**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 
| **ý****QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE** |
|------------------------------------------------------------------------|
| **SECURITIES  EXCHANGE ACT OF 1934**                                   |
| ** **                                                             |
| **For the quarterly period ended June 30,  2005**                      |
| ** **                                                             |
| **OR**                                                                 |
| ** **                                                             |
| **o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**      |
| **SECURITIES  EXCHANGE ACT OF 1934**                                   |

 

**For the transition period from           to           **

 

**Commission File Number  1-2385**

 

**THEDAYTON POWER AND LIGHT COMPANY**

(Exact name of registrant as specified in itscharter)

* *
| **OHIO**                                                        | ** ** | **31-0258470**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**1065 Woodman Drive**

**Dayton, Ohio 45432**

(Address of principal executive offices)

* *

**(937) 224-6000**

(Registrant’s telephone number, including areacode)

 

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

 

YES    ý   NO    o

 

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

 

YES    o   NO    ý

 

Number of shares of registrant’s common stock outstanding as of July27, 2005, all of which were held by DPL Inc., was 41,172,173.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**INDEX**

 
| ** **                        | ** **     | ** **                                                                                  | **Page No.** |
|-----------------------------------|----------------|---------------------------------------------------------------------------------------------|--------------|
| **Part I. Financial Information** |           |                                                                                        |
|                              | Item 1.        | Financial Statements                                                                        |         |
|                              |           |                                                                                        |         |
|                              |           | Consolidated Statement of Results  of Operations                                            | 3            |
|                              |           |                                                                                        |         |
|                              |           | Consolidated Statement of  Cash Flows                                                       | 4            |
|                              |           |                                                                                        |         |
|                              |           | Consolidated Balance Sheet                                                                  | 5            |
|                              |           |                                                                                        |         |
|                              |           | Notes to Consolidated Financial  Statements                                                 | 7            |
|                              |           |                                                                                        |         |
|                              | Item 2.        | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 17           |
|                              |           |                                                                                        |         |
|                              |           | Operating Statistics                                                                        | 30           |
|                              |           |                                                                                        |         |
|                              | Item 3.        | Quantitative and Qualitative  Disclosures about Market Risk                                 | 30           |
|                              |           |                                                                                        |         |
|                              | Item 4.        | Controls and Procedures                                                                     | 30           |
|                              |           |                                                                                        |         |
| **Part  II. Other Information**   |           |
|                              | Item  1.       | Legal  Proceedings                                                                          | 31           |
|                              |           |                                                                                        |         |
|                              | Item 4.        | Submission of Matters to a Vote of Security Holders                                         | 32           |
|                              |           |                                                                                        |         |
|                              | Item  5.  | Other  Information                                                                          | 32           |
|                              |           |                                                                                        |         |
|                              | Item 6.        | Exhibits                                                                                    | 32           |
|                              |           |                                                                                        |         |
| **Other**                         |           |
|                              | Signatures     | 33                                                                                          |
|                              |           |                                                                                        |         |
|                              | Certifications | 34                                                                                          |
|                                   |                |                                                                                             |              |  |

 

**AvailableInformation:**

 

The Dayton Power and Light Company (DP&Lor the Company) files current, annual and quarterly reports and otherinformation required by the Securities Exchange Act of 1934, as amended, withthe Securities and Exchange Commission (SEC). You may read and copy any document the Company files at the SEC’s publicreference room located at 100 F Street, N.E., Room 1580, Washington,D.C.  20549, USA.  Please call the SEC at (800) SEC-0330 forfurther information on the public reference rooms.  The Company’s SEC filings are also availableto the public from the SEC’s web site at http://www.sec.gov.

 

The Company’s public web site is http://www.dplinc.com.  The Company makes available through its website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, 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 web siteincludes other items related to corporate governance matters, including, amongother things, the Company’s governance guidelines, charters of variouscommittees of the Board of Directors and the Company’s code of business conductand ethics applicable to all employees, officers and directors.  You may obtain copies of these documents,free of charge, by sending a request, in writing, to DP&L InvestorRelations, 1065 Woodman Drive, Dayton, Ohio 45432.

 

2

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**Part I. Financial Information**

 

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

 

**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS**

**($ in millions)**

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                             | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                           |       |                   |       |                 |       |   |   |   |   |
| Electric revenues                      | ** ** | **$**                  | **291.4**  |                 | $          | 282.8 | ** ** | **$** | **596.5** |   | $ | 583.2 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| **Operating Expenses**                 |       |                   |       |                 |       |   |   |   |   |
| Fuel                                   | ** ** | **69.5**               |       | 60.5                 | ** ** | **147.2** |   | 123.2 |   |
| Purchased power                        | ** ** | **38.4**               |       | 24.7                 | ** ** | **67.7** |   | 53.2 |   |
| Operation and maintenance              | ** ** | **50.6**               |       | 53.9                 | ** ** | **99.4** |   | 100.7 |   |
| Depreciation and amortization          | ** ** | **31.1**               |       | 29.4                 | ** ** | **61.1** |   | 57.7 |   |
| Amortization of regulatory assets, net | ** ** | **0.4**                |       | 0.1                  | ** ** | **0.9** |   | 0.2 |   |
| General taxes                          | ** ** | **25.4**               |       | 24.6                 | ** ** | **52.8** |   | 51.7 |   |
| Total operating expenses               | ** ** | **215.4**              |       | 193.2                | ** ** | **429.1** |   | 386.7 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| **Operating Income**                   | ** ** | **76.0**               |       | 89.6                 | ** ** | **167.4** |   | 196.5 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Interest expense                       | ** ** | **(9.3**               | **)**      | (10.0                | )          | **(20.6** | **)** | (21.8 | ) |
| Other income (deductions)              | ** ** | **(1.6**               | **)**      | (1.9                 | )          | **6.2** |   | 2.3 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| **Income Before Income Taxes**         | ** ** | **65.1**               |       | 77.7                 | ** ** | **153.0** |   | 177.0 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Income tax expense                     | ** ** | **29.2**               |       | 30.7                 | ** ** | **63.8** |   | 68.0 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| **Net Income**                         | ** ** | **35.9**               |       | 47.0                 | ** ** | **89.2** |   | 109.0 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Preferred dividends                    | ** ** | **0.2**                |       | —               | ** ** | **0.4** |   | 0.2 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| **Earnings on Common Stock**           | ** ** | **$**                  | **35.7**   |                 | $          | 47.0 | ** ** | **$** | **88.8** |   | $ | 108.8 |   |

 

SeeNotes to Consolidated Financial Statements.

Theseinterim statements are unaudited.

 

3

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED STATEMENT OF CASH FLOWS**

**($ in millions)**

 
| ** **                                | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **June 30,**         | ** ** |
| ** **                                | ** ** | **2005**             | ** ** | **2004** | ** ** |
| **Operating Activities**                  |       |                 |       |   |   |
| Net income                                | ** ** | **$**                | **89.2**   | ** ** | $ | 109.0 |   |
| Adjustments:                              |       |                 | ** ** |   |   |
| Depreciation and amortization             | ** ** | **61.1**             | ** ** | 57.7 |   |
| Amortization of regulatory assets, net    | ** ** | **0.9**              | ** ** | 0.2 |   |
| Deferred income taxes                     | ** ** | **(5.6**             | **)**      | 4.9 |   |
| Changes in working capital:               |       |                 | ** ** |   |   |
| Accounts receivable                       | ** ** | **(13.2**            | **)**      | 17.6 |   |
| Accounts payable                          | ** ** | **9.4**              | ** ** | 9.8 |   |
| Accrued taxes payable                     | ** ** | **30.7**             | ** ** | 62.7 |   |
| Prepayments                               | ** ** | **5.6**              | ** ** | (5.0 | ) |
| Inventories                               | ** ** | **(17.4**            | **)**      | (15.6 | ) |
| Deferred compensation assets              | ** ** | **2.5**              | ** ** | 8.5 |   |
| Deferred compensation obligations         | ** ** | **6.9**              | ** ** | (4.8 | ) |
| Other (Note 2)                            | ** ** | **(7.2**             | **)**      | (6.8 | ) |
| Net cash provided by operating activities | ** ** | **162.9**            | ** ** | 238.2 |   |
|                                      |       |                 | ** ** |   |   |
| **Investing Activities**                  |       |                 | ** ** |   |   |
| Capital expenditures                      | ** ** | **(80.6**            | **)**      | (44.8 | ) |
| Net cash used for investing activities    | ** ** | **(80.6**            | **)**      | (44.8 | ) |
|                                      |       |                 | ** ** |   |   |
| **Financing Activities**                  |       |                 | ** ** |   |   |
| Retirement of long-term debt              | ** ** | **(0.4**             | **)**      | (0.4 | ) |
| Dividends paid on common stock            | ** ** | **(75.0**            | **)**      | (150.0 | ) |
| Dividends paid on preferred stock         | ** ** | **(0.4**             | **)**      | (0.2 | ) |
| Net cash used for financing activities    | ** ** | **(75.8**            | **)**      | (150.6 | ) |
|                                      |       |                 | ** ** |   |   |
| **Cash and cash equivalents**             |       |                 | ** ** |   |   |
| Net change                                | ** ** | **6.5**              | ** ** | 42.8 |   |
| Balance at beginning of period            | ** ** | **17.2**             | ** ** | 17.2 |   |
| Balance at end of period                  | ** ** | **$**                | **23.7**   | ** ** | $ | 60.0 |   |
|                                      |       |                 | ** ** |   |   |
| **Cash Paid During the Period for:**      |       |                 | ** ** |   |   |
| Interest                                  | ** ** | **$**                | **19.2**   | ** ** | $ | 18.9 |   |
| Income taxes                              | ** ** | **$**                | **36.8**   | ** ** | $ | 1.7 |   |

 

SeeNotes to Consolidated Financial Statements.

Theseinterim statements are unaudited.

 

4

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED BALANCE SHEET**

**($ in millions)**

 
| ** **                                                                                     | ** ** | **At**       | ** **  | **At**           | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------|-------------|------------------|------------|
| ** **                                                                                     | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                     | ** ** | **2005**     | ** **  | **2004**         | ** ** |
| **ASSETS**                                                                                     |       |         |        |             |       |
|                                                                                           |       |         |        |             |       |
| **Property**                                                                                   |       |         |        |             |       |
| Property, plant and equipment                                                                  | ** ** | **$**        | **4,021.5** |             | $          | 3,944.6 |   |
| Less: Accumulated depreciation and  amortization                                               | ** ** | **(1,916.1** | **)**       | (1,864.4         | )          |
| Net property                                                                                   | ** ** | **2,105.4**  |        | 2,080.2          |       |
|                                                                                           |       |         |        |             |       |
| **Current Assets**                                                                             |       |         |        |             |       |
| Cash and cash equivalents                                                                      | ** ** | **23.7**     |        | 17.2             |       |
| Accounts receivable, less provision for  uncollectible accounts of $1.0 and $1.1, respectively | ** ** | **170.0**    |        | 153.8            |       |
| Inventories, at average cost (Note 2)                                                          | ** ** | **87.2**     |        | 69.8             |       |
| Prepaid taxes                                                                                  | ** ** | **23.2**     |        | 46.4             |       |
| Other (Note 2)                                                                                 | ** ** | **12.7**     |        | 24.8             |       |
| Total current assets                                                                           | ** ** | **316.8**    |        | 312.0            |       |
|                                                                                           |       |         |        |             |       |
| **Other Assets**                                                                               |       |         |        |             |       |
| Income taxes recoverable through future  revenues                                              | ** ** | **31.6**     |        | 32.5             |       |
| Other regulatory assets                                                                        | ** ** | **58.0**     |        | 41.5             |       |
| Other (Note 2)                                                                                 | ** ** | **175.8**    |        | 175.2            |       |
| Total other assets                                                                             | ** ** | **265.4**    |        | 249.2            |       |
|                                                                                           |       |         |        |             |       |
| **Total Assets**                                                                               | ** ** | **$**        | **2,687.6** |             | $          | 2,641.4 |   |

 

See Notes to Consolidated FinancialStatements.

