** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM10-Q**

 

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

 

**For the quarterly period endedMarch 31, 2004**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from               to               **

 

**Commission File Number  1-2385**

 

**THEDAYTON POWER AND LIGHT COMPANY**

(Exact name of registrantas specified in its charter)

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

 

Registrant’s telephonenumber, including area code:  **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 the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES      o         NO     ý

 

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.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

 

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**THE DAYTON POWER AND LIGHTCOMPANY**

**INDEX**

 
| ** **                         | **Page No.**   |
|------------------------------------|----------------|
| **Part I. Financial  Information** |           |
|                               | Item 1.        | Financial Statements |   |
|                               |           |   |   |
|                               |           | Consolidated  Statement of Results of Operations | 3 |
|                               |           |   |   |
|                               |           | Consolidated  Statement of Cash Flows | 4 |
|                               |           |   |   |
|                               |           | Consolidated Balance Sheet | 5 |
|                               |           |   |   |
|                               |           | Notes to  Consolidated Financial Statements | 7 |
|                               |           |   |   |
|                               | Item 2.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 19 |
|                               |           |   |   |
|                               |           | Operating Statistics | 28 |
|                               |           |   |   |
|                               | Item 3.        | Quantitative  and Qualitative Disclosures about Market Risk | 28 |
|                               |           |   |   |
|                               | Item 4.        | Controls and  Procedures | 28 |
|                               |           |   |   |
| **Part II. Other Information**     |           |
|                               | Item 1.        | Legal Proceedings | 31 |
|                               |           |   |   |
|                               | Item  4.       | Submission  of Matters to a Vote of Security Holders | 31 |
|                               |           |   |   |
|                               | Item 5.        | Other Information | 31 |
|                               |           |   |   |
|                               | Item 6.        | Exhibits and  Reports on Form 8-K | 31 |
|                               |           |   |   |
| **Other**                          |           |
|                               | Signatures     |   | 32 |
|                               |           |   |   |
|                               | 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 SECat (800) SEC-0330 for further 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 DP&L Investor Relations, 1065 Woodman Drive,Dayton, Ohio 45432.

 

2

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**Part I. Financial Information**

 

### **Item 1.**  Financial Statements

 

**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED STATEMENT OF RESULTSOF OPERATIONS**

**($ in millions)**

 
| ** **                                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| ** **                                                                 | ** ** | ** **                        | ** ** | **(as restated)** | ** ** |
| **Revenues**                                                               | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Electric  revenues                                                         | ** ** | **$**                             | **300.4**  |   | $ | 295.7 |   |
|                                                                       | ** ** | ** **                        | ** ** |   |   |   |   |
| **Operating  Expenses**                                                    |       |                              |       |   |   |
| Fuel                                                                       | ** ** | **62.7**                          |       | 55.6 |   |
| Purchased power                                                            | ** ** | **28.5**                          |       | 20.0 |   |
| Operation and  maintenance                                                 | ** ** | **46.8**                          |       | 35.8 |   |
| Depreciation and  amortization                                             | ** ** | **28.3**                          |       | 29.1 |   |
| Amortization of  regulatory assets, net                                    | ** ** | **0.1**                           |       | 12.1 |   |
| General taxes                                                              | ** ** | **27.1**                          |       | 28.3 |   |
| Total operating  expenses                                                  | ** ** | **193.5**                         |       | 180.9 |   |
|                                                                       |       |                              |       |   |   |
| **Operating  Income**                                                      | ** ** | **106.9**                         |       | 114.8 |   |
|                                                                       |       |                              |       |   |   |
| Interest expense                                                           | ** ** | **(11.8**                         | )          | (12.8 | ) |
| Other income                                                               | ** ** | **4.2**                           |       | 1.0 |   |
|                                                                       |       |                              |       |   |   |
| **Income  Before Income Taxes and Cumulative Effect of Accounting Change** | ** ** | **99.3**                          |       | 103.0 |   |
|                                                                       |       |                              |       |   |   |
| Income tax  expense                                                        | ** ** | **37.3**                          |       | 39.2 |   |
|                                                                       |       |                              |       |   |   |
| **Income  Before Cumulative Effect of Accounting Change**                  | ** ** | **62.0**                          |       | 63.8 |   |
|                                                                       |       |                              |       |   |   |
| Cumulative  effect of accounting change, net of tax                        | ** ** | **—**                        |       | 17.0 |   |
|                                                                       |       |                              |       |   |   |
| **Net  Income**                                                            | ** ** | **62.0**                          |       | 80.8 |   |
|                                                                       |       |                              |       |   |   |
| Preferred  dividends                                                       | ** ** | **0.2**                           |       | 0.2 |   |
|                                                                       |       |                              |       |   |   |
| **Earnings  on Common Stock**                                              | ** ** | **$**                             | **61.8**   |   | $ | 80.6 |   |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

3

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**THE DAYTON POWER AND LIGHTCOMPANY**

**CONSOLIDATED STATEMENT OF CASHFLOWS**

**($ in millions)**

 
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | ** **                        | ** ** | **(restated)** | ** ** |
| **Operating  Activities**                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net income                                          | ** ** | **$**                             | **62.0**   |   | $ | 80.8 |   |
| Adjustments:                                        |       |                              |       |   |   |
| Depreciation and  amortization                      | ** ** | **28.3**                          |       | 29.1 |   |
| Amortization of  regulatory assets, net             | ** ** | **0.1**                           |       | 12.1 |   |
| Deferred income taxes                               | ** ** | **12.4**                          |       | 23.6 |   |
| Cumulative  effect of accounting change, net of tax | ** ** | **—**                        |       | (17.0 | ) |
| Changes in  working capital:                        |       |                              |       |   |   |
| Accounts  receivable                                | ** ** | **10.0**                          |       | 11.8 |   |
| Accounts payable                                    | ** ** | **1.7**                           |       | 8.4 |   |
| Accrued taxes  payable                              | ** ** | **14.6**                          |       | 11.2 |   |
| Accrued interest  payable                           | ** ** | **4.3**                           |       | (10.8 | ) |
| Prepayments                                         | ** ** | **7.9**                           |       | (2.6 | ) |
| Inventories                                         | ** ** | **(7.7**                          | )          | 2.2 |   |
| Deferred  compensation assets                       | ** ** | **8.8**                           |       | 30.5 |   |
| Deferred  compensation obligations                  | ** ** | **(6.7**                          | )          | (31.2 | ) |
| Other (Note 3)                                      | ** ** | **(15.4**                         | )          | 0.5 |   |
|                                                |       |                              |       |   |   |
| Net cash  provided by operating activities          | ** ** | **120.3**                         |       | 148.6 |   |
|                                                |       |                              |       |   |   |
| **Investing  Activities**                           |       |                              |       |   |   |
|                                                |       |                              |       |   |   |
| Capital  expenditures                               | ** ** | **(25.7**                         | )          | (35.0 | ) |
|                                                |       |                              |       |   |   |
| Net cash used  for investing activities             | ** ** | **(25.7**                         | )          | (35.0 | ) |
|                                                |       |                              |       |   |   |
| **Financing  Activities**                           |       |                              |       |   |   |
|                                                |       |                              |       |   |   |
| Dividends paid  on common stock                     | ** ** | **(75.0**                         | )          | (82.5 | ) |
| Dividends paid  on preferred stock                  | ** ** | **(0.2**                          | )          | (0.2 | ) |
|                                                |       |                              |       |   |   |
| Net cash used  for financing activities             | ** ** | **(75.2**                         | )          | (82.7 | ) |
|                                                |       |                              |       |   |   |
| **Cash  and temporary cash investments**            |       |                              |       |   |   |
|                                                |       |                              |       |   |   |
| Net change                                          | ** ** | **19.4**                          |       | 30.9 |   |
| Balance at  beginning of period                     | ** ** | **17.2**                          |       | 17.1 |   |
| Balance at end  of period                           | ** ** | **$**                             | **36.6**   |   | $ | 48.0 |   |
|                                                |       |                              |       |   |   |
| **Cash  Paid During the Period for:**               |       |                              |       |   |   |
| Interest                                            | ** ** | **$**                             | **6.0**    |   | $ | 22.6 |   |
| Income taxes                                        | ** ** | **$**                             | **0.4**    |   | $ | (5.0 | ) |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

4

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**THE DAYTON POWER AND LIGHTCOMPANY**

