Trust assets                                | ** ** | **$**             | **35.3**    |                  | $          | 40.4 |   |
| Unamortized  debt expense                           | ** ** | **8.4**           |        | 8.6                   |       |
| Unamortized  contracted costs                       | ** ** | **6.3**           |        | —                |       |
| Other                                               | ** ** | **2.3**           |        | 1.5                   |       |
| **Total other deferred assets**                     | ** ** | **$**             | **52.3**    |                  | $          | 50.5 |   |
|                                                |       |              |        |                  |       |
| **Accounts payable:**                               |       |              |        |                  |       |
| Trade  payables                                     | ** ** | **$**             | **48.4**    |                  | $          | 68.6 |   |
| Fuel  accruals                                      | ** ** | **38.7**          |        | 50.4                  |       |
| Purchased  power accruals                           | ** ** | **9.8**           |        | 11.8                  |       |
| Other                                               | ** ** | **17.9**          |        | 45.8                  |       |
| **Total accounts payable**                          | ** ** | **$**             | **114.8**   |                  | $          | 176.6 |   |
|                                                |       |              |        |                  |       |
| **Other current liabilities:**                      |       |              |        |                  |       |
| Customer  security deposits                         | ** ** | **$**             | **19.8**    |                  | $          | 19.8 |   |
| Unrealized  losses on derivatives                   | ** ** | **13.1**          |        | 7.6                   |       |
| Low  income service plan                            | ** ** | **3.0**           |        | 2.4                   |       |
| Pension  and retiree benefits payable               | ** ** | **0.8**           |        | 0.8                   |       |
| Other                                               | ** ** | **6.4**           |        | 3.4                   |       |
| **Total other current liabilities**                 | ** ** | **$**             | **43.1**    |                  | $          | 34.0 |   |
|                                                |       |              |        |                  |       |
| **Other deferred credits:**                         |       |              |        |                  |       |
| Pension  and retiree benefits                       | ** ** | **$**             | **95.3**    |                  | $          | 94.7 |   |
| Asset  retirement obligations - generation property | ** ** | **13.4**          |        | 13.2                  |       |
| Deferred  compensation obligations                  | ** ** | **12.1**          |        | 14.3                  |       |
| Employee  benefit reserves                          | ** ** | **7.6**           |        | 7.7                   |       |
| Obligations  for contracted costs                   | ** ** | **3.7**           |        | —                |       |
| Customer  advances in aid of construction           | ** ** | **3.3**           |        | 3.4                   |       |
| Litigation  and claims reserve                      | ** ** | **2.1**           |        | 2.1                   |       |
| Taxes  payable                                      | ** ** | **—**        |        | 9.8                   |       |
| Other                                               | ** ** | **1.8**           |        | 0.3                   |       |
| **Total other deferred credits**                    | ** ** | **$**             | **139.3**   |                  | $          | 145.5 |   |

 

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**2.     Supplemental FinancialInformation (continued)**

** **
| ** **                                                                      | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **DPL Inc.**                                                                    | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Comprehensive income:**                                                       |       |                                  |       |                                |       |   |   |   |   |
| Net income                                                                      | ** ** | **$**                                 | **42.1**   |                                | $          | 47.6 | ** ** | **$** | **111.3** |   | $ | 124.9 |   |
| Net change in unrealized gains (losses) on  financial instruments               |       | **0.3**                               |       | (0.2                                | )          | **0.2** |   | (0.4 | ) |
| Net change in deferred gains (losses) on cash flow  hedges                      | ** ** | **0.7**                               |       | (1.3                                | )          | **1.2** |   | (4.7 | ) |
| Net change in unrealized gains (losses) on pension  and postretirement benefits |       | **0.8**                               |       | 0.6                                 |       | **1.6** |   | 1.0 |   |
| Deferred income taxes related to unrealized gains  and (losses)                 | ** ** | **(0.6**                              | **)**      | 0.3                                 | ** ** | **(0.9** | **)** | 1.4 |   |
| **Comprehensive income**                                                        | ** ** | **$**                                 | **43.3**   |                                | $          | 47.0 | ** ** | **$** | **113.4** |   | $ | 122.2 |   |

 
| ** **                                                                      | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **DP&L**                                                                    | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Comprehensive income:**                                                       |       |                                  |       |                                |       |   |   |   |   |
| Net income                                                                      | ** ** | **$**                                 | **46.8**   |                                | $          | 63.3 | ** ** | **$** | **123.8** |   | $ | 152.3 |   |
| Net change in unrealized gains (losses) on  financial instruments               | ** ** | **0.9**                               |       | (2.1                                | )          | **(0.9** | **)** | (10.3 | ) |
| Net change in deferred gains (losses) on cash flow  hedges                      | ** ** | **0.7**                               |       | (1.3                                | )          | **1.2** |   | (4.7 | ) |
| Net change in unrealized gains (losses) on pension  and postretirement benefits | ** ** | **0.8**                               |       | 0.5                                 | ** ** | **1.6** |   | 1.0 |   |
| Deferred income taxes related to unrealized gains  and (losses)                 | ** ** | **(0.8**                              | **)**      | 1.0                                 | ** ** | **(0.6** | **)** | 5.5 |   |
| **Comprehensive income**                                                        | ** ** | **$**                                 | **48.4**   |                                | $          | 61.4 | ** ** | **$** | **125.1** |   | $ | 143.8 |   |

 

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**3.  Regulatory Matters**

 

We apply theprovisions of FASB SFAS No. 71, “Accounting for the Effects of CertainTypes of Regulation” (SFAS 71) to our regulated operations.  This accounting standard defines regulatoryassets as the deferral of costs expected to be recovered in future customerrates and regulatory liabilities as current cost recovery of expected futureexpenditures.

 

Regulatoryassets and liabilities on the condensed consolidated balance sheets include:

 
| ** **                                          | ** ** | ** **       | ** ** | ** **       | ** ** | **At**            | ** ** | **At**                | ** ** |
|-----------------------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **Type of**      | ** ** | **Amortization** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                              | ** ** | **Recovery (a)** | ** ** | **Through**      | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **Regulatory Assets:**                              | ** ** | ** **       | ** ** |             |       |              |       |                  |       |
| Deferred  recoverable income taxes                  |       | C/B              |       | Ongoing          | ** ** | **$**             | **83.2**   |                  | $          | 81.2 |   |
| Pension  benefits                                   |       | C                |       | Ongoing          | ** ** | **81.2**          |       | 83.3                  |       |
| Unamortized  loss on reacquired debt                |       | C                |       | Ongoing          | ** ** | **16.4**          |       | 17.2                  |       |
| Electric  Choice systems costs                      |       | F                |       | 2010             | ** ** | **5.5**           |       | 7.1                   |       |
| Regional  transmission organization costs           |       | D                |       |             | ** ** | **7.7**           |       | 8.5                   |       |
| Transmission,  capacity and other PJM-related costs |       | F                |       | 2011             | ** ** | **30.3**          |       | —                |       |
| Deferred  storm costs - 2008                        |       | D                |       |             | ** ** | **15.4**          |       | 13.1                  |       |
| PJM  administrative costs                           |       | F                |       | 2009             | ** ** | **—**        |       | 0.5                   |       |
| Power  plant emission fees                          |       | C                |       | Ongoing          | ** ** | **5.7**           |       | 6.3                   |       |
| Rate  case expenses                                 |       | F                |       | 2010             | ** ** | **0.4**           |       | 0.5                   |       |
| Settlement  system costs                            |       | D                |       |             | ** ** | **3.1**           |       | 3.1                   |       |
| Customer  conservation and energy management costs  |       | D/F              |       | 2012             | ** ** | **10.4**          |       | 8.3                   |       |
| PJM  integration costs                              |       | F                |       | 2015             | ** ** | **0.6**           |       | 0.7                   |       |
| Other  costs                                        |       |             |       |             | ** ** | **3.9**           |       | 3.9                   |       |
| **Total regulatory assets**                         | ** ** | ** **       | ** ** | ** **       | ** ** | **$**             | **263.8**  |                  | $          | 233.7 |   |
|                                                |       |             |       |             |       |              |       |                  |       |
| **Regulatory Liabilities:**                         | ** ** | ** **       | ** ** |             |       |              |       |                  |       |
| Asset  retirement obligations - regulated property  |       |             |       |             | ** ** | **$**             | **98.0**   |                  | $          | 96.0 |   |
| Postretirement  benefits                            |       |             |       |             | ** ** | **5.6**           |       | 5.8                   |       |
| SECA  net revenue subject to refund                 |       |             |       |             | ** ** | **20.1**          |       | 20.1                  |       |
| **Total regulatory liabilities**                    | ** ** | ** **       | ** ** | ** **       | ** ** | **$**             | **123.7**  |                  | $          | 121.9 |   |

 

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

*C – Recovery of incurred costs only.*

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

*D – Recovery not yet determined.*

 

**RegulatoryAssets**

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

 

Deferred recoverableincome taxes represent deferred income tax assets recognizedfrom the normalization of flow-through items as the result of amountspreviously provided to customers.  Sincecurrently existing temporary differences between the financial statements andthe related tax basis of assets will reverse in subsequent periods, deferredrecoverable income taxes are amortized.

 

Pension benefitsrepresent the unfunded benefit obligation related to the transmission anddistribution areas of our electric business. We have historically recorded these costs on the accrual basis and thisis how these costs have historically been recovered through rates.  This factor, combined with the historicalprecedents from the PUCO and the FERC, makes these costs probable of futurerate recovery.

 

Unamortized loss onreacquired debt represents costs associated with bondredemptions financed by other issues. These costs are being amortized over the life of the original issues.

 

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

 

Regional transmissionorganization costs represent costs incurred to join aRTO.  The recovery of these costs has notyet been determined.

 

Transmission, capacityand other PJM-related costs represent the costs associatedwith transmission, capacity, ancillary service and other PJM-related chargesthat are incurred as a member of PJM.  OnFebruary 19, 2009, the PUCO approved **DP&L’s**request to defer such costs incurred since July 31, 2008 consistent withthe provisions of SB 221.  Accordingly,during the six months ended June 30, 2009, **DP&L**deferred net RTO costs in the amount of $28.6 million.  Of this amount, $13.5 million relates to theperiod August 1, 2008 through December 31, 2008, and $15.1 millionrelates to the six month period ended June 30, 2009.  Also included in the total deferred amount of$30.3 million is $1.1 million relating to RTEP costs as well as $0.6 millionrelating to interest and operation and maintenance expenses.  On May 27, 2009, the PUCO granted **DP&L** authority to recover these costs through retailrates over two years beginning June 1, 2009.  Subsequently, on June 19, 2009, theIndustrial Energy Users of Ohio (IEU-OH) filed an application for rehearingclaiming the PUCO’s May 27, 2009 order allowing for recovery of RPM coststhrough this rider was unlawful.  On July 15,2009, the PUCO issued an order granting rehearing for additional review.  The outcome of this proceeding cannot bedetermined at this time but based on past precedent, we continue to believethat these costs are probable of recovery.

 

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

 

PJM administrative costscontain the administrative fees billed by PJM to us as a member of the PJMRTO.  Pursuant to a PUCO order issued on January 25,2006, these deferred costs were recovered over a 3-year period from retailratepayers beginning February 2006. Recovery of these costs was completed in January 2009.

 

Power plant emission feesrepresent costs paid to the State of Ohio for environmental monitoring.  A PUCO-approved rate rider has been in effectto collect fees that were paid and deferred in years prior to 2002.  Pending before the PUCO is an application toamend that rider to collect fees paid since 2002.

 

Rate case expensesrepresent costs incurred in connection with the Rate Stabilization Surchargethat was approved by the PUCO and implemented in January 2006.  These costs are being amortized over afive-year period.

 

Settlement system costsrepresent costs to implement a settlement system that reconciles the amount of energy a CRES supplier delivers to itscustomers and what its customers actually use. Based on case precedent in other utilities’ cases, the cost of thissystem is recoverable through **DP&L**’s nexttransmission rate case that will be filed at the FERC.  The recovery of these costs has not yet beendetermined.

 

Customer conservation andenergy management costs represent costs incurred as a resultof studying and developing distribution system upgrades and implementation ofadvanced metering infrastructure, as well as DSM program development andvarious new customer programs addressing energy efficiency.  The portion of these costs related to energyefficiency is being recovered over three years as part of the Stipulationbeginning July 1, 2009.  **DP&L** intends to file a request for the recovery of theremaining costs related to the advanced metering and smart grid infrastructurelater this summer.

 

PJM integration costsinclude infrastructure costs and other related expenses incurred by PJM andreimbursed by **DP&L** to integrate us into theRTO.  Pursuant to a FERC order, the costsare being recovered over a 10-year period beginning May 2005 fromwholesale customers within PJM.

 

Other costs primarilyinclude consumer education advertising regarding electric deregulation as wellas derivative activity related to fuel and will be recovered over variousperiods.

 

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**RegulatoryLiabilities**

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

 

Postretirement benefitsreflect a regulatory liability that was recorded for the portion of theunrealized gain on our postretirement trust assets related to the transmissionand distribution areas of our electric business.  We have historically recorded thesetransactions on the accrual basis and this is how these costs have historicallybeen recovered through rates.  Thisfactor, combined with the historical precedents from the PUCO and the FERC,make it probable that these amounts will be reflected in future rates.

 

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

 

**4.  Ownership of Facilities**

 

We and other Ohio utilities have undivided ownership interests inseven electric generating facilities and numerous transmission facilities.  Certain expenses, primarily fuel costs forthe generating units, are allocated to the owners based on their energyusage.  The remaining expenses,investments in fuel inventory and plant materials and operating supplies, andcapital additions are allocated to the owners in accordance with theirrespective ownership interests.  As of June 30,2009, we had $113 million ofconstruction work in progress at such facilities.  Ourshare of the operating cost of such facilities is included within thecorresponding line in the condensed consolidated statements of results ofoperations and our share of the investment in the facilities is included in thecondensed consolidated balance sheets. The majority of the construction work in progress at the Conesville Unit4 is related to a new FGD installation.

 

Our undivided ownership interest in such facilities at June 30,2009, is as follows:

 
| ** **                             | ** ** | ** **            | ** ** | ** **        | ** ** | **DP&L****Investment** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **DP&L****Share** | ** ** | **Gross Plant**   | ** ** | **Accumulated**            | ** ** | **Construction** | ** ** |
| ** **                             | ** ** | ** **            | ** ** | **Production**    | ** ** | **In Service**             | ** ** | **Depreciation** | ** ** | **Work in Progress** | ** ** |
| ** **                             | ** ** | **Ownership (%)**     | ** ** | **Capacity (MW)** | ** ** | **($ in millions)**   | ** ** | **($ in millions)** | ** ** | **($ in millions)** | ** ** |
| Production  Units:                     |       |                  |       |              |       |                       |       |   |   |   |   |
| Beckjord  Unit 6                       |       | 50.0                  |       | 210               |       | $                          | 78         |   | $ | 55 |   | $ | 1 |   |
| Conesville  Unit 4                     |       | 16.5                  |       | 129               |       | 37                         |       | 28 |   | 85 |   |
| East  Bend Station                     |       | 31.0                  |       | 186               |       | 199                        |       | 129 |   | 3 |   |
| Killen  Station                        |       | 67.0                  |       | 402               |       | 603                        |       | 269 |   | 1 |   |
| Miami  Fort Units 7&8              |       | 36.0                  |       | 368               |       | 348                        |       | 121 |   | 6 |   |
| Stuart  Station                        |       | 35.0                  |       | 820               |       | 682                        |       | 236 |   | 12 |   |
| Zimmer  Station                        |       | 28.1                  |       | 365               |       | 1,058                      |       | 593 |   | 5 |   |
| Transmission  (at varying percentages) |       |                  |       |              |       | 90                         |       | 53 |   | — |   |
| Total                                  |       |                  |       | 2,480             |       | $                          | 3,095      |   | $ | 1,484 |   | $ | 113 |   |

 

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**5.             Long-term Debt**

 
| ** **                 | ** ** | ** **                                                  | ** ** | **At**            | ** **  | **At**                | ** ** |
|----------------------------|------------|-------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| **DPL Inc.**               | ** ** | ** **                                                  | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**     | ** ** | ** **                                                  | ** ** | **2009**          | ** **  | **2008**              | ** ** |
| DP&L  -                |       | First mortgage bonds  maturing                              |       |              |        |                  |       |
|                       | ** ** | 2013  - 5.125%                                              |       | **$**             | **470.0**   |                  | $          | 470.0 |   |
| DP&L  -                |       | Pollution control  series maturing                          |       |              |        |                  |       |
|                       | ** ** | 2028  through 2034 - 4.78% (a)                              |       | **214.4**         |        | 214.4                 |       |
| DP&L  -                |       | Pollution control  series maturing                          |       |              |        |                  |       |
|                       | ** ** | 2036  - 4.80%                                               |       | **100.0**         |        | 100.0                 |       |
| DP&L  -                |       | Pollution control  series maturing                          |       |              |        |                  |       |
|                       | ** ** | 2040  - variable rates: 0.24% - 0.85% and 0.80% - 1.25% (b) |       | **100.0**         |        | 100.0                 |       |
| ** **                 |       |                                                        |       | **884.4**         |        | 884.4                 |       |
|                       |       |                                                        |       |              |        |                  |       |
| DPL  Inc. -                |       | Senior Notes 6.875%  Series due 2011                   | ** ** | **297.4**         |        | 297.4                 |       |
| DPL  Inc. -                |       | Note to Capital Trust  II 8.125% due 2031                   | ** ** | **195.0**         |        | 195.0                 |       |
| DP&L  -                |       | Obligation for capital  lease                               | ** ** | **0.2**           |        | 0.6                   |       |
| Unamortized  debt discount | ** ** | **(1.1**                                                    | **)**      | (1.3              | )           |
| Total                      | ** ** | ** **                                                  |       | **$**             | **1,375.9** |                  | $          | 1,376.1 |   |