These interim statements are unaudited.

 

5

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED BALANCE SHEET**

**($ in millions)**

(continued)

 
| ** **                               | ** ** | **At**       | ** **  | **At**           | ** ** |
|------------------------------------------|------------|--------------|-------------|------------------|------------|
| ** **                               | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| ** **                               | ** ** | **2005**     | ** **  | **2004**         | ** ** |
|                                     |       |         |        |             |       |
| **CAPITALIZATION AND LIABILITIES**       |       |         |        |             |       |
|                                     |       |         |        |             |       |
| **Capitalization**                       |       |         |        |             |       |
| Common shareholder’s equity         |       |         |        |             |       |
| Common stock                             | ** ** | **$**        | **0.4**     |             | $          | 0.4 |   |
| Other paid-in capital                    | ** ** | **783.0**    |        | 782.9            |       |
| Accumulated other comprehensive income   | ** ** | **44.6**     |        | 43.1             |       |
| Earnings reinvested in the business      | ** ** | **243.4**    |        | 229.7            |       |
|                                     |       |         |        |             |       |
| Total common shareholder’s equity   | ** ** | **1,071.4**  |        | 1,056.1          |       |
|                                     |       |         |        |             |       |
| Preferred stock                          | ** ** | **22.9**     |        | 22.9             |       |
|                                     |       |         |        |             |       |
| Long-term debt (Note 5)                  | ** ** | **685.9**    |        | 686.6            |       |
|                                     |       |         |        |             |       |
| Total capitalization                     | ** ** | **1,780.2**  |        | 1,765.6          |       |
|                                     |       |         |        |             |       |
| **Current Liabilities**                  |       |         |        |             |       |
| Accounts payable                         | ** ** | **120.6**    |        | 107.8            |       |
| Accrued taxes                            | ** ** | **135.4**    |        | 124.8            |       |
| Accrued interest                         | ** ** | **10.8**     |        | 10.7             |       |
| Other (Note 2)                           | ** ** | **24.0**     |        | 22.1             |       |
|                                     |       |         |        |             |       |
| Total current liabilities                | ** ** | **290.8**    |        | 265.4            |       |
|                                     |       |         |        |             |       |
| **Deferred Credits and Other**           |       |         |        |             |       |
| Deferred taxes                           | ** ** | **353.7**    |        | 365.8            |       |
| Unamortized investment tax credit        | ** ** | **47.9**     |        | 49.3             |       |
| Other (Note 2)                           | ** ** | **215.0**    |        | 195.3            |       |
|                                     |       |         |        |             |       |
| Total deferred credits and other         | ** ** | **616.6**    |        | 610.4            |       |
|                                     |       |         |        |             |       |
| **Contingencies (Note 7)**               |       |         |        |             |       |
|                                     |       |         |        |             |       |
| **Total Capitalization and Liabilities** | ** ** | **$**        | **2,687.6** |             | $          | 2,641.4 |   |

 

See Notes to Consolidated FinancialStatements.

These interim statements are unaudited.

 

6

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**Notes to Consolidated Financial Statements**

 

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

 

**Basis of Consolidation**

 

The Dayton Power and Light Company (DP&L or the Company) preparesits consolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America (GAAP).  The consolidated financial statements includethe accounts of DP&L and its 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 andExchange Commission (SEC).  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations.  These consolidated financial statementsshould be read in conjunction with the consolidated financial statements andnotes thereto in DP&L’s 2004 Annual 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 revenue andexpenses of the period reported. Significant items subject to such estimates and judgments include thecarrying value of property, plant and equipment; the valuation of derivativeinstruments; valuation allowance for receivables and deferred income taxes; andassets and liabilities related to employee benefits.  Actual results may differ from thoseestimates.  Reclassifications have beenmade in certain prior years’ amounts to conform to the current reportingpresentation.

 

**Recently Issued Accounting Standards**

 

***Stock-Based Compensation***

 

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-BasedPayment” (SFAS 123R). SFAS 123R replaces SFAS 123, “Accounting for Stock-BasedCompensation”, and supersedes Accounting Principles Board Opinion No. 25(Opinion 25), “Accounting for Stock Issued to Employees”.  SFAS 123R will provide investors and otherusers of financial statements with more complete and neutral financialinformation by requiring that the compensation cost relating to share-basedpayment transactions be recognized in financial statements.  That cost will be measured based on the fairvalue of the equity or liability instruments issued.  SFAS 123R covers a wide range of share-basedcompensation arrangements including share options, restricted share plans,performance-based awards, share appreciation rights, and employee sharepurchase plans.  SFAS 123R establishesstandards in which to account for transactions where an entity exchanges itsequity instruments for goods or services or incurs liabilities in exchange forgoods or services that are based on the fair value of the entity’s equityinstruments or settled by issuance of equity instruments.  This statement focuses primarily onaccounting for employee services paid for by share-based transactions.  SFAS 123R requires a public entity to measurethe cost of employee services received and paid for by equity instruments to bebased on the fair-value of such equity on the grant date.  This cost is recognized in results ofoperations over the period in which employees are required to provide service.  Liabilities initially incurred will be basedon the fair-value of equity instruments and then be re-measured at eachsubsequent reporting date until the liability is ultimately settled.  The fair-value for employee share options andother similar instruments at the grant date will be estimated usingoption-pricing models and excess tax benefits will be recognized as an additionto paid-in capital.  Cash retained fromthe excess tax benefits will be presented in the statement of cash flows asfinancing cash inflows.  The provisionsof this Statement shall be effective for the Company no later than January 1,2006.  DP&L is currently accountingfor such share-based transactions granted after January 1, 2003, using SFAS123, “Accounting for Stock-Based Compensation.” DP&L is evaluating the effect of this new standard on the Company’sresults of operations, cash flows and financial position.

 

***Inventory Costs***

 

In November 2004, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 151, “Inventory Costs, anamendment of ARB No. 43, Chapter 4” (SFAS 151). The amendments made by SFAS 151 clarify that abnormal amounts of idlefacility expense, freight, handling costs, and wasted materials (spoilage)should be recognized as current-period charges and require the allocation offixed production overheads to inventory based on the normal capacity of theproduction facilities.  The guidance iseffective for inventory costs incurred during fiscal years beginning after June15, 2005.  Earlier application ispermitted for inventory costs

 

7

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incurred during fiscal years beginningafter November 23, 2004.  The Company isevaluating the impact of the adoption of SFAS 151 but does not believe theimpact will be significant to the Company’s overall results of operations, cashflows or financial position.

 

***Exchange of Nonmonetary Assets***

 

In December 2004, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 153, “Exchange of NonmonetaryAssets, an amendment of APB Opinion No. 29” (SFAS 153).  The guidance in APB Opinion No. 29, “Accountingfor Nonmonetary Transactions”, is based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged.  The guidance in that Opinion,however, included certain exceptions to that principle.  SFAS 153 amends Opinion 29 to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance.  A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange.  The provisions of SFAS 153 shall be effectivefor nonmonetary asset exchanges occurring in fiscal periods beginning afterJune 15, 2005.  The Company is evaluatingthe impact of the adoption of SFAS 153 but does not believe the impact will besignificant to the Company’s overall results of operations, cash flows orfinancial position.

 

***The American Jobs Creation Act of 2004***

 

On October 22, 2004, the President signed the American Jobs CreationAct of 2004 (the Act).  On December 21,2004, the Financial Accounting Standards Board (FASB) issued two FASB StaffPositions (FSP) regarding the accounting implications of the Act related to (1)the deduction for qualified domestic production activities (FSP FAS 109-1) and(2) the one-time tax benefit for the repatriation of foreign earnings (FSP FAS109-2).  The guidance in the FSPs appliesto financial statements for periods ending after the date the Act wasenacted.  The Act provides a deduction upto 9 percent (when fully phased-in) of the lesser of (a) qualified productionactivities income, as defined by the Act, or (b) taxableincome (after the deduction for the utilization of any net operatingloss carryforwards).  This tax deductionis limited to 50 percent of W-2 wages paid by the taxpayer.  The Act also creates a temporary incentivefor U.S. corporations to repatriate accumulated income earned abroad byproviding an 85 percent dividends received deduction for certain dividends fromcontrolled foreign corporations.  TheCompany reduced its tax expense by $0.5 million for the six months ended June30, 2005 as a result of the deduction for qualified domestic productionactivities.

 

***Discontinued Operations***

 

In November 2004, the EITF issued EITF 03-13, “Applying the Conditionsin Paragraph 42 of FASB Statement No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets,* in Determining Whetherto Report Discontinued Operations” (SFAS No. 144).  This guidance should be applied to acomponent of an enterprise that is either disposed of or classified as held forsale in fiscal periods beginning after December 15, 2004.  Operating results related to a component thatis either disposed of or classified as held for sale within an enterprise’sfiscal year that includes November 30, 2004, may be classified to reflect theconsensus.  The Company determined thatSFAS No. 144 did not have an impact on its results of operations, financialcondition or cash flows.

 

***Accounting for Conditional Asset RetirementObligations***

 

InMarch 2005, the Financial Accounting Standards Board issued FASB InterpretationNo. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN47).  This Interpretation clarifies thatthe term *conditional asset retirementobligation* as used in FASB Statement No. 143, “*Accounting for Asset Retirement Obligations” (SFAS143),* refers to a legal obligation to perform an asset retirementactivity in which the timing and (or) method of settlement are conditional on afuture event that may or may not be within the control of the entity.  The obligation to perform the assetretirement activity is unconditional even though uncertainty exists about thetiming and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on afuture event.  Accordingly, an entity isrequired to recognize a liability for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated.  The fair value of a liabilityfor the conditional asset retirement obligation should be recognized whenincurred—generally upon acquisition, construction, or development and (or)through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists.  SFAS 143 acknowledges that in some cases,sufficient information may not be available to reasonably estimate the fairvalue of an asset retirement obligation. This Interpretation also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation.  This Interpretation iseffective no later than the end of fiscal years ending after December 15,2005.  Retrospective application forinterim financial information is permitted but is not required.  Early adoption of this Interpretation isencouraged.  DP&L is evaluating theeffect of this new standard on the Company’s results of operations, cash flowsand financial position.

 

8

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***Accounting Changes and Error Corrections***

 

In June 2005, the Financial Accounting Standards Board issued Statementof Financial Accounting Standards No. 154, “Accounting Changes and ErrorCorrections- a replacement of APB Opinion No. 20 and FASB Statement No. 3”(SFAS 154).  This Statement replaces APBOpinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “ReportingAccounting Changes in Interim Financial Statements,” and changes therequirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in theunusual instance that the pronouncement does not include specific transitionprovisions.  When a pronouncement includes specific transition provisions,those provisions should be followed. This Statement shall be effective for accounting changes and correctionsof errors made in fiscal years beginning after December 15, 2005.