**CONSOLIDATED BALANCE SHEET**

**($ in millions)**

 
| ** **                                                                                      | ** ** | **At  March 31,  2004** | ** **  | **At  December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|----------------------------|------------|
|                                                                                            |       |                    |        |                       |       |
| **ASSETS**                                                                                      |       |                    |        |                       |       |
|                                                                                            |       |                    |        |                       |       |
| **Property**                                                                                    |       |                    |        |                       |       |
| Property, plant  and equipment                                                                  | ** ** | **$**                   | **3,899.7** |                       | $          | 3,875.4 |   |
| Less:  Accumulated depreciation and amortization                                                | ** ** | **(1,795.9**            | )           | (1,769.1                   | )          |
| Net property                                                                                    | ** ** | **2,103.8**             |        | 2,106.3                    |       |
|                                                                                            |       |                    |        |                       |       |
| **Current  Assets**                                                                             |       |                    |        |                       |       |
| Cash and  temporary cash investments (Note 3)                                                   | ** ** | **36.6**                |        | 17.2                       |       |
| Accounts  receivable, less provision for uncollectible accounts of $3.6 and $3.6,  respectively | ** ** | **150.4**               |        | 160.4                      |       |
| Inventories, at  average cost (Note 3)                                                          | ** ** | **57.3**                |        | 49.6                       |       |
| Prepaid taxes                                                                                   | ** ** | **34.8**                |        | 46.4                       |       |
| Other (Note 3)                                                                                  | ** ** | **17.2**                |        | 24.4                       |       |
| Total current  assets                                                                           | ** ** | **296.3**               |        | 298.0                      |       |
|                                                                                            |       |                    |        |                       |       |
| **Other  Assets**                                                                               |       |                    |        |                       |       |
| Income taxes  recoverable through future revenues                                               | ** ** | **41.9**                |        | 43.3                       |       |
| Other regulatory  assets                                                                        | ** ** | **37.1**                |        | 36.1                       |       |
| Other (Note 3)                                                                                  | ** ** | **159.5**               |        | 176.4                      |       |
| Total other  assets                                                                             | ** ** | **238.5**               |        | 255.8                      |       |
|                                                                                            |       |                    |        |                       |       |
| **Total  Assets**                                                                               | ** ** | **$**                   | **2,638.6** |                       | $          | 2,660.1 |   |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

5

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**THE DAYTON POWER AND LIGHTCOMPANY**

**CONSOLIDATEDBALANCE SHEET**

**($ in millions)**

(continued)

 
| ** **                                | ** ** | **At  March 31,  2004** | ** **  | **At  December 31,  2003** | ** ** |
|-------------------------------------------|------------|-------------------------|-------------|----------------------------|------------|
|                                      |       |                    |        |                       |       |
| **CAPITALIZATION  AND LIABILITIES**       |       |                    |        |                       |       |
|                                      |       |                    |        |                       |       |
| **Capitalization**                        |       |                    |        |                       |       |
| Common  shareholders’ equity         |       |                    |        |                       |       |
| Common stock                              | ** ** | **$**                   | **0.4**     |                       | $          | 0.4 |   |
| Other paid-in  capital                    | ** ** | **781.1**               |        | 780.5                      |       |
| Accumulated  other comprehensive income   | ** ** | **34.3**                |        | 38.2                       |       |
| Earnings  reinvested in the business      | ** ** | **308.5**               |        | 321.7                      |       |
| Total common  shareholders’ equity   | ** ** | **1,124.3**             |        | 1,140.8                    |       |
|                                      |       |                    |        |                       |       |
| Preferred stock                           | ** ** | **22.9**                |        | 22.9                       |       |
|                                      |       |                    |        |                       |       |
| Long-term debt  (Note 6)                  | ** ** | **687.1**               |        | 687.3                      |       |
| Total  capitalization                     | ** ** | **1,834.3**             |        | 1,851.0                    |       |
|                                      |       |                    |        |                       |       |
| **Current  Liabilities**                  |       |                    |        |                       |       |
| Accounts payable                          | ** ** | **89.4**                |        | 88.9                       |       |
| Accrued taxes                             | ** ** | **69.5**                |        | 66.4                       |       |
| Accrued interest                          | ** ** | **14.6**                |        | 10.2                       |       |
| Other (Note 3)                            | ** ** | **21.4**                |        | 24.6                       |       |
| Total current  liabilities                | ** ** | **194.9**               |        | 190.1                      |       |
|                                      |       |                    |        |                       |       |
| **Deferred  Credits and Other**           |       |                    |        |                       |       |
| Deferred taxes                            | ** ** | **379.9**               |        | 381.7                      |       |
| Unamortized  investment tax credit        | ** ** | **51.5**                |        | 52.2                       |       |
| Other (Note 3)                            | ** ** | **178.0**               |        | 185.1                      |       |
| Total deferred  credits and other         | ** ** | **609.4**               |        | 619.0                      |       |
|                                      |       |                    |        |                       |       |
| **Contingencies  (Note 8)**               |       |                    |        |                       |       |
| ** **                                |       |                    |        |                       |       |
| **Total  Capitalization and Liabilities** | ** ** | **$**                   | **2,638.6** |                       | $          | 2,660.1 |   |

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

6

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**Notes to Consolidated FinancialStatements**

 

**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 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 andtransactions are eliminated in consolidation.

 

DP&L has prepared the unaudited consolidated financial statementsin this report, pursuant to the rules and regulations of the Securities and ExchangeCommission (SEC).  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 and expensesof the period reported.  Significantitems subject to such estimates and judgments include the carrying value ofproperty, plant and equipment; the valuation of derivative instruments;valuation allowances for receivables and deferred income taxes; and assets andliabilities related to employee benefits. Actual results may differ from those estimates.  Reclassifications have been made in certainprior years’ amounts to conform 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 defer recognitionof the provisions of this Act until further accounting guidance is issued.

 

***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 effect is not expected to bematerial to the Company’s results of operations, cash flow or financialposition.

 

**2. Restatement of Financial Statements**

 

As part of DP&L’s Audit Committee’s response to a report preparedby Taft, 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 quarterended

 

7

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March 31, 2003 and prior periods.  This adjustment decreased net income by $0.2million to $80.8 million for the first quarter of 2003.  All applicable financial informationcontained in this Quarterly Report on Form 10-Q gives effect to theserestatements.  Accordingly, the financialstatements for this fiscal period described above that have been in the Company’sprior SEC filings should not be relied upon.

 

Certain captions in theMarch 31, 2003 Consolidated Balance Sheet were also adjusted due to the priorperiods’ restatements. Please refer to the Company’s 2003 Annual Report on Form10-K for a more complete description of the prior period adjustments.

 

The accompanying consolidated financial data setforth below presents the Company’s Consolidated Statement of Results ofOperations for the quarter ended March 31, 2003 and Consolidated Balance Sheetas of March 31, 2003 on a comparative basis showing the amounts as originallyreported and as restated.

 

**Effects of Restatementon Net Income**

 

The following table identifies the adjustmentsmade to the consolidated financial statements for the quarter ended March 31,2003:

 
| **($ in  millions)**                  | ** ** | **Net Income  Increase  (Decrease)** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
|                                       |       |                                 |       |
| ** **                                 | ** ** | **2003**                             | ** ** |
| ** **                                 | ** ** | **First**                            | ** ** |
| **Description of Adjustment**              | ** ** | **Quarter**                          | ** ** |
| Supplemental Executive Retirement Plan (1) |       | (0.2                                 | )          |
| Stock incentive units (2)                  |       | (0.2                                 | )          |
| Sub-total pre-tax impact                   |       | (0.4                                 | )          |
|                                       |       |                                 |       |
| Income taxes (3)                           |       | 0.2                                  |       |
| Total Net Income Impact                    |       | (0.2                                 | )          |

 

----

(1) Reflects adjustment to record a settlement ofthe Company’s Supplemental Executive Retirement Plan for certain executives in1997 and 2000 which had not been previously recorded, in addition to anadjustment to record the proper treatment for Company assets previously thoughtto be segregated and restricted solely for purposes of funding this plan.

 

Consolidated Statement of Results of Operations: For the first quarterof 2003, the adjustment increased Operation and Maintenance expense byapproximately $0.2 million.

 

Consolidated Balance Sheet: At March 31, 2003, adjustment decreasedOther Assets – Other by $0.2 million.

 

(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 of Operations:For the first quarter of 2003, the adjustment increased Operation andMaintenance expense by $0.2 million.

 

Consolidated Balance Sheet: At March 31, 2003,the adjustment increased Other Paid-in Capital, net of Treasury Stock by$0.2 million.

 

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

 

Consolidated Statement of Results of Operations:For the first quarter of 2003, the above adjustments decreased income taxexpense by the amount set forth in this table.

 

Consolidated Balance Sheet: At March 31, 2003,the above adjustments decreased Accrued taxes payable by the amounts set forthin this table.

 

8

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**THE DAYTON POWER AND LIGHTCOMPANY**

**Consolidated Statement of Resultsof Operations**

**(unaudited)**

 
| **$ ****in millions except per share amounts**                    | ** ** | **Three Months Ended  March 31, 2003** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **(as  previously  reported)**         | ** ** | **(as  restated)** | ** ** |
|                                                                   |       |                                   |       |   |   |
| **Revenues**                                                           |       |                                   |       |   |   |
| Electric  revenues                                                     |       | $                                      | 295.7      |   | $ | 295.7 |   |
|                                                                   |       |                                   |       |   |   |
| **Operating  Expenses**                                                |       |                                   |       |   |   |
| Fuel                                                                   |       | 55.6                                   |       | 55.6 |   |
| Purchased power                                                        |       | 20.0                                   |       | 20.0 |   |
| Operation and  maintenance                                             |       | 35.4                                   |       | 35.8 |   |
| Depreciation and  amortization                                         |       | 29.1                                   |       | 29.1 |   |
| Amortization of  regulatory assets, net                                |       | 12.1                                   |       | 12.1 |   |
| General taxes                                                          |       | 28.3                                   |       | 28.3 |   |
| Total operating  expenses                                              |       | 180.5                                  |       | 180.9 |   |
|                                                                   |       |                                   |       |   |   |
| Operating income                                                       |       | 115.2                                  |       | 114.8 |   |
|                                                                   |       |                                   |       |   |   |
| Interest expense                                                       |       | (12.8                                  | )          | (12.8 | ) |
| Other income                                                           |       | 1.0                                    |       | 1.0 |   |
|                                                                   |       |                                   |       |   |   |
| Income Before  Income Taxes and Cumulative Effect of Accounting Change |       | 103.4                                  |       | 103.0 |   |
|                                                                   |       |                                   |       |   |   |
| Income tax  expense                                                    |       | 39.4                                   |       | 39.2 |   |
|                                                                   |       |                                   |       |   |   |
| Income Before  Cumulative Effect of Accounting Change                  |       | 64.0                                   |       | 63.8 |   |
|                                                                   |       |                                   |       |   |   |
| Cumulative  effect of accounting change, net of tax                    |       | 17.0                                   |       | 17.0 |   |
|                                                                   |       |                                   |       |   |   |
| Net Income                                                             |       | 81.0                                   |       | 80.8 |   |
|                                                                   |       |                                   |       |   |   |
| Preferred  dividends                                                   |       | 0.2                                    |       | 0.2 |   |
|                                                                   |       |                                   |       |   |   |
| Earnings on  Common Stock                                              |       | $                                      | 80.8       |   | $ | 80.6 |   |