 

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*(a)**      **Weightedaverage interest rate for six months ended June 30, 2009 and 2008.*

*(b)**      **Range ofinterest rates for six months ended June 30, 2009 and the one month ended December 31,2008, respectively.  These pollutioncontrol bonds were issued on December 4, 2008.*

 
| ** **                 | ** ** | ** **                                                  | ** ** | **At**            | ** ** | **At**                | ** ** |
|----------------------------|------------|-------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **DP&L**               | ** ** | ** **                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**     | ** ** | ** **                                                  | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| DP&L  -                |       | First mortgage bonds  maturing                              |       |              |       |                  |       |
|                       |       | 2013  - 5.125%                                              | ** ** | **$**             | **470.0**  |                  | $          | 470.0 |   |
| DP&L  -                |       | Pollution control  series maturing                          |       |              |       |                  |       |
|                       | ** ** | 2028  through 2034 - 4.78% (a)                              |       | **214.4**         |       | 214.4                 |       |
| DP&L  -                |       | Pollution control  series maturing                          |       |              |       |                  |       |
|                       |       | 2036  - 4.80%                                               | ** ** | **100.0**         |       | 100.0                 |       |
| DP&L  -                |       | Pollution control  series maturing                          |       |              |       |                  |       |
|                       |       | 2040  - variable rates: 0.24% - 0.85% and 0.80% - 1.25% (b) | ** ** | **100.0**         |       | 100.0                 |       |
|                       | ** ** | ** **                                                  |       | **884.4**         |       | 884.4                 |       |
|                       |       |                                                        |       |              |       |                  |       |
| DP&L  -                |       | Obligation for capital  lease                               | ** ** | **0.2**           |       | 0.6                   |       |
| Unamortized  debt discount | ** ** | **(0.8**                                                    | **)**      | (1.0              | )          |
| Total                      |       |                                                        | ** ** | **$**             | **883.8**  |                  | $          | 884.0 |   |

 

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*(a)**      **Weightedaverage interest rate for six months ended June 30, 2009 and 2008.*

*(b)**      **Range ofinterest rates for six months ended June 30, 2009 and the one month ended December 31,2008, respectively.  These pollutioncontrol bonds were issued on December 4, 2008.*

 

At June 30, 2009, **DPL’s** scheduled maturities of long-termdebt, including capital lease obligations, over the next five years are $0.7million through June 30, 2010; $0.2 million from July 1, 2010through June 30, 2011; $297.4 million from July 1, 2011 through June 30,2012; $0 from July 1, 2012 through June 30, 2013; and $470.0 millionfrom July 1, 2013 through June 30, 2014.

 

At June 30, 2009, **DP&L’s** scheduled maturities oflong-term debt, including capital lease obligations, over the next five yearsare $0.7 million through June 30, 2010; $0.2 million from July 1,2010 through June 30, 2011; $0 from July 1, 2011 through June 30,2013; and $470.0 million from July 1, 2013 through June 30,2014.  Substantially all property of **DP&L** is subject to the mortgage liensecuring the first mortgage bonds.

 

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**Debt and Debt Covenants**

OnNovember 21, 2006, **DP&L**entered into a $220 million unsecured revolving credit agreement replacing its$100 million facility.  This agreementhas a five-year term that expires November 21, 2011 and provides **DP&L** with the ability to increase the size of thefacility by an additional $50 million at any time.  The facility contains one financial covenant:  **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  As of June 30, 2009, **DP&L**was in compliance with this covenant with a ratio of 0.44 to1.00.  As of June 30, 2009,**DP&L**had $140 million outstanding under this creditfacility.  Fees associated with thiscredit facility are approximately $0.7 million per year.  Changes in credit ratings, however, mayaffect fees and the applicable interest rate. This revolving credit agreement also contains a $50 million letter ofcredit sub-limit.  As of June 30,2009, **DP&L** had no outstanding letters ofcredit against the facility.  **DP&L** has certain contractual agreements for the sale andpurchase of power, fuel and related energy services that contain credit ratingrelated clauses allowing the counter parties to seek additional surety undercertain conditions.

 

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

 

On November 15,2007, the OAQDA issued $90 million of collateralized, variable rate OAQDARevenue Bonds, 2007 Series A due November 1, 2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due was insured by aninsurance policy issued by FGIC.  Duringthe first quarter of 2008, all three credit rating agencies downgradedFGIC.  As a direct result of thesedowngrades, bonds which were subject to the auction clearing process carriedsubstantially higher interest rates in succeeding auctions.  On April 4, 2008, **DP&L**converted the 2007 Series A Bonds from Auction Rate Securities to VariableRate Demand Notes.  At that time, **DP&L** purchased these notes out of the market and placedthem with the bond trustee.  These noteswere redeemed in December 2008 as discussed in the following paragraph.

 

On December 4, 2008,the OAQDA issued $100 million of collateralized, variable rate RevenueRefunding Bonds Series A and B due November 1, 2040.  In turn, **DP&L** borrowedthese funds from the OAQDA.  The paymentof principal and interest on the bonds when due is backed by a standby letterof credit issued by a syndicated bank group. **DP&L** is using $10 million of theproceeds from these bonds to finance its portion of the costs of acquiring,constructing and installing certain solid waste disposal and air qualityfacilities at the Conesville generation station.  The remaining $90 million was used to redeemthe 2007 Series A Bonds discussed above.

 

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

 

On April 21, 2009, **DP&L** entered into a $100 million unsecured revolvingcredit agreement with a syndicated bank group. The agreement is for a 364-day term expiring on April 20, 2010.  The facility contains one financial covenant:**DP&L’s** total debt to totalcapitalization ratio is not to exceed 0.65 to 1.00.  As of June 30, 2009, **DP&L**was in compliance with thiscovenant with a ratio of 0.44 to 1.00. As of June 30, 2009, **DP&L**hadno outstanding borrowings under this facility.

 

On July 29,2009, **DP&L** repaid $105 million of the$140 million borrowing that was outstanding under the $220 million unsecuredrevolving credit agreement. This repayment was made using $25 million of cashon hand and an $80 million withdrawal that was made on July 28, 2009 from the$100 million facility referred to in the preceding paragraph.  After this transaction, the borrowingsoutstanding under both revolving credit facilities amount to $115 million andthe combined cash available to **DP&L** underthese revolving credit facilities amounts to $205 million.

 

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**6.     Pension andPostretirement Benefits**

 

We sponsor a definedbenefit plan for substantially all employees. For collective bargaining employees, the defined benefits are based on aspecific dollar amount per year of service. For all other employees, the defined benefit plan is based primarily oncompensation and years of service. We fund pension plan benefits as accrued inaccordance with the minimum funding requirements of the Employee RetirementIncome Security Act of 1974 (ERISA).  Inaddition, we have a Supplemental Executive Retirement Plan (SERP) for certainactive and retired key executives.  We****also have unfunded liabilities related to retirementbenefits for certain active, terminated and retired key executives.  These liabilities totaled approximately $1.2million at June 30, 2009 and $1.0 million at December 31, 2008.

 

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

 

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

 

**Net periodic benefit cost**

 
| ** **                    | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**        | ** ** | **2009**    | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                  | ** ** | **$**       | **0.9**    |               | $          | 0.8 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                 | ** ** | **4.4**     |       | 4.1                | ** ** | **0.5** |   | 0.4 |   |
| Expected return on assets (a) | ** ** | **(5.6**    | **)**      | (6.0               | )          | **(0.1** | **)** | (0.1 | ) |
|                          |       |        |       |               |       |   |   |   |   |
| Amortization of unrecognized: |       |        |       |               |       |   |   |   |   |
| Actuarial (gain) loss         | ** ** | **1.1**     |       | 0.7                | ** ** | **(0.2** | **)** | (0.2 | ) |
| Prior service cost            | ** ** | **0.9**     |       | 0.6                | ** ** | **—** |   | — |   |
| Net periodic benefit cost     | ** ** | **$**       | **1.7**    |               | $          | 0.2 | ** ** | **$** | **0.2** |   | $ | 0.1 |   |

 

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*(a)**      **Themarket-related value of assets is equal to the fair value of assets atimplementation with subsequent asset gains and losses recognized in themarket-value systematically over a three-year period.*

 

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

 

**Net periodic benefit cost**

 
| ** **                    | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**        | ** ** | **2009**    | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                  | ** ** | **$**       | **1.8**    |               | $          | 1.6 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                 | ** ** | **8.8**     |       | 8.2                | ** ** | **0.9** |   | 0.8 |   |
| Expected return on assets (a) | ** ** | **(11.2**   | **)**      | (12.0              | )          | **(0.2** | **)** | (0.2 | ) |
|                          |       |        |       |               |       |   |   |   |   |
| Amortization of unrecognized: |       |        |       |               |       |   |   |   |   |
| Actuarial (gain) loss         | ** ** | **2.2**     |       | 1.4                | ** ** | **(0.4** | **)** | (0.4 | ) |
| Prior service cost            | ** ** | **1.7**     |       | 1.2                | ** ** | **—** |   | — |   |
| Net periodic benefit cost     | ** ** | **$**       | **3.3**    |               | $          | 0.4 | ** ** | **$** | **0.3** |   | $ | 0.2 |   |

 

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*(a)**      **Themarket-related value of assets is equal to the fair value of assets atimplementation with subsequent asset gains and losses recognized in themarket-value systematically over a three-year period.*

 

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

 

**Estimated Future Benefit Payments:**

 
| **$ in millions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------|------------|-------------|------------|--------------------|------------|
| 2009                   |       | $           | 10.3       |               | $          | 1.3 |   |
| 2010                   |       | $           | 21.2       |               | $          | 2.7 |   |
| 2011                   |       | $           | 21.6       |               | $          | 2.6 |   |
| 2012                   |       | $           | 22.3       |               | $          | 2.5 |   |
| 2013                   |       | $           | 23.1       |               | $          | 2.4 |   |
| 2014 — 2018       |       | $           | 120.8      |               | $          | 9.7 |   |

 

**7.     Share-BasedCompensation**

 

The following tablesummarizes share-based compensation expense:

 
| ** **                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                               | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **$ in millions**                                                   | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Stock  options                                                           | ** ** | **$**                  | **—** |                 | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Restricted  stock units                                                  | ** ** | **—**             |       | —               | ** ** | **—** |   | (0.1 | ) |
| Performance  shares                                                      | ** ** | **0.4**                |       | 0.4                  | ** ** | **0.8** |   | 0.6 |   |
| Restricted  shares                                                       | ** ** | **0.2**                |       | 0.1                  | ** ** | **0.3** |   | 0.2 |   |
| Non-employee  directors’ RSUs                                       | ** ** | **0.1**                |       | 0.1                  | ** ** | **0.2** |   | 0.2 |   |
| Management  performance shares                                           | ** ** | **0.2**                |       | 0.1                  | ** ** | **0.3** |   | 0.1 |   |
| Share-based  compensation included in operations and maintenance expense |       | **$**                  | **0.9**    |                 | $          | 0.7 |   | **$** | **1.6** |   | $ | 1.0 |   |
| Income  tax benefit                                                      | ** ** | **(0.3**               | **)**      | (0.2                 | )          | **(0.6** | **)** | (0.3 | ) |
| Total  share-based compensation, net of tax                              | ** ** | **$**                  | **0.6**    |                 | $          | 0.5 | ** ** | **$** | **1.0** |   | $ | 0.7 |   |

 

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

 

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Summarized share-basedcompensation activity for both **DPL** and **DP&L** for the six months ended June 30, 2009 and2008 was as follows:

 
| ** **                        | ** ** | **Options**           | ** ** | **RSUs**                           | ** ** | **Performance Shares** | ** ** |
|-----------------------------------|------------|-----------------------|------------|------------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **2009**              | ** ** | **2008**                           | ** ** | **2009**               | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Outstanding  at beginning of year | ** ** | **836,500**           |       | 946,500                            | ** ** | **10,120**             |       | 22,976 | ** ** | **156,300** |   | 142,108 |   |
| Granted                           | ** ** | **—**            |       | —                             | ** ** | **—**             |       | — | ** ** | **124,588** |   | 93,298 |   |
| Dividends                         | ** ** | **—**            |       | —                             | ** ** | **—**             |       | — | ** ** | **—** |   | — |   |
| Exercised                         | ** ** | **—**            |       | (50,000                            | )          | **—**             |       | (1,605 | ) | **—** |   | — |   |
| Expired                           | ** ** | **—**            |       | —                             | ** ** | **—**             |       | — | ** ** | **(36,445** | **)** | (37,426 | ) |
| Forfeited                         | ** ** | **—**            |       | —                             | ** ** | **—**             |       | (1,603 | ) | **(6,739** | **)** | (7,253 | ) |
| Outstanding  at period end        | ** ** | **836,500**           |       | 896,500                            | ** ** | **10,120**             |       | 19,768 | ** ** | **237,704** |   | 190,727 |   |
| Exercisable  at period end        | ** ** | **836,500**           |       | 896,500                            | ** ** | **—**             |       | — | ** ** | **—** |   | — |   |
|                              | ** ** | ** **            |       |                               | ** ** | ** **             |       |   | ** ** | ** ** |   |   |   |
| ** **                        | ** ** | **Restricted Shares** | ** ** | **Management Performance  Shares** | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **2009**              | ** ** | **2008**                           | ** ** | **2009**               | ** ** | **2008** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding  at beginning of year | ** ** | **69,147**            |       | 42,200                             | ** ** | **39,144**             |       | — |   |   |   |   |   |
| Granted                           | ** ** | **2,500**             |       | 20,000                             | ** ** | **48,719**             |       | 39,144 |   |   |   |   |   |
| Dividends                         | ** ** | **—**            |       | —                             | ** ** | **—**             |       | — |   |   |   |   |   |
| Exercised                         | ** ** | **(1,000**            | **)**      | (1,000                             | )          | **—**             |       | — |   |   |   |   |   |
| Expired                           | ** ** | **—**            |       | —                             | ** ** | **—**             |       | — |   |   |   |   |   |
| Forfeited                         | ** ** | **—**            |       | —                             | ** ** | **—**             |       | — |   |   |   |   |   |
| Outstanding  at period end        | ** ** | **70,647**            |       | 61,200                             | ** ** | **87,863**             |       | 39,144 |   |   |   |   |   |
| Exercisable  at period end        | ** ** | **—**            |       | —                             | ** ** | **—**             |       | — |   |   |   |   |   |
|                              | ** ** | ** **            |       |                               | ** ** | ** **             |       |   |   |   |   |   |   |
| ** **                        | ** ** | **Director RSUs**     | ** ** | ** **                         | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **2009**              | ** ** | **2008**                           | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding  at beginning of year | ** ** | **15,546**            |       | 13,573                             |       |                   |       |   |   |   |   |   |   |
| Granted                           | ** ** | **20,016**            |       | 15,752                             |       |                   |       |   |   |   |   |   |   |
| Dividends  accrued                | ** ** | **836**               |       | 382                                |       |                   |       |   |   |   |   |   |   |
| Exercised  and issued             | ** ** | **(2,066**            | **)**      | (13,721                            | )          |                   |       |   |   |   |   |   |   |
| Exercised  and deferred           | ** ** | **(14,060**           | **)**      | —                             |       |                   |       |   |   |   |   |   |   |
| Forfeited                         | ** ** | **—**            |       | —                             |       |                   |       |   |   |   |   |   |   |
| Outstanding  at period end        | ** ** | **20,272**            |       | 15,986                             |       |                   |       |   |   |   |   |   |   |
| Exercisable  at period end        | ** ** | **—**            |       | —                             |       |                   |       |   |   |   |   |   |   |

 

**8.     Fair Value Measurements**

 

We follow Statement ofFinancial Accounting Standards No.157, “Fair Value Measurements” (SFAS 157),when determining the fair value of our financial instruments.  SFAS 157 defines fair value as the exchangeprice that would be received for an asset or paid to transfer a liability (anexit price) in the principal or most advantageous market for the asset or liabilityin an orderly transaction between market participants on the measurementdate.  SFAS 157 also establishes a fairvalue hierarchy that requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fairvalue.  The standard describes threelevels of inputs that may be used to measure fair value:

 

**Level 1**

 

Level 1 inputs aredefined as quoted prices in active markets for identical assets orliabilities.  Our Level 1 assets andliabilities include equity securities held in various deferred compensationtrusts and futures contracts that are traded in an active exchange market.

 

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**Level 2**

 

Level 2 inputs areobservable inputs other than Level 1 prices such as quoted prices for similarassets or liabilities, quoted prices in markets that are not active, or otherinputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.  Our Level 2 assets and liabilities includeopen-ended investment funds in the Master Trust and forward contracts withquoted prices from OTC markets or direct broker quotes that are traded lessfrequently than exchange-traded instruments.

 

**Level3**

 

Level 3 inputs areunobservable inputs that are supported by little or no market activity and thatare significant to the fair value of the assets or liabilities.  Our Level 3 assets and liabilities includeasset retirement obligations that are initially recognized at fair value.

 

Valuations of assets andliabilities reflect the value of the instrument including the values associatedwith counterparty risk.  With theissuance of SFAS 157, the accounting industry clarified that these values mustalso take into account a company’s own credit standing.