 

9

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**2.  SupplementalFinancial Information**

 
| ** **                                         | ** ** | **At**       | ** ** | **At**           | ** ** |
|----------------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                             | ** ** | **2005**     | ** ** | **2004**         | ** ** |
|                                               |       |         |       |             |       |
| **Inventories, at average cost**                   |       |         |       |             |       |
| Plant materials and supplies                       | ** ** | **$**        | **29.3**   |             | $          | 29.1 |   |
| Fuel and emission allowances                       | ** ** | **58.6**     |       | 40.7             |       |
| Other                                              | ** ** | **(0.7**     | **)**      | —           |       |
| Total inventories, at average cost                 | ** ** | **$**        | **87.2**   |             | $          | 69.8 |   |
|                                               |       |         |       |             |       |
| **Other current assets**                           |       |         |       |             |       |
| Prepayments                                        | ** ** | **$**        | **8.0**    |             | $          | 11.2 |   |
| Deposits and other advances                        | ** ** | **4.2**      |       | 1.6              |       |
| Current deferred income taxes                      | ** ** | **—**   |       | 6.8              |       |
| Miscellaneous work in progress                     | ** ** | **2.6**      |       | 4.5              |       |
| Other                                              | ** ** | **(2.1**     | **)**      | 0.7              |       |
| Total other current assets                         | ** ** | **$**        | **12.7**   |             | $          | 24.8 |   |
|                                               |       |         |       |             |       |
| **Other deferred assets**                          |       |         |       |             |       |
| Master Trust assets                                | ** ** | **$**        | **109.5**  |             | $          | 106.4 |   |
| Prepaid pension                                    | ** ** | **36.6**     |       | 38.2             |       |
| Unamortized loss on reacquired debt                | ** ** | **22.9**     |       | 23.8             |       |
| Unamoritized debt expense                          | ** ** | **5.6**      |       | 5.6              |       |
| Other                                              | ** ** | **1.2**      |       | 1.2              |       |
| Total other deferred assets                        | ** ** | **$**        | **175.8**  |             | $          | 175.2 |   |
|                                               |       |         |       |             |       |
| **Other current liabilities**                      |       |         |       |             |       |
| Customer security deposits and other  advances     | ** ** | **$**        | **19.0**   |             | $          | 17.3 |   |
| Current deferred income tax                        | ** ** | **1.4**      |       | —           |       |
| Current portion - long-term debt                   | ** ** | **1.3**      |       | 1.5              |       |
| Other                                              | ** ** | **2.3**      |       | 3.3              |       |
| Total other current liabilities                    | ** ** | **$**        | **24.0**   |             | $          | 22.1 |   |
|                                               |       |         |       |             |       |
| **Other deferred credits**                         |       |         |       |             |       |
| Asset retirement obligations - regulated  property | ** ** | **$**        | **80.1**   |             | $          | 77.5 |   |
| Trust obligations                                  | ** ** | **75.1**     |       | 68.2             |       |
| Retirees’ health and life benefits            | ** ** | **32.0**     |       | 32.4             |       |
| Environmental reserves                             | ** ** | **0.1**      |       | 0.1              |       |
| Legal reserves                                     | ** ** | **3.2**      |       | 3.3              |       |
| Asset retirement obligations - generation          | ** ** | **5.3**      |       | 5.1              |       |
| FERC transitional payment deferral                 | ** ** | **9.9**      |       | —           |       |
| Other                                              | ** ** | **9.3**      |       | 8.7              |       |
| Total other deferred credits                       | ** ** | **$**        | **215.0**  |             | $          | 195.3 |   |

 
| ** **                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| **$ in millions**                    | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| **Cash flows - Other**                    |       |                          |       |   |   |
| Payroll taxes payable                     | ** ** | **$**                         | **(0.1**   | **)** | $ | (12.8 | ) |
| Deposits and other advances               | ** ** | **(2.6**                      | **)**      | 3.8 |   |
| Deferred storm costs                      | ** ** | **(11.4**                     | **)**      | — |   |
| Unamortized loss on reacquisition of debt | ** ** | **—**                    | ** ** | 1.9 |   |
| FERC transitional payment deferral        | ** ** | **9.9**                       | ** ** | — |   |
| Other                                     | ** ** | **(3.0**                      | **)**      | 0.3 |   |
| Total cash flows - Other                  | ** ** | **$**                         | **(7.2**   | **)** | $ | (6.8 | ) |

 
| ** **                                                                                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **$ in millions**                                                                                 | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Comprehensive income**                                                                               |       |                            |       |                          |       |   |   |   |   |
| Net income                                                                                             | ** ** | **$**                           | **35.9**   |                          | $          | 47.0 | ** ** | **$** | **89.2** |   | $ | 109.0 |   |
| Net change in unrealized gains (losses) on  financial instruments, net of reclassification adjustments | ** ** | **6.8**                         |       | 1.8                           | ** ** | **5.5** |   | (3.8 | ) |
| Net change in deferred gains on cash flow  hedges                                                      | ** ** | **(1.5**                        | **)**      | (0.9                          | )          | **(2.8** | **)** | (1.6 | ) |
| Deferred income taxes related to unrealized  gains (losses)                                            | ** ** | **(2.1**                        | **)**      | (0.6                          | )          | **(1.2** | **)** | 1.8 |   |
| Comprehensive income                                                                                   | ** ** | **$**                           | **39.1**   |                          | $          | 47.3 | ** ** | **$** | **90.7** |   | $ | 105.4 |   |

 

10

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**3.****              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 ofservice.  The Company funds pension planbenefits as accrued in accordance with the minimum funding requirements of theEmployee Retirement Income Security Act of 1974 (ERISA).

 

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

 

The net periodic benefit cost of the pension and postretirement benefitplans for the three months ended June 30 was:

 

**Net periodic benefit cost**

 
| ** **                    | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**        | ** ** | **2005**    | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                  | ** ** | **$**       | **1.0**    | ** **         | $          | 1.0 |   | **$** | **—** | ** ** | $ | — |   |
| Interest cost                 | ** ** | **3.9**     | ** ** | 4.0                |       | **0.5** | ** ** | 0.5 |   |
| Expected return on assets     | ** ** | **(5.4**    | **)**      | (5.5               | )          | **(0.2** | **)** | (0.1 | ) |
| Amortization of unrecognized: |       |        | ** ** |               |       |   | ** ** |   |   |
| Actuarial (gain) loss         | ** ** | **1.0**     | ** ** | 0.5                |       | **(0.2** | **)** | (0.3 | ) |
| Prior service cost            | ** ** | **0.6**     | ** ** | 0.7                |       | **—** | ** ** | — |   |
| Transition obligation         | ** ** | **—**  | ** ** | —             |       | **—** | ** ** | 0.1 |   |
|                          |       |        | ** ** |               |       |   | ** ** |   |   |
| Net periodic benefit cost     | ** ** | **$**       | **1.1**    | ** **         | $          | 0.7 |   | **$** | **0.1** | ** ** | $ | 0.2 |   |

 

The net periodic benefit cost of the pension and postretirement benefitplans for the six months ended June 30 was:

 

**Net periodic benefit cost**

 
| ** **                    | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**        | ** ** | **2005**    | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                  | ** ** | **$**       | **2.0**    | ** **         | $          | 1.9 |   | **$** | **—** | ** ** | $ | — |   |
| Interest cost                 | ** ** | **7.8**     | ** ** | 8.0                |       | **0.9** | ** ** | 1.0 |   |
| Expected return on assets     | ** ** | **(10.8**   | **)**      | (10.9              | )          | **(0.3** | **)** | (0.3 | ) |
| Amortization of unrecognized: |       |        | ** ** |               |       |   | ** ** |   |   |
| Actuarial (gain) loss         | ** ** | **1.9**     | ** ** | 1.0                |       | **(0.5** | **)** | (0.5 | ) |
| Prior service cost            | ** ** | **1.2**     | ** ** | 1.3                |       | **—** | ** ** | — |   |
| Transition obligation         | ** ** | **—**  | ** ** | —             |       | **0.1** | ** ** | 0.1 |   |
|                          |       |        | ** ** |               |       |   | ** ** |   |   |
| Net periodic benefit cost     | ** ** | **$**       | **2.1**    | ** **         | $          | 1.3 |   | **$** | **0.2** | ** ** | $ | 0.3 |   |

 

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

 

11

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**Estimated Future Benefit Payments**

 
| **$ in millions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------|------------|-------------|------------|--------------------|------------|
|                   |       |        |       |               |       |
| 2005                   |       | $           | 9.7        |               | $          | 2.0 |   |
| 2006                   |       | $           | 19.7       |               | $          | 3.1 |   |
| 2007                   |       | $           | 20.0       |               | $          | 3.1 |   |
| 2008                   |       | $           | 19.1       |               | $          | 3.0 |   |
| 2009                   |       | $           | 20.2       |               | $          | 2.9 |   |
| 2010                   |       | $           | 20.5       |               | $          | 2.8 |   |
| 2011 – 2015       |       | $           | 106.8      |               | $          | 11.8 |   |

 

**4.  Stock-Based Compensation**

 

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

 
| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                           | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| **$ in millions**                                                                               | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Earnings on common stock, as reported                                                                | ** ** | **$**                  | **35.7**   |                 | $          | 47.0 | ** ** | **$** | **88.8** |   | $ | 108.8 |   |
| Add: Total stock-based compensation expense  determined under APB 25, net of related tax effects     | ** ** | **—**             |       | —               | ** ** | **—** |   | — |   |
| Deduct: Total stock-based compensation  expense determined under FAS 123, net of related tax effects | ** ** | **(0.1**               | **)**      | (0.8                 | )          | **(0.1** | **)** | (1.5 | ) |
| Pro-forma earnings on common stock                                                                   | ** ** | **$**                  | **35.6**   |                 | $          | 46.2 | ** ** | **$** | **88.7** |   | $ | 107.3 |   |

 

During the second quarter 2005, 455 thousand DPL Inc. stock optionswere exercised by former, retired officers of the Company who are notaffiliated with the Company’s pending litigation against three formerexecutives of the Company.  See Part II,Item 1-Legal Proceedings.

 

12

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

 
| ** **                                                                | ** ** | **At**       | ** **  | **At**           | ** ** |
|---------------------------------------------------------------------------|------------|--------------|-------------|------------------|------------|
| ** **                                                                | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                    | ** ** | **2005**     | ** **  | **2004**         | ** ** |
| First mortgage bonds maturing:                                            |       |         |        |             |       |
| 2013 - 5.125%                                                             | ** ** | **$**        | **470.0**   | ** **       | $          | 470.0 |   |
| Pollution control series maturing through  2027 - 6.43% (a)               | ** ** | **104.0**    | ** **  | 104.4            |       |
| ** **                                                                |       | **574.0**    | ** **  | 574.4            |       |
| ** **                                                                |       | ** **   | ** **  |             |       |
| Guarantee of Air Quality Development  Obligations - 6.10% Series due 2030 | ** ** | **110.0**    | ** **  | 110.0            |       |
| Obligation for capital leases                                             | ** ** | **3.4**      | ** **  | 3.8              |       |
| Unamortized debt discount and premium (net)                               | ** ** | **(1.5**     | **) ** | (1.6             | )          |
| Total                                                                     | ** ** | **$**        | **685.9**   | ** **       | $          | 686.6 |   |

 

----

(a)  Weightedaverage interest rates for 2005 and 2004.

 

# **Theamounts of maturities and mandatory redemptions for first mortgage bonds andthe capital leases are $0.5 million for the remainder of 2005, $1.3 million in2006, $9.5 million in 2007, $0.7 million in 2008 and $0.7 million in 2009.  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 usedon October 30, 2003, to (i) redeem $226 million principal amount of DP&L’sFirst Mortgage Bonds, 8.15% Series due 2026, at a redemption price of 104.075%of the principal amount plus accrued interest to the redemption date and (ii)redeem $220 million principal amount of DP&L’s First Mortgage Bonds, 7.875%Series due 2024, at a redemption price of 103.765% of the principal amount plusaccrued interest to the redemption date. The 5.125% Series due 2013 were not registered under the Securities Actof 1933, but were offered and sold through a private placement in compliancewith Rule 144A under the Securities Act of 1933.  The bonds included step-up interestprovisions requiring the Company to pay additional interest if (i) DP&L’sregistration statement was not declared effective by the SEC within 180 daysfrom the issuance of the new bonds or (ii) the exchange offer was not completedwithin 210 days from the issuance of the new bonds.  The registration statement was not declared effectiveand the exchange offer was not timely completed and, as a result, the Companywas required to pay additional interest of 0.50% until a registration statementwas declared effective, at which point the additional interest was reduced by0.25%.  The remaining additional interestof 0.25% continued until the exchange offer was completed.  The exchange offer registration for thesesecurities was filed with the SEC on April 26, 2005 and declared effective onMay 18, 2005, at which point the additional interest was reduced by 0.25%.  The exchange offer was completed on June 23,2005, thereby eliminating the additional interest in total.