 

9

----

 

**THEDAYTON POWER AND LIGHT COMPANY**

**Consolidated Statement of CashFlows**

**(unaudited)**

 
| **$ ****in  millions**                         | ** ** | **Three Months Ended March 31,  2003** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **(as previously  reported)**          | ** ** | **(as restated)** | ** ** |
| ** **                                          | ** ** | ** **                             | ** ** | ** ** | ** ** |
| **Operating  Activities**                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net income                                          |       | $                                      | 81.0       |   | $ | 80.8 |   |
| Adjustments:                                        |       |                                   |       |   |   |
| Depreciation and  amortization                      |       | 29.1                                   |       | 29.1 |   |
| Amortization of  regulatory assets, net             |       | 12.1                                   |       | 12.1 |   |
| Deferred income  taxes                              |       | 23.7                                   |       | 23.6 |   |
| Cumulative  effect of accounting change, net of tax |       | (17.0                                  | )          | (17.0 | ) |
| Changes in  working capital:                        |       |                                   |       |   |   |
| Accounts  receivable                                |       | 11.8                                   |       | 11.8 |   |
| Accounts payable                                    |       | 8.5                                    |       | 8.4 |   |
| Accrued taxes  payable                              |       | 11.2                                   |       | 11.2 |   |
| Accrued interest  payable                           |       | (10.8                                  | )          | (10.8 | ) |
| Prepayments                                         |       | (2.6                                   | )          | (2.6 | ) |
| Inventories                                         |       | 2.2                                    |       | 2.2 |   |
| Deferred  compensation assets                       |       | 30.5                                   |       | 30.5 |   |
| Deferred  compensation obligations                  |       | (31.2                                  | )          | (31.2 | ) |
| Other                                               |       | 0.1                                    |       | 0.5 |   |
| Net cash  provided by operating activities          |       | 148.6                                  |       | 148.6 |   |
|                                                |       |                                   |       |   |   |
| **Investing  Activities**                           |       |                                   |       |   |   |
| Capital  expenditures                               |       | (35.0                                  | )          | (35.0 | ) |
|                                                |       |                                   |       |   |   |
| Net cash used  for investing activities             |       | (35.0                                  | )          | (35.0 | ) |
|                                                |       |                                   |       |   |   |
| **Financing  Activities**                           |       |                                   |       |   |   |
| Dividends paid  on common stock                     |       | (82.5                                  | )          | (82.5 | ) |
| Dividends paid  on preferred stock                  |       | (0.2                                   | )          | (0.2 | ) |
|                                                |       |                                   |       |   |   |
| Net cash used  for financing activities             |       | (82.7                                  | )          | (82.7 | ) |
|                                                |       |                                   |       |   |   |
| **Cash  and Temporary Cash Investments**            |       |                                   |       |   |   |
| Net change                                          |       | 30.9                                   |       | 30.9 |   |
| Balance at  beginning of period                     |       | 17.1                                   |       | 17.1 |   |
|                                                |       |                                   |       |   |   |
| Balance at end  of period                           |       | $                                      | 48.0       |   | $ | 48.0 |   |
|                                                |       |                                   |       |   |   |
| **Cash  Paid During the Period For:**               |       |                                   |       |   |   |
| Interest                                            |       | $                                      | 22.6       |   | $ | 22.6 |   |
| Income taxes                                        |       | $                                      | (5.0       | ) | $ | (5.0 | ) |

 

10

----

 

**THE DAYTON POWER AND LIGHTCOMPANY**

**Consolidated Balance Sheet**

**(unaudited)**

 
| **$ in millions**                                                                            | ** ** | **At March 31, 2003**         | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                        | ** ** | **(as previously  reported)** | ** ** | **(as restated)** | ** ** |
|                                                                                              |       |                          |       |   |   |
| **ASSETS**                                                                                        |       |                          |       |   |   |
|                                                                                              |       |                          |       |   |   |
| **Property**                                                                                      |       |                          |       |   |   |
| Property, plant  and equipment                                                                    |       | $                             | 3,803.2    |   | $ | 3,803.2 |   |
| Less:  Accumulated depreciation and amortization                                                  |       | (1,696.1                      | )          | (1,696.1 | ) |
| Net property                                                                                      |       | 2,107.1                       |       | 2,107.1 |   |
|                                                                                              |       |                          |       |   |   |
| **Current  Assets**                                                                               |       |                          |       |   |   |
| Cash and  temporary cash investments                                                              |       | 48.0                          |       | 48.0 |   |
| Accounts  receivable, less provision for uncollectible accounts of $5.0 as reported and  restated |       | 147.5                         |       | 147.5 |   |
| Intercompany  receivables, net                                                                    |       | 36.3                          |       | 36.3 |   |
| Inventories, at  average cost                                                                     |       | 51.9                          |       | 51.9 |   |
| Prepaid taxes                                                                                     |       | 35.2                          |       | 35.1 |   |
| Other                                                                                             |       | 16.8                          |       | 16.6 |   |
| Total current  assets                                                                             |       | 335.7                         |       | 335.4 |   |
|                                                                                              |       |                          |       |   |   |
| **Other  Assets**                                                                                 |       |                          |       |   |   |
| Income taxes  recoverable through future revenues                                                 |       | 43.5                          |       | 43.5 |   |
| Other regulatory  assets                                                                          |       | 68.8                          |       | 68.8 |   |
| Other                                                                                             |       | 159.5                         |       | 158.9 |   |
| Total other  assets                                                                               |       | 271.8                         |       | 271.2 |   |
|                                                                                              |       |                          |       |   |   |
| **Total  Assets**                                                                                 |       | $                             | 2,714.6    |   | $ | 2,713.7 |   |

 

**Note- Reflects adoption of FAS143 in 2003.**

 

11

----

 

**THE DAYTON POWER AND LIGHTCOMPANY**

**Consolidated Balance Sheet**

**(unaudited)**

 
| **$ in millions**                    | ** ** | **At March 31, 2003**         | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **(as previously  reported)** | ** ** | **(as restated)** | ** ** |
|                                      |       |                          |       |   |   |
| **CAPITALIZATION  AND LIABILITIES**       |       |                          |       |   |   |
|                                      |       |                          |       |   |   |
| **Capitalization**                        |       |                          |       |   |   |
| Common  shareholders’ equity         |       |                          |       |   |   |
| Common stock                              |       | $                             | 0.4        |   | $ | 0.4 |   |
| Other paid-in  capital                    |       | 771.8                         |       | 780.4 |   |
| Accumulated  other comprehensive income   |       | (3.3                          | )          | (5.6 | ) |
| Earnings  reinvested in the business      |       | 393.5                         |       | 379.9 |   |
| Total common  shareholders’ equity   |       | 1,162.4                       |       | 1,155.1 |   |
|                                      |       |                          |       |   |   |
| Preferred stock                           |       | 22.9                          |       | 22.9 |   |
|                                      |       |                          |       |   |   |
| Long-term debt                            |       | 665.4                         |       | 665.4 |   |
|                                      |       |                          |       |   |   |
| Total  capitalization                     |       | 1,850.7                       |       | 1,843.4 |   |
|                                      |       |                          |       |   |   |
| **Current  Liabilities**                  |       |                          |       |   |   |
| Accounts payable                          |       | 90.6                          |       | 91.7 |   |
| Accrued taxes                             |       | 98.6                          |       | 101.1 |   |
| Accrued interest                          |       | 8.2                           |       | 8.3 |   |
| Other                                     |       | 26.5                          |       | 26.2 |   |
| Total current  liabilities                |       | 223.9                         |       | 227.3 |   |
|                                      |       |                          |       |   |   |
| **Deferred  Credits and Other**           |       |                          |       |   |   |
| Deferred taxes                            |       | 400.5                         |       | 392.8 |   |
| Unamortized  investment tax credit        |       | 54.7                          |       | 54.7 |   |
| Other                                     |       | 184.8                         |       | 195.5 |   |
| Total deferred  credits and other         |       | 640.0                         |       | 643.0 |   |
|                                      |       |                          |       |   |   |
| Contingencies                             |       |                          |       |   |   |
|                                      |       |                          |       |   |   |
| **Total  Capitalization and Liabilities** |       | $                             | 2,714.6    |   | $ | 2,713.7 |   |

 

**Note - Reflects adoption of FAS143 in 2003.**

 

12

----

 

