**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**ý**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2004**

 

**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  1-2385**

 

**THEDAYTON POWER AND LIGHT COMPANY**

(Exact name of registrant as specified in itscharter)

* *

| **OHIO**                                 | ** ** | **31-0258470**                       |
|------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of          |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)           | ** ** | ** **                           |
| ** **                               | ** ** | ** **                           |
| **1065 Woodman Drive, Dayton, Ohio**     | ** ** | **45432**                            |
| (Address of principal executive offices) |       | (Zip Code)                           |

 

Registrant’s telephone number, including areacode:  **937-224-6000**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to 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 to suchfiling requirements for the past 90 days.

YES  ý   NO  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).

YES  o   NO  ý

 

Number of shares of registrant’s common stock outstanding as of October31, 2004, all of which were held by DPL Inc., was 41,172,173.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

 

----

 

**THE DAYTON POWER AND LIGHT COMPANY**

**INDEX**

 
|         |                      | **Page No.**                                                                                |
|--------------|---------------------------|---------------------------------------------------------------------------------------------|
| **Part I.**  | **Financial Information** |                                                                                        |
|         | Item 1.                   | Financial Statements                                                                        |   |
|         |                      |                                                                                        |   |
|         |                      | Consolidated  Statement of Results of Operations                                            | 3 |
|         |                      |                                                                                        |   |
|         |                      | Consolidated  Statement of Cash Flows                                                       | 4 |
|         |                      |                                                                                        |   |
|         |                      | Consolidated Balance Sheet                                                                  | 5 |
|         |                      |                                                                                        |   |
|         |                      | Notes to  Consolidated Financial Statements                                                 | 7 |
|         |                      |                                                                                        |   |
|         | Item  2.                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 20 |
|         |                      |                                                                                        |   |
|         |                      | Operating Statistics                                                                        | 30 |
|         |                      |                                                                                        |   |
|         | Item  3.                  | Quantitative  and Qualitative Disclosures about Market Risk                                 | 30 |
|         |                      |                                                                                        |   |
|         | Item 4.                   | Controls and Procedures                                                                     | 30 |
|         |                      |                                                                                        |   |
| **Part II.** | **Other Information**     |                                                                                        |
|         | Item 1.                   | Legal Proceedings                                                                           | 33 |
|         |                      |                                                                                        |   |
|         | Item 4.                   | Submission of Matters to a Vote of Security  Holders                                        | 33 |
|         |                      |                                                                                        |   |
|         | Item 5.                   | Other Information                                                                           | 33 |
|         |                      |                                                                                        |   |
|         | Item 6.                   | Exhibits and Reports on Form 8-K                                                            | 33 |
|         |                      |                                                                                        |
| **Other**    |                      |                                                                                        |
|         | Signatures                | 34                                                                                          |
|         |                      |                                                                                        |
|         | Certifications            |                                                                                        |

 

**Available Information:**

The Dayton Power and Light Company (DP&L or the Company) filescurrent, annual and quarterly reports and other information required by theSecurities Exchange Act of 1934, as amended, with the Securities and ExchangeCommission (SEC).  You may read and copyany document the Company files at the SEC’s public reference room located at450 Fifth Street, NW, Washington, DC 20549, USA.  Please call the SEC at (800) SEC-0330 forfurther information on the public reference rooms.  The Company’s SEC filings are also availableto the public from the SEC’s web site at http://www.sec.gov.

 

The Company’s public internet site is http://www.dplinc.com.  The Company makes available through itsinternet site, its annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and Forms 3, 4 and 5 filed on behalf of directorsand executive officers and amendments to those reports filed or furnishedpursuant to the Securities Exchange Act of 1934, as amended, as soon asreasonably practicable after it electronically files such material with, orfurnishes it to, the SEC.

 

In addition, the Company’s public internet site includes other itemsrelated to corporate governance matters, including, among other things, theCompany’s governance guidelines, charters of various committees of the Board ofDirectors and the Company’s code of business conduct and ethics applicable toall employees, officers and directors. You may obtain copies of these documents, free of charge, by sending arequest, in writing, to DPL Investor Relations, 1065 Woodman Drive, Dayton,Ohio 45432.

 

2

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**Part I.  Financial Information**

 

### **Item1.  Financial Statements**

 

**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED STATEMENT OF RESULTS OFOPERATIONS**

**($ in millions)**

 
| ** **                                                                 | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                 | ** ** | ** **                            | ** ** | **(as restated)**                    | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
|                                                                       |       |                                  |       |                                 |       |   |   |   |   |
| **Revenues**                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Electric                                                                   | ** ** | **$**                                 | **310.2**  | ** **                           | $          | 323.2 |   | **$** | **893.4** | ** ** | $ | 890.3 |   |
|                                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| **Operating  Expenses**                                                    |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Fuel                                                                       | ** ** | **64.1**                              | ** ** | 59.9                                 |       | **187.3** | ** ** | 166.3 |   |
| Purchased power                                                            | ** ** | **31.4**                              | ** ** | 29.8                                 |       | **84.6** | ** ** | 76.3 |   |
| Operation and maintenance                                                  | ** ** | **51.8**                              | ** ** | 44.6                                 |       | **152.5** | ** ** | 128.6 |   |
| Depreciation and amortization                                              | ** ** | **29.6**                              | ** ** | 30.1                                 |       | **87.3** | ** ** | 88.5 |   |
| Amortization of regulatory assets, net                                     | ** ** | **0.1**                               | ** ** | 12.5                                 |       | **0.3** | ** ** | 35.3 |   |
| General taxes                                                              | ** ** | **26.5**                              | ** ** | 28.0                                 |       | **78.2** | ** ** | 81.7 |   |
| Total operating expenses                                                   | ** ** | **203.5**                             | ** ** | 204.9                                |       | **590.2** | ** ** | 576.7 |   |
|                                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| **Operating  Income**                                                      | ** ** | **106.7**                             | ** ** | 118.3                                |       | **303.2** | ** ** | 313.6 |   |
|                                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Investment income                                                          | ** ** | **0.1**                               | ** ** | 21.5                                 |       | **0.4** | ** ** | 21.9 |   |
| Other income (deductions)                                                  | ** ** | **(0.9**                              | **)**      | 0.6                                  |       | **1.1** | ** ** | 5.3 |   |
| Interest expense                                                           | ** ** | **(10.6**                             | **)**      | (13.7                                | )          | **(32.4** | **)** | (38.9 | ) |
|                                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| **Income  Before Income Taxes and Cumulative Effect of Accounting Change** | ** ** | **95.3**                              | ** ** | 126.7                                |       | **272.3** | ** ** | 301.9 |   |
|                                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Income tax expense                                                         | ** ** | **39.8**                              | ** ** | 47.9                                 |       | **107.8** | ** ** | 113.9 |   |
|                                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| **Income  Before Cumulative Effect of Accounting Change**                  | ** ** | **55.5**                              | ** ** | 78.8                                 |       | **164.5** | ** ** | 188.0 |   |
|                                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Cumulative effect of accounting change, net  of tax                        | ** ** | **—**                            | ** ** | —                               |       | — | ** ** | 17.0 |   |
|                                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| **Net  Income**                                                            | ** ** | **55.5**                              | ** ** | 78.8                                 |       | **164.5** | ** ** | 205.0 |   |
|                                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Preferred dividends                                                        | ** ** | **—**                            | ** ** | 0.3                                  |       | **0.2** | ** ** | 0.7 |   |
|                                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| **Earnings  on Common Stock**                                              | ** ** | **$**                                 | **55.5**   | ** **                           | $          | 78.5 |   | **$** | **164.3** | ** ** | $ | 204.3 |   |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

3

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED STATEMENT OF CASH FLOWS**

**($ in millions)**

 
| ** **                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                            | ** ** | ** **                           | ** ** | **(as restated)** | ** ** |
| **Operating  Activities**                             | ** ** | ** **                           | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net income                                            | ** ** | **$**                                | **164.5**  | ** ** | $ | 205.0 |   |
| Adjustments:                                          |       |                                 | ** ** |   |   |
| Depreciation and amortization                         | ** ** | **87.3**                             | ** ** | 88.5 |   |
| Amortization of regulatory assets, net                | ** ** | **0.3**                              | ** ** | 35.3 |   |
| Deferred income taxes                                 | ** ** | **(5.5**                             | **)**      | (2.3 | ) |
| Income from interest rate hedges                      | ** ** | **—**                           | ** ** | (21.2 | ) |
| Cumulative effect of accounting change, net  of tax   | ** ** | **—**                           | ** ** | (17.0 | ) |
| Changes in working capital:                           |       |                                 | ** ** |   |   |
| Accounts receivable                                   | ** ** | **25.8**                             | ** ** | 25.7 |   |
| Accounts payable                                      | ** ** | **(11.2**                            | **)**      | (4.8 | ) |
| Net intercompany receivable / payable                 | ** ** | **0.5**                              | ** ** | 70.8 |   |
| Accrued taxes payable                                 | ** ** | **103.8**                            | ** ** | 29.5 |   |
| Accrued interest payable                              | ** ** | **5.1**                              | ** ** | (10.7 | ) |
| Prepayments                                           | ** ** | **(2.0**                             | **)**      | (13.4 | ) |
| Inventories                                           | ** ** | **(12.9**                            | **)**      | 0.5 |   |
| Deferred compensation assets                          | ** ** | **8.2**                              | ** ** | 28.3 |   |
| Deferred compensation obligations                     | ** ** | **(1.1**                             | **)**      | (28.9 | ) |
| Other (Note 3)                                        | ** ** | **(6.7**                             | **)**      | 0.2 |   |
|                                                  |       |                                 | ** ** |   |   |
| Net cash provided by operating activities             | ** ** | **356.1**                            | ** ** | 385.5 |   |
|                                                  |       |                                 | ** ** |   |   |
| **Investing  Activities**                             |       |                                 | ** ** |   |   |
|                                                  |       |                                 | ** ** |   |   |
| Capital expenditures                                  | ** ** | **(62.7**                            | **)**      | (86.8 | ) |
| Settlement of interest rate hedges                    | ** ** | **—**                           | ** ** | 51.4 |   |
|                                                  |       |                                 | ** ** |   |   |
| Net cash used for investing activities                | ** ** | **(62.7**                            | **)**      | (35.4 | ) |
|                                                  |       |                                 | ** ** |   |   |
| **Financing  Activities**                             |       |                                 | ** ** |   |   |
|                                                  |       |                                 | ** ** |   |   |
| Retirement of long-term debt                          | ** ** | **(0.4**                             | **)**      | (0.4 | ) |
| Issuance of long-term debt, net of issuance  costs    | ** ** | **—**                           | ** ** | 465.1 |   |
| Dividends paid on common stock                        | ** ** | **(150.0**                           | **)**      | (212.7 | ) |
| Dividends paid on preferred stock                     | ** ** | **(0.2**                             | **)**      | (0.7 | ) |
|                                                  |       |                                 | ** ** |   |   |
| Net cash (used for) provided by financing  activities | ** ** | **(150.6**                           | **)**      | 251.3 |   |
|                                                  |       |                                 | ** ** |   |   |
| **Cash and  temporary cash investments**              |       |                                 | ** ** |   |   |
|                                                  |       |                                 | ** ** |   |   |
| Net change                                            | ** ** | **142.8**                            | ** ** | 601.4 |   |
| Balance at beginning of period                        | ** ** | **17.2**                             | ** ** | 17.1 |   |
| Balance at end of period                              | ** ** | **$**                                | **160.0**  | ** ** | $ | 618.5 |   |
|                                                  |       |                                 | ** ** |   |   |
| **Cash  Paid During the Period for:**                 |       |                                 | ** ** |   |   |
| Interest                                              | ** ** | **$**                                | **24.2**   | ** ** | $ | 46.3 |   |
| Income taxes                                          | ** ** | **$**                                | **2.2**    | ** ** | $ | 81.9 |   |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

4

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED BALANCE SHEET**

**($ in millions)**

 
| ** **                                                                                     | ** ** | **At  September 30,  2004** | ** **  | **At  December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|----------------------------|------------|
| **ASSETS**                                                                                     |       |                        |        |                       |       |
|                                                                                           |       |                        |        |                       |       |
| **Property**                                                                                   |       |                        |        |                       |       |
| Property, plant and equipment                                                                  | ** ** | **$**                       | **3,928.9** | ** **                 | $          | 3,875.4 |   |
| Less: Accumulated depreciation and  amortization                                               | ** ** | **(1,842.3**                | **)**       | (1,769.1                   | )          |
|                                                                                           |       |                        | ** **  |                       |       |
| Net property, plant and equipment                                                              | ** ** | **2,086.6**                 | ** **  | 2,106.3                    |       |
|                                                                                           |       |                        | ** **  |                       |       |
| **Current  Assets**                                                                            |       |                        | ** **  |                       |       |
| Cash and temporary cash investments (Note  3)                                                  | ** ** | **160.0**                   | ** **  | 17.2                       |       |
| Accounts receivable, less provision for  uncollectible accounts of $1.1 and $3.6, respectively | ** ** | **134.6**                   | ** **  | 160.4                      |       |
| Inventories, at average cost (Note 3)                                                          | ** ** | **62.5**                    | ** **  | 49.6                       |       |
| Prepaid taxes                                                                                  | ** ** | **11.6**                    | ** **  | 46.4                       |       |
| Other (Note 3)                                                                                 | ** ** | **25.2**                    | ** **  | 24.4                       |       |
|                                                                                           |       |                        | ** **  |                       |       |
| Total current assets                                                                           | ** ** | **393.9**                   | ** **  | 298.0                      |       |
|                                                                                           |       |                        | ** **  |                       |       |
| **Other  Assets**                                                                              |       |                        | ** **  |                       |       |
| Income taxes recoverable through future  revenues                                              | ** ** | **42.6**                    | ** **  | 43.3                       |       |
| Other regulatory assets                                                                        | ** ** | **38.6**                    | ** **  | 36.1                       |       |
| Other (Note 3)                                                                                 | ** ** | **161.3**                   | ** **  | 176.4                      |       |
|                                                                                           |       |                        | ** **  |                       |       |
| Total other assets                                                                             | ** ** | **242.5**                   | ** **  | 255.8                      |       |
|                                                                                           |       |                        | ** **  |                       |       |
| **Total  Assets**                                                                              | ** ** | **$**                       | **2,723.0** | ** **                 | $          | 2,660.1 |   |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