 

In February 2004, DP&L entered into a $20 million MasterLetter of Credit Agreement with a financial lending institution.  This agreement supports performance assuranceneeds in the ordinary course of business. The Company has certain contractual agreements for the sale and purchaseof power, fuel and related energy services that contain credit rating relatedclauses allowing the counterparties to seek additional surety under certainconditions.  On February 24, 2005, theCompany entered into an amendment to extend the term of this Agreement for oneyear and reduce the maximum dollar volume of letters of credit to $10 million.  As of June 30, 2005, the Company had twooutstanding letters of credit for a total of $3.1 million.

 

InMay 2005, DP&L obtained a $100 million unsecured revolving credit agreementthat extended and replaced its previous revolving credit agreement of $100million.  The new agreement, renewableannually, expires on May 30, 2010 and provides credit support for the Company’sbusiness requirements during this period. This may be increased up to $150million.  The facility contains onefinancial covenant, maximum debt to total capitalization.  This covenant is currently met.  The Company had no outstanding borrowingsunder this credit facility at June 30, 2005 or at year-end 2004.  Fees associated with this credit facilitywere approximately $0.2 million per year. Changes in debt ratings, however, may affect the applicable interestrate for the revolving credit agreement.

 

DP&L is in the process of refinancing $41.3 million in outstandingOhio Water Development Authority obligations maturing through 2027 with aweighted average interest rate of 6.4%; $137.8 million in outstanding Ohio AirQuality Development Authority obligations maturing through 2030 with a weightedaverage interest rate of 6.2%; and $35.3 million in outstanding Boone County,Kentucky obligations maturing through 2022 with a weighted average interestrate of 6.5%.

 

13

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There are no inter-company debt collateralizations or debt guaranteesbetween DP&L and its parent.  None ofthe debt obligations of DP&L are guaranteed or secured by its parent oraffiliates and no cross-collateralization existsbetween the Company and DPL or any affiliate.

 

**6. Income Taxes**

 

On June 30, 2005, Governor Taft signed House Bill 66 into law whichsignificantly changed the tax structure in Ohio.  The major provisions ofthe bill include phasing-out the Ohio Franchise Tax, phasing-out the PersonalProperty Tax for non-utility taxpayers and phasing-in a Commercial ActivitiesTax.  The Ohio Franchise Tax phase-outrequired second quarter adjustments to income tax expense.  Otherprovisions of House Bill 66 are being evaluated by DP&L.

 

The Company is under audit review by state agencies for the tax years2002 through 2004 and by federal agencies for the tax years 1999 through2003.  The Company believes it has adequate reserves for all positionstaken in each tax jurisdiction but cannot predict the outcome of these audits. Depending upon the outcome of these audits, the Company may be requiredto increase or decrease its reserves.

 

**7.     Commitmentsand Contingencies**

 

**Contingencies**

 

In the normal course of business, DP&L issubject to various lawsuits, actions, proceedings, claims and other mattersasserted under laws and regulations. DP&L believes the amounts provided in its consolidated financialstatements, as prescribed by GAAP, are adequate in light of the probable andestimable contingencies.  However, therecan be no assurances that the actual amounts required tosatisfy alleged liabilities from various legal proceedings, claims, andother matters discussed below, and to comply with applicable laws andregulations, will not exceed the amounts reflected in DP&L’s ConsolidatedFinancial Statements.  As such, costs, ifany, that may be incurred in excess of those amounts provided as of June 30,2005, cannot be reasonably determined.

 

**Environmental Matters**

 

DP&L’s facilities and operations are subject to a wide range ofenvironmental regulations and law.  Inthe normal course of business, the Company has investigatory and remedialactivities underway at these facilities to comply, or to determine compliance,with such regulations.  The Company hasbeen identified, either by a government agency or by a private party seekingcontribution to site clean-up costs, as a potentially responsible party (PRP)at two sites pursuant to state and federal laws.  The Company records liabilities for probableestimated loss in accordance with Statement of Financial Accounting StandardsNo. 5, “Accounting for Contingencies” (SFAS 5). 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, the Company accrues for the low endof the range.  Because of uncertainties relatedto these matters, accruals are based on the best information available at thetime.  DP&L evaluates the potentialliability related to probable losses quarterly and may revise its estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on the Company’s results ofoperations and financial position.

 

**Legal Matters**

 

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

 

On August 24, 2004, theCompany, DPL and MVE filed a Complaint against Mr. 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 thepurported amendments to the deferred compensation plans and to the employmentand consulting agreements with Messrs. Forster and Koziar andMs. Muhlenkamp, and the propriety of the distributions from the plans toMessrs. Forster and Koziar and Ms. Muhlenkamp, 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 thousand, disgorgement of all amountsimproperly withdrawn by Messrs. Forster and Koziar and Ms. Muhlenkamp fromthe deferred compensation plans and a court order declaring that the Company,DPL and MVE have no further obligations under the consulting and employmentcontracts due to those breaches.

 

DefendantsForster, Koziar and Muhlenkamp filed motions to dismiss the Complaint andmotions to stay discovery pending a ruling on the motions to dismiss.  The Company and DPL filed briefs opposingthose motions.  In addition, pursuant toapplicable statutes, regulations and agreements, the Company and DPL have beenadvancing certain of Defendants’ attorneys’ fees and expenses with respect tovarious matters other than the litigation between Defendants and the Company andDPL in Florida and Ohio, and believe that other requested advances are not

 

14

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required.  On February 7, 2005, Mr. Forster and Ms.Muhlenkamp filed a motion in DP&L’s and DPL’s Ohio litigation seeking to compelDPL, MVE and the Company to pay all attorneys’ fees and expenses that have notbeen advanced to them.  The Company, DPLand MVE have filed a brief opposing that motion.  On May 10, 2005, the Court denied DefendantsForster, Koziar, and Muhlenkamp’s motions to dismiss.  Defendants Forster and Muhlenkamp’s motionregarding fees remains pending.  On June15, 2005, Defendants Forster and Muhlenkamp filed an answer and filedcounterclaims against the Company, DPL, MVE andindividually against the current members of the Board of Directors of DPL Inc.as well as a former Board member and various compensation plans of the Companyand DPL.  On June 15, 2005, DefendantKoziar filed his answer and filed counterclaims against the Company, DPL andindividually against the current members of the Board of Directors of DPL Inc.and a former Board member of DPL.  OnJune 29, 2005, the Company, DPL and MVE filed an amended complaint against theDefendants.  On July 18, 2005, Defendantsfiled answers to that amended complaint and Defendant Koziar filed amendedcounterclaims that included claims against various compensation plans of DPLand DP&L that he had not named in his initial counterclaims.  Defendants’ answers substantially deny theallegations made by the Company, DPL and MVE and deny any liability.  The counterclaims and amended counterclaimsallege that the Company, DPL, MVE, various compensation plans and theindividual defendants breached the terms of the employment and consultingcontracts of Defendants Forster, Muhlenkamp and Koziar, and the terms of thecompensation plans.  They further allegetheories of breach of fiduciary duty, breach of contract, promissory estoppel,tortious interference, conversion, replevin and violations of ERISA under whichthey seek distribution of deferred compensation balances, conversion of stockincentive units, exercise of options and payment of amounts allegedly owedunder the contracts and plans.  Forster,Muhlenkamp and Koziar also seek payment of attorneysfees and expenses on claims similar to those filed in the Forster and Muhlenkampmotion for atttorneys fees and expenses.

 

OnMarch 15, 2005, Mr. Forster and Ms. Muhlenkamp filed a lawsuit in New Yorkstate court against the purchasers of the private equity investments in thefinancial asset portfolio and against outside counsel to the Company and DPLconcerning purported entitlements in connection with the purchase of thoseinvestments. They assert that the Company, DPL and MVE had ongoing obligationsto make certain payments to them based on the financial asset portfolio’sreturns and that any purchaser of portfolio investments should have beenobligated to assume those obligations. The Company, DPL and MVE are not defendants in that case; however, theyare parties to an indemnification agreement with respect to the purchaserdefendants.  Those defendants haverequested that the Company, DPL and MVE indemnify them in connection with thatlitigation, and the Company, DPL and MVE have acknowledged indemnityobligations.  On March 28, 2005, theCompany, DPL and MVE filed a Motion for Preliminary Injunction in the Ohiocase, requesting that the court issue a preliminary injunction against Mr.Forster and Ms. Muhlenkamp regarding the lawsuit.  Since certain keyissues raised by Mr. Forster and Ms. Muhlenkamp in their New York lawsuit areidentical to the issues raised in the pending Ohio lawsuit, DPL, MVE and theCompany believe that those issues should be heard and resolved in the pendingOhio lawsuit.  Mr. Forster and Ms. Muhlenkamp filed a brief opposing thepreliminary injunction on April 15, 2005. The Company, DPL and MVE filed their reply brief on April 25, 2005.  The court heard the motion on May 6, 2005 andhas not yet issued a ruling.  Inaddition, the defendants in the New York action filed motions to stay ordismiss that case.  The New York courtheard those motions on June 23, 2005 and on July 5, 2005 entered an ordersevering the claims brought against the purchaser defendants and granting thepurchaser defendants’ motion to stay those claims temporarily.  On July 14, 2005, the New York court held atelephonic conference with the parties. The court continued the stay of the New York case as to the purchaserdefendants until further argument could be held on their motion to stay ordismiss.  The New York court has not yetruled on the motion filed by outside counsel to the Company and DPL.  Counsel for Mr. Forster and Ms. Muhlenkamphave informed the New York court that they intend to file a motion seekingunspecified relief from the stay.

 

Counselto Mr. Forster and Ms. Muhlenkamp have begun sending their attorneys’ invoicesfor the New York action to DPL and the Company for fee advancement and havecontinued to send monthly invoices for the Ohio action to DPL and the Companyfor fee advancement.  DPL and the Companycontinue to maintain that they are not required to advance payment with respectto any of those charges.

 

Cumulativelythrough June 30, 2005, the Company has accrued for accounting purposes,obligations of approximately $50 million to reflect claims regarding deferredcompensation, estimated MVE incentives and/or legal fees that Defendants assertare payable per contracts.  The Company disputesDefendants entitlement to any of those sums and, as noted above is pursuinglitigation against them contesting all such claims.