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

* *
| **$ in millions**                                  | ** ** | **At  March 31,  2004** | ** ** | **At  December 31,  2003** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Cash  and temporary cash investments**                | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Cash and cash  equivalents                              | ** ** | **$**                   | **36.6**   |                       | $          | 17.2 |   |
| Short-term  investments                                 | ** ** | **—**              |       | —                     |       |
| Total cash and  temporary cash investments              | ** ** | **$**                   | **36.6**   |                       | $          | 17.2 |   |
|                                                    |       |                    |       |                       |       |
| **Inventories,  at average cost**                       |       |                    |       |                       |       |
| Plant materials  and supplies                           | ** ** | **$**                   | **28.9**   |                       | $          | 29.3 |   |
| Fuel                                                    | ** ** | **25.8**                |       | 19.5                       |       |
| Other                                                   | ** ** | **2.6**                 |       | 0.8                        |       |
| Total  inventories, at average cost                     | ** ** | **$**                   | **57.3**   |                       | $          | 49.6 |   |
|                                                    |       |                    |       |                       |       |
| **Other  current assets**                               |       |                    |       |                       |       |
| Prepayments                                             | ** ** | **$**                   | **4.1**    |                       | $          | 10.8 |   |
| Deposits and  other advances                            | ** ** | **9.1**                 |       | 5.2                        |       |
| Current deferred  income taxes                          | ** ** | **1.1**                 |       | 4.3                        |       |
| Miscellaneous  work in progress                         | ** ** | **1.8**                 |       | 3.1                        |       |
| Other                                                   | ** ** | **1.1**                 |       | 1.0                        |       |
| Total other  current assets                             | ** ** | **$**                   | **17.2**   |                       | $          | 24.4 |   |
|                                                    |       |                    |       |                       |       |
| **Other  deferred assets**                              |       |                    |       |                       |       |
| Trust assets                                            | ** ** | **$**                   | **88.4**   |                       | $          | 102.9 |   |
| Prepaid pension                                         | ** ** | **38.4**                |       | 39.7                       |       |
| Unamortized loss  on reacquired debt                    | ** ** | **25.4**                |       | 26.6                       |       |
| Unamortized debt  expense                               | ** ** | **5.9**                 |       | 5.9                        |       |
| Other                                                   | ** ** | **1.4**                 |       | 1.3                        |       |
| Total other  deferred assets                            | ** ** | **$**                   | **159.5**  |                       | $          | 176.4 |   |
|                                                    |       |                    |       |                       |       |
| **Other  current liabilities**                          |       |                    |       |                       |       |
| Customer  security deposits and other advances          | ** ** | **$**                   | **11.9**   |                       | $          | 10.6 |   |
| Payroll taxes  payable                                  | ** ** | **—**              |       | 10.1                       |       |
| Unearned  revenues                                      | ** ** | **0.7**                 |       | 1.2                        |       |
| Current deferred  income taxes                          | ** ** | **7.6**                 |       | —                     |       |
| Current portion  - long-term debt                       | ** ** | **1.1**                 |       | 1.1                        |       |
| Other                                                   | ** ** | **0.1**                 |       | 1.6                        |       |
| Total other  current liabilities                        | ** ** | **$**                   | **21.4**   |                       | $          | 24.6 |   |
|                                                    |       |                    |       |                       |       |
| **Other  deferred credits**                             | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Asset retirement  obligations – regulated property | ** ** | **$**                   | **73.3**   |                       | $          | 72.0 |   |
| Trust  obligations                                      | ** ** | **58.1**                |       | 65.3                       |       |
| Retirees health  and life benefits                      | ** ** | **32.7**                |       | 33.7                       |       |
| Environmental  reserves                                 | ** ** | **0.1**                 |       | 0.2                        |       |
| Legal claims  reserves                                  | ** ** | **2.5**                 |       | 2.1                        |       |
| Asset retirement  obligations-generation                | ** ** | **5.0**                 |       | 4.9                        |       |
| Other                                                   | ** ** | **6.3**                 |       | 6.9                        |       |
| Total other  deferred credits                           | ** ** | **$**                   | **178.0**  |                       | $          | 185.1 |   |

 

13

----

 
| ** **                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| **Cash Flows**                 | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| **$ in millions**         | ** ** | ** **                       | ** ** | **(as restated)** | ** ** |
| **Cash  flows – Other**   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Payroll taxes  payable         | ** ** | **$**                            | **(11.2**  | ) | $ | — |   |
| Deposits and  other advances   | ** ** | **(3.9**                         | )          | (0.7 | ) |
| Other                          | ** ** | **(0.3**                         | )          | 1.2 |   |
| Total cash flows  – Other | ** ** | **$**                            | **(15.4**  | ) | $ | 0.5 |   |

 
| ** **                                                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Results of Operations**                                                                               | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| **$ in millions**                                                                                  | ** ** | ** **                       | ** ** | **(as restated)** | ** ** |
| **Comprehensive  income**                                                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                                              | ** ** | **$**                            | **62.0**   |   | $ | 80.8 |   |
| Net change in  unrealized gains (losses) on financial instruments, net of reclassification  adjustments | ** ** | **(5.6**                         | )          | (8.1 | ) |
| Net change in  deferred gains on cash flow hedges                                                       | ** ** | **(0.7**                         | )          | (0.3 | ) |
| Deferred income  taxes related to unrealized gains (losses)                                             | ** ** | **2.4**                          |       | 3.6 |   |
| Comprehensive  income                                                                                   | ** ** | **$**                            | **58.1**   |   | $ | 76.0 |   |

 

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

 

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 of service.The Company funds pension plan benefits as accrued in accordance with theminimum funding requirements of the Employee Retirement Income Security Act of1974 (ERISA).

 

Qualified employees whoretired prior to 1987 and their dependents are eligible for health care andlife insurance benefits.  DP&L hasfunded the union-eligible health benefit using a Voluntary Employee BeneficiaryAssociation Trust.

 

The net periodic benefit (income) cost of the pension andpostretirement benefit plans for the three months ended March 31 were:

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

 

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

 

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:

 

14

----

 
| ** **                                                                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **$ in millions**                                                                                | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **                                                                                            | ** ** | ** **                       | ** ** | **(as restated)** | ** ** |
| Earnings on  common stock, as reported                                                                | ** ** | **$**                            | **61.8**   |   | $ | 80.6 |   |
| 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**                         | )          | (0.7 | ) |
| Pro-forma  earnings on common stock                                                                   | ** ** | **$**                            | **61.1**   |   | $ | 79.9 |   |

 

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

* *
| **$ in millions**                                                    | ** ** | **At  March 31,  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)               | ** ** | **104.8**               |       | 104.8                      |       |
| ** **                                                                |       | **574.8**               |       | 574.8                      |       |
| ** **                                                                |       | ** **              |       |                       |       |
| Guarantee of Air  Quality Development Obligations - 6.10% Series due 2030 | ** ** | **110.0**               |       | 110.0                      |       |
| Obligation for  capital lease                                             | ** ** | **4.1**                 |       | 4.3                        |       |
| Unamortized debt  discount and premium (net)                              | ** ** | **(1.8**                | )          | (1.8                       | )          |
| Total                                                                     | ** ** | **$**                   | **687.1**  |                       | $          | 687.3 |   |

 

----

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

 

The amounts of maturities and mandatory redemptions for First MortgageBonds, notes, and the capital lease obligation are $0.9 million for theremainder of 2004, $1.1 million in 2005, $1.1 million in 2006, $9.3 million in2007 and $0.7 million in 2008. Substantially all property of DP&L is subject to the mortgage liensecuring the First Mortgage Bonds.

 

On September 29, 2003, DP&L issued $470 million principal amount 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 for thesesecurities 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 DP&L’s 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 facility

 

15

----

 

were approximately $0.8 millionper year.  DP&L had no outstandingborrowings under the revolving credit facility and no outstanding commercialpaper balances at March 31, 2004 and 2003.

 

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 had twooutstanding letters of credit totaling $1.4 million as of March 31, 2004and no outstanding letters of credit as of March 31, 2003.

 

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 and no outstandingcommercial paper balances.  Feesassociated with this credit facility are approximately $0.6 million peryear.  Changes in debt ratings, however,may affect the applicable interest rate for DP&L’s revolving creditagreement.  DP&L’s ability to usethis revolving credit agreement is subject to the PUCO’s annual approval whichis set to expire on November 5, 2004. DP&L has filed an application to secure the PUCO’s continuedauthorization and that application is pending.

 

The delay in filing audited financial statements for the year endingDecember 31, 2003, constituted an event of default with DP&L’sprevious revolving credit facility; however, DP&L obtained waivers from itslenders regarding this event.  TheCompany incurred fees of approximately $0.2 million to obtain these waivers.The delay in audited certified financial statements also resulted innoncompliance under the Company’s other debt agreements although thenon-compliance did not result in an immediate event of default.  The Company has not received any default notificationsfrom any of its lenders.  The Company’sdebt agreements allow a grace period to cure a default after notification.  Management, after consultation with legalcounsel, believes all non-compliance conditions have been remedied.

 

There are no inter-company debt collateralizations or debt guaranteesbetween DP&L and its parent or subsidiaries.  None of the debt obligations of DP&L orDPL Inc. are guaranteed or secured by affiliates and no cross-collateralizationexists between any subsidiaries.