5

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED BALANCE SHEET**

**($ in millions)**

 
| ** **                                | ** ** | **At  September 30,  2004** | ** **  | **At  December 31,  2003** | ** ** |
|-------------------------------------------|------------|-----------------------------|-------------|----------------------------|------------|
| **CAPITALIZATION  AND LIABILITIES**       |       |                        |        |                       |       |
|                                      |       |                        |        |                       |       |
| **Capitalization**                        |       |                        |        |                       |       |
| Common shareholders’ equity          |       |                        |        |                       |       |
| Common stock                              | ** ** | **$**                       | **0.4**     | ** **                 | $          | 0.4 |   |
| Other paid-in capital                     | ** ** | **781.0**                   | ** **  | 780.5                      |       |
| Accumulated other comprehensive income    | ** ** | **35.9**                    | ** **  | 38.2                       |       |
| Earnings reinvested in the business       | ** ** | **335.9**                   | ** **  | 321.7                      |       |
|                                      |       |                        | ** **  |                       |       |
| Total common shareholders’ equity    | ** ** | **1,153.2**                 | ** **  | 1,140.8                    |       |
|                                      |       |                        | ** **  |                       |       |
| Preferred stock                           | ** ** | **22.9**                    | ** **  | 22.9                       |       |
|                                      |       |                        | ** **  |                       |       |
| Long-term debt                            | ** ** | **686.4**                   | ** **  | 687.3                      |       |
|                                      |       |                        | ** **  |                       |       |
| Total capitalization                      | ** ** | **1,862.5**                 | ** **  | 1,851.0                    |       |
|                                      |       |                        | ** **  |                       |       |
| **Current  Liabilities**                  |       |                        | ** **  |                       |       |
| Accounts payable                          | ** ** | **78.5**                    | ** **  | 88.9                       |       |
| Accrued taxes                             | ** ** | **135.4**                   | ** **  | 66.4                       |       |
| Accrued interest                          | ** ** | **15.5**                    | ** **  | 10.2                       |       |
| Other (Note 3)                            | ** ** | **19.1**                    | ** **  | 24.6                       |       |
|                                      |       |                        | ** **  |                       |       |
| Total current liabilities                 | ** ** | **248.5**                   | ** **  | 190.1                      |       |
|                                      |       |                        | ** **  |                       |       |
| **Deferred  Credits and Other**           |       |                        | ** **  |                       |       |
| Deferred taxes                            | ** ** | **372.2**                   | ** **  | 381.7                      |       |
| Unamortized investment tax credit         | ** ** | **50.0**                    | ** **  | 52.2                       |       |
| Other (Note 3)                            | ** ** | **189.8**                   | ** **  | 185.1                      |       |
|                                      |       |                        | ** **  |                       |       |
| Total deferred credits and other          | ** ** | **612.0**                   | ** **  | 619.0                      |       |
|                                      |       |                        | ** **  |                       |       |
| **Total  Capitalization and Liabilities** | ** ** | **$**                       | **2,723.0** | ** **                 | $          | 2,660.1 |   |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

6

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**Notes toConsolidated Financial Statements**

 

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

 

**Basis of Consolidation**

The Dayton Power and Light Company (DP&L or the Company) preparesits consolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America (GAAP).  The consolidated financial statements includethe accounts of DP&L and its other majority-owned subsidiaries.  Investments that are not majority-owned areaccounted for using the equity method when DP&L’s investment allows it theability to exert significant influence, as defined by GAAP.  Undivided interests in jointly-ownedgeneration facilities are consolidated on a pro-rata basis.  All material intercompany accounts and transactionsare eliminated in consolidation.

 

DP&L has prepared the unaudited consolidated financial statementsin this report, pursuant to the rules and regulations of the Securities andExchange Commission.  Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto in DP&L’s 2003Annual Report on Form 10-K.

 

**Estimates, Judgments and Reclassifications**

The preparation of financial statements in conformity with GAAPrequires management to make estimates and judgments that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements and the revenues andexpenses of the period reported.  Significantitems subject to such estimates and judgments include the carrying value ofproperty, plant and equipment; the valuation of derivative instruments; the valuationallowance for receivables and deferred income taxes; and assets and liabilitiesrelated to employee benefits.  Actualresults may differ from those estimates. Reclassifications have been made in certain prior years’ amounts toconform to the current reporting presentation.

 

**Recently Issued Accounting Standards**

 

***Staff Position No. 106-1***

In December 2003, the FASB issued Staff Position No. 106-1 (FSP 106-1),“Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003” (the Act).  The Act provides for drug benefits forretirees over the age of 65 under a new Medicare Part D program.  For employers like DP&L, who currentlyprovide retiree medical programs for certain former employees over the age of65, there are subsidies available which are inherent in the Act.  The Act entitles these employers to a directtax-exempt federal subsidy.  However,since the effective date of the Act was December 2003 and because mostemployers have not had time to consider the accounting considerations and thereis no appropriate accounting guidance for the federal subsidy, the FASB issuedthis FSP 106-1 to allow employers a one-time election to defer recognitionof the impact of the Act in the employer’s accounting until formal guidance isissued.  DP&L elected to deferrecognition of the provisions of this Act until further accounting guidance isissued.

 

***Staff Position No. 106-2***

In May 2004, the FASB issued FASB Staff Position No. 106-2(FSP 106-2), “Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003”, which supersedesFSP 106-1.  FSP 106-2 provides guidanceon the accounting for the effects of the Medicare Prescription Drug,Improvement and Modernization Act of 2003 (the Act) for employers that sponsorpostretirement health care plans that provide prescription drug benefits. Italso requires certain disclosures regarding the effect of the federal subsidyprovided by the Act.  FSP 106-2 iseffective for the first interim or annual period beginning after June 15,2004.  The Company adopted FSP 106-2 onJuly 1, 2004 and the effect was not material to the Company’s results ofoperations, cash flow or financial position.

 

***EITF 03-01 and EITF 02-14***

In June 2004, theEmerging Issues Task Force (EITF) issued EITF 03-01 “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments”,which is applicable for periods effective beginning after June 15, 2004.  EITF 03-01 addresses the meaning ofother-than-temporary impairment and its application to debt and equitysecurities within the scope of Statement of Financial Accounting Standards No.115 “Accounting for Certain Investments in Debt and Equity Securities” (SFAS115), certain debt and equity securities within the scope of

 

7

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Statement of FinancialAccounting Standards No. 124 “Accounting for Certain Investments Held byNot-for-Profit Organizations” (SFAS 124), and equity securities that are notsubject to the scope of SFAS 115 and not accounted for under the equity methodof accounting. In September 2004, the EITF issued EITF 02-14 “Whether anInvestor Should Apply the Equity Method of Accounting to Investments Other ThanCommon Stock”, which is applicable for periods effective after June 15,2004.  EITF 02-14, addresses: (1) whetheran investor should apply the equity method of accounting to investments otherthan common stock, (2) if the equity method should be applied to investmentsother than common stock, how the equity method of accounting should be appliedto those investments and (3) whether investments other than common stock thathave a “readily determinable fair value” under paragraph 3 of SFAS 115 shouldbe accounted for in accordance with SFAS 115 rather than pursuant to EITF02-14.  The Company is in the process ofevaluating each of these issues and has not determined the impact to itsresults of operations, statement of financial position or cash flows.

 

**2.Restatement of Financial Statements**

 

As part of DPL’s Audit Committee’s response to a report prepared byTaft, Stettinius & Hollister LLP and during the 2003 year-end financialclosing process, the Company identified certain adjustments to prior periodfinancial statements.  As a result, theCompany has restated its consolidated financial statements for the three monthsand nine months ended September 30, 2003, in addition to prior periods.  These adjustments increased net income by$1.1 million to $45.4 million for the third quarter of 2003, and increased netincome by $0.9 million to $126.2 million for the nine months ended September30, 2003.  All applicable financialinformation contained in this Quarterly Report on Form 10-Q gives effect tothese restatements.  Accordingly, thefinancial statements for this fiscal period described above that have been inthe Company’s prior SEC filings should not be relied upon.

 

Certain captions in the September 30, 2003 Consolidated Balance Sheetwere also adjusted due to the prior periods’ restatements. Please refer to theCompany’s 2003 Annual Report on Form 10-K for a more complete description ofthe prior period adjustments.

 

The accompanying consolidated financial data setforth below presents the Company’s Consolidated Statement of Results ofOperations for the three and nine months ended September 30, 2003, ConsolidatedStatement of Cash Flows for the nine months ended September 30, 2003 andConsolidated Balance Sheet as of September 30, 2003 on a comparative basisshowing the amounts as originally reported and as restated.

 

**Effectsof Restatement on Net Income**

 

The following table identifies the adjustmentsmade to the consolidated financial statements for the three and nine monthsended September 30, 2003:

 
| ** **                                  | ** ** | **Net Income Increase  (Decrease)** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|
| **($ in  millions)**                   | ** ** | **2003 Third Quarter**              | ** ** | **2003 Year To Date** | ** ** |
| Description of  Adjustment                  |       |                                |       |   |   |
| Supplemental  Executive Retirement Plan (1) |       | $                                   | (0.3       | ) | $ | 1.2 |   |
| Stock  incentive units (2)                  |       | (1.4                                | )          | (1.4 | ) |
| Accrued  expenses (3)                       |       | (0.4                                | )          | (0.4 | ) |
| Sub-total  pre-tax impact                   |       | (2.1                                | )          | (0.6 | ) |
|                                        |       |                                |       |   |   |
| Income taxes  (4)                           |       | 0.9                                 |       | 0.3 |   |
| Total Net  Income Impact                    |       | $                                   | (1.2       | ) | $ | (0.3 | ) |

 

----

(1) Reflects adjustment to record asettlement of the Company’s Supplemental Executive Retirement Plan for certainexecutives in 1997 and 2000 which had not been previously recorded, to includein the plan an executive who had not been previously considered a planparticipant, and to record the proper treatment for Company assets previouslythought to be segregated and restricted solely for purposes of funding thisplan.

 

Consolidated Statement of Results of Operations: For the third quarterof 2003, the adjustment increased Operation and Maintenance expense by $0.3million.  Year-to-date 2003, theadjustment decreased Operation and Maintenance expense by $1.0 million andincreased Other Income by approximately $0.2 million.

 

Consolidated Balance Sheet: At September 30, 2003, the adjustmentincreased Other Assets – Other by approximately $1.2 million.

 

8

----

 

(2) Reflects adjustment to record outstandingstock incentive units at fair value following a change in the operation of theManagement Stock Incentive Plan made as of January 1, 2002 that allowed certainretirees to diversify stock incentive awards to investments other than DPLcommon stock.

 

Consolidated Statement of Results ofOperations: For the third quarter of 2003, the adjustment increased Operationand Maintenance expense by $1.4 million. Year-to-date 2003, theadjustment increased Operation and Maintenance expense by $1.4 million.

 

Consolidated Balance Sheet: At September 30,2003, the adjustment increased Other Paid-in Capital, net of Treasury Stock byapproximately $1.0 million, and Other Deferred Credits by approximately$0.4 million.

 

(3) Reflects adjustment to record accruedexpenses in the period in which these items were incurred.

 

Consolidated Statement of Results ofOperations:  For the three and ninemonths ended September 30, 2003, the adjustment increased Operation andMaintenance expense by $0.4 million.

 

Consolidated Balance Sheet:  At September 30, 2003, the adjustmentincreased Accounts Payable by $0.2 million and decreased Current Assets -Other by $0.2 million.

 

(4) Reflects income taxes related to theabove non-tax adjustments.

 

Consolidated Statement of Results ofOperations: For the third quarter of 2003, the above adjustments resulted in adecrease of $0.9 million to income tax expense. Year-to-date 2003, the adjustments decreased income tax expense by $0.3million.

 

Consolidated Balance Sheet: At September 30,2003, the above adjustments resulted in a decrease of $0.8 million to AccruedTaxes and a decrease of $0.5 million to Other Assets - Other.