 

***Master Trust Assets***

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

 

**DPL** had no unrealized gainsand $0.3 million of unrealized losses on the Master Trust assets in OCI at June30, 2009 and no unrealized gains and $0.5 million of unrealized losses in OCIat December 31, 2008.  

 

**DP&L** had $9.7 million inunrealized gains and $0.3 million of unrealized losses on the Master Trustassets in OCI at June 30, 2009 and $10.9 million in unrealized gains and $0.5in unrealized losses in OCI at December 31, 2008.  

 

No unrealized gains or losses are expected to be transferred to earningsin 2009.  The unrealized losses arepredominantly from a mutual fund invested in a Vanguard 500 Index which isexpected to recover its full value.

 

***Long-term Debt***

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

 

***DerivativeInstruments***

In the normalcourse of business, **DPL** and **DP&L** enter into various derivative financialinstruments.  We use derivativesprincipally to manage the risk of changes in market prices forcommodities.  All of our derivativeinstruments are used for risk management purposes and are designated as a cashflow hedge or marked to market each reporting period.  See Note 9 of Notes to Condensed ConsolidatedFinancial Statements.

 

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The fair values ofour financial instruments and debt are based on market quotes of similarinstruments and represent estimates of possible value that may not be realizedin the future.  The table below presentsthe fair value and cost of these instruments at June 30, 2009 and December31, 2008.

 
| ** **             | ** ** | **At June 30, 2009** | ** ** | **At December 31, 2008** | ** ** |
|------------------------|------------|----------------------|------------|--------------------------|------------|
| **$ in millions** | ** ** | **Cost**             | ** ** | **Fair Value**           | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| **DPL Inc.**           |       |                 |       |                     |       |   |   |   |   |
| **Assets**             |       |                 |       |                     |       |   |   |   |   |
| Master Trust Assets    |       | $                    | 11.8       |                     | $          | 11.5 |   | $ | 13.6 |   | $ | 13.1 |   |
| Derivative Assets      |       | —               |       | 3.8                      |       | — |   | — |   |
| Total Assets           |       | $                    | 11.8       |                     | $          | 15.3 |   | $ | 13.6 |   | $ | 13.1 |   |
|                   |       |                 |       |                     |       |   |   |   |   |
| **Liabilities**        |       |                 |       |                     |       |   |   |   |   |
| Debt                   |       | $                    | 1,376.7    |                     | $          | 1,285.9 |   | $ | 1,553.0 |   | $ | 1,471.6 |   |
| Derivative Liabilities |       | —               |       | 13.1                     |       | — |   | 6.6 |   |
| Total Liabilities      |       | $                    | 1,376.7    |                     | $          | 1,299.0 |   | $ | 1,553.0 |   | $ | 1,478.2 |   |
|                   |       |                 |       |                     |       |   |   |   |   |
| **DP&L**           |       |                 |       |                     |       |   |   |   |   |
| **Assets**             |       |                 |       |                     |       |   |   |   |   |
| Master Trust Assets    |       | $                    | 25.8       |                     | $          | 35.3 |   | $ | 29.9 |   | $ | 40.2 |   |
| Derivative Assets      |       | —               |       | 3.8                      |       | — |   | — |   |
| Total Assets           |       | $                    | 25.8       |                     | $          | 39.1 |   | $ | 29.9 |   | $ | 40.2 |   |
|                   |       |                 |       |                     |       |   |   |   |   |
| **Liabilities**        |       |                 |       |                     |       |   |   |   |   |
| Debt                   |       | $                    | 884.5      |                     | $          | 814.3 |   | $ | 884.8 |   | $ | 815.7 |   |
| Derivative Liabilities |       | —               |       | 13.1                     |       | — |   | 6.6 |   |
| Total Liabilities      |       | $                    | 884.5      |                     | $          | 827.4 |   | $ | 884.8 |   | $ | 822.3 |   |

 

The fair value ofassets measured on a recurring basis was determined as follows:

 
| ** **              | ** ** | **Assets and Liabilities Measured at Fair Value on a  Recurring Basis** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **              | ** ** | ** **                                                              | ** ** | ** ** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| ** **              | ** ** | **Fair Value at**                                                       | ** ** | **Based on Quoted  Prices in Active** | ** ** | **Other Observable** | ** ** | **Unobservable** | ** ** |
| ** **              | ** ** | **June 30, 2009**                                                  | ** ** | **Market** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **$ in millions**  | ** ** | **DPL**                                                                 | ** ** | **DP&L (a)** | ** ** | **DPL** | ** ** | **DP&L (a)** | ** ** | **DPL** | ** ** | **DP&L(a)** | ** ** | **DPL** | ** ** | **DP&L** | ** ** |
| **Assets**              |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Master  Trust Assets    |       | $                                                                       | 11.5       |   | $ | 35.3 |   | $ | — |   | $ | 23.8 |   | $ | 11.5 |   | $ | 11.5 |   | $ | — |   | $ | — |   |
| Derivative  Assets      |       | 3.8                                                                     |       | 3.8 |   | — |   | — |   | 3.8 |   | 3.8 |   | — |   | — |   |
| Total                   |       | $                                                                       | 15.3       |   | $ | 39.1 |   | $ | — |   | $ | 23.8 |   | $ | 15.3 |   | $ | 15.3 |   | $ | — |   | $ | — |   |
|                    |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**         |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Derivative  Liabilities |       | $                                                                       | 13.1       |   | $ | 13.1 |   | $ | 3.0 |   | $ | 3.0 |   | $ | 10.1 |   | $ | 10.1 |   | $ | — |   | $ | — |   |
| Total                   |       | $                                                                       | 13.1       |   | $ | 13.1 |   | $ | 3.0 |   | $ | 3.0 |   | $ | 10.1 |   | $ | 10.1 |   | $ | — |   | $ | — |   |

 

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

 

Level 1 inputs are usedfor **DPL** stock held by the Master Trust andfor heating oil futures.  The fair valueis determined by reference to quoted market prices and other relevant informationgenerated by market transactions.  Level2 inputs are used to value derivatives such as financial transmission rightsand capacity swap contracts where the quoted prices are from a relativelyinactive market; forward power contracts and forward NYMEX-quality coalcontracts which are traded on the OTC market but which are valued using priceson the NYMEX for similar contracts on the OTC market; and open-ended funds thatare in the Master Trust valued using the end of day Net Asset Value (NAV).

 

The fair value of anasset retirement obligation (ARO) is estimated by discounting expected cashoutflows to their present value at the initial recording of the liability.  Cash outflows are based on the approximatefuture disposal cost as determined by market information, historicalinformation or management judgment. During the three months ended June 30, 2009, **DP&L**added a minimal amount to an asbestos removal ARO and an ash landfill ARO dueto changes in costs and timing estimates for the asbestos removal and landfillretirement.  This non-recurring fairvalue would be considered a Level 3 input.

 

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At June 30, 2009, **DPL** had $10.0 million of investments in money market mutualfunds classified as cash and cash equivalents in its condensed consolidatedbalance sheet.  The money market fundshave quoted prices that are generally equivalent to par.

 

**9.     DerivativeInstruments and Hedging Activities**

 

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

 

In the normalcourse of business, **DPL** and **DP&L** enter into various derivative financialinstruments.  We use derivativesprincipally to manage the risk of changes in market prices forcommodities.  The derivatives that we useto economically hedge this risk are governed by our risk management policiesfor forward and futures contracts.  Ourpositions are continually assessed within our structured hedging programs todetermine whether new or offsetting transactions are required.  The objective of the hedging program isgenerally to mitigate financial risks while ensuring that sufficient volumesare available to meet our requirements. We monitor and value derivative positions monthly as part of our riskmanagement processes.  We use publishedsources for pricing when possible to mark positions to market.  We rely on modeled valuations only when noother method exists.  (See Note 8 ofNotes to Condensed Consolidated Financial Statements.)  All of our derivative instruments are usedfor risk management purposes and are designated as a cash flow hedge or markedto market each reporting period.

 

***CashFlow Hedges***

As part of our riskmanagement processes, we identify the relationships between hedging instrumentsand hedged items, as well as the risk management objective and strategy forundertaking various hedge transactions. The mark-to-market value of cash flow hedges, as determined by currentpublic market prices, will continue to fluctuate with changes in market pricesup to contract expiration.  The effectiveportion of the hedging transaction is recognized in Other Comprehensive Income(OCI) and transferred to earnings when the hedged forecasted transaction takesplace or when the hedged forecasted transaction is no longer probable ofoccurring.  The ineffective portion ofthe cash flow hedge is recognized in earnings in the current period.  All risk components were taken into accountto determine the hedge effectiveness of the cash flow hedges.

 

We currently use cashflow hedging with forward power contracts and in 2003 we entered into aninterest rate swap which was settled that same year.  As of June 30, 2009, themaximum length of time that we are hedging (with SFAS 133 designated contracts)our exposure to variability in future cash flows related to forecastedtransactions is 18 months.  Approximately $2.2 million of accumulatedgains in OCI related to the above mentioned power hedges are expected to bereclassified to earnings over the next twelve months. The balance of theremaining deferred gain from the interest rate swap in OCI is being amortizedinto earnings over the life of the related bonds.  Approximately $2.5 million of accumulatedgains in OCI related to the above referenced interest rate hedge are expectedto be reclassified to earnings over the next twelve months.

 

The followingtable provides information concerning gains or losses recognized in OCI for thecash flow hedges:

 
| ** **                                                      | ** ** | **For the six months ended June 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| **$ in millions**                                          | ** ** | **Power**                             | ** ** | **Interest    Rate   Hedge** | ** ** | **Power   and   Capacity** | ** ** | **Interest    Rate   Hedge** | ** ** |
| Beginning  Accumulated Derivative (Gain) /Loss in OCI           | ** ** | **$**                                 | **0.3**    | ** ** | **$** | **(17.2** | **)** | $ | 1.5 |   | $ | (19.7 | ) |
| Net  change associated with current period hedging transactions | ** ** | **(3.1**                              | **)**      | **—** |   | 5.4 |   | — |   |
| Net  amount of any reclassification into earnings               | ** ** | **0.7**                               | ** ** | **1.2** |   | (1.9 | ) | 1.2 |   |
| Ending  Accumulated Derivative (Gain) /Loss in OCI              | ** ** | **$**                                 | **(2.1**   | **)** | **$** | **(16.0** | **)** | $ | 5.0 |   | $ | (18.5 | ) |

 

***Mark to Market***

Certain derivativecontracts are entered into on a regular basis as part of our risk managementprogram but do not qualify for hedge accounting or the normal purchase andsales exceptions under SFAS 133, as amended. Accordingly, such contracts are recorded at fair value with changes inthe fair value charged or credited to the income statement in the period inwhich the change occurred.  Contracts weenter into as part of our risk management program may be settled financially,by physical delivery or net settled with the counterparty.  We currently mark to market FinancialTransmission Rights (FTRs), heating oil futures and forward NYMEX-quality coalcontracts that do not qualify for cash flow hedge accounting.

 

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**DP&L** enters into coal contracts from time totime to supply its generating plants.  Weperform a quarterly evaluation of the different coal markets to determine ifthese coal contracts are considered derivative instruments under SFAS 133 “Accountingfor Derivative Instruments and Hedging Activities” (SFAS 133).  **DP&L** hasconcluded that NYMEX and NYMEX look-a-like coal contracts will be consideredderivative instruments under SFAS 133 because they have been determined to bereadily convertible to cash under SFAS 133. These contracts were marked to market and are further discussed in Note8 of Notes to Condensed Consolidated Financial Statements.

 

***RegulatoryAssets and Liabilities***

Portionsof the derivative contracts that are marked to market each reporting period andare related to the retail portion of **DP&L’s** loadrequirements are probable of recovery as part of the fuel clause in theStipulation and Recommendation (the Stipulation) filed with the PUCO on February24, 2009.  The Stipulation was discussedin our Annual Report on Form 10-K for the fiscal year ended December 31,2008.  On June 24, 2009, the PUCO issuedan order granting approval of the Stipulation as filed authorizing **DP&L** to implement rates associated with alternativeenergy and energy efficiency compliance costs beginning July 1, 2009.  Under SFAS 71, “Accounting for the Effects ofCertain Types of Regulation”, if a cost is probable of recovery in futurerates; it should be deferred as a regulatory asset.  If a gain is probable of being returned tocustomers, it should be deferred as a regulatory liability.  **DP&L** believesthese costs, if incurred after the fuel rate becomes effective on January 1,2010, are probable of recovery.  The Ohiojurisdictional retail portion of the heating oil futures and the NYMEX-qualitycoal contracts will be deferred as a regulatory asset or liability accountuntil the contracts settle.  If theseunrealized gains and losses are no longer deemed to be probable of recoverythrough our rates, they will be reclassified into earnings in the period suchdetermination is made.

 

As of June 30, 2009, **DP&L** had the following outstanding derivativeinstruments that were entered into to economically hedge changes in cash flowsdue to changes in the price of the underlying commodity:

 
| **Commodity**                        | ** ** | **Accounting Treatment** | ** ** | **Volume**        |
|--------------------------------------|------------|--------------------------|------------|-------------------|
| FTRs                                 |       | Mark to Market           |       | 20,417 MW         |
| Heating Oil Futures                  |       | Mark to Market           |       | 6,216,000 Gallons |
| Forward Power Contracts              |       | Cash Flow Hedge          |       | 1,148,400 MWH     |
| NYMEX-quality Coal  Contracts        |       | Mark to Market           |       | 1,457,000 Tons    |
| (includes our partners’  share) |       |                     |       |              |

 

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The followingtable shows the fair value and balance sheet classification of our derivativeinstruments.

 

Fair Values ofDerivative Instruments

 
| ** **                                                                 | ** ** | **Asset Derivatives**      | ** ** | **Liability Derivatives** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------|------------|
| ** **                                                                 | ** ** | **As of June 30, 2009**    | ** ** | **As of June 30, 2009**   | ** ** |
| **$ in millions**                                                     | ** ** | **Balance Sheet Location** | ** ** | **Fair Value**            | ** ** | **Balance Sheet Location** | ** ** | **Fair Value** | ** ** |
|                                                                       |       |                       |       |                      |       |   |   |   |   |
| **Derivatives designated as hedging instruments  under FAS 133**           | ** ** | ** **                 | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Forward Power Contracts                                                    |       | Other  Assets              |       | $                         | 2.1        |   |   |   | $ | — |   |
| **Total Derivatives designated as  hedging instruments under FAS 133**     |       |                       |       | $                         | 2.1        |   |   |   | $ | — |   |
|                                                                       |       |                       |       |                      |       |   |   |   |   |
| **Derivatives not designated as  hedging instruments under FAS 133**       | ** ** | ** **                 | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| FTRs                                                                       |       | Other  Assets              |       | $                         | 1.7        |   |   |   | $ | — |   |
| Heating Oil Futures                                                        |       |                       |       | —                    |       | Other  Liabilities |   | 2.9 |   |
| NYMEX-Quality Coal Forwards                                                |       |                       |       | —                    |       | Other  Liabilities |   | 10.2 |   |
| **Total Derivatives not designated  as hedging instruments under FAS 133** |       |                       |       | $                         | 1.7        |   |   |   | $ | 13.1 |   |
| **Total Derivatives**                                                      |       |                       |       | $                         | 3.8        |   |   |   | $ | 13.1 |   |

 

Thefollowing table shows the amount and income statement classification of thegains and losses on our derivative instruments for the three-month periodending June 30, 2009.