 

**Long-term Obligations and CommercialCommitments**

 

DP&L enters into various contractual and other long-termobligations that may affect the liquidity of its operations.  At June 30, 2005, these include:

 

15

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**Long Term Obligations**

 
| ** **                          | ** ** | **Payment Year** | ** ** |
|-------------------------------------|------------|------------------|------------|
| **$ in millions**              | ** ** | **2005**         | ** ** | **2006 & 2007** | ** ** | **2008 & 2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                |       |             |       |   |   |   |   |   |   |   |   |
| Long-term debt                      |       | $                | —     |   | $ | 9.0 |   | $ | — |   | $ | 673.9 |   | $ | 682.9 |   |
| Interest payments                   |       | 18.7             |       | 74.4 |   | 73.9 |   | 36.9 |   | 203.9 |   |
| Pension and postretirement payments |       | 11.7             |       | 45.9 |   | 45.2 |   | 141.9 |   | 244.7 |   |
| Capital leases                      |       | 0.5              |       | 1.8 |   | 1.4 |   | 0.6 |   | 4.3 |   |
| Operating leases                    |       | 0.8              |       | 0.9 |   | — |   | — |   | 1.7 |   |
| Coal contracts (a)             |       | 169.9            |       | 583.4 |   | 83.7 |   | 85.5 |   | 922.5 |   |
| Other long-term obligations         |       | 17.6             |       | 12.7 |   | 0.5 |   | — |   | 30.8 |   |
| Total long-term obligations         |       | $                | 219.2      |   | $ | 728.1 |   | $ | 204.7 |   | $ | 938.8 |   | $ | 2,090.8 |   |

 

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(a) DP&L operated units.

 

Long-term debt:

 

Long-term debt as of June 30, 2005, consists of first mortgage bondsand guaranteed air quality development obligations and includes currentmaturities and unamortized debt discount. See Note 5 of Notes to Consolidated Financial Statements.

 

Interest payments:

 

Interest payments through 2010 associated with the Long-term debtdescribed above.  See Note 5 of Notes toConsolidated Financial Statements.

 

Pension and postretirement payments:

 

As of June 30, 2005, DP&L had estimated future benefit payments asoutlined in Note 3 of Notes to Consolidated Financial Statements.  These estimated future benefit payments areprojected through 2015.

 

Capital leases:

 

As of June 30, 2005, the Company had two capital leases that expire inNovember 2007 and September 2010.

 

Operating leases:

 

As of June 30, 2005, the Company had several operating leases withvarious terms and expiration dates.

 

Coal contracts:

 

The Company has entered into various long-term coal contracts to supplyportions of its coal requirements for its generating plants.  Contract prices are subject to periodicadjustment, and have features that limit price escalation in any given year.

 

Other long-term obligations:

 

As of June 30, 2005, the Company had various other long-termobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

DP&L enters into various commercial commitments, which may affectthe liquidity of its operations.  At June30, 2005, these include:

 

**CommercialCommitments**

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

 

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Credit facilities:

 

In May 2005, the Company replaced its previous $100 million revolvingcredit agreement with a $100 million, 364 day unsecured credit facility that isrenewable annually and expires on May 30, 2010. At June 30, 2005, there were no borrowings outstanding under this creditagreement.  The new facility may beincreased up to $150 million.

 

Guarantees:

 

DP&L owns a 4.9% equity ownership interest in an electricgeneration company.  As of June 30, 2005,DP&L could be responsible for the repayment of 4.9%, or $14.9 million, of a$305 million debt obligation and also 4.9%, or $2.9 million, of a separate $60million debt obligation.  Bothobligations mature in 2006.

 

**Item 2.****  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

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

 

Forward-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.  (SeeFACTORS THAT MAY AFFECT FUTURE RESULTS.)

 

**OTHERMATTERS**

 

**Debt Refinancing**

 

DP&L is in the process of refinancing $41.3 million in outstandingOhio Water Development Authority obligations maturing through 2027 with aweighted average interest rate of 6.4%; $137.8 million in outstanding Ohio AirQuality Development Authority obligations maturing through 2030 with a weightedaverage interest rate of 6.2%; and $35.3 million in outstanding Boone County,Kentucky obligations maturing through 2022 with a weighted average interestrate of 6.5%.

 

**Updates on Competition and Regulation**

 

On April 7, 2004, DPL Inc. received noticethat the staff of the Public Utilities Commission of Ohio (PUCO) was conductingan investigation into the financial condition of the Company as a result ofpreviously disclosed matters raised by a Company employee during the 2003year-end financial closing process.  OnMay 27, 2004, the PUCO ordered the Company to file a plan of utility financialintegrity that outlines the actions DPL Inc. has taken or will take to insulateDP&L utility operations and customers from the unregulated activities ofits parent and subsidiaries.  The Companywas required to file this plan by March 2, 2005.  On February 4, 2005, the Company filed itsprotection plan with the PUCO and expressed its intentions to continue tocooperate with the PUCO in their investigation. On March 29, 2005, the Ohio Consumers Counsel (OCC) filed comments withthe PUCO on DPL’s financial plan of integrity, requesting the PUCO continue theinvestigation and monitor the Company’s progress toward implementation of itsfinancial plan of integrity.  On June 29,2005, the Commission closed its investigation, citing significant positiveactions taken by DPL including changes in the Board of Directors as well asexecutive management of the Company, and that no apparent diminution of servicequality has occurred because of the events that initiated the investigation.

 

As of June 30, 2005, four unaffiliated marketers were registered ascompetitive retail electric service (CRES) providers in the Company’s serviceterritory; to date, there has been no significant activity from thesesuppliers.  DPL Energy Resources, Inc. (DPLER), an affiliated company, isalso a registered CRES provider and accounted for nearly all load served by CRESproviders within the Company’s service territory in 2004 and for the first sixmonths of 2005.  In addition, several communities in the Company’s servicearea have passed ordinances allowing the

 

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communities tobecome government aggregators for the purpose of offering alternative electricgeneration supplies to their citizens. To date none of these communities have aggregated.

 

As a part of the Market Development Period Stipulation, the Companyagreed to implement a Voluntary Enrollment Process that would provide customerswith an option to choose a competitive supplier to provide their retailgeneration service should switching not reach 20% in each customer class byOctober 2004.  Approximately 51 thousandresidential customers that volunteered for the program were bid out to CRESproviders who are registered in the Company’s service territory.  As of July 5, 2005, three rounds of biddinghave been completed, resulting in no bids being received.  The fourth and final bidding for 2005 isscheduled to take place by August 30, 2005. The magnitude of any customer switching and the financial impact of thisprogram are not expected to be material to the Company’s results of operations,cash flows or financial position in 2005. Future period effects cannot be determined at this time.

 

There was a complaint filed on January 21, 2004 at the PUCO concerningthe pricing of the Company’s billing services. Additionally, on December 16, 2003, a complaint was filed at the PUCOalleging that the Company has established improper barriers tocompetition.  On October 13, 2004, theparties reached a settlement on the pricing of the Company’s billing servicesthat the Company will charge CRES providers. Additionally, on October 19, 2004, the Company entered into a settlementwith Dominion Retail, Green Mountain Energy, and the Staff of the PUCO thatresolves all matters in the competition barrier complaint.  This settlement provides that the Companywill modify the manner in which customer partial payments are applied tobilling charges and the Company will no longer offer to purchase thereceivables of CRES providers who operate in the Company’s certifiedterritory.  On February 2, 2005, the PUCOissued an Order approving both settlements with minor modifications.  This Order gives the Company the right todefer costs of approximately $18 million and later file for recovery over afive year period, subject to PUCO approval. On March 4, 2005, the OCC filed a Motion for Rehearing with thePUCO.  On March 23, 2005, the PUCO deniedthe OCC Motion for Rehearing.  On May 23,2005, the OCC appealed the order to the Ohio Supreme Court.  On June 17, 2005, the Company filed forPUCO approval for recovery of the deferred billing costs plus carrying chargesbeginning January 1, 2006.  If approvedas proposed, this new rider will result in approximately $6 million inadditional annual revenue through 2010.

 

On April 4, 2005, the Company filed a request at the PUCO to implementa rate stabilization surcharge effective January 1, 2006.  The proposed rate surcharge request supportsapproximately $117 million in increased costs and is designed to reimburse theCompany for certain costs of providing electric service related to fuel,environmental compliance, taxes, regulatory changes and security measures.  The surcharge is capped at 11% of thegeneration portion of the Company’s rates. The surcharge, if approved, would result in approximately $76 million inadditional revenue in 2006.

 

The Federal Energy Regulatory Commission (FERC) issued a final rule onDecember 20, 1999, which required all public utilities that own, operate, orcontrol interstate transmission lines to file a proposal to join a RegionalTransmission Organization (RTO) or file a description of efforts taken toparticipate in a RTO, or reasons for not participating in a RTO.  In June 2003, the Company turned over certaintransmission functions for PJM Interconnection, L.L.C. (PJM) to operateincluding management of certain information systems, scheduling, marketmonitoring and security coordination. The Company was fully integrated into PJM on October 1, 2004.  As of December 31, 2004, the Company hadinvested a total of approximately $18.0 million in its efforts to join a RTO.  On March 8, 2005, the Company, along withCommonwealth Edison and American Electric Power Service Corporation, filed torecover a portion of integration expenses relating to efforts to join the RTO.  On May 6, 2005, FERC approved the filingsubject to certain modifications. Applications for rehearing are currently pending.

 

Effective October 1, 2004, PJM began to assess a FERC-approvedadministrative fee on every megawatt consumed by the Company’s customers.  On October 26, 2004, the Company filed an applicationwith the PUCO for authority to modify its accounting procedures to defercollection of this PJM administrative fee, effective October 1, 2004, pluscarrying charges, until such time as the Company has obtained the authority toadjust its rates pursuant to the Company’s approved Stipulation andRecommendation.  On June 1, 2005, thePUCO authorized the Company to defer the PJM administrative fee, plus carryingcharges incurred after the date of the application requesting the authority todefer the charges.  On July 1, 2005, theOCC filed an Application for Rehearing on the Commission’s June 1 order.  The Application for Rehearing ispending.  Also on July 1, 2005, theCompany filed a subsequent case requesting PUCO authority for recovery of thePJM administrative fee from retail customers beginning January 1, 2006.  If approved as filed, this will result inapproximately an additional $8 million in revenue per year for three years.

 

On July 23, 2003, the FERC issued an Order rejecting in part the InitialDecision and found that the rates for transmission service through and out ofthe service territories of seven former Alliance RTO companies, including theCompany, may be unjust, unreasonable, or unduly discriminatory orpreferential.  Subsequently, the FERC required the parties to enter intosettlement discussions.  On March 19, 2004, the FERC approved a settlement

 

18

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agreement regarding transmission pricingthat allowed the Company to continue to charge its existing transmission rateuntil December 1, 2004.  The settlement agreement also outlined theprinciples and procedures to arrive at a single, long-term transmission pricingstructure to be effective December 1, 2004.  On October 1, 2004, theCompany, along with approximately 60 other parties, filed a long-term pricingplan with the FERC.  On November 18, 2004, the FERC approved this ratedesign.  In addition, the FERC ordered transitional payments, known asSeams Elimination Charge Adjustment (SECA), to be effective December 1, 2004through March 31, 2006.  On February 10, 2005, FERC issued an order thatreaffirmed the pricing structure, but set the SECA rates for hearing, subjectto refund.  Several parties have sought rehearing of the FERC orders andthere likely will be appeals filed in the matter.  All motions for rehearing are pending.

 

Beginning May 2005, the Company began receiving these FERC orderedtransitional payments and has received $10.6 million of SECA collections net ofSECA charges.  The Company’s management believes that appropriate reservesof $9.9 million have been established in the event that such SECA collectionsare required to be refunded.  The ultimate outcome of the proceedingestablishing SECA rates is uncertain at this time.  However, based on the amount of reservesestablished for this item, the results of this proceeding are not expected tohave a material adverse effect on the Company’s financial condition, results ofoperations and cash flows.

 

On May 31, 2005, the FERC instituted a proceeding under Federal PowerAct Section 206 concerning the justness and reasonableness of PJM’s ratedesign.  This proceeding sets the ratesfor hearing and requests that all of PJM members, which include the Company,address the justness and reasonableness of the current rate design.  DP&L cannot determine what effect, ifany, the outcome of this proceeding may have on the future recovery oftransmission revenues by the Company.