 

9

----

 

**THE DAYTON POWER AND LIGHT COMPANY**

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

**(unaudited)**

 
| **$ in millions**                                                 | ** ** | **Three Months Ended  September 30, 2003** | ** ** | **Nine Months Ended  September 30, 2003** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                             | ** ** | **(as previously reported)**               | ** ** | **(as restated)**                         | ** ** | **(as previously reported)** | ** ** | **(as restated)** | ** ** |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| **Revenues**                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Electric revenues                                                      |       | $                                          | 323.2      |                                      | $          | 323.2 |   | $ | 890.3 |   | $ | 890.3 |   |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| **Operating  Expenses**                                                |       |                                       |       |                                      |       |   |   |   |   |
| Fuel                                                                   |       | 59.9                                       |       | 59.9                                      |       | 166.3 |   | 166.3 |   |
| Purchased power                                                        |       | 29.8                                       |       | 29.8                                      |       | 76.3 |   | 76.3 |   |
| Operation and maintenance                                              |       | 42.5                                       |       | 44.6                                      |       | 127.8 |   | 128.6 |   |
| Depreciation and amortization                                          |       | 30.1                                       |       | 30.1                                      |       | 88.5 |   | 88.5 |   |
| Amortization of regulatory assets, net                                 |       | 12.5                                       |       | 12.5                                      |       | 35.3 |   | 35.3 |   |
| General taxes                                                          |       | 28.0                                       |       | 28.0                                      |       | 81.7 |   | 81.7 |   |
| Total operating expenses                                               |       | 202.8                                      |       | 204.9                                     |       | 575.9 |   | 576.7 |   |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Operating Income                                                       |       | 120.4                                      |       | 118.3                                     |       | 314.4 |   | 313.6 |   |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Investment income                                                      |       | 21.5                                       |       | 21.5                                      |       | 21.7 |   | 21.9 |   |
| Other income                                                           |       | 0.6                                        |       | 0.6                                       |       | 5.3 |   | 5.3 |   |
| Interest expense                                                       |       | (13.7                                      | )          | (13.7                                     | )          | (38.9 | ) | (38.9 | ) |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Income Before Income Taxes and Cumulative  Effect of Accounting Change |       | 128.8                                      |       | 126.7                                     |       | 302.5 |   | 301.9 |   |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Income tax expense                                                     |       | 48.8                                       |       | 47.9                                      |       | 114.2 |   | 113.9 |   |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Income Before Cumulative Effect of  Accounting Change                  |       | 80.0                                       |       | 78.8                                      |       | 188.3 |   | 188.0 |   |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Cumulative effect of accounting change, net  of tax                    |       | —                                     |       | —                                    |       | 17.0 |   | 17.0 |   |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Net Income                                                             |       | 80.0                                       |       | 78.8                                      |       | 205.3 |   | 205.0 |   |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Preferred dividends                                                    |       | 0.3                                        |       | 0.3                                       |       | 0.7 |   | 0.7 |   |
|                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Earnings on Common Stock                                               |       | $                                          | 79.7       |                                      | $          | 78.5 |   | $ | 204.6 |   | $ | 204.3 |   |

 

10

----

 

**THEDAYTON POWER AND LIGHT COMPANY**

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

**(unaudited)**

 
| **$ in millions**                              | ** ** | **Nine Months Ended September 30,  2003** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **(as previously reported)**              | ** ** | **(as restated)** | ** ** |
| ** **                                          | ** ** | ** **                                | ** ** | ** ** | ** ** |
| **Operating  Activities**                           | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Net income                                          |       | $                                         | 205.3      |   | $ | 205.0 |   |
| Adjustments:                                        |       |                                      |       |   |   |
| Depreciation and amortization                       |       | 88.5                                      |       | 88.5 |   |
| Amortization of regulatory assets, net              |       | 35.3                                      |       | 35.3 |   |
| Deferred income taxes                               |       | (1.8                                      | )          | (2.3 | ) |
| Income from interest rate hedges                    |       | (21.2                                     | )          | (21.2 | ) |
| Cumulative effect of accounting change, net  of tax |       | (17.0                                     | )          | (17.0 | ) |
| Changes in working capital:                         |       |                                      |       |   |   |
| Accounts receivable                                 |       | 25.7                                      |       | 25.7 |   |
| Accounts payable                                    |       | (5.0                                      | )          | (4.8 | ) |
| Net intercompany receivables and payables           |       | 70.8                                      |       | 70.8 |   |
| Accrued taxes payable                               |       | 29.3                                      |       | 29.5 |   |
| Accrued interest payable                            |       | (10.7                                     | )          | (10.7 | ) |
| Prepayments                                         |       | (12.8                                     | )          | (13.4 | ) |
| Inventories                                         |       | 0.5                                       |       | 0.5 |   |
| Deferred compensation assets                        |       | 28.3                                      |       | 28.3 |   |
| Deferred compensation obligations                   |       | (28.9                                     | )          | (28.9 | ) |
| Other                                               |       | (0.8                                      | )          | 0.2 |   |
| Net cash provided by operating activities           |       | 385.5                                     |       | 385.5 |   |
|                                                |       |                                      |       |   |   |
| **Investing  Activities**                           |       |                                      |       |   |   |
| Capital expenditures                                |       | (86.8                                     | )          | (86.8 | ) |
| Settlement of interest rate hedges                  |       | 51.4                                      |       | 51.4 |   |
|                                                |       |                                      |       |   |   |
| Net cash used for investing activities              |       | (35.4                                     | )          | (35.4 | ) |
|                                                |       |                                      |       |   |   |
| **Financing  Activities**                           |       |                                      |       |   |   |
| Issuance of long-term debt, net of issue  costs     |       | 465.1                                     |       | 465.1 |   |
| Dividends paid on preferred stock                   |       | (0.7                                      | )          | (0.7 | ) |
| Retirement of long-term debt                        |       | (0.4                                      | )          | (0.4 | ) |
| Dividends paid on common stock                      |       | (212.7                                    | )          | (212.7 | ) |
|                                                |       |                                      |       |   |   |
| Net cash used for financing activities              |       | 251.3                                     |       | 251.3 |   |
|                                                |       |                                      |       |   |   |
| **Cash and  Temporary Cash Investments**            |       |                                      |       |   |   |
| Net change                                          |       | 601.4                                     |       | 601.4 |   |
| Balance at beginning of period                      |       | 17.1                                      |       | 17.1 |   |
|                                                |       |                                      |       |   |   |
| Balance at end of period                            |       | $                                         | 618.5      |   | $ | 618.5 |   |
|                                                |       |                                      |       |   |   |
| **Cash  Paid During the Year For:**                 |       |                                      |       |   |   |
| Interest                                            |       | $                                         | 46.3       |   | $ | 46.3 |   |
| Income taxes                                        |       | $                                         | 81.9       |   | $ | 81.9 |   |

 

11

----

 

**THE DAYTON POWER AND LIGHT COMPANY**

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

**(unaudited)**

 
| **$ in millions**                                                                           | ** ** | **At September 30, 2003**    | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                       | ** ** | **(as previously reported)** | ** ** | **(as restated)** | ** ** |
|                                                                                             |       |                         |       |   |   |
| **ASSETS**                                                                                       |       |                         |       |   |   |
|                                                                                             |       |                         |       |   |   |
| **Property**                                                                                     |       |                         |       |   |   |
| Property, plant and equipment                                                                    |       | $                            | 3,849.1    |   | $ | 3,849.1 |   |
| Less: Accumulated depreciation and  amortization                                                 |       | (1,750.9                     | )          | (1,750.9 | ) |
| Net property                                                                                     |       | 2,098.2                      |       | 2,098.2 |   |
|                                                                                             |       |                         |       |   |   |
| **Current  Assets**                                                                              |       |                         |       |   |   |
| Cash and temporary cash investments                                                              |       | 618.5                        |       | 618.5 |   |
| Accounts receivable, less provision for  uncollectible accounts of $5.0 as reported and restated |       | 133.7                        |       | 133.7 |   |
| Inventories, at average cost                                                                     |       | 53.6                         |       | 53.6 |   |
| Prepaid taxes                                                                                    |       | 11.7                         |       | 11.7 |   |
| Other                                                                                            |       | 26.0                         |       | 25.6 |   |
| Total current assets                                                                             |       | 843.5                        |       | 843.1 |   |
|                                                                                             |       |                         |       |   |   |
| **Other  Assets**                                                                                |       |                         |       |   |   |
| Income taxes recoverable through future  revenues                                                |       | 41.4                         |       | 41.4 |   |
| Other regulatory assets                                                                          |       | 47.3                         |       | 47.3 |   |
| Other                                                                                            |       | 173.6                        |       | 174.0 |   |
| Total other assets                                                                               |       | 262.3                        |       | 262.7 |   |
|                                                                                             |       |                         |       |   |   |
| Total Assets                                                                                     |       | $                            | 3,204.0    |   | $ | 3,204.0 |   |

 

**Note - Reflects adoption of FAS 143 in2003.**

 

12

----

 

**THE DAYTON POWER AND LIGHT COMPANY**

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

**(unaudited)**

 
| **$ in millions**                    | ** ** | **At September 30, 2003**    | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **(as previously reported)** | ** ** | **(as restated)** | ** ** |
|                                      |       |                         |       |   |   |
| **CAPITALIZATION  AND LIABILITIES**       |       |                         |       |   |   |
|                                      |       |                         |       |   |   |
| **Capitalization**                        |       |                         |       |   |   |
| Common shareholders’ equity          |       |                         |       |   |   |
| Common stock                              |       | $                            | 0.4        |   | $ | 0.4 |   |
| Other paid-in capital                     |       | 771.8                        |       | 781.3 |   |
| Accumulated other comprehensive income    |       | 35.3                         |       | 32.9 |   |
| Earnings reinvested in the business       |       | 387.2                        |       | 373.4 |   |
| Total common shareholders’ equity    |       | 1,194.7                      |       | 1,188.0 |   |
|                                      |       |                         |       |   |   |
| Preferred stock                           |       | 22.9                         |       | 22.9 |   |
|                                      |       |                         |       |   |   |
| Long-term debt                            |       | 686.8                        |       | 686.8 |   |
|                                      |       |                         |       |   |   |
| Total capitalization                      |       | 1,904.4                      |       | 1,897.7 |   |
|                                      |       |                         |       |   |   |
| **Current  Liabilities**                  |       |                         |       |   |   |
| Current portion – long-term debt     |       | 447.1                        |       | 447.1 |   |
| Accounts payable                          |       | 75.9                         |       | 77.2 |   |
| Net intercompany payables                 |       | 34.4                         |       | 34.0 |   |
| Accrued taxes                             |       | 90.5                         |       | 93.2 |   |
| Accrued interest                          |       | 8.5                          |       | 8.5 |   |
| Other                                     |       | 16.3                         |       | 16.3 |   |
| Total current liabilities                 |       | 672.7                        |       | 676.3 |   |
|                                      |       |                         |       |   |   |
| **Deferred  Credits and Other**           |       |                         |       |   |   |
| Deferred taxes                            |       | 388.8                        |       | 380.7 |   |
| Unamortized investment tax credit         |       | 52.9                         |       | 52.9 |   |
| Other                                     |       | 185.2                        |       | 196.4 |   |
| Total deferred credits and other          |       | 626.9                        |       | 630.0 |   |
|                                      |       |                         |       |   |   |
| Contingencies                             |       |                         |       |   |   |
|                                      |       |                         |       |   |   |
| **Total  Capitalization and Liabilities** |       | $                            | 3,204.0    |   | $ | 3,204.0 |   |

 

**Note - Reflects adoption of FAS 143 in2003.**

 

13

----

 