 

**Derivatives Designated as Hedging Instruments (Cash FlowHedges) (three months ending June 30, 2009):**

** **
| **$ in millions**                                                                                | ** ** | **Amount of Gain or   (Loss) Recognized   in AOCI on   Derivative (Effective   Portion)** | ** ** | **Location of Gain or   (Loss) Reclassified   from AOCI into   Income (Effective   Portion)** | ** **        | **Amount of Gain or   (Loss) Reclassified   from AOCI into   Income (Effective   Portion)** | ** ** | **Location of Gain or   (Loss) Recognized   in Income on   Derivative   (Ineffective Portion)** | ** ** | **Amount of Gain or   (Loss) Recognized   in Income on   Derivative   (Ineffective Portion)** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|-------------------|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| **Derivatives Designated as Hedging  Instruments Under FAS 133**                                      | ** ** | ** **                                                                                | ** ** | ** **                                                                                    | ** **        | ** **                                                                                  | ** ** | ** **                                                                                      | ** ** | ** **                                                                                    | ** ** |
| Interest Rate Hedge                                                                                   |       | $                                                                                         | —     |                                                                                          | Interest  Expense |                                                                                        | $          | 0.6                                                                                             |       | Interest  Expense                                                                             |       | $ | — |   |
| Forward Power Contracts                                                                               |       | 1.5                                                                                       |       | Wholesale  Revenue                                                                            |              | 0.1                                                                                         |       | Wholesale  Revenue                                                                              |       | —                                                                                        |       |
| **Total Effect of Derivative  Instruments Designated as Hedging Instruments on the Income Statement** | ** ** | ** **                                                                                | ** ** | ** **                                                                                    | ** **        | ** **                                                                                  | ** ** | ** **                                                                                      | ** ** | ** **                                                                                    | ** ** |
|                                                                                                  |       | $                                                                                         | 1.5        |                                                                                          |              |                                                                                        | $          | 0.7                                                                                             |       |                                                                                          |       | $ | — |   |

 

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**Derivatives Not Designated as Hedging Instruments(MTM) (three months ending June 30, 2009);**

 
| **$ in millions**                                                                                    | ** ** | **Amount of Gain or   (Loss) in Regulatory   (Asset)/Liability on   Derivative per SFAS 71** | ** ** | **Location of Gain or   (Loss) Recognized in   Income on Derivative** | ** **      | **Amount of Gain or   (Loss) Recognized in   Income on Derivative** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|-----------------|---------------------------------------------------------------------|------------|
| **Derivatives Not Designated as Hedging Instruments Under FAS  133**                                      | ** ** | ** **                                                                                   | ** ** | ** **                                                            | ** **      | ** **                                                          | ** ** |
| FTRs                                                                                                      |       | $                                                                                            | —     |                                                                  | Purchased Power |                                                                | $          | 1.6 |   |
| Heating  Oil Futures                                                                                      |       | 0.9                                                                                          |       | Fuel Costs(2)                                                         |            | 1.4                                                                 |       |
| Heating  Oil Futures                                                                                      |       | —                                                                                       |       | O&M Expense                                                       |            | 0.4                                                                 |       |
| NYMEX-Quality  Coal Forwards(1)                                                                           |       | (4.4                                                                                         | )          |                                                                  |            |                                                                |       |
| NYMEX-Quality  Coal Forwards                                                                              |       | (0.7                                                                                         | )          | Fuel Costs(3)                                                         |            | (5.8                                                                | )          |
| ** **                                                                                                |       |                                                                                         |       |                                                                  |            |                                                                |       |
| **Total Effect of Derivative Instruments Not Designated as  Hedging Instruments on the Income Statement** | ** ** | ** **                                                                                   | ** ** | ** **                                                            | ** **      | ** **                                                          | ** ** |
|                                                                                                      |       | $                                                                                            | (4.2       | )                                                                     |            |                                                                | $          | (2.4 | ) |

 

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*(1) A proportional share of MTMon NYMEX-quality coal forwards that will be passed to the partners of thejointly owned generating plants when the contracts settle has been deferred ina partner account on the balance sheet.*

*(2) Includes a MTM gain of $2.0 million on openpositions and a realized loss on settlement of closed contracts of $0.6million.*

*(3) Includes a MTM loss of $3.8million on open positions, a realized loss on physically settled coal contractsof $3.2 million and a realized gain on the sale of coal contracts of $1.2million.*

 

Thefollowing table shows the amount and income statement classification of thegains and losses on our derivative instruments for the six-month period ending June30, 2009.

 

**Derivatives Designated as Hedging Instruments (Cash FlowHedges) (six months ending June 30, 2009):**

 
| **$ in millions**                                                                                | ** ** | **Amount of Gain or   (Loss) Recognized   in AOCI on   Derivative (Effective   Portion)** | ** ** | **Location of Gain or   (Loss) Reclassified   from AOCI into   Income (Effective   Portion)** | ** **        | **Amount of Gain or   (Loss) Reclassified   from AOCI into   Income (Effective   Portion)** | ** ** | **Location of Gain or   (Loss) Recognized   in Income on   Derivative   (Ineffective Portion)** | ** ** | **Amount of Gain or   (Loss) Recognized   in Income on   Derivative   (Ineffective Portion)** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|-------------------|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| **Derivatives Designated as Hedging  Instruments Under FAS 133**                                      | ** ** | ** **                                                                                | ** ** | ** **                                                                                    | ** **        | ** **                                                                                  | ** ** | ** **                                                                                      | ** ** | ** **                                                                                    | ** ** |
| Interest Rate Hedge                                                                                   |       | $                                                                                         | —     |                                                                                          | Interest  Expense |                                                                                        | $          | 1.2                                                                                             |       | Interest  Expense                                                                             |       | $ | — |   |
| Forward Power Contracts                                                                               |       | 3.2                                                                                       |       | Wholesale  Revenue                                                                            |              | 0.7                                                                                         |       | Wholesale  Revenue                                                                              |       | —                                                                                        |       |
| **Total Effect of Derivative  Instruments Designated as Hedging Instruments on the Income Statement** | ** ** | ** **                                                                                | ** ** | ** **                                                                                    | ** **        | ** **                                                                                  | ** ** | ** **                                                                                      | ** ** | ** **                                                                                    | ** ** |
|                                                                                                  |       | $                                                                                         |  3.2  |                                                                                          |              |                                                                                        | $          | 1.9                                                                                             |       |                                                                                          |       | $ | — |   |

 

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**Derivatives Not Designated as Hedging Instruments(MTM) (six months ending June 30, 2009);**

 
| **$ in millions**                                                                                    | ** ** | **Amount of Gain or   (Loss) in Regulatory   (Asset)/Liability on   Derivative per SFAS 71** | ** ** | **Location of Gain or   (Loss) Recognized in   Income on Derivative** | ** **      | **Amount of Gain or   (Loss) Recognized in  Income on Derivative** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|-----------------|--------------------------------------------------------------------|------------|
| **Derivatives Not Designated as Hedging Instruments Under FAS  133**                                      | ** ** | ** **                                                                                   | ** ** | ** **                                                            | ** **      | ** **                                                         | ** ** |
| FTRs                                                                                                      |       | $                                                                                            | —     |                                                                  | Purchased Power |                                                               | $          | 1.7 |   |
| Heating  Oil Futures                                                                                      |       | (1.1                                                                                         | )          | Fuel Costs (2)                                                        |            | 2.4                                                                |       |
| Heating  Oil Futures                                                                                      |       | —                                                                                       |       | O&M Expense                                                       |            | 0.4                                                                |       |
| NYMEX-Quality  Coal Forwards(1)                                                                           |       | (5.1                                                                                         | )          |                                                                  |            |                                                               |       |
| NYMEX-Quality  Coal Forwards                                                                              |       | 0.5                                                                                          |       | Fuel Costs (3)                                                        |            | (6.5                                                               | )          |
| ** **                                                                                                |       |                                                                                         |       |                                                                  |            |                                                               |       |
| **Total Effect of Derivative Instruments Not Designated as  Hedging Instruments on the Income Statement** | ** ** | ** **                                                                                   | ** ** | ** **                                                            | ** **      | ** **                                                         | ** ** |
|                                                                                                      |       | $                                                                                            | (5.7       | )                                                                     |            |                                                               | $          | (2.0 | ) |

 

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

*(2)**      **Includes a MTM gain of $4.0 million on openpositions and a realized loss on settlement of closed contracts of $1.6million.*

*(3)  Includes a MTM loss of $5.5 million on open positions, a realizedloss on physically settled coal contracts of $3.2 million and a realized gainon the sale of coal contracts of $2.2 million.*

 

Certain of our derivative instruments containprovisions that require our debt to maintain an investment grade credit ratingfrom the credit rating agencies.  If ourdebt were to fall below investment grade, we would be in violation of theseprovisions, and the counterparties to the derivative instruments could requestimmediate payment or demand immediate and ongoing full overnightcollateralization of the mark to market loss. The aggregate fair value of all derivative instruments withcredit-risk-related contingent features that are in a liability position June 30,2009, is $13.2 million.  We have notposted collateral for this risk because our debt is above the lowest investmentgrade level.

 

**10.  Earnings per Share**

 

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

 

The following tablerepresents common-equivalent shares excluded from the calculation of dilutedEPS because they were anti-dilutive. These shares may be dilutive in the future.

 
| ** **               | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **In millions**          | ** ** | **2009**                         | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|                     |       |                             |       |                           |       |   |   |   |   |
| Common equivalent shares | ** ** | **0.3**                          |       | 0.3                            | ** ** | **0.3** |   | 0.3 |   |

 

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

 
| ** **                            | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| **$ in millions except per**     | ** ** | **Net**                         | ** ** | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **share amounts**                     | ** ** | **Income**                      | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic EPS**                         | ** ** | **$**                           | **42.1**   | ** ** | **112.2** | ** ** | **$** | **0.38** | ** ** | $ | 47.6 | ** ** | 109.4 |   | $ | 0.43 |   |
| ** **                            | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| **Effect of Dilutive Securities:**    | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |
| Warrants  (a)                         | ** ** | ** **                      | ** ** | **0.8** | ** ** | ** ** | ** ** | ** ** | ** ** | 7.7 |   |   |   |
| Stock  options and performance shares | ** ** | ** **                      | ** ** | **0.2** | ** ** | ** ** | ** ** | ** ** | ** ** | 0.2 |   |   |   |
| ** **                            | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| **Diluted EPS**                       | ** ** | **$**                           | **42.1**   | ** ** | **113.2** | ** ** | **$** | **0.37** |   | $ | 47.6 |   | 117.3 |   | $ | 0.41 |   |

 
| ** **                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| **$ in millions except per**     | ** ** | **Net**                       | ** ** | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **share amounts**                     | ** ** | **Income**                    | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic EPS**                         | ** ** | **$**                         | **111.3**  | ** ** | **112.2** | ** ** | **$** | **0.99** |   | $ | 124.9 |   | 109.4 |   | $ | 1.14 |   |
| ** **                            | ** ** | ** **                    | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive Securities:**    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |
| Warrants  (a)                         | ** ** | ** **                    | ** ** | **0.6** | ** ** | ** ** |   |   |   | 7.2 |   |   |   |
| Stock  options and performance shares | ** ** | ** **                    | ** ** | **0.1** | ** ** | ** ** |   |   |   | 0.2 |   |   |   |
|                                  | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |
| **Diluted EPS**                       | ** ** | **$**                         | **111.3**  | ** ** | **112.9** | ** ** | **$** | **0.99** |   | $ | 124.9 |   | 116.8 |   | $ | 1.07 |   |

 

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*(a)** **On March 20, 2009, **DPL** repurchased 7.06 million warrants, each at a price of$2.25.  The repurchased warrants werecancelled by **DPL** on the date they wererepurchased.  See Note 13 of Notes toCondensed Consolidated Financial Statements.*

 

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**11.  ContractualObligations, Commitments and Contingencies**

 

**DPL Inc. — Guarantees**

In the normal course ofbusiness, **DPL**enters into various agreements with itswholly-owned generating subsidiary, DPLE providing financial or performanceassurance to third parties.  Theseagreements are entered into primarily to support or enhance thecreditworthiness otherwise attributed to DPLE on a stand-alone basis, thereby facilitating the extension ofsufficient credit to accomplish DPLE’s intended commercial purposes.  Suchagreements fall outside the scope of FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” There have been no material changes to our guarantees as disclosed inour Annual Report on Form 10-K for the fiscal year ended December 31,2008.  Through June 30, 2009, **DPL** has not incurred any losses related to the guarantees ofDPLE’s obligations and we believe it is unlikely that **DPL** would be required to perform or incurany losses in the future associated with any of the above guarantees of DPLE’sobligations.

 

**DP&L — Equity Ownership Interest**

**DP&L** owns a 4.9% equity ownership interest inOVEC, an electric generation company.  Asof June 30, 2009, **DP&L** couldbe responsible for the repayment of 4.9%, or $55.3 million, of a $1,127.9million debt obligation that matures in 2026. This would only happen if OVEC defaulted on its debt payments.  As of June 30, 2009, OVEC has not defaultedon its debt payment obligations.

 

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

 

**Contingencies**

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  We believe the amounts provided in ourcondensed consolidated financial statements, as prescribed by GAAP, areadequate in light of the probable and estimable contingencies.  However, there can be no assurances that theactual amounts required to satisfy alleged liabilities from various legalproceedings, claims, tax examinations, and other matters discussed below, andto comply with applicable laws and regulations, will not exceed the amountsreflected in our condensed consolidated financial statements.  As such, costs, if any, that may be incurredin excess of those amounts provided as of June 30, 2009, cannot be reasonablydetermined.

 

**Commercial Commitments and Contractual Obligations**

Therehave been no material changes, outside the ordinary course of business, to ourcommercial commitments and to the information disclosed in the contractualobligations table in our Annual Report on Form 10-K for the fiscal year ended December31, 2008.

 

**EnvironmentalMatters**

**DPL**, **DP&L** and oursubsidiaries’ facilities and operations are subject to a wide range ofenvironmental regulations and laws.  Inthe normal course of business, we haveinvestigatory and remedial activities underway at these facilities to comply,or to determine compliance, with such regulations.  We havebeen identified, either by a government agency or by a private party seekingcontribution to site clean-up costs, as a potentially responsible party (PRP)at two sites pursuant to state and federal laws.  Werecord liabilities for probable estimated loss in accordance with SFAS 5as discussed in Note 1 of Notes to Condensed Consolidated FinancialStatements.  We evaluate the potential liability related to probable lossesquarterly and may revise our estimates. Such revisions in the estimates of the potential liabilities could havea material effect on our results of operations and financial position.

 

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**12.  Redeemable Preferred Stock**

 

**DP&L**has $100 par value preferred stock,4,000,000 shares authorized, of which 228,508 are outstanding.  **DP&L** alsohas $25 par value preferred stock, 4,000,000 shares authorized, none of whichwere outstanding at June 30, 2009.  Thetable below details the shares outstanding at June 30, 2009.

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

 

The **DP&L**preferred stock may be redeemed at **DP&L’s**option as determined by its Board of Directors at the per-share pricesindicated, plus cumulative accrued dividends. In addition, **DP&L’s**Amended Articles of Incorporation contain provisions that permit preferredstockholders to elect members of the Board of Directors in the event thatcumulative dividends on the preferred stock are in arrears in an aggregateamount equivalent to at least four full quarterly dividends.  Since this potential redemption-triggeringevent is not solely within the control of **DP&L**, thepreferred stock is presented on the balance sheet as “Redeemable PreferredStock” in a manner consistent with temporary equity as defined in EITF Topic No.98, “Classification and Measurement of Redeemable Securities”.

 

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

 

**13.  Common Shareholders’ Equity**

 

In February 2000, **DPL** entered into a series of recapitalization transactionswhich included the issuance of 31.6 million warrants for an aggregate purchaseprice of $50 million.  The warrants areexercisable, in whole or in part, for common shares at any time during thetwelve-year period commencing on March 13, 2000.  Each warrant is exercisable for one commonshare, subject to anti-dilution adjustments (e.g., stock split, stock dividend)at an exercise price of $21.00 per common share.

 

At December 31, 2008, **DPL** had 19.6 million outstanding warrants.  On March 20, 2009, **DPL**re-purchased 7,060,000 of such warrants at a price of $2.25 each.  The repurchased warrants were cancelled by **DPL**on the date they were repurchased.  Accordingly, at June 30, 2009, **DPL** had 12.5 million warrants outstanding.

 

**14.  Income Taxes**

 

During the three monthsended June 30, 2009, **DP&L**recordeda current tax receivable in the amount of $79.9 million, a reduction in currentincome tax liabilities of $28.9 million and a net non-current deferred taxliability of $108.8 million.  Theserecorded amounts were due to the recognition of certain income tax benefitsrelating to a change in the tax accounting method for deductions pertaining torepairs, depreciation and mixed service costs. These benefits, which are expected to reduce current year tax paymentsand result in a refund of prior period taxes, have been recorded under the provisionsof FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”  The recognition of these benefits did nothave a material impact on our results of operation for the three months and sixmonths ended June 30, 2009.

 

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

 

This report includes thecombined filing of DPL Inc.**(DPL)** and TheDayton Power and Light Company **(DP&L).  DP&L**is the principalsubsidiary of **DPL**providing approximately 97% of**DPL’s**total consolidated revenue andapproximately 95% of **DPL’s**totalconsolidated asset base.  Throughout thisreport the terms “we,” “us,” “our” and “ours” are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in this section.

 

Certainstatements contained in this report are “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report that relateto events or developments that are expected to occur in the future, includingmanagement’s expectations, strategic objectives, business prospects,anticipated economic performance and financial condition and other similarmatters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs, assumptionsand expectations of future economic performance, taking into account theinformation currently available to management. These statements are not statements of historical fact and are typicallyidentified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,”“expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will,”and similar expressions.  Suchforward-looking statements are subject to risks and uncertainties, andinvestors are cautioned that outcomes and results may vary materially fromthose projected due to various factors beyond our control, including but notlimited to: abnormal or severe weather and catastrophic weather-related damage;unusual maintenance or repair requirements; changes in fuel costs and purchasedpower, coal, environmental emissions, natural gas, oil, and other commodityprices; volatility and changes in markets for electricity and otherenergy-related commodities; performance of our suppliers and othercounterparties; increased competition and deregulation in the electric utilityindustry; increased competition in the retail generation market; changes ininterest rates; state, federal and foreign legislative and regulatoryinitiatives that affect cost and investment recovery, emission levels andregulations, rate structures or tax laws; changes in federal and/or stateenvironmental laws and regulations to which **DPL**and its subsidiaries are subject; the development and operation of RTOs,including PJM to which **DPL’s** operatingsubsidiary (**DP&L**) has given control of itstransmission functions; changes in our purchasing processes, pricing, delays,employee, contractor, and supplier performance and availability; significantdelays associated with large construction projects; growth in our serviceterritory and changes in demand and demographic patterns; changes in accountingrules and the effect of accounting pronouncements issued periodically byaccounting standard-setting bodies; financial market conditions, includingimpacts the current financial crisis may have on our business and financialcondition; the outcomes of litigation and regulatory investigations,proceedings or inquiries; general economic conditions; and the risks and otherfactors discussed in **DPL’s** and **DP&L’s**filings with the SEC.

 

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

 

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

 

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**BUSINESSOVERVIEW**

 

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

 

**DPL’s** principal subsidiary is**DP&L**.  **DP&L**is a public utility incorporated in 1911 under the laws of Ohio.  **DP&L**sells electricity to residential, commercial, industrial and governmentalcustomers in a 6,000 square mile area of West Central Ohio.  Electricity for **DP&L’s** 24 county service area is primarily generated ateight coal-fired power plants and is distributed to more than 500,000 retailcustomers.  Principal industries servedinclude automotive, food processing, paper, plastic manufacturing and defense.