 

**7.  BusinessSegment Reporting**

 

DP&L is a regional energy company providing electric services toover 500,000 retail customers in West Central Ohio.  Assets and related costs associated withDP&L’s transmission and distribution and base load and peaking generationoperations are managed and evaluated as a single operating segment captionedElectric.

 
| **$ in millions**                      | ** ** | **At  March 31,  2004** | ** **  | **At  March 31,  2003** | ** ** |
|---------------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
|                                        |       |                    |        | **(as restated)**       |       |
| **Revenues:**                               |       |                    |        |                    |       |
| Electric                                    | ** ** | **$**                   | **300.4**   |                    | $          | 295.7 |   |
|                                        |       |                    |        |                    |       |
| **Operating  income:**                      |       |                    |        |                    |       |
| Electric                                    | ** ** | **$**                   | **112.6**   |                    | $          | 119.3 |   |
| Other (a)                                   | ** ** | **(5.7**                | )           | (4.5                    | )          |
| Total operating  income                     | ** ** | **$**                   | **106.9**   |                    | $          | 114.8 |   |
|                                        |       |                    |        |                    |       |
| **Depreciation  and amortization:**         |       |                    |        |                    |       |
| Electric                                    | ** ** | **$**                   | **28.3**    |                    | $          | 29.1 |   |
|                                        |       |                    |        |                    |       |
| **Expenditures  - construction additions:** |       |                    |        |                    |       |
| Electric                                    | ** ** | **$**                   | **22.9**    |                    | $          | 20.5 |   |
|                                        |       |                    |        |                    |       |
| **Assets:**                                 |       |                    |        |                    |       |
| Electric                                    | ** ** | **$**                   | **2,535.9** |                    | $          | 2,575.5 |   |
| Unallocated  corporate assets               | ** ** | **102.7**               |        | 138.2                   |       |
| Total assets                                | ** ** | **$**                   | **2,638.6** |                    | $          | 2,713.7 |   |

 

16

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*(a) Includes unallocatedcorporate items.*

 

**8.     Commitments and 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 liabilitiesfrom various legal proceedings, claims, and other matters discussed below, andto comply with applicable laws and regulations, will not exceed the amountsreflected in DP&L’s Consolidated Financial Statements.  As such, costs, if any, that may be incurredin excess of those amounts provided as of March 31, 2004 cannot be reasonablydetermined.

 

**Environmental Matters**

DP&L’s facilities and operations are subject to a wide range ofenvironmental regulations and law.  Inthe normal course of business, DP&L has investigatory and remedialactivities underway at these facilities to comply, or to determine compliance,with such regulations.  DP&L has beenidentified, either by a government agency or by a private party seekingcontribution to site clean-up costs, as a potentially responsible party (PRP)at a number of sites pursuant to state and federal laws.  DP&L records liabilities for probableestimated loss in accordance with Statement of Financial Accounting StandardsNo. 5 (SFAS 5), “Accounting for Contingencies.” To the extent a probable loss can only be estimated by reference to arange of equally probable outcomes, and no amount within the range appears tobe a better estimate than any other amount, DP&L accrues for the low end ofthe range.  Because of uncertaintiesrelated to these matters, accruals are based on the best information availableat the time.  DP&L evaluates thepotential liability related to probable losses quarterly and may revise itsestimates.  Such revisions in theestimates of the potential liabilities could have a material effect on theCompany’s results of operations 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.  OnAugust 16, 2004, the defendants moved to dismiss the litigation based on theFlorida federal court’s lack of jurisdiction over the Company, DPL and MVE, allof whom are companies based in Dayton, Ohio. In the alternative, the defendants requested that the court transfer thecase to the 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.  The court has not yet ruled on the defendants’motions.

 

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 deferred compensationplans and a court order declaring that the Company, DPL and MVE have no furtherobligations under the consulting and employment contracts due to thosebreaches.  At this time, defendantsForster, Koziar and Muhlenkamp have not yet responded to the Complaint.  The Company continues to evaluate all ofthese matters and is considering other claims against Mr. Forster, Mr. Koziarand/or Ms. Muhlenkamp that include, but are not limited to, breach of fiduciaryduty or other claims relating to personal and Company investments, the calculationof benefits under the SERP and financial reporting with respect to suchbenefits, and, with respect to Mr. Koziar, the fulfillment of duties owed tothe Company as its legal counsel.

 

17

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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, the Company received notice that the staff of thePUCO is conducting an investigation into the financial condition of DP&L asa result of the issues raised by the Thobe Memorandum.  On May 27, 2004, the PUCO ordered DP&L tofile a plan of utility financial integrity that outlines the actions DPL Inc.has taken or will take to insulate DP&L utility operations and customersfrom its unregulated activities. DP&L must file this plan within 120 days of the filing of its Form10-K with the SEC.  The Company intends tocomply with this order and 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.

 

Commencing on or aboutJune 24, 2004, the Internal Revenue Service (IRS) has issued a series of datarequests to the Company and DPL regarding issues raisedin the Thobe Memorandum.  The staff ofthe IRS has requested that the Company and DPL provide certain documents,including but not limited to, matters concerning executive/director deferredcompensation plans, management stock incentive plans and MVE financial statements.  The Company and DPL are cooperating withthese requests.

 

On December 12, 2003, the Office of Federal Contract CompliancePrograms (OFCCP) notified DP&L by letter alleging it had discriminated inthe hiring of meter readers during 2000-2001 by utilizing credit checks todetermine if applicants had paid their electric bills.  On February 12, 2004, DP&L and the OFCCPentered into a Conciliation Agreement whereby DP&L agreed to distributeapproximately $0.2 million in compensation to certain affected applicants.  DP&L has completed these payments to theaffected applicants.

 

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 Court refusedto hear the case, so the matter has been remanded to the trial court for are-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-termobligations that may affect the liquidity of its operations. The followingtable outlines DP&L’s obligations at March 31, 2004:

 
| ** **                                      | ** ** | **Payment Year** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| **Long-term Obligations ($ in  millions)** | ** ** | **2004**         | ** ** | **2005 &  2006** | ** ** | **2007 &  2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-term debt                                  |       | $                | 0.4        |   | $ | 0.8 |   | $ | 8.6 |   | $ | 673.6 |   | $ | 683.4 |   |
| Capital lease                                   |       | 0.5              |       | 1.4 |   | 1.4 |   | 1.5 |   | 4.8 |   |
| Operating leases                                |       | 0.8              |       | 0.4 |   | — |   | — |   | 1.2 |   |
| Coal contracts                                  |       | 270.2            |       | 211.2 |   | 84.6 |   | 127.7 |   | 693.7 |   |
| Other long-term  obligations                    |       | 9.9              |       | 14.8 |   | 1.0 |   | — |   | 25.7 |   |
| Total long-term  Obligations                    |       | $                | 281.8      |   | $ | 228.6 |   | $ | 95.6 |   | $ | 802.8 |   | $ | 1,408.8 |   |

 

Long-term debt:

Long-term debt as ofMarch 31, 2004 consists of first mortgage bonds and guaranteed air qualitydevelopment obligations, including current maturities.

 

Capital lease:

As of March 31, 2004, theCompany had one capital lease that expires September 2010.

 

Operating leases:

As of March 31, 2004, theCompany had several operating leases with various terms and expiration dates.

 

18

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Coal contracts:

DP&L has entered into various long-term coalcontracts to supply portions of its coal requirements for its generatingplants.  Contract prices are subject toadjustment in accordance with various indices, and have features that willlimit price escalation in any given year.

 

Other long-termobligations:

As of March 31, 2004,DP&L had various other long-term obligations including non-cancelablecontracts to purchase goods and services with various terms and expirationdates.

 

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

 
| ** **                                            | ** ** | **Expiring Year** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|
| **Commercial Commitments ($ in  millions)** | ** ** | **2004**          | ** ** | **2005 &  2006** | ** ** | **2007 &  2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Credit  facilities                                    |       | $                 | 150.0      |   | $ | — |   | $ | — |   | $ | — |   | $ | 150.0 |   |
| Guarantees                                            |       | —            |       | 17.8 |   | — |   | — |   | 17.8 |   |
| Total commercial  commitments                         |       | $                 | 150.0      |   | $ | 17.8 |   | $ | — |   | $ | — |   | $ | 167.8 |   |

 

Credit facilities:

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

 

Guarantees:

DP&L owns a 4.9%equity ownership interest in an electric generation company.  As of March 31, 2004, DP&L could beresponsible for the repayment of 4.9%, or $14.9 million, of a $305 million debtobligation and also 4.9%, or $2.9 million, of a separate $60.0 million debtobligation.  Both obligations mature in2006.

 

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

Certain statements contained in this discussion are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  Matters discussed in thisreport which relate to events or developments that are expected to occur in thefuture, including management’s expectations, strategic objectives, businessprospects, anticipated economic performance and financial condition and othersimilar matters constitute forward-looking statements.  Forward-looking statements are based onmanagement’s beliefs, assumptions and expectations of the Company’s futureeconomic performance, taking into account the information currently availableto management.  These statements are notstatements of historical fact.  Suchforward-looking statements are subject to risks and uncertainties and investorsare cautioned that outcomes and results may vary materially from thoseprojected due to various factors beyond the control of The Dayton Power andLight Company (DP&L or the Company), including but not limited to: abnormalor severe weather; unusual maintenance or repair requirements; changes in fuelcosts; changes in electricity, coal, environmental emissions, gas and othercommodity prices; increased competition; regulatory changes and decisions;changes in accounting rules; financial market conditions; and general economicconditions.