**3.****              Supplemental FinancialInformation**

 
| **$ in  millions**                                 | ** ** | **At  September 30,  2004** | ** ** | **At  December 31,  2003** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **Cash and  temporary cash investments**                |       |                        |       |                       |       |
| Cash and cash equivalents                               | ** ** | **$**                       | **160.0**  | ** **                 | $          | 17.2 |   |
| Short-term investments                                  | ** ** | **—**                  | ** ** | —                     |       |
| Total cash and temporary cash investments               | ** ** | **$**                       | **160.0**  | ** **                 | $          | 17.2 |   |
|                                                    |       |                        | ** ** |                       |       |
| **Inventories,  at average cost**                       |       |                        | ** ** |                       |       |
| Plant materials and supplies                            | ** ** | **$**                       | **27.9**   | ** **                 | $          | 29.3 |   |
| Fuel                                                    | ** ** | **33.5**                    | ** ** | 19.5                       |       |
| Other                                                   | ** ** | **1.1**                     | ** ** | 0.8                        |       |
| Total inventories, at average cost                      | ** ** | **$**                       | **62.5**   | ** **                 | $          | 49.6 |   |
|                                                    |       |                        | ** ** |                       |       |
| **Other  current assets**                               |       |                        | ** ** |                       |       |
| Prepayments                                             | ** ** | **$**                       | **14.8**   | ** **                 | $          | 10.8 |   |
| Deposits and other advances                             | ** ** | **2.6**                     | ** ** | 5.2                        |       |
| Current deferred income taxes                           | ** ** | **0.9**                     | ** ** | 4.3                        |       |
| Miscellaneous work in progress                          | ** ** | **4.6**                     | ** ** | 3.1                        |       |
| Other                                                   | ** ** | **2.3**                     | ** ** | 1.0                        |       |
| Total other current assets                              | ** ** | **$**                       | **25.2**   | ** **                 | $          | 24.4 |   |
|                                                    |       |                        | ** ** |                       |       |
| **Other  deferred assets**                              |       |                        | ** ** |                       |       |
| Trust assets                                            | ** ** | **$**                       | **93.9**   | ** **                 | $          | 102.9 |   |
| Prepaid pension                                         | ** ** | **37.6**                    | ** ** | 39.7                       |       |
| Unamortized loss on reacquired debt                     | ** ** | **24.3**                    | ** ** | 26.6                       |       |
| Unamortized debt expense                                | ** ** | **5.6**                     | ** ** | 5.9                        |       |
| Other                                                   | ** ** | **(0.1**                    | **)**      | 1.3                        |       |
| Total other deferred assets                             | ** ** | **$**                       | **161.3**  | ** **                 | $          | 176.4 |   |
|                                                    |       |                        | ** ** |                       |       |
| **Other  current liabilities**                          |       |                        | ** ** |                       |       |
| Customer security deposits and other  advances          | ** ** | **$**                       | **14.2**   | ** **                 | $          | 10.6 |   |
| Current deferred income taxes                           | ** ** | **1.5**                     | ** ** | —                     |       |
| Payroll taxes payable                                   | ** ** | **—**                  | ** ** | 10.1                       |       |
| Unearned revenues                                       | ** ** | **0.5**                     | ** ** | 1.2                        |       |
| Current portion - long-term debt                        | ** ** | **1.1**                     | ** ** | 1.1                        |       |
| Other                                                   | ** ** | **1.8**                     | ** ** | 1.6                        |       |
| Total other current liabilities                         | ** ** | **$**                       | **19.1**   | ** **                 | $          | 24.6 |   |
|                                                    |       |                        | ** ** |                       |       |
| **Other  deferred credits**                             |       |                        | ** ** |                       |       |
| Asset retirement obligations – regulated  property | ** ** | **$**                       | **76.4**   | ** **                 | $          | 72.0 |   |
| Trust obligations                                       | ** ** | **66.0**                    | ** ** | 65.3                       |       |
| Retirees health and life benefits                       | ** ** | **32.5**                    | ** ** | 33.7                       |       |
| Environmental reserves                                  | ** ** | **0.1**                     | ** ** | 0.2                        |       |
| Legal claims reserves                                   | ** ** | **3.1**                     | ** ** | 2.1                        |       |
| Asset retirement obligations-generation                 | ** ** | **5.2**                     | ** ** | 4.9                        |       |
| Other                                                   | ** ** | **6.5**                     | ** ** | 6.9                        |       |
| Total other deferred credits                            | ** ** | **$**                       | **189.8**  | ** **                 | $          | 185.1 |   |

 

**Cash Flows**

 
| ** **                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| **$ in  millions**                   | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                | ** ** | ** **                           | ** ** | **(as restated)** | ** ** |
| **Cash  flows – Other**              |       |                                 | ** ** |   |   |
| Payroll taxes payable                     | ** ** | **$**                                | **(11.2**  | **)** | $ | — |   |
| Customer security deposits                | ** ** | **5.5**                              | ** ** | (1.6 | ) |
| Unamortized loss on reacquisition of debt | ** ** | **2.4**                              | ** ** | 2.9 |   |
| Unearned revenues                         | ** ** | **(0.7**                             | **)**      | (1.6 | ) |
| Other                                     | ** ** | **(2.7**                             | **)**      | 0.5 |   |
| Total cash flows – other             | ** ** | **$**                                | **(6.7**   | **)** | $ | 0.2 |   |

 

14

----

 

**Results of Operations**

 
| ** **                                                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **$ in millions**                                                                                 | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                             | ** ** | ** **                            | ** ** | **(as restated)**                    | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| **Comprehensive  income**                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                                                                             | ** ** | **$**                                 | **55.5**   | ** **                           | $          | 78.8 |   | **$** | **164.5** | ** ** | $ | 205.0 |   |
| Net change in unrealized gains (losses) on  financial instruments, net of reclassification adjustments | ** ** | **3.3**                               | ** ** | 3.8                                  |       | **(0.5** | **)** | 6.6 |   |
| Net change in deferred gains on cash flow  hedges                                                      | ** ** | **(0.7**                              | **)**      | 29.0                                 |       | **(2.3** | **)** | 30.0 |   |
| Deferred income taxes related to unrealized  gains (losses)                                            | ** ** | **(1.3**                              | **)**      | (1.1                                 | )          | **0.5** | ** ** | (2.8 | ) |
| Comprehensive income                                                                                   | ** ** | **$**                                 | **56.8**   | ** **                           | $          | 110.5 |   | **$** | **162.2** | ** ** | $ | 238.8 |   |

 

**4.  Pension and PostretirementBenefits**

 

DP&L sponsors a defined benefit plan for substantially all itsemployees.  For collective bargainingemployees, the defined benefits are based on a specific dollar amount per yearof service.  For all other employees, thedefined benefit plan is based primarily on compensation and years ofservice.  The Company funds pension planbenefits as accrued in accordance with the minimum funding requirements of theEmployee Retirement Income Security Act of 1974 (ERISA).

 

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

 

The net periodic benefit (income) cost of the pension andpostretirement benefit plans for the three months ended September 30 were:

 

**Net periodic benefit (income) cost**

 
| ** **                        | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**            | ** ** | **2004**    | ** ** | **2003**           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                        | ** ** | ** **  | ** ** | **(as restated)**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                      | ** ** | **$**       | **0.9**    | ** **         | $          | 0.8 |   | **$** | **—** | ** ** | $ | — |   |
| Interest cost                     | ** ** | **4.0**     | ** ** | 4.1                |       | **0.5** | ** ** | 0.6 |   |
| Expected return on assets         | ** ** | **(5.4**    | **)**      | (6.3               | )          | **(0.2** | **)** | (0.2 | ) |
| Amortization of unrecognized:     |       |        | ** ** |               |       |   | ** ** |   |   |
| Actuarial (gain) loss             | ** ** | **0.4**     | ** ** | —             |       | **(0.2** | **)** | (0.3 | ) |
| Prior service cost                | ** ** | **0.7**     | ** ** | 0.8                |       | **—** | ** ** | — |   |
| Transition obligation             | ** ** | **—**  | ** ** | —             |       | **—** | ** ** | 0.1 |   |
| Net pension benefit (income) cost | ** ** | **$**       | **0.6**    | ** **         | $          | (0.6 | ) | **$** | **0.1** | ** ** | $ | 0.2 |   |

 

 

The net periodic benefit (income) cost of the pension andpostretirement benefit plans for the nine months ended September 30 were:

 

15

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**Net periodic benefit (income) cost**

 
| ** **                        | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------|------------|-------------|------------|--------------------|------------|
| **$****in  millions**             | ** ** | **2004**    | ** ** | **2003**           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                        | ** ** | ** **  | ** ** | **(as restated)**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                      | ** ** | **$**       | **2.8**    | ** **         | $          | 2.5 |   | **$** | **—** | ** ** | $ | — |   |
| Interest cost                     | ** ** | **12.0**    | ** ** | 12.2               |       | **1.5** | ** ** | 1.7 |   |
| Expected return on assets         | ** ** | **(16.3**   | **)**      | (18.8              | )          | **(0.5** | **)** | (0.4 | ) |
| Amortization of unrecognized:     |       |        | ** ** |               |       |   | ** ** |   |   |
| Actuarial (gain) loss             | ** ** | **1.4**     | ** ** | 0.1                |       | **(0.7** | **)** | (0.9 | ) |
| Prior service cost                | ** ** | **2.0**     | ** ** | 2.2                |       | **—** | ** ** | — |   |
| Transition obligation             | ** ** | **—**  | ** ** | —             |       | **0.1** | ** ** | 0.2 |   |
| Net pension benefit (income) cost | ** ** | **$**       | **1.9**    | ** **         | $          | (1.8 | ) | **$** | **0.4** | ** ** | $ | 0.6 |   |

 

**5.****              Stock-Based Compensation**

 

DP&L accounts for DPL Inc. stock options granted on or afterJanuary 1, 2003 under the fair value method set forth in FASB Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (SFAS 123).  This standardrequires the recognition of compensation expense for stock-based awards toreflect the fair value of the award on the date of grant.  DP&L follows Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and relatedAccounting Principles Board and FASB interpretations in accounting forstock-based compensation granted before January 1, 2003.  If DP&L had used the fair value method ofaccounting for stock options granted prior to 2003, earnings on common stockwould have been reported as follows:

 
| ** **                                                                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **$ in millions**                                                                               | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                           | ** ** | ** **                            | ** ** | **(as restated)**                    | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
|                                                                                                 |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Earnings on common stock, as reported                                                                | ** ** | **$**                                 | **55.5**   | ** **                           | $          | 78.5 |   | **$** | **164.3** | ** ** | $ | 204.3 |   |
| Add: Total stock-based compensation expense  determined under APB 25, net of related tax effects     |       | —                                | ** ** | —                               |       | — | ** ** | — |   |
| Deduct: Total stock-based compensation  expense determined under FAS 123, net of related tax effects | ** ** | **(0.7**                              | **)**      | (0.8                                 | )          | **(2.2** | **)** | (2.0 | ) |
| Pro-forma earnings on common stock                                                                   | ** ** | **$**                                 | **54.8**   | ** **                           | $          | 77.7 |   | **$** | **162.1** | ** ** | $ | 202.3 |   |

 

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

 

| **$ in millions**                                                    | ** ** | **At  September 30,  2004** | ** ** | **At  December 31,  2003** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| First Mortgage Bonds maturing: 2013 -  5.125%                             |       | **$**                       | **470.0**  | ** **                 | $          | 470.0 |   |
| Pollution control series maturing Through  2027 - 6.43% (a)               | ** ** | **104.4**                   | ** ** | 104.8                      |       |
| ** **                                                                |       | **574.4**                   | ** ** | 574.8                      |       |
| ** **                                                                |       | ** **                  | ** ** |                       |       |
| Guarantee of Air Quality Development Obligations  - 6.10% Series due 2030 | ** ** | **110.0**                   | ** ** | 110.0                      |       |
| Obligation for capital lease                                              | ** ** | **3.7**                     | ** ** | 4.3                        |       |
| Unamortized debt discount and premium (net)                               | ** ** | **(1.7**                    | **)**      | (1.8                       | )          |
| Total                                                                     | ** ** | **$**                       | **686.4**  | ** **                 | $          | 687.3 |   |

 

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

 

The amounts of maturities and mandatory redemptions for First MortgageBonds, Guaranteed Air Quality Development Obligations and the Capital Lease are$0.2 million for the remainder of 2004, $1.1 million in 2005, $1.1 million in2006, $9.3 million in 2007 and $0.7 million in 2008.  Substantially all property of DP&L issubject to the mortgage lien securing the First Mortgage Bonds.

 

16

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On September 29, 2003, DP&L issued $470 million principal amount ofFirst Mortgage Bonds, 5.125% Series due 2013. The net proceeds from the sale of the bonds, after expenses, were usedto (i) redeem $226 million principal amount of DP&L’s First Mortgage Bonds,8.15% Series due 2026, at a redemption price of 104.075% of the principalamount plus accrued interest to the redemption date, and (ii) redeem $220million principal amount of DP&L’s First Mortgage Bonds, 7.875% Series due2024, at a redemption price of 103.765% of the principal amount plus accruedinterest to the redemption date.  The$446 million of First Mortgage Bonds were called by DP&L on September 30,2003, for redemption on October 30, 2003. The 5.125% Series due 2013 have not been registered under the SecuritiesAct of 1933, but were offered and sold through a private placement incompliance with Rule 144A under the Securities Act of 1933.  The bonds include step-up interest provisionsrequiring DP&L to pay additional interest if the securities remainunregistered after 180 days from issuance. The sale of the bonds was not registered and, as a result, the Companyis required to pay additional interest of 0.50% until an exchange offer forthese securities is registered with the SEC.

 

Issuance of additional amounts of First Mortgage Bonds by DP&L islimited by provisions of its mortgage; however, DP&L continues to havesufficient capacity to issue First Mortgage Bonds that the Company believeswill satisfy its requirements in connection with its refinancing andconstruction programs through 2008.  Theamounts and timing of future financings will depend upon market and otherconditions, rate increases, levels of sales and construction plans.

 

In February 2004, DP&L entered into a $20 million MasterLetter of Credit Agreement with a financial lending institution.  This agreement, which expires inFebruary 2005, supports performance assurance needs in the ordinary courseof business.  As of September 30,2004, DP&L had eight outstanding letters of credit totaling $8.5 million.

 

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

 

There are no intercompany debt collateralizations or debt guaranteesbetween DP&L and its parent or subsidiaries.  None of the debt obligations of DP&L areguaranteed or secured by affiliates and no cross-collateralization existsbetween any subsidiaries.