 

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

 

**DPL’s** significant subsidiaries (all of whichare wholly owned) include DPLE, which engages in the operation of peakinggenerating facilities; DPLER, which sells retail electric energy under contractto major industrial and commercial customers in West Central Ohio; and MVIC,our captive insurance company that provides insurance services to us and oursubsidiaries.

 

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

 

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

 

·                  **Emissions**

Rules issued by theUSEPA and Ohio EPA that require substantial reductions in SO2, NOx, and mercury emissions impact our business andoperations.  In addition, emissions legislation has recently been passedby the House of Representatives and is being considered by the Senate.  We are installing (and have installed)emission control technology and are taking other measures to comply with requiredreductions in the emissions.

 

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

 

·                  **RPM Auction Price**

The PJM RPM base residualauction (BRA) for the 2012/13 period cleared at a per megawatt price of$16.46/day for the RTO area.  Prior to this auction, the per megawattprice for the 2011/2012 period was $110/day. Future RPM auction results will be dependent not only on the overallsupply and demand of generation and load, but may also be impacted bycongestion as well as PJM’s business rules relating to bidding for DemandResponse and Energy Efficiency resources in the RPM auctions.  We cannot predict the outcome of futureauctions but if the current auction price is sustained, our future results ofoperations, financial condition and cash flows could be adverselyimpacted.  We currently cannot determinethe extent to which these future auction results will impact our operations.

 

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**UPDATES / OTHER MATTERS**

 

**Competition and Regulation Updates**

 

**Ohio Matters Updates**

 

***Ohio Retail Rates***

In compliance with SB221, **DP&L**filed its electric securityplan at the PUCO on October 10, 2008. On February 24, 2009, **DP&L**reached an agreement with the majority of the parties to that case.  The resulting Stipulation extends **DP&L’s** rate plan through 2012, provides for recovery ofthe Ohio jurisdictional retail portion of fuel and purchased power costsbeginning January 2010, provides for recovery of certain SB 221 compliancecosts, and requires **DP&L** torefile its Smart Grid and Advanced Metering Infrastructure business cases by September 1,2009.  The terms of the Stipulation werediscussed in greater detail in our Annual Report on Form 10-K for thefiscal year ended December 31, 2008. On June 24, 2009, the PUCO issued an order granting approval of theStipulation as filed and authorized **DP&L** toimplement rates associated with alternative energy and energy efficiencycompliance costs beginning July 1, 2009. **DP&L** is preparing its Smart Gridand Advanced Metering infrastructure business cases and plans to resubmit thisinformation to the PUCO prior to September 1, 2009.

 

As a member of PJM, **DP&L** incurs costs and receives revenues from the RTOrelated to its transmission and generation assets, as well as its loadobligations for retail customers.  SB 221included a provision that would allow Ohio electric utilities to seek andobtain a reconcilable rider to recover RTO-related costs and credits.  On February 19, 2009, the PUCO approved **DP&L’s** request to defer costs associated with itstransmission, capacity, ancillary service and other PJM-related chargesincurred as a member of PJM consistent with the provisions of SB 221.  As a result, at June 30, 2009, we haverecorded a net regulatory asset in the amount of $30.3 million. See Note 3 ofNotes to Condensed Consolidated Financial Statements.  On March 28, 2009, **DP&L**filed for recovery of these PJM-related costs. Through this filing, **DP&L**eliminated seven retail riders related to transmission and ancillary servicesand replaced them with a single Transmission Cost Recovery Rider (TCRR) thatwould incorporate all charges and credits from the RTO as well as the amountsapproved for deferral.  On May 27,2009 the PUCO granted approval of this filing, authorizing **DP&L**to recover the new rate beginning June 1, 2009.  On June 19, 2009, the Industrial EnergyUsers of Ohio (IEU-OH) filed an application for rehearing claiming the PUCO’s May 27,2009 order allowing for recovery of reliability pricing model (RPM) coststhrough this rider was unlawful.  On July 15,2009, the PUCO issued an order granting rehearing for additional review.  **DP&L** doesnot have any information that would indicate that the PUCO will agree ordisagree with IEU-OH’s claims, therefore the outcome of this proceeding cannotbe determined at this time.  However,based on past precedent, we continue to believe that these costs are probableof recovery.

 

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

 

**Ohio Competitive Considerations and Proceedings**

As of June 30, 2009,four unaffiliated marketers were registered as Competitive Retail ElectricService (CRES) providers in **DP&L’s**service territory, and a fifth unaffiliated marketer began the registrationprocess but is not yet fully registered. While there has been some customer switching associated withunaffiliated marketers, it represented less than 0.12% of sales in 2008. DPLER, an affiliated company, is also a registered CRES provider and accountedfor 99.4% of the total kWh supplied by CRES providers within **DP&L’s** service territory in 2008.

 

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**EnvironmentalUpdates**

 

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

 

As well as imposingcontinuing compliance obligations, these laws and regulations authorize theimposition of substantial penalties for noncompliance, including fines,injunctive relief and other sanctions. In the normal course of business, wehave investigatory and remedial activities underway at these facilities tocomply, or to determine compliance, with such regulations.  We record liabilitiesfor probable estimated loss in accordance with SFAS No. 5 “Accounting forContingencies” as discussed in Note 1 of Notes to Condensed ConsolidatedFinancial Statements. **  DPL,** through its wholly ownedcaptive insurance subsidiary MVIC, has an actuarially calculated reserve forenvironmental matters.  We evaluate thepotential liability related to probable losses quarterly and mayrevise our estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on our results ofoperations, financial position or cash flows.

 

**Environmental Regulation andLitigation Related to Air Quality**

In response to a U.S.Supreme Court decision that the USEPA has the authority to regulate CO2 emissions frommotor vehicles, the USEPA made a finding that CO2 and certain other gases are pollutants underthe CAA.  The USEPA has not yet identified the specifics of how thesenewly designated pollutants will be regulated.

 

Pursuant tothe Clean Air Interstate Rule (CAIR)previously discussed in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2008,the Ohio EPA initiated an Early Reduction Credit (ERC) program for annual NOxemission allowances for 2008 and 2009.  **DP&L**qualified and filed for the maximum number of ERCs that were initiallyallocable to **DP&L**.  **DP&L** has been informed that because certain unrelatedentities failed to meet all requirements for their allocated ERCs, additionalERCs would be allocated to all entities that did qualify.  **DP&L** is expected to be allocated approximately 28% moreERCs than its initial allocation.

 

**DP&L’s** 2008 10-K filed in 2009 reports onlitigation challenging USEPA final non-attainment designations for the nationalambient air quality standard for Fine Particulate Matter 2.5 (PM2.5), includinggeographic areas in which **DP&L** hasownership in generation facilities. On July 7, 2009, the D.C. CircuitCourt of Appeals upheld the USEPA non-attainment designations for the areasimpacting **DP&L** generation plants. At thispoint, **DP&L** cannot determine the effect ofthe ruling, if any, on its operations.

 

**DP&L’s** 2008 10-K filed in 2009 reports onlitigation between the U.S. Department of Justice and Cinergy Corp. (now partof Duke Energy) and two Cinergy subsidiaries for alleged violations of the CAAat various generation units operated by PSI Energy, Inc. and CG&E,including generation units co-owned by  **DP&L** (Beckjord Unit 6 and MiamiFort Unit 7).  A retrial has been held in which the second jury found forDuke Energy on some allegations, but for plaintiffs with respect to units atanother one of Duke Energy’s wholly-owned facilities.  In a separate phase II remedies trial withrespect to violations found in the first trial, Duke Energy was ordered toclose down three of its wholly-owned generating units by September 2009,surrender some emission allowances and pay a fine.  None of the violations found or remediesordered relate to generating units owned in part by **DP&L**.

 

**DP&L’s** 2008 10-K filed in 2009 reports onlitigation between various residents of the Village of Moscow, Ohio suedCG&E, as the operator of Zimmer generating station (co-owned by CG&E,  **DP&L******andCSP).  A proposed settlement was filed onJune 3, 2009, where it is pending court consideration after the requisiteperiod runs for comment and for the exercise of any opt-out rights for membersof the class.  The cash portion of thesettlement was for $900,000, of which **DP&L**expects to be invoiced 28.1% based on its ownership share.  Non-cash portions of the settlement are notexpected to have material effects on the future operation of the station.

 

**DP&L’s** 2008 10-K filed in 2009 reports on NOVsissued in 2007, by the Ohio EPA and the USEPA to  **DP&L** for allegedviolations of the CAA at the O.H. Hutchings station.  During2009, **DP&L** has continued to submitvarious other operational and performance data to USEPA.  **DP&L**is unable to determine the timing, costs, or method by which the issues may beresolved.

 

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

**DP&L’s** 2008 10-K filed in 2009reports on a special notice received in 2002, that USEPA considers **DP&L** and other parties to be PRPs for the clean-up ofhazardous substances at the South Dayton Dump landfill site.  No recent activity has occurred with respectto that notice or PRP status.  More recently,**DP&L** has received requests by theUSEPA and the existing PRP group to allow access to be given to **DP&L’s** service center building site, which is across astreet from the landfill site.  The USEPArequested access to drill monitoring and test wells to determine whethercertain chemicals used at the service center building site might have migratedthrough groundwater to the landfill site. **DP&L** has declined to grant suchaccess and is unable to predict whether there will be further activity withrespect to this request.  **DP&L**believes the chemicals used at its service centerbuilding site were appropriately disposed of and have not contributed to thecontamination at the South Dayton Dump landfill site.

 

**FINANCIAL OVERVIEW**

 

As more fullydiscussed in later sections of this Form 10-Q, the following weresignificant themes and events for the three months and six months ended June 30,2009:

 

·                  During the three months and six monthsended June 30, 2009, **DP&L**realized total gains of $14.4 million and $35.1 million, respectively, fromsales of coal to various counterparties in connection with both **DP&L** and partner-operated generation facilities.  The gains realized from coal sales during thesimilar periods in 2008 amounted to $8.6 million and $11.8 million,respectively.  Net gains realized fromcoal sales are recorded as a component of fuel costs and reflected in operatingincome.

 

·                  During the three months and six monthsended June 30, 2009, **DP&L**realized total gains of $1.2 million and $3.4 million, respectively, from salesof excess emission allowances to various counterparties compared to total gainsof $4.0 million and $30.5 million realized during the respective periods in2008.  Net gains realized from emissionallowance sales are also recorded as a component of fuel costs and reflected inoperating income.

 

·                  On February 19, 2009, the PUCOapproved **DP&L’s** request to defer the netcosts associated with transmission, capacity, ancillary service and otherPJM-related charges that are incurred as a member of PJM, consistent with theprovisions of SB 221.  Accordingly,during the six months ended June 30, 2009, **DP&L**deferred RTO costs in the amount of $28.6 million.  Of this amount, $13.5 million relates to theperiod August 1, 2008 through December 31, 2008, and $15.1 millionrelates to the six-month period ended June 30, 2009.  These RTO costs were capitalized as aregulatory asset resulting in a favorable impact to **DP&L’s**operating income.  Also included in thetotal deferred amount of $30.3 million is $1.1 million relating to RTEP costsas well as $0.6 million relating to interest and operation and maintenanceexpenses.  See Note 3 of Notes toCondensed Consolidated Financial Statements.

 

Also, for the threemonths ended June 30, 2009:

 

·                  **DPL’s** revenue decreased by 5% over the sameperiod in 2008 mainly due to decreased retail sales volume and wholesale pricesas well as lower RTO revenues, partially offset by increased retail prices andwholesale volume as well as increased RTO capacity revenues.

 

·                  **DPL’s** fuel costs increased by 11% over thesame period in 2008 mainly due to an overall higher average cost of fuelconsumed combined with the impact of lower gains realized in 2009 from the saleof emission allowances.  These increasesto fuel costs were partially offset by higher gains realized in 2009 from thesale of coal.

 

·                  **DPL’s** purchased power costs decreased by 26%over the same period in 2008 mainly as a result of lower RTO charges combinedwith the impact of decreased purchased power volumes and prices.  These decreases to purchased power costs werepartially offset by increased RTO capacity charges.

 

·                  **DPL’s** operation and maintenance expensesincreased by 8% over the same period in 2008 due to various factors which arediscussed in later sections of this Item 2.

 

·                  **DP&L’s** revenues decreased by 7% over the sameperiod in 2008 mainly due to decreased retail sales volume and wholesale pricesas well as lower RTO revenues, partially offset by increased retail prices andwholesale volume as well as increased RTO capacity revenues.

 

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·                  **DP&L’s** fuel costs increased by 13% over thesame period in 2008 mainly due to an overall higher average cost of fuelconsumed combined with the impact of lower gains realized in 2009 from the saleof emission allowances.  These increasesto fuel costs were partially offset by higher gains realized in 2009 from thesale of coal.

 

·                  **DP&L’s** purchased power costs decreased by 28%over the same period in 2008 mainly as a result of lower RTO charges combinedwith the impact of decreased purchased power volumes and prices.  These decreases to purchased power costs werepartially offset by increased RTO capacity charges.

 

·                  **DP&L’s** operation and maintenance expensesincreased by 12% over the same period in 2008 due to various factors which arediscussed in later sections of this Item 2.

 

For the six months ended June 30,2009:

 

·                  **DPL’s** revenue decreased by 2% over the sameperiod in 2008 mainly due to decreased retail and wholesale volumes, lowerwholesale prices and decreased other RTO revenues.  These decreases were partially offset byincreased retail prices and higher RTO capacity revenues.

 

·                  **DPL’s**fuel costs increased by 21% over the sameperiod in 2008 mainly due to an overall higher average cost of fuel consumedcombined with the impact of lower gains realized in 2009 from the sale ofemission allowances.  These increases tofuel costs were partially offset by higher gains realized in 2009 from the saleof coal as well as a decrease in generation output during 2009 compared to2008.

 

·                  **DPL’s** purchased power costs decreased by 27%over the same period in 2008 mainly as a result of the deferral of RTO costs asdiscussed above, lower RTO charges and the impact of decreased purchased powervolumes and prices.  These decreases topurchased power costs were partially offset by increased RTO capacity charges.

 

·                  **DPL’s** operation and maintenance expensesincreased by 15% over the same period in 2008 due to various factors which arediscussed in later sections of this Item 2.

 

·                  **DP&L’s** revenue decreased by 4% over the sameperiod in 2008 mainly due to decreased retail and wholesale volumes, lowerwholesale prices and decreased other RTO revenues.  These decreases were partially offset byincreased retail prices and higher RTO capacity revenues.

 

·                  **DP&L’s** fuel costs increased by 21% over thesame period in 2008 mainly due to an overall higher average cost of fuelconsumed combined with the impact of lower gains realized in 2009 from the saleof emission allowances.  These increasesto fuel costs were partially offset by higher gains realized in 2009 from thesale of coal as well as a decrease in 2009 generation output compared to 2008.

 

·                  **DP&L’s** purchased power costs decreased by 29%over the same period in 2008 mainly as a result of the deferral of RTO costs asdiscussed above, lower RTO charges and the impact of decreased purchased powervolumes and prices.  These decreases topurchased power costs were partially offset by increased RTO capacity charges.

 

·                  **DP&L’s** operation and maintenance expensesincreased by 17% over the same period in 2008 due to various factors which arediscussed in later sections of this Item 2.