 

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 FUTURERESULTS.)

 

**OVERVIEW AND FUTURE EXPECTATIONS**

 

In the first quarter of 2004, DP&L’s operating income and cash flowfrom operations decreased $7.9 million and $28.3 million, respectively, fromthe first quarter of 2003.  Total revenueof $300.4 million exceeded the prior year by $4.7 million resulting from anincrease in wholesale revenue.  Operatingexpenses of $193.5 million in the first quarter of 2004 increased by $12.6million or 7% compared to the same period in the prior year. This increase wasthe result of higher fuel and purchased power costs as well as higher 

operation and maintenanceexpenses.

 

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DP&L’s earnings on common stock of $61.8 million in the firstquarter of 2004 decreased $18.8 million compared to the same period in theprior year.

 

**RESULTS OF OPERATIONS**

 

**Income Statement Highlights**

** **
| ** **               | ** **      | **Three Months Ended March 31,** | ** ** |
|--------------------------|-----------------|----------------------------------|------------|
| **$ in millions**   | ** **      | **2004**                         | ** ** | **2003** | ** ** |
| ** **               | ** **      | ** **                       | ** ** | **(restated)** | ** ** |
| Electric  revenues       | ** **      | **$**                            | **300.4**  |   | $ | 295.7 |   |
| Less:                    | Fuel            | ** **                       | **62.7**   |   | 55.6 |   |
|                     | Purchased power | ** **                       | **28.5**   |   | 20.0 |   |
| Net electric  margin (a) | ** **      | **$**                            | **209.2**  |   | $ | 220.1 |   |
|                     |            |                             |       |   |   |
| Operating income         | ** **      | **$**                            | **106.9**  |   | $ | 114.8 |   |

 

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*(a)  Forpurposes of discussing operating results DPL presents and discusses netelectric margin. This format is useful to investors because it allows analysisand comparability of operating trends and includes the same information that isused by management to make decisions regarding the Company’s financialperformance.*

 

**Revenues**

Electric revenuesincreased to $300.4 million in the first quarter of 2004 from $295.7 million inthe first quarter of 2003 reflecting higher wholesale revenues offset by adecline in retail revenues.  Wholesalerevenues increased $18.3 million or 41% as a result of increased resaletransactions and higher power sales. Retail revenues declined $13.6 million or 5% primarily reflectingindustrial and commercial customers moving to a power supplier who is asubsidiary of DPL Inc.  Retail sales wereup slightly as a result of increased usage despite an 8% drop in heatingdegree-days to 2,949 for the first quarter of 2004 compared to 3,193 for thesame period in 2003.

 

**Operating Expenses**

Net electric margin of $209.2 million in the firstquarter of 2004 decreased by $10.9 million from $220.1 million in the firstquarter of 2003.  Asa percentage of total electric revenues, net electric margin decreased by 4.8percentage points to 69.6% from 74.4%. This decline is primarily the result of increased fuel and purchasedpower costs.  Fuel costs increased by$7.1 million or 13% for the three months ended March 31, 2004 compared to thesame period in 2003 primarily resulting from higher average fuel costs relatingto both retail and wholesale sales. Purchased power costs increased by $8.5 million or 43% in the firstquarter of 2004 compared to the same period in 2003 primarily resulting from ahigher volume of purchased power as retail and wholesale capacity needs werenot entirely met by internal generation. Average market prices for purchased power decreased in the first quarterof 2004 compared to the first quarter of 2003, helping to buffer the impact ofincreased power purchases.

 

Operation and maintenance expense increased $11.0 million or 31% forthe three months ended March 31, 2004 compared to the same period in 2003,primarily as a result of higher corporate costs and increased electricproduction expenses.  Corporate costsincreased primarily from higher premiums for Directors and Officers liabilityinsurance of $3.5 million, the settlement of an outstanding jointly-heldfacility receivable in 2003 of $3.8 million and increased pension expense of$1.2 million offset by lower deferred compensation expense of $1.2million.  Electric production expensesincreased $3.0 million over the prior year primarily related to maintenance andrepair expenses incurred for scheduled outages and ash disposal.

 

Amortization of regulatory assets decreased $12.0 million in the firstquarter of 2004 compared to the first quarter of 2003 reflecting the conclusionof the three-year regulatory transition cost recovery period granted by thePublic Utilities Commission of Ohio in 2000 and ended December 31, 2003.

 

**Interest Expense**

Interest expense decreased by $1.0 million or 8% in the first quarterof 2004 compared to the first quarter of 2003. Lower bond interest expense of $3.3 million resulting from the issuanceof the $470 million First Mortgage Bonds 5.125% Series due 2013 was partiallyoffset by a $2.3 million decrease in capitalized interest reflecting thecompletion of pollution control construction projects.  (See Note 6 of Notes to ConsolidatedFinancial Statements.)

 

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**Other Income**

Other income for the first three months ended March 31, 2004 increased$3.2 million compared to the first three months ended March 31, 2003 primarilyresulting from $5.5 million realized from the sale of 2004 NOx pollutionallowances, partially offset by miscellaneous deductions of $2.0 million fordeferred compensation.

 

## **IncomeTax Expense**

Income tax expense decreased $1.9 million or 5% in the first quarter of2004 compared to the first quarter of 2003 primarily resulting from lowerincome.

 

## **CumulativeEffect of Accounting Change**

The cumulative effect of accounting change of $17.0 million in thefirst quarter of 2003 reflects the adoption of the provisions of FASB Statementof Financial Accounting Standards No. 143, “Accounting for Asset RetirementObligations” (SFAS 143).

 

**LIQUIDITY, CAPITAL RESOURCES ANDREQUIREMENTS**

 

DP&L’s cash and temporary cash investments totaled $36.6 million atMarch 31, 2004 compared to $48.0 million at March 31, 2003.  This decrease was primarily attributed tolower profitability relating to higher fuel and purchased power costs.  DP&L’s cash and temporary cash investmentstotaled $17.2 million at December 31, 2003.

 

The Company generated net cash from operating activities of $120.3million in the first quarter of 2004 compared to $148.6 million in the firstquarter of 2003.  The net cash fromoperating activities for the three months ended March 31, 2004 was primarilythe result of operating profitability and working capital. Operatingprofitability primarily drove net cash provided from operating activities forthe three months ended March 31, 2003. The decline in operating cash flow in the first quarter of 2004 comparedto the first quarter of 2003 is primarily the result of lower operatingprofitability relating to higher fuel and purchased power costs.  The tariff-based revenue from DP&L’senergy business continues to be the principal source of cash from operatingactivities.  Management believes that thediversified retail customer mix of residential, commercial, and industrialclasses provides DP&L with a reasonably predictable gross cash flow.

 

Net cash flows used for investing activities was $25.7 million in thefirst quarter of 2004 and $35.0 million in the first quarter of 2003 to providefunding for capital expenditures.

 

Net cash flows used for financing activities was $75.2 million in thefirst quarter of 2004 and $82.7 million in the first quarter of 2003.  Net cash flows used for financing activitiesfor each of these periods were to pay dividends on common stock to the parentand for dividends paid on preferred stock.

 

**Capital Requirements**

# **Construction additions were$22.9 million for the first three months of 2004 and are expected toapproximate $88 million for the year ended 2004 compared to $20.5 million inthe first three months of 2003 and $98 million for the year ended 2003.  Planned construction additions for 2004relate to DP&L’s environmental compliance program, power plant equipment,and its transmission and distribution system.**

 

Capital projects aresubject to continuing review and are revised in light of changes in financialand economic conditions, load forecasts, legislative and regulatorydevelopments and changing environmental standards, among other factors.  Over the next four years, DP&L isprojecting to spend $800 million in capital projects, approximately half ofwhich 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.

 

**DebtObligations and Maturities**

# **The amounts of maturities andmandatory redemptions for First Mortgage Bonds, notes, and the capital leaseobligation are $0.9 million remaining in 2004, $1.1 million in 2005, $1.1million in 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 amount of DP&L’s First Mortgage Bonds,8.15% Series due 2026, at a redemption price of 104.075% of the

 

21

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principal amount plus accruedinterest to the redemption date, and (ii) redeem $220 million principal amountof DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at a redemptionprice of 103.765% of the principal amount plus accrued interest to theredemption date.  The $446 million ofFirst Mortgage Bonds were called by DP&L on September 30, 2003, forredemption on October 30, 2003.  The5.125% Series due 2013 have not been registered under the Securities Act of1933, but were offered and sold through a private placement in compliance withRule 144A under the Securities Act of 1933. The bonds include step-up interest provisions requiring DP&L to payadditional interest if the securities remain unregistered after 180 days fromissuance.  The sale of the bonds was notregistered and, as a result, the Company is required to pay additional interestof 0.50% until an exchange offer for these securities is registered with theSEC.

 

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

 

In 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 DP&L’s 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 an applicable interest rate. DP&L had no outstanding borrowings under the revolving creditfacility and no outstanding commercial paper balances at March 31, 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.  DP&L had two outstanding letters ofcredit totaling $1.4 million as of March 31, 2004 and no outstanding letters ofcredit as of March 31, 2003.

 

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 and no outstandingcommercial paper balances.  Feesassociated with this credit facility are approximately $0.6 million peryear.  Changes in debt ratings, however,may affect the applicable interest rate for DP&L’s revolving creditagreement.  A one-step increase inDP&L’s credit rating reduces the facility’s interest rate by 0.38% and aone-step decrease in credit rating increases the facility’s interest rate by0.38%.  DP&L’s ability to use thisrevolving credit agreement is subject to the PUCO’s annual approval which isset to expire on November 5, 2004. DP&L has filed an application to secure the PUCO’s continuedauthorization and that application is pending.