 

**Update on Environmental Considerations**

 

*Air and Water Quality*

 

On December 17, 2003,the USEPA proposed the Interstate Air Quality Rule (IAQR) designed to reduceand permanently cap sulfur dioxide (SO2) and NOx emissions fromelectric utilities.  The proposed IAQRfocused on states, including Ohio, whose power plant emissions are believed tobe significantly contributing to fine particle and ozone pollution in otherdownwind states in the eastern United States. On June 10, 2004, the USEPA issued a supplemental proposal to theIAQR, now renamed as the Clean Air Interstate Rule (CAIR).  The final rules were signed on March 10,2005.  Although not yet published, CAIRwill have a material effect on the Company’s operations.  The Company anticipates that Phase I of CAIRwill require the installation of flue gas desulfurization (FGD) equipment andannual operation of the currently-installed SCR.

 

On January 30, 2004,the USEPA published its proposal to restrict mercury and other air toxics fromcoal-fired and oil-fired utility plants. The final Clean Air Mercury Rule (CAM-R) was signed March 15, 2005.  Although not yet published, the final ruleswill have a material effect on the Company’s operations.  DP&L anticipates that the FGD beingplanned to meet the requirements of CAIR may be adequate to meet the Phase Irequirements of CAM-R.  The Companyexpects that additional controls will be needed to meet the Phase IIrequirements of CAM-R that go into effect January 1, 2018.  On March 29, 2005, nine states sued USEPA,opposing the regulatory approach taken by USEPA.  On March 31, 2005, various groups requestedthat USEPA stay implementation of CAM-R.

 

Under the CAIR and CAM-R capand trade programs for SO2, NOx and mercury, the Company estimatesit will spend more than $500 million from 2005 through 2008 to install thenecessary pollution controls.  If CAM-Rlitigation results in plant specific mercury controls, the Company’s costs maybe higher.  Due to the ongoinguncertainties associated with the litigation of the CAM-R, the Company cannotproject the final costs at this time.

 

**OVERVIEW AND FUTURE EXPECTATIONS**

 

As part of Ohio’s electric deregulation law, all of the state’sinvestor-owned utilities are required to join a RTO, whose role is toadminister an electric marketplace and insure reliability.  In October 2004, the Company successfullyintegrated its 1,000 miles of high-voltage transmission into the PJM RTO.  PJM ensures the reliability of thehigh-voltage electric power system serving 44 million people in all or parts ofDelaware, Indiana, Kentucky, Maryland, Michigan, New Jersey, Ohio,Pennsylvania, Tennessee, Virginia, West Virginia and the District ofColumbia.  PJM coordinates and directsthe operation of the region’s transmission grid; administers a competitivewholesale electricity market, the world’s largest; and plans regionaltransmission expansion improvements to maintain grid reliability and relievecongestion.

 

In the second quarter of 2005, DP&L’s operating income decreased$13.6 million or 15% from the second quarter of 2004.  Total revenues of $291.4 million in thesecond quarter of 2005 exceeded total revenues for the second quarter of 2004by $8.6 million resulting from an increase in average market rates andancillary revenues associated with the Company’s participation in PJM.  These increases were largely offset by adecline in wholesale electric

 

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sales volume.  Operating expenses of $215.4 million in thesecond quarter of 2005 increased by $22.2 million or 11% compared to the sameperiod in the prior year.  This increasewas primarily the result of higher fuel and purchased power costs.  DP&L’s earnings on common stock of $35.7million in the second quarter of 2005 decreased $11.3 million compared to thesame period in the prior year.

 

For the six months ended June 30, 2005, DP&L’s operating income of$167.4 million decreased $29.1 million over the same period of the prioryear.  Electric revenues of $596.5million exceeded the same period of the prior year by $13.3 million primarilyresulting from an increase in average market rates and ancillary revenuesassociated with the Company’s participation in PJM.  These increases were largely offset by adecline in retail and wholesale electric sales volume.  Operating expenses of $429.1 million for thesix months ended June 30, 2005 were greater than the six months ended June 30,2004 by $42.4 million or 11% primarily relating to increases in fuel andpurchased power costs.  DP&L’sreported earnings on common stock of $88.8 million for the six months ended June30, 2005 decreased $20.0 million from the six months ended June 30, 2004.

 

**RESULTS OFOPERATIONS**

 

**Income Statement Highlights**

 
| ** **                                                             | ** ** | **Three Months**   | ** ** | **Six Months**    | ** ** |
|------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                             | ** ** | **Ended June 30,** | ** ** | **Ended June 30** | ** ** |
| **$ in millions**                                                 | ** ** | **2005**           | ** ** | **2004**          | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                   |       |               |       |              |       |   |   |   |   |
| Electric revenues                                                      | ** ** | **$**              | **291.4**  |              | $          | 282.8 | ** ** | **$** | **596.5** |   | $ | 583.2 |   |
| Less: Fuel                                                             | ** ** | **69.5**           |       | 60.5              | ** ** | **147.2** |   | 123.2 |   |
|          Purchased  power | ** ** | **38.4**           |       | 24.7              | ** ** | **67.7** |   | 53.2 |   |
| Net electric margin (a)                                                | ** ** | **$**              | **183.5**  |              | $          | 197.6 | ** ** | **$** | **381.6** |   | $ | 406.8 |   |
|                                                                   |       |               |       |              |       |   |   |   |   |
| Net electric margin as a percentage of  Electric revenues              | ** ** | **63.0**           | **%**      | 69.9              | %          | **64.0** | **%** | 69.8 | % |
|                                                                   |       |               |       |              |       |   |   |   |   |
| Operating income                                                       | ** ** | **$**              | **76.0**   |              | $          | 89.6 | ** ** | **$** | **167.4** |   | $ | 196.5 |   |

 

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

 

**Revenues**

 

Electric revenues increased to $291.4 million in the second quarter of2005 from $282.8 million in the second quarter of 2004 reflecting higheraverage rates for wholesale and retail revenues and ancillary revenuesassociated with participation in PJM.  Theseincreases were offset by lower wholesale sales volume.  Retail revenues increased $1.5 million,primarily resulting from $3.1 million related to higher average rates, offsetby $2.0 million in lower miscellaneous retail revenues reflecting transmissionservices that were under contract in 2004 that are now provided by PJM.  The higher average rates were primarily theresult of a difference in the balance of sales among the various categories ofcustomers (see Operating Statistics). Wholesale revenue decreased $10.4 million, primarily related to a $29.7million decline in wholesale sales volume due to reduced plant availabilitythat was partially offset by a $19.3 million increase related to higher averagemarket rates.  During the second quarterof 2005, ancillary revenues from RTO services were $17.5 million.  The Company did not participate in a RTO forthe same period for 2004.  RTO ancillaryrevenues primarily consist of compensation for use of the Company’stransmission assets, reactive supply and regulation services.  Heating degree-days were up 28% to 618 forthe second quarter of 2005 compared to 484 for the same period in 2004.  Cooling degree-days were down 1% to 278 forthe second quarter of 2005 compared to 280 for the same period in 2004.

 

For the six months ended June 30, 2005, electric revenues increased to$596.5 million compared to $583.2 million for the six months ended June 30,2004, reflecting higher average rates for wholesale and retail revenues andancillary revenues associated with participation in PJM.  These increases were offset by lower retailand wholesale sales volume.  Retailrevenues decreased $1.1 million, primarily resulting from $2.2 million in lowersales volume and $3.1 million in lower miscellaneous retail revenues reflectingtransmission services that were under contract in 2004 that are now provided byPJM, partially offset by $4.2 million in higher average rates.  The higher average

 

20

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rates were primarily the result of adifference in the balance of sales among the various categories ofcustomers.  Wholesale revenue decreased$18.5 million, primarily related to a $53.2 million decline in sales volumethat was partially offset by a $34.7 million increase related to higher averagemarket rates.  For the six months endedJune 30, 2005, ancillary revenues from RTO services were $33.0 million.  The Company did not participate in a RTO forthe same period for 2004.  RTO ancillaryrevenues primarily consist of compensation for use of the Company’stransmission assets, reactive supply and regulation services.  Heating degree-days were up 2% to 3,515 forthe first six months of 2005 compared to 3,433 for the same period in2004.  Cooling degree-days were down 1%to 278 for the first six months of 2005 compared to 280 for the same period in2004.

 

**Electric Margins, Fuel and Purchased Power**

 

DP&L’s net electric margin of $183.5 million in the second quarterof 2005 decreased by $14.1 million as compared to the net electric margin of$197.6 million in the second quarter of 2004. As a percentage of total electric revenues, net electric margindecreased by 6.9 percentage points to 63.0% from 69.9%.  This decline is primarily the result ofincreased fuel and purchased power costs, partially offset by a moderateincrease in electric revenues.  Fuelcosts increased by $9.0 million or 15% for the three months ended June 30, 2005compared to the same period in 2004 primarily resulting from higher averagefuel costs, including emission allowances. Purchased power costs increased by $13.7 million or 55% in the secondquarter of 2005 compared to the same period in 2004 primarily resulting from$12.4 million of charges associated with moving power across PJM; the Companydid not participate in a RTO for the same period in 2004.  The remaining increase of $1.3 million wasrelated to $6.9 million in higher average market rates for power purchasespartially offset by $5.6 million in lower purchased power volumes.

 

The Company’s net electric margin of $381.6 million for the six monthsended June 30, 2005 decreased by $25.2 million when compared to the netelectric margin of $406.8 million for the six months ended June 30, 2004.  As a percentage of total electric revenues,net electric margin decreased by 5.8 percentage points to 64.0% from69.8%.  This decline is primarily theresult of increased fuel and purchased power costs, partially offset by amoderate increase in electric revenues. Fuel costs increased by $24.0 million or 19% for the six months endedJune 30, 2005 compared to the same period in 2004 primarily resulting fromhigher average fuel costs, including emission allowances.  Purchased power costs increased by $14.5million or 27% for the six months ended June 30, 2005 compared to the sameperiod in 2004 primarily resulting from $23.2 million of charges associatedwith moving power across PJM and higher average market rates for powerpurchases of $11.4 million.  Theseincreases were partially offset by $20.3 million in lower purchased powervolumes.  The Company did not participatein a RTO for the same period in 2004.

 

**Operation and Maintenance**

 

Operation and maintenance expense decreased $3.3 million or 6% for thethree months ended June 30, 2005 compared to the same period in 2004 primarilyresulting from a decrease in Directors and Officers’ liability insurance costsof $4.4 million, the deferral of PJM administrative fees of $2.5 million, and$1.1 million of lower Sarbanes-Oxley project costs.   These decreases were partially offset by a$3.3 million mark to market increase in stock incentive units and a $2.2million increase in transmission and distribution expenses.  DP&L received an order from the PUCOallowing the company to defer the PJM administrative fees during the second quarterof 2005 that were incurred since October 2004.

 

For the six months ended June 30, 2005, operation and maintenanceexpense decreased $1.3 million or 1% compared to the same period in 2004 as aresult of a $6.8 million decrease in Directors and Officers’ liabilityinsurance costs and lower Sarbanes-Oxley project costs of $1.0 million.  These decreases were partially offset by a$4.3 million mark to market increase in stock incentive units and a $2.3million increase in transmission and distribution expenses.

 

**Depreciation and Amortization**

 

Depreciation expense increased $1.7 million or 6% in the second quarterof 2005 compared to the second quarter of 2004 primarily resulting from ahigher plant base.

 

For the six months ended June 30, 2005, depreciation increased $3.4million or 6% compared to the six months ended June 30, 2004 reflecting ahigher plant base.