 

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**RESULTS OF OPERATIONS — DPL Inc.**

 

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

 

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

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **$ in millions except per share  amounts** | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                             |       |                   |       |                 |       |   |   |   |   |
| **Revenues:**                                    |       |                   |       |                 |       |   |   |   |   |
| Retail                                           | ** ** | **$**                  | **282.2**  |                 | $          | 287.0 | ** ** | **$** | **602.5** |   | $ | 605.1 |   |
| Wholesale                                        | ** ** | **19.7**               |       | 39.8                 | ** ** | **50.6** |   | 96.9 |   |
| RTO revenues                                     | ** ** | **21.4**               |       | 28.2                 | ** ** | **46.9** |   | 53.1 |   |
| RTO capacity revenues                            | ** ** | **34.7**               |       | 20.7                 | ** ** | **70.1** |   | 33.9 |   |
| Other revenues                                   | ** ** | **3.2**                |       | 3.1                  | ** ** | **6.1** |   | 5.9 |   |
| Total revenues                                   | ** ** | **$**                  | **361.2**  |                 | $          | 378.8 | ** ** | **$** | **776.2** |   | $ | 794.9 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| **Cost of revenues:**                            |       |                   |       |                 |       |   |   |   |   |
| Fuel costs                                       | ** ** | **$**                  | **91.5**   |                 | $          | 81.0 | ** ** | **$** | **195.8** |   | $ | 172.6 |   |
| Gains from sale of coal                          | ** ** | **(14.4**              | **)**      | (8.6                 | )          | **(35.1** | **)** | (11.8 | ) |
| Gains from sale of emission allowances           | ** ** | **(1.2**               | **)**      | (4.0                 | )          | **(3.4** | **)** | (30.5 | ) |
| Net fuel                                         | ** ** | **75.9**               |       | 68.4                 | ** ** | **157.3** |   | 130.3 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Purchased power                                  | ** ** | **14.0**               |       | 29.8                 | ** ** | **29.7** |   | 65.4 |   |
| RTO charges                                      | ** ** | **22.2**               |       | 37.2                 | ** ** | **52.8** |   | 72.5 |   |
| RTO capacity charges                             | ** ** | **32.7**               |       | 19.1                 | ** ** | **69.1** |   | 31.2 |   |
| Deferral of RTO related charges                  | ** ** | **(5.6**               | **)**      | —               | ** ** | **(28.6** | **)** | — |   |
| Total purchased power                            | ** ** | **63.3**               |       | 86.1                 | ** ** | **123.0** |   | 169.1 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Total cost of revenues                           | ** ** | **$**                  | **139.2**  |                 | $          | 154.5 | ** ** | **$** | **280.3** |   | $ | 299.4 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Gross margin (a)                                 | ** ** | **$**                  | **222.0**  |                 | $          | 224.3 | ** ** | **$** | **495.9** |   | $ | 495.5 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Gross margin as a percentage of revenues         |       | **61**                 | **%**      | 59                   | %          | **64** | **%** | 62 | % |
|                                             |       |                   |       |                 |       |   |   |   |   |
| **Operating income**                             | ** ** | **$**                  | **81.9**   |                 | $          | 85.6 | ** ** | **$** | **208.9** |   | $ | 228.3 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| **Earnings per share of common  stock:**         |       |                   |       |                 |       |   |   |   |   |
| Basic                                            | ** ** | **$**                  | **0.38**   |                 | $          | 0.43 | ** ** | **$** | **0.99** |   | $ | 1.14 |   |
| Diluted                                          | ** ** | **$**                  | **0.37**   |                 | $          | 0.41 | ** ** | **$** | **0.99** |   | $ | 1.07 |   |

 

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

 

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**DPL — Revenues**

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

 

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

 

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

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **$ in millions**           | ** ** | **2009 vs. 2008**      | ** ** | **2009 vs. 2008**    | ** ** |
|                             |       |                   |       |                 |       |
| **Retail**                       |       |                   |       |                 |       |
| Rate                             |       | $                      | 18.9       |                 | $          | 48.5 |   |
| Volume                           |       | (23.7                  | )          | (50.5                | )          |
| Other                            |       | —                 |       | (0.6                 | )          |
| **Total retail change**          | ** ** | **$**                  | **(4.8**   | **)**                | **$**      | **(2.6** | **)** |
|                             |       |                   |       |                 |       |
| **Wholesale**                    |       |                   |       |                 |       |
| Rate                             |       | $                      | (22.7      | )                    | $          | (26.1 | ) |
| Volume                           |       | 2.6                    |       | (20.2                | )          |
| **Total wholesale change**       | ** ** | **$**                  | **(20.1**  | **)**                | **$**      | **(46.3** | **)** |
|                             |       |                   |       |                 |       |
| **RTO capacity and other**       |       |                   |       |                 |       |
| RTO  capacity and other revenues | ** ** | **$**                  | **7.3**    | ** **           | **$**      | **30.2** | ** ** |
|                             |       |                   |       |                 |       |
| **Total revenues**               | ** ** | **$**                  | **(17.6**  | **)**                | **$**      | **(18.7** | **)** |

 

For the three monthsended June 30, 2009, revenues decreased $17.6 million, or 5%, to $361.2million from $378.8 million for the same period in the prior year.  Thisdecrease was primarily the result of lower retail sales volume and lowerwholesale average rates, partially offset by higher average rates for retailsales, increased RTO capacity and other revenues, as well as increasedwholesale sales volume. The revenue components for the three months ended June 30,2009, are further discussed below:

 

·                  Retail revenues decreased $4.8 millionresulting from an 8% decrease in sales volume driven largely by the economicrecession, partially offset by a 7% increase in average retail rates duelargely to the incremental effect of the recovery of costs under the secondphase of the environmental investment rider (EIR) combined with theimplementation of the Transmission Cost Recovery Rider (TCRR). The recovery ofcosts under the TCRR began on June 1, 2009.  As a result, retail revenues had anunfavorable $23.7 million sales volume variance and a favorable $18.9 millionprice variance.

 

·                  Wholesale revenues decreased $20.1million primarily as a result of a 54% decrease in wholesale average rates,partially offset by a 6% increase in sales volume, resulting in an unfavorable$22.7 million wholesale price variance and a favorable $2.6 million volumevariance.

 

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·                  RTO capacity and other revenues, consisting primarilyof compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, increased $7.3 millioncompared to the same period in the prior year. This increase to RTO capacity and other RTO revenues was primarily theresult of additional revenue of $14.0 million that was realized from the PJMcapacity auction, partially offset by a decrease in PJM transmission andcongestion revenues of $6.8 million.

 

For the six months ended June 30,2009, revenues decreased $18.7 million, or 2%, to $776.2 million from $794.9million for the same period in the prior year.  This decrease wasprimarily the result of lower retail and wholesale sales volume as well asdecreased wholesale average rates, partially offset by higher average retailrates and an increase in RTO capacity and other revenues. The revenuecomponents for the six months ended June 30, 2009, are further discussedbelow:

 

·                  Retail revenues decreased $2.6 millionresulting primarily from an 8% decrease in sales volume driven largely by theeconomic recession and milder weather conditions, partially offset by a 9%increase in average retail rates due largely to the incremental effect of therecovery of costs under the second phase of the EIR combined with theimplementation of the TCRR.  As a result,retail revenues had an unfavorable $50.5 million sales volume variance and afavorable $48.5 million price variance.

 

·                  Wholesale revenues decreased $46.3million primarily as a result of a 34% decrease in wholesale average ratescombined with a 21% decrease in sales volume, resulting in an unfavorable $26.1million wholesale price variance and an unfavorable $20.2 million volumevariance.

 

·                  RTO capacity and other revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, increased $30.2 millioncompared to the same period in the prior year. This increase was primarily the result of additional revenue of $36.2million that was realized from the PJM capacity auction, partially offset by adecrease in PJM transmission and congestion revenues of $6.2 million.

 

## **DPL— Cost of Revenues**

For the three monthsended June 30, 2009:

 

·                  Fuel costs, which include coal (net ofgains on sales), gas, oil and emission allowances (net of gains on sales),increased $7.5 million, or 11%, compared to the same period in 2008, primarilydue to a 14% increase in the average cost of fuel consumed per kilowatt-hourlargely resulting from increased coal prices and outages at lower-costunits.  Also contributing to the increasein fuel costs was the impact of lower gains realized from the sale of excessemission allowances.  In 2009, **DP&L** realized $1.2 million in gains from the sale ofexcess emission allowances compared to $4.0 million during the same period in2008.  The above increases to fuel costswere partially offset by higher gains realized in 2009 from the sale ofcoal.  Gains from the sale of coalamounted to $14.4 million compared to $8.6 million for the same period in 2008.

 

·                  Purchased power decreased $22.8 million,or 26%, compared to the same period in 2008. The decrease in purchased power primarily resulted from a $10.7 milliondecrease relating to lower average market rates, a $7.0 million decrease in RTOcapacity and other RTO charges, and a $5.0 million decrease relating to lowervolumes of purchased power.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned andunanticipated outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

For the six months ended June 30,2009:

 

·                  Fuel costs, which include coal (net of gains onsales), gas, oil and emission allowances (net of gains on sales), increased$27.0 million, or 21%, compared to the same period in 2008, primarily due to a19% increase in the average cost of fuel consumed per kilowatt-hour largelyresulting from increased coal prices and outages at lower-cost units.  Also contributing to the increase in fuelcosts was the impact of lower gains realized from the sale of excess emission allowances.  In 2009, **DP&L**realized $3.4 million in gains from the sale of excess emission allowancescompared to $30.5 million during the same period in 2008.  The above increases to fuel costs werepartially offset by a decrease in the usage of fuel due mainly to a 4% decreasein generation output, as well as higher gains realized in 2009 from the sale ofcoal.  In 2009, gains from the sale ofcoal amounted to $35.1 million compared to $11.8 million for the same period in2008.

 

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·                  Purchased power decreased $46.1 million compared tothe same period in 2008.  The netdecrease in purchased power is partly a result of the deferral in 2009 of costsrelating to **DPL’s** transmission, capacity andother PJM-related charges which were incurred as a member of PJM.  The deferral is discussed in greater detailin the Financial Overview section above. Also contributing to the decrease in purchased power were decreases of$14.8 million and $20.9 million relating to lower average market rates and lowervolumes of purchased power, respectively. These decreases were partially offset by increased RTO capacity andother RTO charges.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned and unanticipatedoutages, or when market prices are below the marginal costs associated with ourgenerating facilities.

 

**DPL**—**Operation and Maintenance**

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

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **$ in millions**                                    | ** ** | **2009 vs. 2008**      | ** ** | **2009 vs. 2008**    | ** ** |
| Generating  facilities operating and maintenance expenses |       | $                      | 2.6        |                 | $          | 7.2 |   |
| Low-income  payment program                               |       | 1.3                    |       | 3.4                  |       |
| Pension                                                   |       | 1.5                    |       | 2.9                  |       |
| ESOP                                                      |       | 0.7                    |       | 2.1                  |       |
| Other,  net                                               |       | (0.4                   | )          | 4.7                  |       |
| **Total operation and maintenance expense**               |       | $                      | 5.7        |                 | $          | 20.3 |   |

 

During thethree months and six months ended June 30, 2009, operation and maintenanceexpense increased $5.7 million, or 8%, and $20.3 million, or 15%, respectively,compared to similar periods in 2008. These variances were primarily the result of:

 

·                  increases in operating and maintenanceexpenses for generating facilities largely due to costs associated with anunplanned outage at a jointly-owned production unit as well as the operation ofFGD and SCR equipment,

 

·                  increases in the USF rate rider related toassistance for low-income retail customers,

 

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

 

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

 

**DPL — Depreciation andAmortization**

For the three months andsix months ended June 30, 2009, depreciation and amortization expenseincreased $1.8 million and $4.5 million, respectively, compared to the similarperiods in 2008 primarily as a result of higher asset balances at thegenerating stations.  These higherbalances were due largely to the completion of the FGD projects in 2008.

 

**DPL— General Taxes**

For the threemonths and six months ended June 30, 2009, general taxes decreased $5.0million and $2.7 million, respectively, to $27.5 million and $59.6 million,respectively, compared to the similar periods in 2008.  These decreases were primarily the result oflower property tax accruals in 2009 compared to 2008.

 

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

For the three months andsix months ended June 30, 2009, the amortization of regulatory assets was$1.1 million and $2.3 million, respectively, lower than that of the similarperiods in 2008, primarily reflecting the 2008 amortization of incrementalcosts incurred in 2004 and 2005 for severe storms.  These storm costs were fully amortized in thethird quarter of 2008.

 

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**DPL**—**Interest Expense**

For the three monthsended June 30, 2009, interest expense decreased $5.6 million compared tothe same period in 2008 primarily due to:

 

·                  a $4.3 millionreduction in interest expense due to the redemption of **DPL’s**$175 million 8.00% Senior Notes and the $100 million 6.25% Senior Notes on March 31,2009 and May 15, 2008, respectively, and

 

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

 

For the six months ended June 30,2009, interest expense decreased $4.9 million compared to the same period in2008 primarily due to:

 

·                  a $5.8 millionreduction in interest expense due to the redemption of **DPL’s**$175 million 8.00%Senior Notes and the $100 million 6.25%Senior Notes on March 31, 2009 and May 15, 2008, respectively,

 

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

 

·                  lower rates of interest on the $100million Revenue Refunding Bonds issued in December 2008, as compared tothe $90 million Revenue Bonds which were issued in November 2007 andredeemed in December 2008.

 

The above decreases werepartially offset by $4.8 million of lower capitalized interest in 2009 comparedto 2008, due largely to the completion of the FGD projects at the generationstations.

 

## **DPL— Income Tax Expense**

For the three monthsended June 30, 2009, income taxes increased $5.5 million, or 39%, comparedto the same period in 2008, primarily reflecting a 2008 decrease in tax expensedue to the $42 million settlement of the Ohio Franchise Tax issues, partiallyoffset by a decrease in the effective tax rate resulting from the phase-out ofthe Ohio Franchise Tax.

 

For the six months ended June 30,2009, income taxes decreased $3.5 million, or 6%, compared to the same periodin 2008, primarily reflecting a decrease in pre-tax book income and a decreasein the effective tax rate resulting from the phase-out of the Ohio FranchiseTax, partially offset by a 2008 decrease in tax expense due to the settlementof the Ohio Franchise Tax issues mentioned above.

 

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**RESULTS OF OPERATIONS — The DaytonPower and Light Company (DP&L)**

 

**Income Statement Highlights —DP&L**

 
| ** **                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **$ in millions**                    | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                      |       |                                  |       |                                |       |   |   |   |   |
| **Revenues:**                             |       |                                  |       |                                |       |   |   |   |   |
| Retail                                    | ** ** | **$**                                 | **265.9**  |                                | $          | 248.7 | ** ** | **$** | **574.0** |   | $ | 531.5 |   |
| Wholesale                                 | ** ** | **36.0**                              |       | 78.8                                | ** ** | **77.0** |   | 171.8 |   |
| RTO  revenues                             | ** ** | **20.7**                              |       | 28.2                                | ** ** | **45.2** |   | 53.1 |   |
| RTO  capacity revenues                    | ** ** | **29.3**                              |       | 20.7                                | ** ** | **59.3** |   | 33.9 |   |
| Total  revenues                           | ** ** | **$**                                 | **351.9**  |                                | $          | 376.4 | ** ** | **$** | **755.5** |   | $ | 790.3 |   |
| ** **                                |       |                                  | ** ** | ** **                          |       |   |   |   |   |
| **Cost of revenues:**                     | ** ** | ** **                            |       |                                | ** ** | ** ** |   |   |   |
| Fuel  costs                               | ** ** | **$**                                 | **90.0**   |                                | $          | 78.5 | ** ** | **$** | **191.7** |   | $ | 168.9 |   |
| Gains  from sale of coal                  | ** ** | **(14.4**                             | **)**      | (8.6                                | )          | **(35.1** | **)** | (11.8 | ) |
| Gains  from sale of emission allowances   | ** ** | **(1.2**                              | **)**      | (4.0                                | )          | **(3.4** | **)** | (30.5 | ) |
| Net  fuel                                 | ** ** | **74.4**                              |       | 65.9                                | ** ** | **153.2** |   | 126.6 |   |
| ** **                                |       |                                  | ** ** | ** **                          |       |   |   |   |   |
| Purchased  power                          | ** ** | **14.1**                              |       | 31.5                                | ** ** | **29.7** |   | 68.0 |   |
| RTO  charges                              | ** ** | **22.2**                              |       | 37.2                                | ** ** | **52.3** |   | 72.5 |   |
| RTO  capacity charges                     | ** ** | **32.6**                              |       | 19.1                                | ** ** | **69.0** |   | 31.2 |   |
| Deferral  of RTO related charges          | ** ** | **(5.6**                              | **)**      | —                              | ** ** | **(28.6** | **)** | — |   |
| Total  purchased power                    | ** ** | **$**                                 | **63.3**   |                                | $          | 87.8 | ** ** | **$** | **122.4** |   | $ | 171.7 |   |
| ** **                                |       |                                  | ** ** | ** **                          |       |   |   |   |   |
| Total  cost of revenues                   | ** ** | **$**                                 | **137.7**  |                                | $          | 153.7 | ** ** | **$** | **275.6** |   | $ | 298.3 |   |
| ** **                                |       |                                  | ** ** | ** **                          |       |   |   |   |   |
| Gross  margin (a)                         | ** ** | **$**                                 | **214.2**  |                                | $          | 222.7 | ** ** | **$** | **479.9** |   | $ | 492.0 |   |
| ** **                                |       |                                  | ** ** | ** **                          |       |   |   |   |   |
| Gross  margin as a percentage of revenues | ** ** | **61**                                | **%**      | 59                                  | %          | **64** | **%** | 62 | % |
| ** **                                |       |                                  | ** ** | ** **                          |       |   |   |   |   |
| **Operating income**                      | ** ** | **$**                                 | **78.9**   |                                | $          | 90.5 | ** ** | **$** | **203.7** |   | $ | 236.9 |   |

 

----

*(a)**                              **Forpurposes of discussing operating results, we present and discuss gross 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 decisions regarding our financial performance.*

 

**DP&L — Revenues**

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

 

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

 

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

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **$ in millions**           | ** ** | **2009 vs. 2008**      | ** ** | **2009 vs. 2008**    | ** ** |
|                             |       |                   |       |                 |       |
| **Retail**                       |       |                   |       |                 |       |
| Rate                             |       | $                      | 37.6       |                 | $          | 87.3 |   |
| Volume                           |       | (20.4                  | )          | (44.3                | )          |
| Other                            |       | —                 |       | (0.5                 | )          |
| **Total retail change**          | ** ** | **$**                  | **17.2**   | ** **           | **$**      | **42.5** | ** ** |
|                             |       |                   |       |                 |       |
| **Wholesale**                    |       |                   |       |                 |       |
| Rate                             |       | $                      | (45.7      | )                    | $          | (53.5 | ) |
| Volume                           |       | 2.8                    |       | (41.3                | )          |
| **Total wholesale change**       | ** ** | **$**                  | **(42.9**  | **)**                | **$**      | **(94.8** | **)** |
|                             |       |                   |       |                 |       |
| **RTO capacity and other**       |       |                   |       |                 |       |
| RTO  capacity and other revenues | ** ** | **$**                  | **1.2**    | ** **           | **$**      | **17.5** | ** ** |
|                             |       |                   |       |                 |       |
| **Total revenues**               | ** ** | **$**                  | **(24.5**  | **)**                | **$**      | **(34.8** | **)** |

 

For the three monthsended June 30, 2009, revenues decreased $24.5 million, or 7%, to $351.9million from $376.4 million in the same period of the prior year.  Thisdecrease was primarily the result of lower average rates for wholesale salesand lower retail sales volume, partially offset by higher average rates forretail sales and higher wholesale volumes. The revenue components for the threemonths ended June 30, 2009, are further discussed below:

 

·                  Retail revenues increased $17.2 millionresulting primarily from a 17% increase in average retail rates due largely tothe incremental effect of the recovery of costs under the second phase of theEIR combined with the implementation of the TCRR.  The recovery of costs under the TCRR began onJune 1, 2009.  This increase waspartially offset by an 8% decrease in sales volume driven largely by theeconomic recession.  As a result, retailrevenues had a favorable $37.6 million price variance and an unfavorable $20.4million sales volume variance.