 

Subsequent to the December 31, 2003 balance sheet, the Company receivedmultiple credit rating downgrades. Currently, DP&L’s senior secured debt credit ratings are as follows:

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

 

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

 

The delay in filing audited financial statements for the year endingDecember 31, 2003 constituted an event of default with DP&L’s previousrevolving credit facility; however, DP&L obtained waivers from its lendersregarding this event.  The Companyincurred fees of approximately $0.2 million to obtain these waivers. The delayin audited certified financial statements also resulted in noncompliance underthe Company’s other debt agreements although the non-compliance did not resultin an immediate event of default.  TheCompany has not received any default notifications

 

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from any of its lenders.  The Company’s debt agreements allow a graceperiod to cure a default after notification. Management, after consultation with legal counsel, believes all non-complianceconditions have been remedied.

 

There are no inter-company debt collateralizations or debt guaranteesbetween DP&L and its subsidiaries or parent.  None of the debt obligations of DP&L orDPL Inc. are guaranteed or secured by affiliates and no cross-collateralizationexists between any subsidiaries.

 

**Off-Balance Sheet Arrangements**

DP&L does not haveany off-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on DP&L’s financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources that is 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 March 31, 2004:

 
| ** **                                      | ** ** | **Payment Year** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| **Long-term Obligations ($ in  millions)** | ** ** | **2004**         | ** ** | **2005 &  2006** | ** ** | **2007 &  2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-term debt                                  |       | $                | 0.4        |   | $ | 0.8 |   | $ | 8.6 |   | $ | 673.6 |   | $ | 683.4 |   |
| Capital lease                                   |       | 0.5              |       | 1.4 |   | 1.4 |   | 1.5 |   | 4.8 |   |
| Operating leases                                |       | 0.8              |       | 0.4 |   | — |   | — |   | 1.2 |   |
| Coal contracts                                  |       | 270.2            |       | 211.2 |   | 84.6 |   | 127.7 |   | 693.7 |   |
| Other long-term  obligations                    |       | 9.9              |       | 14.8 |   | 1.0 |   | — |   | 25.7 |   |
| Total long-term  Obligations                    |       | $                | 281.8      |   | $ | 228.6 |   | $ | 95.6 |   | $ | 802.8 |   | $ | 1,408.8 |   |

 

Long-term debt:

Long-term debt as ofMarch 31, 2004 consists of first mortgage bonds and guaranteed air qualitydevelopment obligations, including current maturities.

 

Capital lease:

As of March 31, 2004, theCompany had one capital lease that expires September 2010.

 

Operating leases:

As of March 31, 2004, theCompany had several operating leases with various terms and expiration dates.

 

Coal contracts:

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

 

Other long-termobligations:

As of March 31, 2004,DP&L had various other long-term obligations including non-cancelablecontracts to purchase goods and services with various terms and expirationdates.

 

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

 
| ** **                                            | ** ** | **Expiring Year** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|
| **Commercial Commitments ($ in  millions)** | ** ** | **2004**          | ** ** | **2005 &  2006** | ** ** | **2007 &  2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Credit  facilities                                    |       | $                 | 150.0      |   | $ | — |   | $ | — |   | $ | — |   | $ | 150.0 |   |
| Guarantees                                            |       | —            |       | 17.8 |   | — |   | — |   | 17.8 |   |
| Total commercial  commitments                         |       | $                 | 150.0      |   | $ | 17.8 |   | $ | — |   | $ | — |   | $ | 167.8 |   |

 

Credit facilities:

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

 

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Guarantees:

DP&L owns a 4.9%equity ownership interest in an electric generation company.  As of March 31, 2004, DP&L could beresponsible for the repayment of 4.9%, or $14.9 million, of a $305 million debtobligation and also 4.9%, or $2.9 million, of a separate $60.0 million debtobligation.  Both obligations mature in2006.

 

**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 21 percent of DP&L’s first 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 first quarter of 2004, sales of

excess wholesale energy and capacitycontributed $5.8 million in net electric margins.  This compares to net electric margins fromwholesale energy and capacity sales of $10.2 million in 2003.  This decrease in net electric marginsresulted from lower average market prices for wholesale sales and increasedaverage market prices for fuel and purchased power.   Wholesale sales per megawatt hour in thefirst quarter of 2004 and 2003 were $33.69 and $34.76, respectively.  Wholesale fuel costs per megawatt hour forthe first quarter of 2004 and 2003 were $15.07 and $12.30,respectively and wholesale purchased power costs per megawatt hour for thefirst quarter of 2004 and 2003 were $33.82 and $32.34, respectively.

 

Fuel and purchased power costs represented 47% of total operating costsin the first quarter of 2004.  DP&Lhas contracted for all of its projected coal needs for 2004, at an estimatedcost per Btu increase of approximately 15% over average 2003 levels.  Purchased power costs depend, in part, uponthe timing and extent of planned and unplanned outages of its generatingcapacity.  DP&L will purchase poweron a discretionary basis when wholesale market conditions provide opportunitiesto obtain power at a cost below the Company’s internal production costs.

 

The carrying value of DP&L’s debt was $688.2 million at March 31,2004, consisting of DP&L’s First Mortgage Bonds, DP&L’s Guaranteed AirQuality Development Obligations and Capital Lease. The fair value of this debtwas $619.1 million, based on current market prices or discounted cash flowsusing current rates for similar issues with similar terms and remainingmaturities.  The principal cashrepayments and related weighted average interest rates by maturity date forlong-term, fixed rate debt at March 31, 2004 are as follows:

 
| **Expected Maturity** | ** ** | **Long-term Debt**       | ** ** |
|-----------------------|------------|--------------------------|------------|
| **Date**              | ** ** | **Amount**               | ** ** | **Average Rate** | ** ** |
|                  |       | **($ in millions)** |       |   |   |
| 2004                  |       | $                        | 0.9        |   | 4.2 | % |
| 2005                  |       | 1.1                      |       | 3.9 | % |
| 2006                  |       | 1.1                      |       | 3.9 | % |
| 2007                  |       | 9.3                      |       | 6.1 | % |
| 2008                  |       | 0.7                      |       | 2.6 | % |
| Thereafter            |       | 675.1                    |       | 5.5 | % |
| Total                 |       | $                        | 688.2      |   | 5.5 | % |
|                  |       |                     |       |   |   |
| Fair Value            |       | $                        | 619.1      |   |   |   |

 

The fair value of financial instruments held was $89 million and $103.5million at March 31, 2004 and December 31, 2003 respectively.  The market risk related to these financialinstruments were estimated as the potential increase/decrease in fair value ofapproximately $9 million at March 31, 2004, resulting from a hypothetical 10%increase/decrease in the value of the underlying securities.

 

**FACTORS THAT MAY AFFECT FUTURERESULTS**

 

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,

 

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contain information based onmanagement’s beliefs and include forward-looking statements (within the meaningof the Private Securities Litigation Reform Act of 1995) that involve a numberof known and unknown risks, uncertainties and assumptions. Theseforward-looking statements are not guarantees of future performance, and thereare a number of factors including, but not limited to, those listed below,which could cause actual outcomes and results to differ materially from theresults contemplated by such forward-looking statements. DP&L does not undertakeany obligation to publicly update or revise any forward-looking statements,whether as a result of new information, future events or otherwise. Theseforward-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 andpurchased 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.

 

Changes in DP&L’s customer base, including aggregation, could leadto the entrance of competitors in the Company’s marketplace affecting itsresults of operations and financial condition.

 

**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 and transmissionfunctions.  Unanticipated changes inDP&L’s purchase processes may affect the Company’s business and operatingresults. In addition, the Company relies on others to provide professionalservices, such as, but not limited to investment management, actuarialcalculations, internal audit services, payroll processing and variousconsulting 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; catastrophic weather-related damage; unscheduledgeneration outages; unusual maintenance or repairs; changes in coal costs, gassupply costs, or availability constraints; environmental compliance, includingcosts of compliance with existing and future environmental requirements; andelectric transmission system constraints.

 

**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.

 

**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 litigationin 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 - Recent Developments, in theCompany’s Form 10-K for the year ended December 31, 2003, a review byindependent counsel to DP&L’s Audit Committee of the Board of Directors ofthe

 

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Company has identifiedrecommendations for improvement relating to some of the concerns raised by theCompany’s Controller including, among other things, internal controls.  In addition, as further described under Item9A - Controls and Procedures, during their year-end review, the Company’sindependent auditors identified and reported to management and the AuditCommittee of the Board of Directors two material weaknesses and certain othermatters involving internal control deficiencies considered to be reportableconditions under standards established by the Public Company AccountingOversight Board (PCAOB).  The materialweaknesses include conditions related to (1) the Company’s process forrecognizing an adjustment to the Company’s income tax provision to reflect adeductibility limitation under Section 162(m) with respect to executivedeferred compensation distributions made during 2003 and (2) lack of effectivecommunication in internal reporting of certain investment income that may leadto improper accounting of such transactions in accordance with generallyaccepted accounting principles.