 

## **Other Income(Deductions)**

 

Other deductions for the three months ended June 30, 2005 decreased$0.3 million compared to the three months ended June 30, 2004.  This decrease primarily resulted from $0.7million of lower fees resulting from the 2004 cancellation and replacement ofthe revolving credit facility and $0.7 million of increased dividend incomefrom Master Trust assets partially offset by a $0.7 million increase ininvestment monitoring fees.

 

For the six months ended June 30, 2005, other income increased $3.9million primarily resulting from $12.3 million of gains realized from the saleof pollution control emission allowances in 2005 compared to $5.5 million ofgains

 

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from emission allowance sales in 2004 aswell as $0.9 million of increased dividend income from Master Trustassets.  These increases were partiallyoffset by a $3.6 million increase in investment monitoring fees.

 

## **Income Tax Expense**

 

Income tax expense decreased $1.5 million or 5% in the second quarterof 2005 and decreased $4.2 million or 6% for the six months ended June 30, 2005compared to the second quarter of 2004 and the six months ended June 30, 2004,primarily reflecting lower income experienced in each of the respectiveperiods.

 

On June 30, 2005, Governor Taft signed House Bill 66 into law whichsignificantly changed the tax structure in Ohio.  The major provisions ofthe bill include phasing-out the Ohio Franchise Tax, phasing-out the PersonalProperty Tax for non-utility taxpayers and phasing-in a Commercial ActivitiesTax.  The Ohio Franchise Tax phase-outrequired second quarter adjustments to income tax expense.  Otherprovisions of House Bill 66 are being evaluated by the Company.

 

DP&L is under audit review by state agencies for the tax years 2002through 2004 and by federal agencies for the tax years 1999 through 2003. The Company believes it has adequate reserves for all positions taken in eachtax jurisdiction but cannot predict the outcome of these audits. Depending upon the outcome of these audits, the Company may be requiredto increase or decrease its reserves.

 

**Preferred Dividends**

 

For the three months and six months ended June 30, 2005, preferreddividends increased $0.2 million or 100% over the same periods in 2004resulting from the suspension of dividend payments arising from the delayedfiling of the Company’s 2003 Form 10-K filing. The Company’s 2003 Form 10-K was filed in the fourth quarter of 2004 andall suspended dividends were paid at that time.

 

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

DP&L’s cash and cash equivalents totaled $23.7 million at June 30,2005 compared to $60.0 million at June 30, 2004.  This decrease was primarily attributed tolower profitability relating to higher fuel costs and less cash provided byworking capital.  DP&L’s cash andcash equivalents totaled $17.2 million at December 31, 2004.

 

The Company generated net cash from operating activities of $162.9million for the six months ended June 30, 2005 compared to $238.2 million forthe six months ended June 30, 2004.  Thenet cash from operating activities for the six months ended June 30, 2005 and2004 was primarily the result of operating profitability and, in 2004, cashprovided by working capital.  The declinein operating cash flow of $75.3 million in the six months ended June 30, 2005compared to the six months ended June 30, 2004 is primarily the result of loweroperating profitability relating to higher fuel costs as well as less cash fromaccounts receivable and higher tax payments. The tariff-based revenue from DP&L’s business continues to be theprincipal source of cash from operating activities.  Management believes that the diversifiedretail customer mix of residential, commercial, and industrial classes providesthe Company with a reasonably predictable gross cash flow.

 

Net cash flows used for investing activities was $80.6 million for thesix months ended June 30, 2005 and $44.8 million for the six months ended June30, 2004.  The net cash used in bothperiods was to provide funding for capital expenditures.

 

Net cash flows used for financing activities was $75.8 million for thesix months ended June 30, 2005 and $150.6 million for the six months ended June30, 2004.  Net cash flows used forfinancing activities for each of these periods were to pay dividends on commonstock to the parent company, retirement of long-term debt, and for dividendspaid on preferred stock.

 

In an effort to lower costs, the Company is taking advantage of thecurrent low interest rates by refinancing $41.3 million in outstanding OhioWater Development Authority obligations maturing through 2027 with a weightedaverage interest rate of 6.4%; $137.8 million in outstanding Ohio Air QualityDevelopment Authority obligations maturing through 2030 with a weighted averageinterest rate of 6.2%; and $35.3 million in outstanding Boone County, Kentuckyobligations maturing through 2022 with a weighted average interest rate of6.5%.

 

The Company has obligations to make future payments for capitalexpenditures, debt agreements, lease agreements and other long-term purchaseobligations, and has certain contingent commitments such as guarantees.  The Company believes its cash flows fromoperations, the credit facilities (existing or future arrangements), and othershort- and long-term debt financing will be sufficient to satisfy its futureworking capital, capital expenditures and other financing requirements for theforeseeable future.  DP&L’s abilityto generate positive cash flows from operations is dependent on generaleconomic conditions, competitive pressures, and other

 

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business and risk factors described in “FactorsThat May Affect Future Results.”  If theCompany is unable to generate sufficient cash flows from operations, orotherwise comply with the terms of its credit facilities, DP&L may berequired to refinance all or a portion of its existing debt or seek additional financingalternatives.  A discussion of each ofDP&L’s critical liquidity commitments is outlined below.

 

**Capital Requirements**

 

# **Constructionadditions were $82.6 million and $45.0 million for the six months ended June30, 2005 and 2004, respectively, and are expected to approximate $193 millionin 2005.**

# ** **

# **Plannedconstruction additions for 2005 relate to DP&L’s environmental complianceprogram, power plant equipment, and its transmission and distributionsystem.  During the last three years,capital expenditures have been utilized to meet the Company’s state and federalstandards for Nitrogen Oxide (NOx) emissions from power plants and to makepower plant improvements.**

 

Capitalprojects are subject to continuing review and are revised in light of changesin financial and economic conditions, load forecasts, legislative andregulatory developments and changing environmental standards, among otherfactors.  Over the next four years,DP&L is projecting to spend an estimated $930 million ($850 millionpreviously reported) in capital projects, approximately $515 million ($441million previously reported) of which is to meet changing environmentalstandards.  The Company’s ability tocomplete its capital projects and the reliability of future service will beaffected by its financial condition, the availability of internal and externalfunds at reasonable cost, and adequate and timely return on these capitalinvestments.  DP&L expects to financeits construction additions in 2005 with internally-generated funds.

 

**Debt and Debt Covenants**

 

AtJune 30, 2005, the Company’s scheduled maturities of long-term debt,including capital lease obligations, over the next five years are $0.5 millionfor the remainder of 2005, $1.3 million in 2006, $9.5 million in 2007, $0.7million in 2008, and $0.7 million in 2009. Substantially all property of DP&L is subject to the mortgage liensecuring the first mortgage bonds.  Debtmaturities in 2005 are expected to be financed with internal funds.  Certain debt agreements contain reporting andfinancial covenants for which the Company is in compliance as of June 30, 2005and expects to be in compliance during the near term.

 

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 usedon October 30, 2003, to (i) redeem $226 million principal amount of DP&L’sFirst Mortgage Bonds, 8.15% Series due 2026, at a redemption price of 104.075%of the principal amount plus accrued interest to the redemption date and (ii)redeem $220 million principal amount of DP&L’s First Mortgage Bonds, 7.875%Series due 2024, at a redemption price of 103.765% of the principal amount plusaccrued interest to the redemption date. The 5.125% Series due 2013 were not registered under the Securities Actof 1933, but were offered and sold through a private placement in compliancewith Rule 144A under the Securities Act of 1933.  The bonds included step-up interestprovisions requiring the Company to pay additional interest if (i) DP&L’sregistration statement was not declared effective by the SEC within 180 daysfrom the issuance of the new bonds or (ii) the exchange offer was not completedwithin 210 days from the issuance of the new bonds.  The registration statement was not declaredeffective and the exchange offer was not timely completed and, as a result, theCompany was required to pay additional interest of 0.50% until a registrationstatement was declared effective at which point the additional interest wasreduced by 0.25%.  The remainingadditional interest of 0.25% continued until the exchange offer wascompleted.  The exchange offerregistration for these securities was filed with the SEC on April 26, 2005 anddeclared effective on May 18, 2005, at which point the additional interest wasreduced by 0.25%.  The exchange offer wascompleted on June 23, 2005, thereby eliminating the additional interest intotal.

 

Issuance of additional amounts of first mortgage bonds by DP&L islimited by the provisions of its mortgage; however, management believes thatDP&L continues to have sufficient capacity to issue first mortgage bonds tosatisfy its requirements in connection with its current refinancing andconstruction programs.  The amounts andtiming of future financings will depend upon market and other conditions, rateincreases, levels of sales and construction plans.

 

InMay 2005, DP&L obtained a $100 million unsecured revolving credit agreementthat extended and replaced its previous revolving credit agreement of $100million.  The new agreement, renewableannually, expires on May 30, 2010, and provides credit support for the Company’sbusiness requirements during this period. This may be increased up to $150million.  The facility contains one financialcovenant, maximum debt to total capitalization. This covenant is currently met. The Company had no outstanding borrowings under this credit facility atJune 30, 2005 or at year-end 2004.  Feesassociated with this credit facility were approximately $0.2 million peryear.  Changes in debt ratings, however,may affect the applicable interest rate for the revolving credit agreement.

 

23

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In February 2004, DP&L entered into a $20 million MasterLetter of Credit Agreement with a financial lending institution.  This agreement supports performance assuranceneeds in the ordinary course of business. The Company has certain contractual agreements for the sale and purchaseof power, fuel and related energy services that contain credit rating relatedclauses allowing the counterparties to seek additional surety under certainconditions.  On February 24, 2005, theCompany entered into an amendment to extend the term of this Agreement for oneyear and reduce the maximum dollar volume of letters of credit to $10million.  As of June 30, 2005, theCompany had two outstanding letters of credit for a total of $3.1 million.

 

DP&L is in the process of refinancing $41.3 million in outstandingOhio Water Development Authority obligations maturing through 2027 with aweighted average interest rate of 6.4%; $137.8 million in outstanding Ohio AirQuality Development Authority obligations maturing through 2030 with a weightedaverage interest rate of 6.2%; and $35.3 million in outstanding Boone County,Kentucky obligations maturing through 2022 with a weighted average interestrate of 6.5%.

 

There are no inter-company debt collateralizations or debt guaranteesbetween DP&L and its parent.  None ofthe debt obligations of DP&L are guaranteed or secured by its parent oraffiliates and no cross-collateralization existsbetween the Company and DPL or any affiliate.

 

**Credit Ratings**

 

Currently, DP&L’s senior secured debt credit ratings are asfollows:

 
| ** **                       | ** ** | **Rating** | ** ** | **Outlook** | ** ** | **Effective** | ** ** |
|----------------------------------|------------|------------|------------|-------------|------------|---------------|------------|
| Fitch Ratings                    |       | A-         |       | Stable      |       | July 2005     |       |
|                             |       |       |       |        |       |          |       |
| Moody’s Investors Service   |       | Baa1       |       | Positive    |       | July 2005     |       |
|                             |       |       |       |        |       |          |       |
| Standard & Poor’s Corp. |       | BBB-       |       | Positive    |       | May 2005      |       |

 

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

 

**Off-Balance Sheet Arrangements**

 

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

 

**Long-term Obligations and CommercialCommitments**

 

DP&L enters into various contractual and other long-termobligations that may affect the liquidity of its operations.  At June 30, 2005, these include:

 

**LongTerm Obligations**

 
| ** **                          | ** ** | **Payment Year** | ** ** |
|-------------------------------------|------------|------------------|------------|
| **$ in millions**              | ** ** | **2005**         | ** ** | **2006 & 2007** | ** ** | **2008 & 2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                |       |             |       |   |   |   |   |   |   |   |   |
| Long-term debt                      |       | $                | —     |   | $ | 9.0 |   | $ | — |   | $ | 673.9 |   | $ | 682.9 |   |
| Interest payments                   |       | 18.7             |       | 74.4 |   | 73.9 |   | 36.9 |   | 203.9 |   |
| Pension and postretirement payments |       | 11.7             |       | 45.9 |   | 45.2 |   | 141.9 |   | 244.7 |   |
| Capital leases                      |       | 0.5              |       | 1.8 |   | 1.4 |   | 0.6 |   | 4.3 |   |
| Operating leases                    |       | 0.8              |       | 0.9 |   | — |   | — |   | 1.7 |   |
| Coal contracts (a)             |       | 169.9            |       | 583.4 |   | 83.7 |   | 85.5 |   | 922.5 |   |
| Other long-term obligations         |       | 17.6             |       | 12.7 |   | 0.5 |   | — |   | 30.8 |   |
| Total long-term obligations         |       | $                | 219.2      |   | $ | 728.1 |   | $ | 204.7 |   | $ | 938.8 |   | $ | 2,090.8 |   |

 

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(a) DP&L operated units.