 

**7.     BusinessSegment Reporting**

 

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

 
| ** **                          | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|-------------|--------------------------------------|------------|
| **$ in millions**              | ** ** | **2004**                              | ** **  | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | ** **                            | ** **  | **(as restated)**                    | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Revenues                            |       |                                  |        |                                 |       |   |   |   |   |
| Electric                            | ** ** | **$**                                 | **310.2**   | ** **                           | $          | 323.2 |   | **$** | **893.4** | ** ** | $ | 890.3 |   |
|                                |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Operating income                    |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Electric                            | ** ** | **$**                                 | **117.3**   | ** **                           | $          | 128.0 |   | **$** | **330.3** | ** ** | $ | 336.4 |   |
| Other (a)                           | ** ** | **(10.6**                             | **)**       | (9.7                                 | )          | **(27.1** | **)** | (22.8 | ) |
| Total operating income              | ** ** | **$**                                 | **106.7**   | ** **                           | $          | 118.3 |   | **$** | **303.2** | ** ** | $ | 313.6 |   |
|                                |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Depreciation and amortization       |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Electric                            | ** ** | **$**                                 | **29.6**    | ** **                           | $          | 30.1 |   | **$** | **87.3** | ** ** | $ | 88.5 |   |
|                                |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Expenditures-construction additions |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Electric                            | ** ** | **$**                                 | **17.1**    | ** **                           | $          | 18.6 |   | **$** | **62.1** | ** ** | $ | 70.1 |   |
|                                |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Assets                              |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Electric                            | ** ** | **$**                                 | **2,592.4** | ** **                           | $          | 3,060.1 |   | **$** | **2,592.4** | ** ** | $ | 3,060.1 |   |
| Unallocated corporate assets        | ** ** | **130.6**                             | ** **  | 143.9                                |       | **130.6** | ** ** | 143.9 |   |
| Total assets                        | ** ** | **$**                                 | **2,723.0** | ** **                           | $          | 3,204.0 |   | **$** | **2,723.0** | ** ** | $ | 3,204.0 |   |

 

17

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*(a) Includes unallocated corporate items.*

 

**8.     Commitmentsand Contingencies**

 

**Contingencies**

In the normal course of business, DP&L is subject to variouslawsuits, actions, proceedings, claims and other matters asserted under lawsand regulations.  DP&L believes theamounts provided in its consolidated financial statements, as prescribed byGAAP, are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that theactual amounts required to satisfy alleged liabilities from various legalproceedings, claims, and other matters discussed below, and to comply with applicablelaws and regulations, will not exceed the amounts reflected in DP&L’sConsolidated Financial Statements.  Assuch, costs, if any, that may be incurred in excess of those amounts providedas of September 30, 2004 cannot be reasonably determined.

 

**Environmental Matters**

DP&L and its subsidiaries’ facilities and operations are subject toa wide range of environmental regulations and law.  In the normal course of business, DP&Lhas investigatory and remedial activities underway at these facilities to comply,or to determine compliance, with such regulations.  DP&L has been identified, either by agovernment agency or by a private party seeking contribution to site clean-upcosts, as a potentially responsible party (PRP) at a number of sites pursuantto state and federal laws.  DP&Lrecords liabilities for probable estimated loss in accordance with FASBStatement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting forContingencies.”  To the extent a probableloss can only be estimated by reference to a range of equally probableoutcomes, and no amount within the range appears to be a better estimate thanany other amount, DP&L accrues for the low end of the range.  Because of uncertainties related to thesematters, accruals are based on the best information available at the time.  DP&L evaluates the potential liabilityrelated to probable losses quarterly and may revise its estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on the Company’s results ofoperations and financial position.

 

**Legal Matters**

 

On July 9, 2004, Mr. Forster and Ms. Muhlenkamp filed a lawsuit againstthe Company, DPL and MVE, Inc. (MVE) in the Circuit Court, Fourth JudicialCircuit, in and for Duval County, Florida. The complaint asserts that the Company, DPL and MVE (i) wrongfullyterminated Mr. Forster and Ms. Muhlenkamp by undermining their authority andresponsibility to manage the companies and excluding them from discussions oncorporate financial issues and strategic planning after the Thobe Memorandumwas distributed and (ii) breached Mr. Forster’s consulting contract and Ms.Muhlenkamp’s employment agreement by denying them compensation and benefitsallegedly provided by the terms of such contract and agreement upon theirtermination from the Company and DPL. Mr. Forster and Ms. Muhlenkamp seek damages of an undeterminedamount.  On August 9, 2004, thedefendants removed the case to the U.S. District Court for the Middle Districtof Florida, Jacksonville Division.  On August16, 2004, the defendants moved to dismiss the litigation based on the Floridafederal court’s lack of jurisdiction over the Company, DPL and MVE, all of whomare companies based in Dayton, Ohio.  Inthe alternative, the defendants requested that the court transfer the case tothe U.S. District Court for the Southern District of Ohio, which hasjurisdiction in Dayton, Ohio.  OnSeptember 17, 2004, Mr. Forster and Ms. Muhlenkamp opposed these motions.  On November 10, 2004, the U.S. District Courtfor the Middle District of Florida, Jacksonville Division, granted DPL’s motionto dismiss.

 

On August 24, 2004, the Company, DPL and MVE filed a Complaint againstMr. Forster, Ms. Muhlenkamp and Mr. Koziar in the Court of Common Pleas ofMontgomery County, Ohio asserting legal claims against them relating to thetermination of the Valley Partners Agreements, challenging the validity of theamendments and the propriety of the distributions and alleging that Messrs.Forster and Koziar and Ms. Muhlenkamp breached their fiduciary duties andbreached their consulting and employment contracts.  The Company, DPL and MVE seek, among otherthings, damages in excess of $25,000, disgorgement of all amounts improperlywithdrawn by Messrs. Forster and Koziar and Ms. Muhlenkamp from the deferredcompensation plans and a court order declaring that the Company, DPL 

 

18

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and MVE have no further obligations under the consulting and employmentcontracts due to those breaches.  OnNovember 5, 2004, defendants Forster, Koziar and Muhlenkamp filed motions todismiss the Complaint.  The Companycontinues to evaluate all of these matters and is considering other claimsagainst Mr. Forster, Mr. Koziar and/or Ms. Muhlenkamp that include, but are notlimited to, breach of fiduciary duty or other claims relating to personal andCompany investments, the calculation of benefits under the DP&L SERP andfinancial reporting with respect to such benefits, and, with respect to Mr.Koziar, the fulfillment of duties owed to the Company as its legal counsel.

 

On or about June 24, 2004, the SEC commenced a formal investigationinto the issues raised by the Thobe Memorandum. The Company is cooperating with the investigation.

 

On April 7, 2004, DPL received notice that the staff of the PUCO isconducting an investigation into the financial condition of DP&L as aresult of the issues raised by the Thobe Memorandum.  On May 27, 2004, the PUCO ordered DPL to filea plan of utility financial integrity that outlines the actions DPL Inc. hastaken or will take to insulate DP&L utility operations and customers fromits unregulated activities.  DPL must filethis plan within 120 days of the filing of its Form 10-K with the SEC.  The Company intends to comply with this orderand to cooperate with the PUCO’s continuing investigation.

 

On May 28, 2004, the U.S. Attorney’s Office for the Southern Districtof Ohio, assisted by the Federal Bureau of Investigation, notified the Companyand DPL that it has initiated an inquiry involving the subject matters coveredby the Company’s and DPL’s internal investigation.  The Company and DPL are cooperating with thisinvestigation.

 

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

 

In June 2002, a contractor’s employee received a verdict againstDP&L for injuries he sustained while working at a DP&L powerstation.  The Court awarded thecontractor’s employee compensatory damages of approximately $0.8 million andprejudgment interest of approximately $0.6 million.  On April 28, 2004, the appellate court upheldthis verdict except the award for prejudgment interest.  On September 1, 2004, the Ohio Supreme Courtrefused to hear the case, so the matter has been remanded to the trial courtfor a re-determination of whether prejudgment interest should be awarded.  The trial court heard this matter on October15, 2004 and the decision is pending.

 

**Long-Term Obligations and Commercial Commitments**

DP&L enters into various contractual and other long-term obligationsthat may affect the liquidity of its operations. The following table outlinesDP&L’s obligations at September 30, 2004:

 

**Long-term Obligations**

 
| ** **                  | ** ** | **Payment Year** | ** ** |
|-----------------------------|------------|------------------|------------|
| **($ in  millions)**   | ** ** | **2004**         | ** ** | **2005 & 2006** | ** ** | **2007 & 2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-term debt              |       | $                | —     |   | $ | 0.8 |   | $ | 8.6 |   | $ | 673.6 |   | $ | 683.0 |   |
| Capital lease               |       | 0.2              |       | 1.4 |   | 1.4 |   | 1.5 |   | 4.5 |   |
| Operating leases            |       | 0.8              |       | 0.4 |   | — |   | — |   | 1.2 |   |
| Coal contracts              |       | 311.5            |       | 475.2 |   | 206.8 |   | 127.7 |   | 1,121.2 |   |
| Other long-term obligations |       | 12.2             |       | 18.1 |   | 0.5 |   | — |   | 30.8 |   |
| Total long-term obligations |       | $                | 324.7      |   | $ | 495.9 |   | $ | 217.3 |   | $ | 802.8 |   | $ | 1,840.7 |   |

 

Long-term debt:

Long-term debt as of September 30, 2004 consists of First MortgageBonds and Guaranteed Air Quality Development Obligations, including currentmaturities.

 

Capital lease:

As of September 30, 2004, the Company had one capital lease thatexpires September 2010.

 

Operating leases:

As of September 30, 2004, the Company had several operating leases withvarious terms and expiration dates.

 

19

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Coal contracts:

DP&L has entered into various long-term coal contracts to supplyportions of its coal requirements for its generating plants.  Contract prices are subject to adjustment inaccordance with various indices, and have features that will limit priceescalation in any given year.

 

Other long-term obligations:

As of September 30, 2004, DP&L had various other long-termobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

DP&L enters into various commercial commitments which may affectthe liquidity of its operations.

 

**Commercial Commitments**

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

 

Credit facilities:

DP&L had $150 million available through a revolving creditagreement with a consortium of banks that was scheduled to expire onDecember 10, 2004.  In June 2004,the Company replaced this facility with a $100 million, 364 day unsecuredcredit facility that expires on May 31, 2005. At September 30, 2004, there were no borrowings outstanding under thiscredit agreement.  The new facility maybe increased to up to $150 million.

 

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electricgeneration company.  As of September 30,2004, DP&L could be responsible for the repayment of 4.9%, or $14.9 million,of a $305 million debt obligation and also 4.9%, or $2.9 million, of a separate$60.0 million debt obligation.  Bothobligations mature in 2006.

 

**Item2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

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

 

Forward-looking statements speak only as of the date of the document inwhich they are made.  The Companydisclaims any obligation or undertaking to provide any updates or revisions toany forward-looking statement to reflect any change in its expectations or anychange in events, conditions or circumstances on which the forward-lookingstatement is based. (See FACTORS THAT MAY AFFECT FUTURE RESULTS.)

 

**OVERVIEW AND FUTURE EXPECTATIONS**

 

In the third quarter of 2004, DP&L’s operating income decreased$11.6 million from the third quarter of 2003. Electric revenues of $310.2 million decreased from the prior year by$13.0 million primarily resulting from decreased retail and wholesalerevenues.  Operating expenses of $203.5million in the third quarter of 2004 were less than the third quarter of 2003by $1.4 million.  DP&L’s earnings oncommon stock of $55.5 million in the third quarter of 2004 decreased $23.0million from the third quarter of 2003.

 

20

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For the nine months ended September 30, 2004, DP&L’s operatingincome of $303.2 million decreased $10.4 million from the same period of theprior year.  Electric revenues of $893.4million exceeded the same period of the prior year by $3.1 million primarilyresulting from an increase in wholesale revenues, partially offset by lowerretail revenues.  Operating expenses of$590.2 million for the nine months ended September 30, 2004 were greater thanthe nine months ended September 30, 2003 by $13.5 million or 2% primarilyrelating to increases in fuel and purchased power costs and corporateexpenses.  DP&L’s reported earningson common stock of $164.3 million for the nine months ended September 30, 2004decreased $40.0 million from the nine months ended September 30, 2003.

 

The increases in fuel and purchase power costs and corporate expensesare expected to continue to have a negative impact on operating income for thebalance of 2004.