 

Thereportable conditions that are not believed to be a material weakness includeconditions related to payroll processing, the quality and change controlprocess for the preparation of SEC filings, management’s assessment of theCompany’s internal controls, executive travel and entertainment expensereporting, the lack of a comprehensive controller function and segregation ofduties for certain accounting transactions and activities.

 

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 newpolicies or procedures that the Company implements to remedy the materialweaknesses and/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 therequirements under Section 404 of the Sarbanes-Oxley Act of 2002 and theCompany is using this review to further assist in identifying and correctingany control deficiencies.  As expected,this review has revealed some control weaknesses, which the Company hasreported 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 auditorswill perform independent testing of the Company’s internal controls as part oftheir year-end review.  At this time, theCompany has not completed its review of the existing controls and theireffectiveness.  Unless the materialweaknesses described above, or any identified during this review, are remedied, there can be no assurances that the Companywill be able to assert that its internal control over financial reporting iseffective, pursuant to the rules adopted by the SEC under Section 404, whenthose rules take effect.

 

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

DP&L’s consolidated financial statements are prepared in accordancewith generally accepted accounting principles in the United States (GAAP). Inconnection with the preparation of these financial statements, DP&L’smanagement is required to make assumptions, estimates and judgments that affectthe reported amounts of assets, liabilities, revenues, expenses and the relateddisclosure of contingent liabilities. These assumptions, estimates andjudgments are based on management’s historical experience and assumptions thatare believed to be reasonable at the time. However, because future events andtheir effects cannot be determined with certainty, the determination ofestimates requires the exercise of judgment. DP&L’s critical accountingpolicies are those which require assumptions to be made about matters that arehighly uncertain.

 

Different estimates could have a material effect on its financialresults. Judgments and uncertainties affecting the application of thesepolicies and estimates may result in materially different amounts beingreported under different conditions or circumstances.  Significant items subject to such judgmentsinclude the carrying value of property, plant and equipment; the valuation ofderivative instruments; valuation allowance for receivables and deferred incometaxes; the valuation of reserves related to current litigation; and assets andliabilities related to employee benefits.

 

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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 1 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 make it a part hereof.

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**OPERATING STATISTICS**

** **
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** **  |
|--------------------------------------|------------|-----------------------------------|-------------|
| ** **                           | ** ** | **2004**                          | ** **  | **2003** | ** ** |
| **Electric**                         | ** ** | ** **                        | ** **  | ** ** | ** ** |
| ** **                           | ** ** | ** **                        | ** **  | ** ** | ** ** |
| Sales (millions  of kWh)             |       |                              |        |   |   |
| Residential                          | ** ** | **1,531**                         |        | 1,546 |   |
| Commercial                           | ** ** | **904**                           |        | 886 |   |
| Industrial                           | ** ** | **1,038**                         |        | 1,023 |   |
| Other retail                         | ** ** | **333**                           |        | 333 |   |
| Total retail                         | ** ** | **3,806**                         |        | 3,788 |   |
| Wholesale                            | ** ** | **982**                           |        | 832 |   |
|                                 |       |                              |        |   |   |
| Total                                | ** ** | **4,788**                         |        | 4,620 |   |
|                                 |       |                              |        |   |   |
| Revenues ($ in  thousands)      |       |                              |        |   |   |
| Residential                          | ** ** | **$**                             | **125,992** |   | $ | 126,193 |   |
| Commercial                           | ** ** | **57,597**                        |        | 60,130 |   |
| Industrial                           | ** ** | **30,830**                        |        | 41,619 |   |
| Other retail                         | ** ** | **22,808**                        |        | 22,870 |   |
| Total retail                         | ** ** | **237,227**                       |        | 250,812 |   |
| Wholesale                            | ** ** | **63,174**                        |        | 44,853 |   |
|                                 |       |                              |        |   |   |
| Total                                | ** ** | **$**                             | **300,401** |   | $ | 295,665 |   |
|                                 |       |                              |        |   |   |
| Electric  customers at end of period | ** ** | **507,659**                       |        | 505,568 |   |

 

**Item 3.****  Quantitative and Qualitative Disclosuresabout Market Risk**

 

See the “Market Risk” section of Item 2.

 

**Item 4.****  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 quarterly 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 quarterlyreport includes the information concerning the controls evaluation referred toin the certifications and should be read in conjunction with the certificationsfor a more complete understanding of the topics presented.

 

There were no changes in the Company’s internal control over financialreporting that occurred during the last quarter that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.  However,during their year-end review, KPMG LLP (KPMG), the Company’s independentaccountants, identified and reported to management and the Audit Committee ofDPL’s Board of Directors two material weaknesses and certain other mattersinvolving internal control deficiencies considered to be reportable

 

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conditions under standardsestablished by the Public Company Accounting Oversight Board (PCAOB).  Reportable conditions are matters coming tothe attention of the auditors that, in their judgment, relate to significantdeficiencies in the design or operation of internal control and could adverselyaffect the organization’s ability to record, process, summarize and reportfinancial data consistent with the assertions of management in the financialstatements.  A material weakness is areportable condition in which the design or operation of one or more internalcontrol components does not reduce to a relatively low level the risk thaterrors or fraud in amounts that would be material in relation to the financialstatements being audited may occur and not be detected within a timely periodby employees in the normal course of performing their assigned functions.

 

The two material weaknesses identified are:

 

(1)           An ineffective process forrecognizing an adjustment to the Company’s income tax provision to reflect adeductibility 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 furtherevaluated its internal processes relating to executive compensation and hasimplemented internal control improvements in this area; and

 

(2)           A complex and manual process foraccounting and reporting transactions in DPL’s financial asset portfolio,including, (i) separate reporting structures for MVE accounting and corporateaccounting that do not allow for a review of the entire process, (ii) the lackof a complete accounting manual for financial asset portfolio accounting thatcontemplates all investment transactions that occur on a regular basis and(iii) ineffective communication between the MVE and corporate accounting groupsthat does not ensure that all investment portfolio transactions are identified,accumulated and reported in accordance with generally accepted accountingprinciples.  Specifically, in 2003private equity fund distributions in the form of stock of underlyinginvestments were initially accounted for by management entirely as return ofcapital transactions.  A large element ofeach distribution should have been accounted for as income rather than a returnof capital.  As a result, results for thethird quarter 2003 were required to be revised. Similar transactions in prior years were also accounted for inappropriatelyand were revised.  Management concurredwith KPMG’s observations relating to investment portfolio accounting andacknowledged the need for improvement. DPL further evaluated its accounting processes relating to itsinvestment portfolio and has implemented internal control improvements in thisarea.

 

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 andpreparation and 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 comprehensive

 

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controller function.  The Company reviewed the accounting processesperformed outside the corporate controller’s area and reassigned responsibilityfor these processes as deemed appropriate for improved internal controls.  Finally, management concurred with KPMG’sobservations regarding segregation of duties related to specific activitiesperformed by the prior interim chief financial officer and acknowledged thatimprovements were needed in this area. The Company plans to use the Sarbanes-Oxley Section 404 implementationprocess to further assist in identifying and reassigning responsibility foractivities that require additional 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 auditorswill perform independent testing of the Company’s internal controls as part oftheir year-end review.  At this time, theCompany has not completed its review of the existing controls and theireffectiveness.  Unless the material weaknessesdescribed above, and any identified during this review, are remedied, there canbe no assurances that the Company will be able to assert that its internalcontrol over financial reporting is effective in the management report to beincluded in the Annual Report for the year ended December 31, 2004, pursuant tothe rules adopted by the SEC under Section 404.

 

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**Part II. Other Information**

 

**Item 1.****  Legal Proceedings**

 

There were nosignificant changes to the Legal Proceedings reported in DP&L’s Form 10-Kas of December 31, 2003.  A discussion oflegal proceedings is described in Item 3-Legal Proceedings and Note 16 of Notesto Consolidated Financial Statements of DP&L’s Form 10-K for the year endedDecember 31, 2003 and such discussions are incorporated by reference and made apart hereof.

 

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

 

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

 

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

 

Therewere no significant changes to the Recent Developments reported in Item1-Business or to the Subsequent Events discussed in Note 18 of Notes toConsolidated Financial Statements in DP&L’s Form 10-K as of December 31,2003 and such discussions are incorporated by reference and made a part hereof.

 

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

 

(a)                                  Thefollowing exhibit is filed herewith:

 

Exhibits 31.1 and 31.2 – Officer’s Certificationspursuant to Section 302 of the Sarbanes Oxley Act of 2002

 

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

 

(b)                                 Reports on Form 8-K.

 

No reports on Form 8-K were filed by the Companyduring the quarter ended March 31, 2004.

 

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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 5, 2004 |       |  /s/ James V.  Mahoney                                                                                      |       |
|       |             |       |  James V.  Mahoney                                                                                          |
|       |             |       |  President and  Chief Executive Officer (principal executive officer)                                  |
|       |             |       |                                                                                                             |
|       |             |       |                                                                                                             |
|       | November 5, 2004 |       |  /s/ Pamela  Holdren                                                                                        |       |
|       |             |       |  Pamela  Holdren                                                                                            |
|       |             |       |  Treasurer and  Interim Chief Financial Officer (principal financial and principal accounting officer) |
|       |             |       |                                                                                                             |
|       | November 5, 2004 |       |  /s/ Daniel L.  Thobe                                                                                       |       |
|       |             |       |  Daniel L.  Thobe                                                                                           |
|       |             |       |  Corporate  Controller                                                                                      |
|            |                  |            |                                                                                                                  |            |  |

 

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