 

·                  Wholesale revenues decreased $42.9million primarily as a result of a 56% decrease in wholesale average rates,partially offset by a 3% increase in sales volume, resulting in an unfavorable$45.7 million wholesale price variance and a favorable $2.8 million volumevariance.

 

·                  RTO capacity and other revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, increased $1.2 millioncompared to the same period in the prior year. This increase primarily resulted from additional revenue of $8.6 millionthat was realized from the PJM capacity auction, partially offset by a decreasein PJM transmission and congestion revenues of $7.5 million.

 

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For the six months ended June 30,2009, revenues decreased $34.8 million, or 4%, to $755.5 million from $790.3million in the same period of the prior year.  This decrease was primarilythe result of lower retail and wholesale sales volume and lower wholesaleaverage rates, partially offset by higher retail average rates and an increasein RTO capacity and other revenues. The revenue components for the six monthsended June 30, 2009, are further discussed below:

 

·                  Retail revenues increased $42.5 millionresulting primarily from an 18% increase in average retail rates due largely tothe second phase of the EIR and the implementation of the TCRR, partiallyoffset by an 8% decrease in retail sales volume.  As a result, retail revenues had a favorable$87.3 million price variance and an unfavorable $44.3 million sales volumevariance.

 

·                  Wholesale revenues decreased $94.8million primarily as a result of a 41% decrease in wholesale average rates,combined with a 24% decrease in sales volume, resulting in an unfavorable $53.5million wholesale price variance and an unfavorable $41.3 million volumevariance.

 

·                  RTO capacity and other revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, increased $17.5million compared to the same period in the prior year.  This increase primarily resulted from additionalrevenue of $25.4 million that was realized from the PJM capacity auction,partially offset by a $7.9 million decrease in PJM transmission and congestionrevenues.

 

## **DP&L— Cost of Revenues**

For the three monthsended June 30, 2009:

 

·                  Fuel costs, which include coal (net ofgains on sales), gas, oil and emission allowances (net of gains on sales),increased $8.5 million, or 13%, compared to the same period in 2008 primarilydue to a 16% increase in the average cost of fuel consumed per kilowatt-hourlargely resulting from increased coal prices and outages at lower-cost units.Also contributing to the increase in fuel costs was the impact of lower gainsrealized from the sale of excess emission allowances.  In 2009, **DP&L**realized $1.2 million in gains from the sale of excess emission allowancescompared to $4.0 million during the same period in 2008.  The above increases to fuel costs werepartially offset by higher gains realized in 2009 from the sale of coal.  Gains from the sale of coal amounted to $14.4million compared to $8.6 million for the same period in 2008.

 

·                  Purchased power decreased $24.5 million,or 28%, compared to the same period in 2008. The decrease in purchased power primarily results from an $11.6 milliondecrease relating to lower average market rates, a $6.9 million decrease in RTOcapacity and other RTO charges, and a $5.9 million decrease relating to lowervolumes of purchased power.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned andunanticipated outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

For the six months ended June 30,2009:

 

·                  Fuel costs, which include coal (net ofgains on sales), gas, oil and emission allowances (net of gains on sales),increased $26.6 million, or 21%, compared to the same period in 2008, primarilydue to a 19% increase in the average cost of fuel consumed per kilowatt-hourlargely resulting from increased coal prices and outages at lower-costunits.  Also contributing to the increasein fuel costs was the impact of lower gains realized from the sale of excessemission allowances.  In 2009, **DP&L** realized $3.4 million in gains from the sale ofexcess emission allowances compared to $30.5 million during the same period in2008.  The above increases to fuel costswere partially offset by a decrease in the usage of fuel due mainly to a 5%decrease in generation output, as well as higher gains realized in 2009 fromthe sale of coal.  Gains from the sale ofcoal amounted to $35.1 million compared to $11.8 million for the same period in2008.

 

·                  Purchased power decreased $49.3 millioncompared to the same period in 2008.  Thenet decrease in purchased power is partly a result of the deferral in 2009 ofcosts relating to **DP&L’s**transmission, capacity and other PJM-related charges which were incurred as amember of PJM.  See Financial Overviewsection above.  Also contributing to thedecrease in purchased power were lower incurred RTO charges as well asdecreases of $15.7 million and $22.6 million relating to lower average marketrates and lower volumes of purchased power, respectively.  These decreases were partially offset byincreased RTO capacity charges.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned andunanticipated outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

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

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

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **$ in millions**                                    | ** ** | **2009 vs. 2008**      | ** ** | **2009 vs. 2008**    | ** ** |
| Generating  facilities operating and maintenance expenses |       | $                      |  2.6  |                 | $          |  7.2 |   |
| Low-income  payment program                               |       | 1.3                    |       | 3.4                  |       |
| Pension                                                   |       | 1.5                    |       | 2.9                  |       |
| ESOP                                                      |       | 0.7                    |       | 2.1                  |       |
| Other,  net                                               |       | 1.5                    |       | 6.1                  |       |
| **Total operation and maintenance expense**               |       | $                      | 7.6        |                 | $          | 21.7 |   |

 

During thethree months and six months ended June 30, 2009, operation and maintenanceexpense increased $7.6 million, or 12%, and $21.7 million, or 17%,respectively, compared to similar periods in 2008.  These variances were primarily the result of:

 

·                  increases in operating and maintenanceexpenses for generating facilities largely due to costs associated with anunplanned outage at a jointly-owned production unit as well as the operation ofFGD and SCR equipment,

 

·                  increases in the USF rate rider related toassistance for low-income retail customers,

 

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

 

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

 

**DP&L — Depreciation andAmortization**

For the three months andsix months ended June 30, 2009, depreciation and amortization expenseincreased $1.7 million and $4.4 million, respectively, compared to the similarperiods in 2008 primarily as a result of higher asset balances at thegenerating stations.  These higherbalances were due largely to the completion of the FGD projects in 2008.

 

**DP&L— General Taxes**

For the threemonths and six months ended June 30, 2009, general taxes decreased $5.1million and $2.7 million, respectively, to $27.2 million and $59.1 million,respectively, compared to the similar periods in 2008.  These decreases were primarily the result oflower property tax accruals in 2009 compared to 2008.

 

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

For the three months andsix months ended June 30, 2009, the amortization of regulatory assets was$1.1 million and $2.3 million, respectively, lower than that of the similarperiods in 2008, primarily reflecting the 2008 amortization of incrementalcosts incurred in 2004 and 2005 for severe storms.  These storm costs were fully amortized in thethird quarter of 2008.

 

**DP&L**—**Interest Expense**

Interest expense for thethree months ended June 30, 2009 decreased $1.2 million compared to thesame period of the prior year primarily as a result of a $1.6 million write-off in 2008 of unamortized debt issuance costs relatingto **DP&L’s** $90 million variable ratepollution control bonds following their repurchase from the bondholders on April 4,2008.

 

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Interest expense for thesix months ended June 30, 2009 increased $0.9 million compared to the sameperiod of the prior year primarily as a result of $4.8 million of lowercapitalized interest in 2009 compared to 2008, due largely to the completion ofthe FGD projects at the generation stations. This increase was partially offset by:

 

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

 

·                  lower rates of interest on the $100 million RevenueRefunding Bonds issued in December 2008, as compared to the $90 millionRevenue Bonds which were issued in November 2007 and redeemed in December 2008.

 

## **DP&L— Income Tax Expense**

For the three monthsended June 30, 2009, income taxes increased $1.6 million, or 8%, comparedto the same period in the prior year, primarily reflecting a 2008 decrease intax expense due to the $42 million settlement of the Ohio Franchise Tax issues,partially offset by a decrease in pre-tax book income and a decrease in theeffective tax rate resulting from the phase-out of the Ohio Franchise Tax.

 

For the six months ended June 30,2009, income taxes decreased $9.6 million, or 13%, compared to the same periodin the prior year, primarily reflecting a decrease in pre-tax book income and adecrease in the effective tax rate resulting from the phase-out of the OhioFranchise Tax, partially offset by a 2008 decrease in tax expense due to thesettlement of the Ohio Franchise Tax issues mentioned above.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL REQUIREMENTS**

 

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

 

**DPL’s Cash Position**

**DPL’s** cash and cash equivalents totaled $55.8million at June 30, 2009, compared to $62.5 million at December 31,2008, a decrease of $6.7 million.  Thedecrease in cash and cash equivalents was primarily attributed to the retirementof $175 million of long-term debt, $89.6 million of capital expenditures, $63.8million of dividends paid on common stock, $15.9 million used to repurchaseoutstanding stock warrants, and a $15 million repayment on the revolving creditfacility, partially offset by a $155 million cash borrowing from the revolvingcredit facility, cash generated from operating activities of $184.7 million,net withdrawals of $6.7 million from restricted funds drawn to fund pollutioncontrol capital expenditures and $5 million of cash from the maturity of ashort-term investment.  At June 30,2009, **DPL** had $7.9 million in restrictedfunds held in trust to fund pollution control capital expenditures.

 

**DP&L’s Cash Position**

**DP&L’s** cash and cash equivalents totaled $23.1million at June 30, 2009, compared to $20.8 million at December 31,2008, an increase of $2.3 million. The increase in cash and cash equivalentswas primarily attributed to $162.7 million in cash generated from operatingactivities, a $155 million borrowing from the revolving credit facility and netwithdrawals of $6.7 million from restricted funds to pay for pollution controlcapital expenditures.  These cash inflowswere partially offset by $220 million in dividends paid on common stock to ourparent **DPL,** $86.7 million used for capitalexpenditures, and a $15 million repayment on the revolving creditfacility.  At June 30, 2009, **DP&L** had $7.9 million in restricted funds held in trustto fund pollution control capital expenditures.

 

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**Operating Activities**

 

For the six months ended June 30,2009 and 2008, cash flows from operations were as follows:

 

**NetCash provided by Operating Activities**

** **

| ** **             | ** ** | **Six Months Ended** | ** ** |
|------------------------|------------|----------------------|------------|
| ** **             | ** ** | **June 30,**    | ** ** |
| **$ in millions** | ** ** | **2009**             | ** ** | **2008** | ** ** |
|                   |       |                 |       |   |   |
| **DPL**                | ** ** | **$**                | **184.7**  |   | $ | 200.4 |   |
|                   |       |                 |       |   |   |
| **DP&L**           | ** ** | **$**                | **162.7**  |   | $ | 212.9 |   |

 

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

 

**DPL’sCash provided by Operating Activities**

**DPL** generated net cash from operatingactivities of $184.7 million and $200.4 million in the six-month periods ended June 30,2009 and 2008, respectively.  The netcash provided by operating activities for 2009 and 2008 was primarily theresult of cash received from utility customers, partially offset by cash usedfor fuel, purchased power, operating expenditures, interest and taxes.  The fluctuations in certain assets and liabilitiesresult from the timing of payments made and cash receipts from our utilitycustomers.

 

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

**DP&L** generated net cash from operatingactivities of $162.7 million and $212.9 million in the six-month periods ended June 30,2009 and 2008, respectively.  The netcash provided by operating activities for 2009 and 2008 was primarily theresult of cash received from utility customers, partially offset by cash usedfor fuel, purchased power, operating expenditures, interest and taxes.  The fluctuations in certain assets andliabilities result from the timing of payments made and cash receipts from ourutility customers.

 

**Investing Activities**

 

For the six months ended June 30,2009 and 2008, cash flows from investing activities were as follows:

 

**NetCash used for Investing Activities**

** **

| ** **             | ** ** | **Six Months Ended** | ** ** |
|------------------------|------------|----------------------|------------|
| ** **             | ** ** | **June 30,**    | ** ** |
| **$ in millions** | ** ** | **2009**             | ** ** | **2008** | ** ** |
|                   |       |                 |       |   |   |
| **DPL**                | ** ** | **$**                | **(83.4**  | **)** | $ | (118.4 | ) |
|                   |       |                 |       |   |   |
| **DP&L**           | ** ** | **$**                | **(86.7**  | **)** | $ | (117.7 | ) |

 

**DPL’sCash used for Investing Activities**

**DPL’s**net cash usedfor investing activities was $83.4 million and $118.4 million in the six-monthperiods ended June 30, 2009 and 2008, respectively. Net cash flows used for investing activities during both of theseperiods were primarily related to capital expenditures.

 

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

**DP&L’s** net cash used for investing activitieswere $86.7 million and $117.7 million in the six-month periods ended June 30,2009 and 2008, respectively.  Net cashflows used for investing activities during both of these periods were relatedto capital expenditures.

 

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**Financing Activities**

 

For the six months ended June 30,2009 and 2008, cash flows from financing activities were as follows:

 

**NetCash used for Financing Activities**

** **

| ** **             | ** ** | **Six Months Ended** | ** ** |
|------------------------|------------|----------------------|------------|
| ** **             | ** ** | **June 30,**    | ** ** |
| **$ in millions** | ** ** | **2009**             | ** ** | **2008** | ** ** |
|                   |       |                 |       |   |   |
| **DPL**                | ** ** | **$**                | **(108.0** | **)** | $ | (138.2 | ) |
|                   |       |                 |       |   |   |
| **DP&L**           | ** ** | **$**                | **(73.7**  | **)** | $ | (79.9 | ) |

 

**DPL’sCash used for Financing Activities**

**DPL’s**net cash usedfor financing activities in the six months ended June 30, 2009 was $108 million compared to $138.2 million during the same period of the prior year.  Net cash flows used for financing activitiesin the six months ended June 30, 2009 were primarily the result of cashused to retire $175 million of long-term debt, to pay dividends of $63.8million to stockholders, to repurchase $15.9 million of outstanding stockwarrants, and to repay $15 million on the revolving credit facility, partiallyoffset by a borrowing of $155 million from the revolving credit facility andnet withdrawals of $6.7 million from the restricted funds held in trust.  Net cash flows used for financing activitiesin the six months ended June 30, 2008 were primarily the result of cashused to redeem the $100 million of long-term debt and to pay dividends of $59.9million to stockholders, partially offset by net withdrawals of $20.5 millionfrom the restricted funds held in trust.

 

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

**DP&L’s** net cash used for financing activitiesin the six months ended June 30, 2009 were $73.7 million compared to $79.9million during the same period of the prior year.  Net cash flows used for financing activitiesin the six months ended June 30, 2009 were primarily the result of cashused to pay common stock dividends of $220 million to our parent **DPL** and a $15 million repayment on the revolving creditfacility, partially offset by a borrowing of $155 million from the revolvingcredit facility and $6.7 million in net withdrawals from restricted funds heldin trust.  Net cash flows used forfinancing activities for the six months ended June 30, 2008 were primarilythe result of cash used to pay common stock dividends of $80 million to ourparent **DPL** and the repayment of a short-termloan from **DPL** of $20 million, partially offset bynet withdrawals of $20.5 million from restricted funds held in trust.

 

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

 

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**Revolving Credit Facility**

On April 21, 2009, **DP&L** entered into a $100 million unsecured revolvingcredit agreement with a syndicated bank group. The agreement is for a 364-day term expiring on April 20,2010.  The facility contains onefinancial covenant: **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  As of June 30, 2009,**DP&L**was in compliance with thiscovenant with a ratio of 0.44 to 1.00. As of June 30, 2009, **DP&L**had no outstanding borrowings under this facility.

 

**Future Liquidity**

On July 29,2009, **DP&L** repaid $105 million of the$140 million borrowing that was outstanding under the $220 million unsecuredrevolving credit agreement. This repayment was made using $25 million of cashon hand and an $80 million withdrawal that was made on July 28, 2009 from the$100 million facility referred to in the preceding paragraph.  After this transaction, the borrowingsoutstanding under both revolving credit facilities amount to $115 million andthe combined cash available to **DP&L** underthese revolving credit facilities amounts to $205 million.

 

Inaddition, at June 30, 2009, **DP&L** had anet tax receivable in the amount of $79.9 million resulting from therecognition of certain tax benefits (see Note 14 of Notes to CondensedConsolidated Financial Statements).  Thisreceivable is available to be offset against future income tax liabilities andis expected to be fully recouped within the next 12 months.

 

**Capital Requirements**

**DPL’s** construction additions were $72.5million and $106.5 million during the six-month periods ended June 30,2009 and 2008, respectively.  **DPL** is expected to spend approximately $87 million for theremainder of 2009.

 

**DP&L’s** construction additions were $71.5million and $105.8 million during the six-month periods ended June 30,2009 and 2008, respectively.  **DP&L**is****expected tospend approximately $86 million for the remainder of 2009.  Planned construction additions for 2009relate to **DP&L’s** environmentalcompliance program, power plant equipment and its transmission and distributionsystem.