 

**RESULTS OF OPERATIONS**

 

**Income Statement Highlights**

 
| ** **              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **$****in  millions**   | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **              | ** ** | ** **                            | ** ** | **(as restated)**                    | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
|                    |       |                                  |       |                                 |       |   |   |   |   |
| Electric revenues       | ** ** | **$**                                 | **310.2**  |                                 | $          | 323.2 | ** ** | **$** | **893.4** |   | $ | 890.3 |   |
| Less:                   |       |                                  |       |                                 |       |   |   |   |   |
| Fuel                    | ** ** | **64.1**                              |       | 59.9                                 | ** ** | **187.3** |   | 166.3 |   |
| Purchased power         | ** ** | **31.4**                              |       | 29.8                                 | ** ** | **84.6** |   | 76.3 |   |
| Net electric margin (a) | ** ** | **$**                                 | **214.7**  |                                 | $          | 233.5 | ** ** | **$** | **621.5** |   | $ | 647.7 |   |
|                    |       |                                  |       |                                 |       |   |   |   |   |
| Operating income        | ** ** | **$**                                 | **106.7**  |                                 | $          | 118.3 | ** ** | **$** | **303.2** |   | $ | 313.6 |   |

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

 

**Revenues**

Electricrevenues decreased $13.0 million or 4% to $310.2 million in the third quarterof 2004 compared to $323.2 million for the third quarter of 2003 primarilyreflecting lower retail and wholesale revenues. Retail revenues declined primarily resulting from lower residential andindustrial revenues.  Residential revenuedecreased by $3.7 million related to lower sales volume and industrial revenuedecreased $7.2 million primarily resulting from lower average rates.  Wholesale revenues decreased $3.4 millionresulting from lower sales volume for wholesale sales, partially offset byhigher average rates for wholesale sales. Wholesale revenues decreased primarily resulting from a 31% decrease inwholesale sales volume as opportunities to sell energy and capacity in excessof existing retail sales with positive margin were not as readily availablewhen compared to the same period of the prior year.

 

Forthe nine months ended September 30, 2004, electric revenues increased $3.1million to $893.4 million compared to $890.3 million for the same period of theprior year.  Retail revenues decreased$20.8 million while wholesale revenues increased $23.9 million for the ninemonths ended September 30, 2004 compared to the same period in the prioryear.  Retail revenues declined primarilyresulting from lower Industrial and Commercial revenues relating to loweraverage rates.  These decreases werepartially offset by an increase in Residential revenues relating to highersales volume.  Wholesale revenuesincreased $23.9 million for the nine months ended September 30, 2004 over thesame period in 2003 resulting from higher average market rates for wholesalesales, partially offset by lower sales volume for wholesale sales.  Wholesale average market rates increasedapproximately 30% for the nine months ended September 30, 2004 compared to thesame period of the prior year, while wholesale sales volume decreased byapproximately 12% when compared to the prior year.

 

**Operating Expenses**

Net electric margin of $214.7 million in the third quarter of 2004decreased by $18.8 million from $233.5 million in the third quarter of2003.  As a percentage of total electricrevenues, net electric margin decreased by 3.0 percentage points to 69.2% from72.2%.  This decline is primarily theresult of lower retail and wholesale revenues and increased fuel and purchasedpower costs.  Fuel costs increased by$4.2 million or 7% in the three months ended September 30, 2004 compared to thesame period in 2003 primarily resulting from higher average fuel costs forretail sales.  Purchased power costsincreased by $1.6 million or 5% in the third quarter of 2004 compared to the

 

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same period in 2003 primarily resulting from a higher volume ofpurchased power for retail sales and higher average market prices for wholesalesales, partially offset by a lower volume of purchased power for wholesalesales.

 

For the nine months ended September 30, 2004, net electric margin of$621.5 million decreased by $26.2 million or 4% from $647.7 million for thenine months ended September 30, 2003.  Asa percentage of total electric revenues, net electric margins decreased by 3.2percentage points to 69.6% from 72.8%. This decline is primarily the result of increased fuel and purchasedpower costs.  Fuel costs increased by$21.0 million or 13% for the nine months ended September 30, 2004 compared tothe same period in 2003 primarily resulting from higher average fuel costs forboth retail and wholesale sales. Purchased power costs increased by $8.3 million or 11% for the ninemonths ended September 30, 2004 compared to the same period in 2003 primarilyresulting from a higher volume of purchased power for retail sales and higheraverage market prices for wholesale sales.

 

Operation and maintenance expense increased $7.2 million or 16% to$51.8 million for the three months ended September 30, 2004 compared to $44.6million for the same period in 2003 as a result of higher corporate costs andincreased electric production expenses. Corporate costs increased reflecting deferred compensation of $2.9million, Director’s fees of $1.2 million, pension expense of $1.2 million and$0.8 million in Sarbanes-Oxley project costs. Electric production expenses were $1.4 million higher primarily forscheduled outages and ash disposal.

 

For the nine months ended September 30, 2004, operation and maintenanceexpenses increased $23.9 million or 19% to $152.5 million compared to $128.6million for the same period in 2003 as a result of higher corporate costs andincreased electric production costs. Corporate costs increased primarily resulting from higher insurancepremiums for Directors and Officers’ liability insurance of $4.8 million,pension expense of $3.7 million, Sarbanes-Oxley project costs of $2.3 million,deferred compensation of $1.4 million and Director’s fees of $1.2 million.  Electric production expenses increased $6.3million for the nine months ended September 30, 2004 over the same period inthe prior year primarily related to maintenance and repair expenses incurredfor scheduled outages and ash disposal.

 

Amortization of regulatory assets decreased $12.4 million in the thirdquarter of 2004 and decreased $35.0 million for the nine months ended September30, 2004 compared to the third quarter of 2003 and the nine months endedSeptember 30, 2003 reflecting the conclusion of the three-year transitionperiod for cost recovery related to deregulation granted by the PublicUtilities Commission of Ohio in 2000 and ended December 31, 2003.

 

## **For the nine months ended September 30, 2004, general taxesdecreased $3.5 million compared to the same period of the prior year primarilyresulting from a 2003 excise tax expense of $4.0 million that did not occur in2004.**

## ** **

## **Other income(deductions)**

Other income (deductions) decreased in the third quarter of 2004 by$1.5 million compared to the third quarter of 2003 primarily as a result of$3.2 million of deferred compensation expense incurred in 2004 as well asreduced dividends and interest income on trust assets of $1.0 million,partially offset by $2.8 million in gains realized from the disposition ofpollution control emission allowances. For the nine months ended September 30, 2004, other income (deductions)decreased $4.2 million primarily resulting from $6.5 million of deferredcompensation expense in 2004, $2.1 million of reduced dividends and interestincome on trust assets compared to 2003, $1.7 million of 2004 revolving creditfacility fees and $1.6 million of non-operating income received in 2003,partially offset by $7.9 million of gains realized from the disposition ofpollution control emission allowances.

 

## **Interest Expense**

Interest expense decreased by $3.1 million or 23% in the third quarterof 2004 compared to the same period in 2003 primarily resulting from lowerinterest related to the issuance of the $470 million First Mortgage Bonds5.125% Series due 2013 that have a lower interest rate than the retireddebt.  This decrease was offset by lowercapitalized interest reflecting the completion of capital projects in 2003.

 

For the nine months ended September 30, 2004, interest expense declined$6.5 million or 17% compared to the nine months ended September 30, 2003,primarily reflecting lower interest related to the $470 million First MortgageBonds issuance.  This decrease was offsetby lower capitalized interest expense as a result of capital projects completedin 2003.

 

## **Income Tax Expense**

Income tax expense decreased $8.1 million or 17% in the third quarterof 2004 and decreased $6.1 million or 5% for the nine months ended September30, 2004 compared to the third quarter of 2003 and the nine months endedSeptember 30, 2003 primarily resulting from lower income experienced in each ofthe respective periods.  In

 

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addition, during the third quarter of 2004, the Company increased itstax expense by approximately $3.1 million to reflect a state determinationdenying certain credits claimed on prior tax returns.  The Company intends to appeal thisdetermination.

 

## **Cumulative Effect ofAccounting Change**

The cumulative effect of accounting change of $17.0 million for thenine months ended September 30, 2003 reflects the adoption of the provisions ofFASB Statement of Financial Accounting Standards No. 143, “Accounting for AssetRetirement Obligations” (SFAS 143).

 

**LIQUIDITY, CAPITAL RESOURCES AND REQUIREMENTS**

 

DP&L’s cash and temporary cash investments totaled $160.0 millionat September 30, 2004 compared to $618.5 million at September 30, 2003.DP&L’s cash and temporary cash investments totaled $17.2 million atDecember 31, 2003.

 

The Company generated net cash from operating activities of $356.1million for the nine months ended September 30, 2004 compared to $385.5 millionfor the nine months ended September 30, 2003. The net cash from operating activities for the nine months endedSeptember 30, 2004 was primarily the result of operating profitability and cashgenerated from working capital, specifically related to cash generated fromreceivables and the timing of tax payments. This increase in working capital was partially offset by cash used topurchase coal inventory.  Operatingprofitability and increases in working capital, specifically related to cashgenerated from receivables and the timing of tax payments, primarily drove netcash provided from operating activities for the nine months ended September 30,2003.  The tariff-based revenue continuesto be the principal source of cash from operating activities.  Management believes that the diversifiedretail customer mix of residential, commercial, and industrial classes providesDP&L with a reasonably predictable gross cash flow.

 

Net cash flows used for investing activities were $62.7 million for thenine months ended September 30, 2004 and $35.5 million for the same period ofthe prior year.  The net cash used inboth periods was primarily for capital expenditures.  For the nine months ended September 30, 2003,net cash used for investing activities was partially offset by cash provided bythe settlement of interest rate hedges of $51.4 million.

 

Net cash flows used for financing activities were $150.6 million forthe nine months ended September 30, 2004 compared to net cash flows provided byfinancing activities of $251.3 million for the nine months ended September 30,2003.  Net cash flows used for financingactivities for the nine months ended September 30, 2004 and 2003 related to thepayment of dividends on common stock, retirement of long-term debt, anddividends paid on preferred stock.  Forthe nine months ended September 30, 2003, the cash flows used for financingactivities were offset by cash flows provided by the issuance of long-term debtof $465.1 million.

 

**Capital Requirements**

# **Construction additions were $62.1 million for the ninemonths ended September 30, 2004 and are expected to approximate $88 million forthe year compared to $70.1 million for the nine months ended September 30, 2003and $98 million for the year ended 2003. Planned construction additions for 2004 relate to DP&L’senvironmental compliance program, power plant equipment, its transmission anddistribution system, and information systems.**

 

Capitalprojects are subject to continuing review and are revised in light of changesin financial and economic conditions, load forecasts, legislative andregulatory developments and changing environmental standards, among otherfactors.  Over the next four years,DP&L is projecting to spend $800 million in capital projects, approximatelyhalf of which is to meet changing environmental standards.  DP&L’s ability to complete its capitalprojects and the reliability of future service will be affected by itsfinancial condition, the availability of internal and external funds atreasonable cost, and adequate and timely return on these capitalinvestments.  DP&L expects to financeits construction additions over the next few years with internally generatedfunds.

 

**Debt Obligations and Maturities**

TheCompany’s scheduled maturities and mandatory redemptions for First MortgageBonds, Guaranteed Air Quality Development Obligations, and the Capital Leaseare $0.2 million for the remainder of 2004, $1.1 million in 2005, $1.1 millionin 2006, $9.3 million in 2007 and $0.7 million in 2008.  Substantially all property of DP&L issubject to the mortgage lien securing the First Mortgage Bonds.

 

On September 29, 2003, DP&L issued $470 million principal amount ofFirst Mortgage Bonds, 5.125% Series due 2013. The net proceeds from the sale of the bonds, after expenses, were usedto (i) redeem $226 million principal

 

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

 

Issuance of additional amounts of First Mortgage Bonds by DP&L islimited by provisions of its mortgage; however, DP&L continues to havesufficient capacity to issue First Mortgage Bonds to satisfy its requirementsin connection with its refinancing and construction programs through 2008.  The amounts and timing of future financingswill depend upon market and other conditions, rate increases, levels of salesand construction plans.

 

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

 

 

In February 2004, DP&L entered into a $20 million MasterLetter of Credit Agreement with a financial lending institution.  This agreement, which expires inFebruary 2005, supports performance assurance needs in the ordinary courseof business.  DP&L has certaincontractual agreements for the sale and purchase of power, fuel and relatedenergy services that contain credit rating clauses allowing the counterpartiesto seek additional surety under certain conditions. As of September 30,2004, DP&L had eight outstanding letters of credit totaling $8.5 million.

 

In June 2004, DP&L obtained a $100 million unsecured revolvingcredit agreement that extended and replaced DP&L’s revolving creditagreement of $150 million.  The newagreement, which expires on May 31, 2005, provides credit support for theCompany’s business requirements and commercial paper program during this periodand may be increased to up to $150 million. The facility contains two financial covenants including maximum debt tototal capitalization, and minimum earnings before interest and taxes (EBIT) tototal interest expense.  These covenantsare currently met.  DP&L currentlyhas no outstanding borrowings under this credit facility.  Fees associated with this credit facility areapproximately $0.6 million per year. Changes in debt ratings, however, may affect the applicable interestrate for DP&L’s revolving credit agreement. A one-step increase in DP&L’s credit rating reduces the facility’sinterest rate by 0.38% and a one-step decrease in credit rating increases thefacility’s interest rate by 0.38%. DP&L’s ability to use this revolving credit agreement is subject tothe PUCO’s annual approval which expired on November 5, 2004.  DP&L has filed an application to securethe PUCO’s continued authorization and that application is pending.

 

The Company has received multiple credit rating downgrades sinceDecember 31, 2003.  Currently, DP&L’ssenior secured debt credit ratings are as follows:

 
| ** **                       | ** ** | **Rating** | ** ** | **Outlook**                       | ** ** | **Effective** | ** ** |
|----------------------------------|------------|------------|------------|-----------------------------------|------------|---------------|------------|
| Fitch Ratings                    |       | BBB        |       | Positive                          |       | November 2004 |       |
| Moody’s Investors Service   |       | Baa3       |       | Under review for possible upgrade |       | November 2004 |       |
| Standard & Poor’s Corp. |       | BBB-       |       | Negative                          |       | March 2004    |       |

 

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

 

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**Off-Balance Sheet Arrangements**

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

 

**Long-Term Obligations and Commercial Commitments**

DP&L enters into various contractual and other long-termobligations that may affect the liquidity of its operations. The followingtable outlines DP&L’s obligations at September 30, 2004:

 

**Long-term Obligations**

 
| ** **                  | ** ** | **Payment Year** | ** ** |
|-----------------------------|------------|------------------|------------|
| **($ in millions)**    | ** ** | **2004**         | ** ** | **2005 & 2006** | ** ** | **2007 & 2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-term debt              |       | $                | —     |   | $ | 0.8 |   | $ | 8.6 |   | $ | 673.6 |   | $ | 683.0 |   |
| Capital lease               |       | 0.2              |       | 1.4 |   | 1.4 |   | 1.5 |   | 4.5 |   |
| Operating leases            |       | 0.8              |       | 0.4 |   | — |   | — |   | 1.2 |   |
| Coal contracts              |       | 311.5            |       | 475.2 |   | 206.8 |   | 127.7 |   | 1,121.2 |   |
| Other long-term obligations |       | 12.2             |       | 18.1 |   | 0.5 |   | — |   | 30.8 |   |
| Total long-term obligations |       | $                | 324.7      |   | $ | 495.9 |   | $ | 217.3 |   | $ | 802.8 |   | $ | 1,840.7 |   |

 

Long-term debt:

Long-term debt as of September 30, 2004 consists of First MortgageBonds and Guaranteed Air Quality Development Obligations, including currentmaturities.

 

Capital lease:

As of September 30, 2004, the Company had one capital lease thatexpires September 2010.

 

Operating leases:

As of September 30, 2004, the Company had several operating leases withvarious terms and expiration dates.

 

Coal contracts:

DP&L has entered into various long-term coal contracts to supplyportions of its coal requirements for its generating plants.  Contract prices are subject to adjustment inaccordance with various indices, and have features that will limit priceescalation in any given year.

 

Other long-term obligations:

As of September 30, 2004, DP&L had various other long-termobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

DP&L enters into various commercial commitments which may affectthe liquidity of its operations.

 

**Commercial Commitments**

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

 

Credit facilities:

DP&L had $150 million available through a revolving creditagreement with a consortium of banks that was scheduled to expire onDecember 10, 2004.  In June 2004,the Company replaced this facility with a $100 million, 364 day unsecuredcredit facility that expires on May 31, 2005. At September 30, 2004, there were no borrowings outstanding under thiscredit agreement.  The new facility maybe increased to up to $150 million.

 

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electricgeneration company.  As of September 30,2004, DP&L could be responsible for the repayment of 4.9%, or $14.9million, of a $305 million debt obligation and also 4.9%, or $2.9 million, of aseparate $60.0 million debt obligation. Both obligations mature in 2006.

 

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**MARKET RISK**

 

DP&L’s financial results are subject to certain market risks,including changes in electricity, coal, environmental emissions, gas and othercommodity prices; the effect of weather, increased competition and economicconditions in the sales area on retail sales volume; and adverse economicconditions.

 

Approximately 22 percent of DP&L’s third quarter 2004 revenues werefrom sales of energy and capacity in the wholesale market.  Energy and capacity in excess of the needs ofexisting retail customers is sold in the wholesale market when DP&L canidentify opportunities with positive margins. In the third quarter of 2004, sales of excess wholesale energy andcapacity contributed $5.0 million in net electric margins.  This compares to net electric margins fromwholesale energy and capacity sales of $6.6 million in 2003.  This decrease in net electric margin resultedfrom 8% fewer wholesale sales, increased average market prices for fuel andpurchased power and lower capacity valuation. Wholesale sales in the third quarter of 2004 and 2003 were 817 Mwh and891 Mwh, respectively.  Wholesale fuelcosts per megawatt hour for the third quarter of 2004 and 2003 were $14.90 and$13.18, respectively and wholesale purchased power costs per megawatt hour forthe third quarter of 2004 and 2003 were $41.91 and $32.72, respectively.

 

For the nine months ended September 30, 2004, approximately 22 percentof DP&L’s revenues were from sales of excess energy and capacity in thewholesale market.  Energy and capacity inexcess of the needs of existing retail customers is sold in the wholesalemarket when DP&L can identify opportunities with positive margins.  For the nine months ended September 30, 2004,sales of excess wholesale energy and capacity contributed $17.4 million in netelectric margin.  This compares to netelectric margin from wholesale energy and capacity sales of $23.8 million in2003.  This decrease in net electricmargin resulted from increased average market prices for fuel and purchasedpower. Wholesale fuel costs per megawatt hour year-to-date 2004 and 2003 were$16.43 and $13.02, respectively and wholesale purchased power costs permegawatt hour year-to-date 2004 and 2003 were $38.07 and $31.53, respectively.

 

Fuel and purchased power costs represented 47% and 46% of totaloperating costs in the third quarter of 2004 and for the nine months endedSeptember 30, 2004, respectively. DP&L has contracted for all of its projected coal needs for 2004, atan estimated cost per Btu increase of approximately 15% over average 2003levels.  The price of spot coal hasincreased nearly 60% over the last twelve months.  DP&L has term (short, medium and long)contracts executed prior to and during the last twelve months that are pricedbelow present spot prices.  If spot coalprices continue to increase, the probability of counter party non-performancemay increase.  In the event that any coalsupplier does not meet their contract obligations, the Company may be exposedto supply chain risks in a high priced market resulting in potential increasedfuel costs.  Purchased power costsdepend, in part, upon the timing and extent of planned and unplanned outages ofits generating capacity.  DP&L willpurchase power on a discretionary basis when wholesale market conditionsprovide opportunities to obtain power at a cost below the Company’s internalproduction costs.

 

The carrying value of DP&L’s debt was $687.5 million at September30, 2004, consisting of DP&L’s First Mortgage Bonds, Guaranteed Air QualityDevelopment Obligations and the Capital Lease. The fair value of this debt was$683.5 million, based on current market prices or discounted cash flows usingcurrent rates for similar issues with similar terms and remainingmaturities.  The principal cashrepayments and related weighted average interest rates by maturity date forlong-term, fixed rate debt at September 30, 2004 are as follows:

 
| ** **                  | ** ** | **Long-term Debt**       | ** ** |
|-----------------------------|------------|--------------------------|------------|
| **Expected Maturity  Date** | ** ** | **Amount**               | ** ** | **Average Rate** | ** ** |
| ** **                  | ** ** | **($ in millions)** | ** ** | ** ** | ** ** |
|                        |       |                     |       |   |   |
| 2004                        |       | $                        | 0.2        |   |   | 3.3% |   |   |
| 2005                        |       | 1.1                      |       |   | 4.4% |   |   |
| 2006                        |       | 1.1                      |       |   | 4.4% |   |   |
| 2007                        |       | 9.3                      |       |   | 6.1% |   |   |
| 2008                        |       | 0.7                      |       |   | 3.3% |   |   |
| Thereafter                  |       | 675.1                    |       |   | 5.8% |   |   |
| Total                       |       | $                        | 687.5      |   |   | 5.8% |   |   |
|                        |       |                     |       |   |   |   |
| Fair Value                  |       | $                        | 683.5      |   |   |   |   |

 

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Debt maturities remaining in 2004 are expected to be financed withinternal funds.  The fair value offinancial instruments held was $94.6 million and $103.5 million at September30, 2004 and December 31, 2003, respectively. The market risk related to these financial instruments was estimated asthe potential increase/decrease in fair value of approximately $9 million atSeptember 30, 2004, resulting from a hypothetical 10% increase/decrease in thevalue of the underlying securities.

 

**FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

This quarterly report and other documents that DP&L files with theSecurities and Exchange Commission (SEC) and other regulatory agencies, as wellas other oral or written statements the Company may make from time to time,contain information based on management’s beliefs and include forward-lookingstatements (within the meaning of the Private Securities Litigation Reform Actof 1995) that involve a number of known and unknown risks, uncertainties andassumptions. These forward-looking statements are not guarantees of futureperformance, and there are a number of factors including, but not limited to,those listed below, which could cause actual outcomes and results to differ materiallyfrom the results contemplated by such forward-looking statements. DP&L doesnot undertake any obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.These forward-looking statements are identified by terms and phrases such as “anticipate”,“believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”,“plan”, “project”, “predict”, “will”, and similar expressions.

 

**Regulation/Competition**

DP&L operates in a rapidly changing industry with evolving industrystandards and regulations. In recent years a number of federal and statedevelopments aimed at promoting competition triggered industryrestructuring.  Regulatory factors, suchas changes in the policies or procedures that set rates; changes in tax laws,tax rates, and environmental laws and regulations; changes in DP&L’sability to recover expenditures for environmental compliance, fuel costs,purchased power costs and investments made under traditional regulation throughrates; and changes to the frequency and timing of rate increases, can affectthe Company’s results of operations and financial condition.  Additionally, financial or regulatoryaccounting principles or policies imposed by governing bodies can increaseDP&L’s operational and monitoring costs affecting its results of operationsand financial condition.

 

In September 2003, the PUCO approved a Stipulation that provides thefollowing: DP&L’s market development period will continue through December31, 2005; retail generation rates will remain frozen at present levels; acredit issued to customers who elect competitive retail generation service willincrease over two years; and a rate stabilization period from January 1, 2006through December 31, 2008, during which DP&L’s retail generation rates ineffect on January 1, 2004 will serve as market-based rates.  The Stipulation also provides that beginningJanuary 1, 2006, rates may be modified by up to 11% of generation rates,estimated at $75 million, to reflect increased costs associated with fuel,environmental compliance, taxes, regulatory changes, and security measures.

 

Changes in DP&L’s customer base, including aggregation, has led tothe entrance of competitors in the Company’s marketplace and may affect itsresults of operations and financial condition. A new program began November 1,2004 that is designed to assist DP&L residential customers to activelychoose a new generation supplier.  Customerparticipation in this program and its financial impact cannot be determined atthis time.

 

**Economic Conditions**

Economic pressures, as well as changing market conditions and otherfactors related to physical energy and financial trading activities, whichinclude price, basis, credit, liquidity, volatility, capacity, transmission,and interest rates can have a significant effect on DP&L’s operations andthe operations of its retail, industrial and commercial customers.

 

**Reliance on Third Parties**

DP&L relies on many suppliers for the purchase and delivery ofinventory and components to operate its energy production, transmission anddistribution functions.  Unanticipatedchanges in DP&L’s purchase processes may affect the Company’s business andoperating results.  In addition, theCompany relies on others to provide professional services, such as, but notlimited to investment management, actuarial calculations, internal auditservices, payroll processing and various consulting services.

 

**Operating Results Fluctuations**

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

 

**Employees**

A majority of the Company’s employees are under a collective bargainingagreement.  If the Company is unable tonegotiate future collective bargaining agreements, the Company could experiencework stoppages, which may affect its business and operating results.

 

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**Regulatory Uncertainties and Litigation**

In the normal course of business, the Company is subject to variouslawsuits, actions, proceedings, claims and other matters asserted under lawsand regulations.  Additionally, theCompany is subject to diverse and complex laws and regulations, including thoserelating to corporate governance, public disclosure and reporting and taxation,which are rapidly changing and subject to changes in the future. As describedunder Item 3 – Legal Proceedings, in the Company’s Form 10-K for the year endedDecember 31, 2003, the Company is also currently involved in various litigationsin which the outcome is uncertain. Compliance with these rapid changes may substantially increase costs toDP&L’s organizations and could affect its future operating results.

 

**Internal Controls**

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

 

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

 

The Company’s failure to timely improve any deficiencies in itsinternal controls and procedures could result in errors in its consolidatedfinancial statements, adversely affect its ability to operate its business andhamper management’s ability to report on the effectiveness of its internalcontrols.  The Company has taken steps tocorrect the internal control deficiencies identified and will further developand enhance the Company’s internal control policies, procedures, systems andstaff to allow it to mitigate the risk that material accounting errors might goundetected and be included in its consolidated financial statements.  The Company cannot assure that any new policiesor procedures that the Company implements to remedy the material weaknessesand/or reportable conditions will be successful in the near term.

 

The Company is currently undertaking a thorough review of its internalcontrols as part of the Company’s preparation for compliance with the requirementsunder Section 404 of the Sarbanes-Oxley Act of 2002 and the Company is usingthis review to further assist in identifying and correcting any controldeficiencies.  As expected, this reviewhas revealed some control weaknesses, which the Company has reported to theAudit Committee. The Company has since taken steps to strengthen its internalcontrols in these areas, including increasing segregation of duties, writingpolicies where necessary, adding checks at key decision points and increasingsupervisor review of transactions.  Theseactions have been successful in eliminating a large percentage of thedeficiencies noted, but additional remediation activities continue.  Corrected control deficiencies are beingretested by management to assure that remediation efforts were successful, andthe Company’s auditors will perform independent testing of the Company’sinternal controls as part of their year-end review.  At this time, the Company has not completedits review of the existing controls and their effectiveness.  Unless the material weaknesses describedabove, or any identified during this review, are remedied, there can be noassurances that the Company will be able to assert that its internal controlover financial reporting is effective, pursuant to the rules adopted by the SECunder Section 404, when those rules take effect.