 

Capital projects are subjectto continuing review and are revised in light of changes in financial andeconomic conditions, load forecasts, legislative and regulatory developmentsand changing environmental standards, among other factors.  **DPL,**through its subsidiary **DP&L,**is projectingto spend an estimated $500 million in capital projects for the period 2009through 2011.  Our ability to completecapital projects and the reliability of future service will be affected by ourfinancial condition, the availability of internal funds and the reasonable costof external funds.  We expect to financeour construction additions in 2009 with a combination of cash on hand,short-term financing, long-term debt and cash flows from operations.

 

**Debt Covenants**

Therehave been no changes to our debt covenants as disclosed in our Annual Report onForm 10-K for the fiscal year ended December 31, 2008.  We are in compliance with these debtcovenants.

 

**Credit Ratings**

Thefollowing table outlines the debt credit ratings and outlook of each company, alongwith the effective dates of each rating and outlook for **DPL**and**DP&L**.  Standard & Poor’s Corporation andMoody’s Investors Service revised their rating and outlook in April 2009and June 2009, respectively, for both **DPL** and **DP&L**.

 
| ** **                             | ** ** | **DPL Inc.****(a)** | ** ** | **DP&L****(b)** | ** ** | **Outlook** | ** ** | **Effective**   | ** ** |
|----------------------------------------|------------|---------------------|------------|---------------------|------------|-------------|------------|-----------------|------------|
|                                   |       |                |       |                |       |        |       |            |       |
| Fitch  Ratings                         |       | BBB+                |       | A+                  |       | Positive    |       | April 2008 |       |
| Moody’s  Investors Service        |       | Baa1                |       | A1                  |       | Stable      |       | June 2009  |       |
| Standard &  Poor’s Corp. |       | BBB+                |       | A                   |       | Stable      |       | April 2009 |       |

 

----

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

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

 

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**Off-BalanceSheet Arrangements**

 

**DPLInc. - Guarantees**

In the normal course ofbusiness, **DPL**enters into various agreements with ourwholly owned generating subsidiary DPLE providing financial or performanceassurance to third parties.  Theseagreements are entered into primarily to support or enhance thecreditworthiness otherwise attributed to DPLE on a stand-alone basis, thereby facilitating the extension ofsufficient credit to accomplish DPLE’s intended commercial purposes.  Suchagreements fall outside the scope of FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” There have been no material changes to our guarantees as disclosed inour Annual Report on Form 10-K for the fiscal year ended December 31,2008.

 

**Commercial Commitments and Contractual Obligations**

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

 

**MARKET RISK**

 

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

 

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

 

**Commodity Pricing Risk**

In 2008 and during thesix months ended June 30, 2009, the coal market has experiencedunprecedented price volatility.  The coalmarket has increasingly been influenced by international rather than solelydomestic supply and consumption, and coal prices, while still volatile week toweek, have been generally exhibiting a downward trend since the second half of2008.   While we have all of the totalexpected coal volume needed to meet our retail and firm wholesale salesrequirements for 2009 under contract, sales requirements may change,particularly for retail load.  To theextent we are not able to hedge against price volatility, our results ofoperations, financial position or cash flows could be materially affected.

 

Approximately7% of **DPL’s** and 10% of **DP&L’s** electric revenues for the six months ended June 30, 2009 were from sales of excess energy in thewholesale market.  Energy in excess ofthe needs of existing retail customers is sold in the wholesale market when wecan identify opportunities with positive margins. As of June 30,2009, a hypothetical increase or decrease of 10% in **DPL’s** annual wholesale revenues could result in approximatelya $7 million increase or decrease to net income, assuming no increases in fueland purchased power costs.  As of June 30,2009, a hypothetical increase or decrease of 10% in **DP&L’s** annual wholesale revenues could result inapproximately a $10 million increase or decrease to net income, assuming noincreases in fuel and purchased power costs.

 

**DPL’s** fuel (including coal, gas, oil andemission allowances) and purchased power costs as a percent of total operatingcosts in the six months ended June 30, 2009 and 2008 were 49% and 53%,respectively.   **DP&L’s** fuel (including coal, gas, oiland emission allowances) and purchased power costs as a percent of totaloperating costs were 50% and 54% for the six-month periods ending June 30,2009 and 2008, respectively.  We havesubstantially all of the total expected coal volume needed to meet our retailand firm wholesale sales requirements for 2009 under contract.  The majority of our contracted coal ispurchased at fixed prices.  Some contractsprovide for periodic adjustment and some are priced based on marketindices.  Substantially all contractshave features that limit price escalations in any given year.  We do not expect to purchase SO2 

 

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allowances for 2009,however, the exact consumption of SO2 allowances will depend on market prices for power, availability of ourgeneration units and the actual sulfur content of the coal burned.  We do not plan to purchase NOx allowances for2009.  Fuel costs are impacted by changesin volume and price and are driven by a number of variables including weather,reliability of coal deliveries, scheduled outages and generation plantmix.  Based on higher volume and price,fuel costs excluding the effect of emission allowance sales are forecasted tobe 15% to 20% higher in 2009 compared to 2008.

 

Purchased power costsdepend, in part, upon the timing and extent of planned and unplanned outages ofour generating capacity.  We willpurchase power on a discretionary basis when wholesale market conditionsprovide opportunities to obtain power at a cost below our internal productioncosts. As of June 30, 2009, a hypothetical increase or decrease of 10% in **DPL’s** annual fuel and purchased power costscould result in approximately a $30 million increase or decrease to netincome.  As of June 30, 2009, ahypothetical increase or decrease of 10% in **DP&L’s**annual fuel and purchased power costs could result in approximately a $30million increase or decrease to net income.

 

**InterestRate Risk**

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

 

The carrying value of **DPL’s** long-term debt was $1,376.6 million at June 30,2009, consisting of **DP&L’s**first mortgage bonds, **DP&L’s**tax-exempt pollution control bonds, **DPL’s** unsecurednotes and **DP&L’s** capitallease.  The fair value of this debt was$1,285.9 million, based on current market prices or discounted cash flows usingcurrent rates for similar issues with similar terms and remaining maturities.

 

The carrying value of **DP&L’s**long-term debt was $884.5 million at June 30, 2009, consisting of **DP&L’s** first mortgage bonds, **DP&L’s**tax-exempt pollution control bonds and **DP&L’s**capital lease.  The fair value of thisdebt was $814.3 million, based on current market prices or discounted cashflows using rates for similar issues with similar terms and remainingmaturities.

 

**CRITICAL ACCOUNTING ESTIMATES**

 

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

 

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

 

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**ELECTRICSALES AND REVENUES**

 
| ** **                                | ** ** | **DPL  Inc.**           | ** **  | **DP&L  (a)**     | ** ** |
|-------------------------------------------|------------|-------------------------|-------------|-----------------------|------------|
| ** **                                | ** ** | **Three  Months Ended** | ** **  | **Six  Months Ended** | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
| ** **                                | ** ** | **June 30,**       | ** **  | **June 30,**     | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                | ** ** | **2009**                | ** **  | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Electric  sales (millions in kWh)         |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                               | ** ** | **1,024**               |        | 1,089                 | ** ** | **2,625** |   | 2,769 | ** ** | **1,024** |   | 1,089 | ** ** | **2,625** |   | 2,769 |   |
| Commercial                                | ** ** | **922**                 |        | 987                   | ** ** | **1,838** |   | 1,946 | ** ** | **922** |   | 987 | ** ** | **1,838** |   | 1,946 |   |
| Industrial                                | ** ** | **853**                 |        | 996                   | ** ** | **1,613** |   | 1,963 | ** ** | **853** |   | 996 | ** ** | **1,613** |   | 1,963 |   |
| Other  retail                             | ** ** | **358**                 |        | 369                   | ** ** | **696** |   | 716 | ** ** | **358** |   | 369 | ** ** | **696** |   | 716 |   |
| Total  retail                             | ** ** | **3,157**               |        | 3,441                 | ** ** | **6,772** |   | 7,394 | ** ** | **3,157** |   | 3,441 | ** ** | **6,772** |   | 7,394 |   |
|                                      |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                                 | ** ** | **553**                 |        | 520                   | ** ** | **1,124** |   | 1,419 | ** ** | **538** |   | 520 | ** ** | **1,078** |   | 1,419 |   |
|                                      |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                     | ** ** | **3,710**               |        | 3,961                 | ** ** | **7,896** |   | 8,813 | ** ** | **3,695** |   | 3,961 | ** ** | **7,850** |   | 8,813 |   |
|                                      |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues ($ in thousands) |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                               | ** ** | **$**                   | **115,609** |                  | $          | 113,921 | ** ** | **$** | **275,860** |   | $ | 269,590 | ** ** | **$** | **115,609** |   | $ | 113,921 | ** ** | **$** | **275,860** |   | $ | 269,590 |   |
| Commercial                                | ** ** | **82,087**              |        | 85,767                | ** ** | **162,642** |   | 164,671 | ** ** | **81,100** |   | 79,137 | ** ** | **161,723** |   | 153,409 |   |
| Industrial                                | ** ** | **57,035**              |        | 60,070                | ** ** | **110,876** |   | 118,207 | ** ** | **45,904** |   | 33,301 | ** ** | **90,990** |   | 64,687 |   |
| Other  retail                             | ** ** | **25,246**              |        | 25,021                | ** ** | **48,966** |   | 47,852 | ** ** | **21,073** |   | 20,183 | ** ** | **41,238** |   | 39,079 |   |
| Other  miscellaneous revenues             | ** ** | **2,138**               |        | 2,173                 | ** ** | **4,113** |   | 4,749 | ** ** | **2,186** |   | 2,188 | ** ** | **4,178** |   | 4,747 |   |
| Total  retail                             | ** ** | **282,115**             |        | 286,952               | ** ** | **602,457** |   | 605,069 | ** ** | **265,872** |   | 248,730 | ** ** | **573,989** |   | 531,512 |   |
|                                      |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                                 | ** ** | **19,679**              |        | 39,854                | ** ** | **50,583** |   | 96,925 | ** ** | **35,873** |   | 78,755 | ** ** | **76,951** |   | 171,810 |   |
|                                      |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| RTO  revenues                             | ** ** | **56,119**              |        | 48,969                | ** ** | **117,031** |   | 87,022 | ** ** | **50,167** |   | 48,968 | ** ** | **104,580** |   | 87,022 |   |
|                                      |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  revenues                           | ** ** | **3,231**               |        | 3,042                 | ** ** | **6,093** |   | 5,899 | ** ** | **—** |   | — | ** ** | **—** |   | — |   |
|                                      |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                     | ** ** | **$**                   | **361,144** |                  | $          | 378,817 | ** ** | **$** | **776,164** |   | $ | 794,915 | ** ** | **$** | **351,912** |   | $ | 376,453 | ** ** | **$** | **755,520** |   | $ | 790,344 |   |
|                                      |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Electric  customers at end of period      |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                               | ** ** | **455,809**             |        | 456,308               | ** ** | **455,809** |   | 456,308 | ** ** | **455,809** |   | 456,308 | ** ** | **455,809** |   | 456,308 |   |
| Commercial                                | ** ** | **50,109**              |        | 49,961                | ** ** | **50,109** |   | 49,961 | ** ** | **50,109** |   | 49,961 | ** ** | **50,109** |   | 49,961 |   |
| Industrial                                | ** ** | **1,788**               |        | 1,800                 | ** ** | **1,788** |   | 1,800 | ** ** | **1,788** |   | 1,800 | ** ** | **1,788** |   | 1,800 |   |
| Other                                     | ** ** | **6,546**               |        | 6,473                 | ** ** | **6,546** |   | 6,473 | ** ** | **6,546** |   | 6,473 | ** ** | **6,546** |   | 6,473 |   |
|                                      |       |                    |        |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                     | ** ** | **514,252**             |        | 514,542               | ** ** | **514,252** |   | 514,542 | ** ** | **514,252** |   | 514,542 | ** ** | **514,252** |   | 514,542 |   |

 

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

 

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

 

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

 

**Item 4.  Controls and Procedures**

 

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

 

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

 

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**Part II — Other Information**

 

**Item1**— **Legal Proceedings**

 

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  We believe the amounts provided in ourcondensed consolidated financial statements, as prescribed by GAAP, for thesematters are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that theactual amounts required to satisfy alleged liabilities from various legalproceedings, claims, and other matters discussed below, and to comply withapplicable laws and regulations will not exceed the amounts reflected in ourcondensed consolidated financial statements. As such, costs, if any, that may be incurred in excess of those amountsprovided as of June 30, 2009, cannot be reasonably determined.

 

Our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008 and Quarterly Report on Form 10-Qfor the three months ended March 31, 2009, contain descriptions of certainlegal proceedings in which we are or were involved.  The information in this Item 1 of thisQuarterly Report on Form 10-Q is limited to certain recent developmentsconcerning our legal proceedings and should be read in conjunction with ourAnnual Report on Form 10-K for the fiscal year ended December 31,2008, and our Quarterly Report on Form 10-Q for the three months ended March 31,2009.

 

As previously reported,on May 16, 2007, **DPL** filed aclaim with Energy Insurance Mutual (EIM) to recoup legal expenses associatedwith our litigation against certain former executives.  Arbitration on that claim occurred on May 13,2009 and the outcome is pending. Information concerning the legal proceedings discussed in Item 2 —UPDATES/OTHER MATTERS of Part I of this Quarterly Report on Form 10-Qis incorporated by reference into this Item.

 

**Item1A — Risk Factors**

 

Acomprehensive listing of risk factors that we consider to be the mostsignificant to your decision to invest in our stock is provided in our mostrecent Annual Report on Form 10-K. The Form 10-K may be obtained as discussed on Page 6 of thisreport.  If any of these events occur,our business, financial position or results of operation could be materiallyaffected.

 

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

 

None

 

**Item3 — Defaults Upon Senior Securities**

 

None

 

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

 

**DPL** held its Annual Meeting of Shareholderson April 29, 2009, at which security holders elected the three directorsnominated for three-year terms expiring 2012. The results of the voting were as follows:

 
| ** **                      | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** | **BROKER NON-VOTE** | ** ** |
|---------------------------------|------------|------------|------------|--------------|------------|---------------------|------------|
| Paul  R. Bishop                 |       | 95,710,770 |       | 1,365,527    |       | —              |       |
| Frank  F. Gallaher              |       | 95,770,159 |       | 1,306,138    |       | —              |       |
| General  Lester L. Lyles (Ret.) |       | 95,091,201 |       | 1,985,096    |       | —              |       |

 

The otherdirectors whose terms of office continued after the Annual Meeting are RobertD. Biggs, Pamela B. Morris and Ned J. Sifferlen (each of the class of 2010) andPaul M. Barbas, Barbara S. Graham and Glenn E. Harder (each of the class of2011).

 

Security holdersalso voted to ratify the selection of KPMG LLP as **DPL’s**independent public accountant for 2009. The results of the voting were as follows:

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NON-VOTE** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------|------------|
| 95,658,932 |       | 788,016     |       | 629,347     |       | —              |       |

 

**Item5 — Other Information**

 

None

 

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**Item6 — Exhibits**

 
| ** **    | ** ** | ** **   | ** ** | **Exhibit** | ** ** | ** **                                                                                                                                                                                                                | ** ** | ** **                                                                           |
|---------------|------------|--------------|------------|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|
| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Number**  | ** ** | **Exhibit**                                                                                                                                                                                                               | ** ** | **Location**                                                                         |
| X             |       | X            |       | 10(a)       |       | Amendment No. 1,  dated as of April 9, 2009, to Credit Agreement, dated as of  November 21, 2006, among the Dayton Power and Light Company, KeyBank  National Association and certain lending institutions |       | Filed herewith as Exhibit 10(a)                                                 |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
| X             |       | X            |       | 10(b)       |       | Credit Agreement by and  among The Dayton Power and Light Company and the lenders party thereto and  PNC Bank, National Association, as Administrative Agent, dated as of  April 21, 2009                            |       | Exhibit 10.1 to Form 8-K  filed April 24, 2009 (File No. 1-2385) |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
| X             |       | X            |       | 10(c)*      |       | Participation Agreement  dated May 18, 2009, among DPL Inc., The Dayton Power and Light Company  and Joseph W. Mulpas                                                                                                |       | Exhibit 10.1 to Form 8-K  filed May 18, 2009 (File No. 1-9052)   |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
| X             |       |         |       | 10(d)       |       | Form of DPL Inc. Restricted  Stock Agreement                                                                                                                                                                              |       | Filed herewith as Exhibit 10(d)                                                 |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
| X             |       |         |       | 31(a)       |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                  |       | Filed herewith as Exhibit 31(a)                                                 |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
| X             |       |         |       | 31(b)       |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                 |       | Filed herewith as Exhibit 31(b)                                                 |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
|          |       | X            |       | 31(c)       |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                  |       | Filed herewith as Exhibit 31(c)                                                 |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
|          |       | X            |       | 31(d)       |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                 |       | Filed herewith as Exhibit 31(d)                                                 |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
| X             |       |         |       | 32(a)       |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                 |       | Filed herewith as Exhibit 32(a)                                                 |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
| X             |       |         |       | 32(b)       |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                  |       | Filed herewith as Exhibit 32(b)                                                 |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
|          |       | X            |       | 32(c)       |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                 |       | Filed herewith as Exhibit 32(c)                                                 |
|          |       |         |       |        |       |                                                                                                                                                                                                                      |       |                                                                                 |
|          |       | X            |       | 32(d)       |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                  |       | Filed herewith as Exhibit 32(d)                                                 |

 

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* Managementcontract or compensatory plan

 

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**SIGNATURES**

 

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

 

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

 

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