 

**CRITICAL ACCOUNTING POLICIES**

 

DP&L’s consolidated financial statements are prepared in accordancewith generally accepted accounting principles in the United States (GAAP).  In connection with the preparation of thesefinancial statements, DP&L’s management is required to make assumptions,estimates and judgments that affect the reported amounts of assets,liabilities, revenues, expenses and the related disclosure of contingent liabilities.  These assumptions, estimates and judgmentsare based on management’s historical experience and assumptions that arebelieved to be reasonable at

 

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the time.  However, becausefuture events and their effects cannot be determined with certainty, thedetermination of estimates requires the exercise of judgment.  DP&L’s critical accounting policies arethose which require assumptions to be made about matters that are highlyuncertain.

 

Different estimates could have a material effect on its financialresults.  Judgments and uncertaintiesaffecting the application of these policies and estimates may result inmaterially different amounts being reported under different conditions orcircumstances.  Significant items subjectto such judgments include the carrying value of property, plant and equipment;the valuation of derivative instruments; the valuation allowance forreceivables and deferred income taxes; the valuation of reserves related tocurrent litigation; and assets and liabilities related to employee benefits.

 

There have been no significant changes to the critical accountingpolicies as disclosed in DP&L’s Form 10-K as of December 31, 2003.

 

**Recently Issued Accounting Pronouncements**

A discussion of recently issued accounting pronouncements is describedin Note 2 of Notes to Consolidated Financial Statements and such discussion isincorporated by reference in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and made a part hereof.

 

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**THE DAYTON POWER AND LIGHTCOMPANY**

**OPERATING STATISTICS**

** **
| ** **                          | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|-------------|--------------------------------------|------------|
| ** **                          | ** ** | **2004**                              | ** **  | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Electric**                        |       |                                  |        |                                 |       |   |   |   |   |
| ** **                          | ** ** | ** **                            | ** **  | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales (millions of kWh)             |       |                                  |        |                                 |       |   |   |   |   |
| Residential                         | ** ** | **1,300**                             |        | 1,356                                | ** ** | **3,921** |   | 3,851 |   |
| Commercial                          | ** ** | **1,016**                             |        | 1,016                                |       | **2,856** |   | 2,804 |   |
| Industrial                          | ** ** | **1,161**                             |        | 1,140                                | ** ** | **3,338** |   | 3,281 |   |
| Other retail                        | ** ** | **367**                               |        | 355                                  | ** ** | **1,057** |   | 1,042 |   |
| Total retail                        | ** ** | **3,844**                             |        | 3,867                                | ** ** | **11,172** |   | 10,978 |   |
| Wholesale                           | ** ** | **956**                               |        | 1,390                                | ** ** | **2,977** |   | 3,400 |   |
|                                |       |                                  |        |                                 |       |   |   |   |   |
| Total                               | ** ** | **4,800**                             |        | 5,257                                | ** ** | **14,149** |   | 14,378 |   |
|                                |       |                                  |        |                                 |       |   |   |   |   |
| Revenues ($ in thousands)      |       |                                  |        |                                 |       |   |   |   |   |
| Residential                         | ** ** | **$**                                 | **117,277** |                                 | $          | 120,972 | ** ** | **$** | **341,856** |   | $ | 335,192 |   |
| Commercial                          | ** ** | **62,133**                            |        | 62,721                               | ** ** | **179,396** |   | 182,912 |   |
| Industrial                          | ** ** | **33,429**                            |        | 40,598                               | ** ** | **97,145** |   | 124,501 |   |
| Other retail                        | ** ** | **25,355**                            |        | 23,455                               | ** ** | **73,019** |   | 69,638 |   |
| Total retail                        | ** ** | **238,194**                           |        | 247,746                              | ** ** | **691,416** |   | 712,243 |   |
| Wholesale                           | ** ** | **72,046**                            |        | 75,429                               | ** ** | **202,006** |   | 178,051 |   |
|                                |       |                                  |        |                                 |       |   |   |   |   |
| Total                               | ** ** | **$**                                 | **310,240** |                                 | $          | 323,175 | ** ** | **$** | **893,422** |   | $ | 890,294 |   |
|                                |       |                                  |        |                                 |       |   |   |   |   |
| Electric customers at end of period | ** ** | **507,669**                           |        | 505,462                              | ** ** | **507,669** |   | 505,462 |   |

 

# **Item3.  Quantitative and QualitativeDisclosures about Market Risk**

 

See the “Market Risk” section of Item 2.

 

**Item4.  Controls and Procedures**

 

For the period covered by this report, the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and interim ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the interimChief Financial Officer concluded that the Company’s disclosure controls andprocedures are effective to ensure that information required to be disclosed bythe Company in the reports that it files or submits under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported. There are inherent limitations to the effectiveness of any system ofdisclosure controls and procedures.  Eveneffective disclosure controls and procedures can only provide reasonableassurance of achieving their control objectives.

 

Attached as Exhibits 31.1 and 31.2 to this annual report arecertifications of the Chief Executive Officer and the interim Chief FinancialOfficer required in accordance with Rule 13a-14 of the Exchange Act.  This portion of the Company’s annual reportincludes the information concerning the controls evaluation referred to in thecertifications and should be read in conjunction with the certifications for amore complete understanding of the topics presented.

 

Except as described below there were no changes in the Company’s internalcontrol over financial reporting that occurred during the last quarter thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.  During their year-end review, KPMG LLP (KPMG),the Company’s independent accountants, identified and reported to managementand the Audit Committee of DPL’s Board of Directors two material weaknesses andcertain other matters involving internal control deficiencies considered to bereportable conditions under standards established by the Public CompanyAccounting Oversight Board (PCAOB). Reportable conditions are matters coming to the attention of theauditors that, in their judgment, relate to significant deficiencies in thedesign or operation of internal control and could adversely affect theorganization’s ability to record, process, summarize and report financial dataconsistent with the assertions of

 

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management in the financial statements. A material weakness is a reportable condition in which the design oroperation of one or more internal control components does not reduce to arelatively low level the risk that errors or fraud in amounts that would bematerial in relation to the financial statements being audited may occur andnot be detected within a timely period by employees in the normal course ofperforming their assigned functions.

 

The two material weaknesses identified are:

 

(1)                                  An ineffectiveprocess for recognizing an adjustment to the Company’s income tax provision toreflect a deductibility limitation under Section 162(m) for executive deferredcompensation distributions made during 2003, including, without limitation,insufficient supporting documentation submitted to the Company’s tax departmentfor purposes of calculating the income tax provision and the lack of effectivecommunication between and among senior management, counsel and the Company’stax and compensation experts.  Absentreview of specific deferred compensation records by the Company’s outsideauditors, income tax balances for 2003 may have been improperly stated atDecember 31, 2003.  Management concurredwith KPMG’s observations relating to income tax reporting of executivecompensation.  The Company further evaluatedits internal processes relating to executive compensation and has implementedinternal control improvements in this area; and

 

(2)                                  A complex and manualprocess for accounting and reporting transactions in DPL’s financial assetportfolio, including, (i) separate reporting structures for MVE accounting andcorporate accounting that do not allow for a review of the entire process, (ii)the lack of a complete accounting manual for financial asset portfolioaccounting that contemplates all investment transactions that occur on aregular basis and (iii) ineffective communication between the MVE and corporateaccounting groups that does not ensure that all investment portfoliotransactions are identified, accumulated and reported in accordance withgenerally accepted accounting principles. Specifically, in 2003 private equity fund distributions in the form ofstock of underlying investments were initially accounted for by managemententirely as return of capital transactions. A large element of each distribution should have been accounted for asincome rather than a return of capital. As a result, results for the third quarter 2003 were required to berevised.  Similar transactions in prioryears were also accounted for inappropriately and were revised.  Management concurred with KPMG’s observationsrelating to investment portfolio accounting and acknowledged the need forimprovement.  DPL further evaluated itsaccounting processes relating to its investment portfolio and has implementedinternal control improvements in this area.

 

The reportable conditions that are not believed to be materialweaknesses are conditions related to: (i) payroll processing and the fact that the Company has two separatepayroll processes, one for the majority of personnel and one for the Company’ssenior executives, (ii) the lack of a quality and change control process forthe preparation and submission of SEC filings on Form 10-K and Form 10-Q, (iii)the lack of significant progress made by management in assessing the Company’sinternal controls in preparation for Sarbanes-Oxley Section 404 implementationand KMPG’s belief that the Company will identify control weaknesses requiringremediation, (iv) the Company’s process for executive travel and entertainmentexpense reporting and reimbursement and the lack of sufficient supportingdocumentation for reported business expenses of certain executives to supportdeductibility for tax purposes, (v) the lack of a comprehensive controllerfunction to monitor the accounting function in the Company and (vi) inadequatesegregation of duties for certain accounting transactions and activitiesprocessed at the executive level, including payroll, benefit plans, othercompensation plans, time and expense reporting by senior management and preparationand submission of SEC filings.

 

The material weaknesses and reportable conditions identified above, ifunaddressed, could result in errors in the Company’s consolidated financialstatements.

 

Management concurred with KPMG’s observations relating to payrollprocessing (particularly those relating to executive compensation), externalreporting processes, and executive travel and entertainment expensereporting.  The Company further evaluatedthese areas and implemented appropriate internal control improvements.

 

Management acknowledged KPMG’s observations relating to Sarbanes-OxleySection 404 implementation and increased resources dedicated to thiseffort.  Additionally, the Company hasimproved its communications both within the organization and with KPMGregarding the status of the implementation process, project scope, preliminaryresults and remediation efforts. Management also acknowledged the need for a more comprehensivecontroller function.  The Companyreviewed the accounting processes performed outside the corporate controller’sarea and reassigned responsibility for these processes as deemed appropriatefor improved internal controls.  Finally,management concurred with KPMG’s observations regarding segregation of dutiesrelated to specific activities performed by the prior interim chief financialofficer and acknowledged that improvements were needed in

 

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this area.  The Company plans touse the Sarbanes-Oxley Section 404 implementation process to further assist inidentifying and reassigning responsibility for activities that requireadditional segregation of duties.

 

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

 

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**Part II.  Other Information**

 

**Item1.  Legal Proceedings**

 

Exceptas set forth herein in Notes to Consolidated Financial Statements, there wereno significant changes to the Legal Proceedings reported in DP&L’s Form10-K as of December 31, 2003.  Adiscussion of legal proceedings is described in Item 3-Legal Proceedings andNote 16 of Notes to Consolidated Financial Statements of DP&L’s Form 10-Kfor the year ended December 31, 2003 and such discussions are incorporated byreference and made a part hereof.

 

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

 

There were no submissions to the security holders in the third quarter.

 

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

 

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

 

**Item6.  Exhibits and Reports on Form 8-K**

 

(a)                                  The following exhibit is filed herewith:

 

Exhibits 31.1 and 31.2 – Officer’s Certifications pursuant to Section302 of the Sarbanes-Oxley Act of 2002

 

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

 

(b)                                 Reports on Form 8-K.

 

On September1, 2004, The Dayton Power and Light Company (DP&L or the Company) filed aForm 8-K reporting, under Item 8.01, that DP&L and DPL Inc. sent a letterto the common shareholders of DPL Inc. and the preferred shareholders ofDP&L that provided, among other things, an update to the efforts tofinalize audited financial statements for 2003 and the intent to resume thedeclaration and payment of quarterly dividends once all SEC reports are filedand the Board declares the dividend and sets a payment date.  The Company also reported its liquidity tomeet near-term operating requirements.

 

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**SIGNATURES**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| ** ** | ** **         | **THE DAYTON POWER AND LIGHT COMPANY**                                                                                 | ** ** |
|------------|--------------------|------------------------------------------------------------------------------------------------------------------------|------------|
|       |               | (Registrant)                                                                                                           |       |
|       |               |                                                                                                                   |       |
|       |               |                                                                                                                   |       |
| Date:      | November 15, 2004  | /s/ James V. Mahoney                                                                                                   |       |
|       |               | James V. Mahoney  President and Chief Executive Officer  (principal executive officer)                                 |       |
|       |               |                                                                                                                   |       |
|       |               |                                                                                                                   |       |
|       | November 15,  2004 | /s/  Pamela Holdren                                                                                                    |       |
|       |               | Pamela  Holdren  Treasurer and interim Chief Financial Officer  (principal financial and principal accounting officer) |       |
|       |               |                                                                                                                   |       |
|       |               |                                                                                                                   |       |
|       | November 15,  2004 | /s/  Daniel L. Thobe                                                                                                   |       |   |
|       |               | Daniel  L. Thobe  Corporate Controller                                                                                 |       |
|            |                    |                                                                                                                        |            |  |

 

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