 

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Long-term debt:

 

Long-term debt as of June 30, 2005, consists of first mortgage bondsand guaranteed air quality development obligations and includes currentmaturities and unamortized debt discount. See Note 5 of Notes to Consolidated Financial Statements.

 

Interest payments:

 

Interest payments through 2010 associated with the Long-term debtdescribed above.  See Note 5 of Notes toConsolidated Financial Statements.

 

Pension and postretirement payments:

 

As of June 30, 2005, DP&L had estimated future benefit payments asoutlined in Note 3 of Notes to Consolidated Financial Statements.  These estimated future benefit payments areprojected through 2015.

 

Capital leases:

 

As of June 30, 2005, the Company had two capital leases that expire inNovember 2007 and September 2010.

 

Operating leases:

 

As of June 30, 2005, the Company had several operating leases withvarious terms and expiration dates.

 

Coal contracts:

 

The Company has entered into various long-term coal contracts to supplyportions of its coal requirements for its generating plants.  Contract prices are subject to periodicadjustment, and have features that limit price escalation in any given year.

 

Other long-term obligations:

 

As of June 30, 2005, the Company had various other long-termobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

DP&L enters into various commercial commitments, which may affectthe liquidity of its operations.  At June30, 2005, these include:

 

**Commercial Commitments**

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

 

Credit facilities:

 

In May 2005, the Company replaced its previous $100 million revolvingcredit agreement with a $100 million, 364 day unsecured credit facility that isrenewable annually and expires on May 30, 2010. At June 30, 2005, there were no borrowings outstanding under this creditagreement.  The new facility may beincreased up to $150 million.

 

Guarantees:

 

DP&L owns a 4.9% equity ownership interest in an electricgeneration company.  As of June 30, 2005,DP&L could be responsible for the repayment of 4.9%, or $14.9 million, of a$305 million debt obligation and also 4.9%, or $2.9 million, of a separate $60million debt obligation.  Bothobligations mature in 2006.

 

**MARKETRISK**

 

Asa result of its operating, investing and financing activities, DP&L issubject to certain market risks, including changes in commodity prices forelectricity, coal, environmental emissions and gas; and fluctuations ininterest rates.  Commodity pricingexposure includes the impacts of weather, market demand, potential coalsupplier contract breaches or defaults, increased competition and othereconomic conditions.  For purposes ofpotential risk analysis, DP&L uses sensitivity analysis to quantifypotential impacts of market rate changes on the results of

 

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operations.  The sensitivity analysis representshypothetical changes in market values that may or may not occur in the future.

 

**Commodity Pricing Risk**

 

For the six months ended June 30, 2005, approximately 19 percent ofDP&L’s 2005 electric revenues were from sales of excess energy and capacityin the wholesale market.  Energy andcapacity in excess of the needs of existing retail customers is sold in thewholesale market when DP&L can identify opportunities with positivemargins.  As of June 30, 2005, ahypothetical increase or decrease of 10% in annual wholesale revenues,excluding RTO services, would result in approximately a $13 million increase ordecrease to earnings on common stock, assuming no change in costs.

 

Fuel (including emission allowances) and purchased power costs as apercent of total operating costs for the six months ended June 30, 2005 and2004 were 50% and 46%, respectively.  Asof June 30, 2005, DP&L has contracted for substantially all of itsprojected coal requirements for 2005. The prices to be paid by the Company under its long-term coal contractsare either fixed or subject to periodic adjustment.  Each contract has features that will limit priceescalations in any given year.  DP&Lhas also covered all of its estimated 2005 emission allowancerequirements.  The Company expects its2005 fuel costs to exceed its 2004 fuel costs by approximately 17% (assumingcomparable volumes).  This increase isprimarily the result of increased coal costs and a slight increase in emissionsallowance costs.  Purchased power costsdepend, in part, upon the timing and extent of planned and unplanned outages ofits generating capacity.  DP&L willpurchase power on a discretionary basis when wholesale market conditionsprovide opportunities to obtain power at a cost below the Company’s internalproduction costs.  As of June 30, 2005, ahypothetical increase or decrease of 10% in annual fuel and purchased powercosts, excluding RTO services, would result in approximately a $22 millionincrease or decrease to earnings on common stock.

 

**Interest Rate Risk**

 

As a result of DP&L’s normal borrowing and leasing activities, theCompany’s results are exposed to fluctuations in interest rates, which theCompany manages through its regular financing activities.  DP&L maintains a limited amount of cashon deposit or investments in cash equivalents that may be affected by adverseinterest rate fluctuations.  The Company’slong-term debt represents publicly held secured and unsecured debentures withfixed interest rates.  At June 30, 2005,DP&L had no short-term borrowings.

 

The carrying value of the Company’s debt was$687.2 million at June 30, 2005, consisting of first mortgage bonds, guaranteedAir Quality Development Authority and Water Development Authority obligationsand capital leases.  The fair value ofthis debt was $708.0 million, based on current market prices or discounted cashflows using 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 June 30, 2005, are as follows:

 

| **Expected Maturity** | ** ** | **Long-term Debt**       | ** ** |
|-----------------------|------------|--------------------------|------------|
| **Date**              | ** ** | **Amount**               | ** ** | **Average Rate** | ** ** |
| ** **            | ** ** | **($ in millions)** | ** ** | ** ** | ** ** |
| 2005                  | ** ** | **$**                    | **0.5**    |   | 4.4 | % |
| 2006                  | ** ** | **1.3**                  |       | 5.0 | % |
| 2007                  | ** ** | **9.5**                  |       | 6.2 | % |
| 2008                  | ** ** | **0.7**                  |       | 4.8 | % |
| 2009                  | ** ** | **0.7**                  |       | 4.8 | % |
| Thereafter            | ** ** | **674.5**                |       | 5.5 | % |
| Total                 | ** ** | **$**                    | **687.2**  |   | 5.8 | % |
|                  |       |                     |       |   |   |
| Fair Value            | ** ** | **$**                    | **708.0**  |   |   |   |

 

Debt maturities in 2005 are expected to befinanced with internal funds.

 

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

 

This quarterly report and other documents that DP&L files with theSecurities and Exchange Commission (SEC) and other regulatory agencies, as wellas other oral or written statements the Company may make from time to time,

 

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contain information based on management’sbeliefs and include forward-looking statements (within the meaning of thePrivate Securities Litigation Reform Act of 1995) that involve a number ofknown and unknown risks, uncertainties and assumptions. These forward-lookingstatements are not guarantees of future performance, and there are a number offactors including, but not limited to, those listed below, which could causeactual outcomes and results to differ materially from the results contemplatedby such forward-looking statements. DP&L does not undertake any obligation to publicly update or reviseany forward-looking statements, whether as a result of new information, futureevents or otherwise. These forward-looking statements are identified by termsand phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”,“should”, “could”, “may”, “plan”, “project”, “predict”, “will”, and similarexpressions.

 

**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 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 municipal customeraggregation, could lead to the entrance of competitors in the Company’smarketplace affecting its results 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, credit, liquidity, volatility, capacity, transmission, andinterest rates can have a significant effect on DP&L’s operations and theoperations of its retail, industrial and commercial customers.

 

Duringthe past few years, the merchant energy industry in many parts of the UnitedStates has suffered from oversupply of merchant generation and a decline intrading and marketing activity.  Thesemarket conditions are expected to continue for several years.  As a result of these market conditions, theCompany continues to evaluate the carrying values of certain long-livedgeneration assets.

 

**Reliance on Third Parties**

 

DP&L relies on many suppliers for the purchase and delivery ofinventory and components to operate its energy production, transmission anddistribution functions.  Unanticipatedchanges in the Company’s purchasing processes may affect the Company’s businessand operating results. In addition, the Company relies on others to provideprofessional services, such as, but not limited to, investment management,actuarial calculations, 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; catastrophicweather-related damage; unscheduled generation outages; unusual maintenance orrepairs; changes in coal costs, gas supply costs, emissions allowance costs, oravailability constraints; environmental compliance, including costs ofcompliance with existing and future environmental requirements; and electrictransmission system constraints.

 

A majority of the Company’s employees are under a collective bargainingagreement expiring at the end of October 2005. If the Company is unable to negotiate this or future collectivebargaining agreements, the Company could experience work stoppages, which mayaffect 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, andtaxation, which are rapidly changing and subject to additional changes in thefuture.  As further described in Part II,Item 1 – Legal Proceedings, the Company is also currently involved in variouslitigation in which the outcome is uncertain. Compliance with these rapid changes may substantially increase costs toDP&L’s organization and could affect its future operating results.

 

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**Internal Controls**

 

DP&L’s internal controls, accounting policies and practices, andinternal information systems are intended to enable the Company to capture andprocess transactions in a timely and accurate manner in compliance withaccounting principles generally accepted in the United States of America, lawsand regulations, taxation requirements, and federal securities laws andregulations.  DP&L implementedcorporate governance, internal control and accounting rules issued inconnection with the Sarbanes-Oxley Act of 2002. The Company’s internal controls and policies are being closely monitoredby management, as well as the Board of Directors, for continued compliance withSection 404 of the Act.  While DP&Lbelieves these controls, policies, practices and systems are adequate to ensuredata integrity, unanticipated and unauthorized actions of employees, temporarylapses in internal controls due to shortfalls in oversight, or resourceconstraints, could lead to improprieties and undetected errors that couldimpact the Company’s financial condition or results of operations.

 

**Environmental Compliance**

 

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

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

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 and judgmentsare based on management’s historical experience and assumptions that arebelieved to be reasonable at the time. However, because future events and theireffects cannot be determined with certainty, the determination of estimatesrequires the exercise of judgment. DP&L’s critical accounting policies arethose which require assumptions to be made about matters that are highlyuncertain.

 

Different estimates could have a material effect on its financialresults. Judgments and 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.

 

There has been one significant change to the critical accountingpolicies as disclosed in DP&L’s Form 10-K as of December 31, 2004. Thefollowing policy has been added to the Company’s critical accounting policies:

 

**Revenue Recognition**

 

The Company considers revenue realized, or realizable, and earned whenpersuasive evidence of an arrangement exists, the products or services havebeen provided to the customer, the sales price is fixed or determinable, andcollectibility is reasonably assured. The Company’s utility operating companies****record electric revenues when delivered to customers. Customers are billed throughout the month as electric meters are read. The Company recognizes revenues for retail energy sales that have not yet beenbilled, but where electricity has been consumed.  This is termed “unbilledrevenues” and is a widely recognized and accepted practice for utilities. The Company’s estimates of unbilled revenues use systems that consider variousfactors, including weather, to calculate retail customer consumption at the endof each month.  Given the use of these systems and the fact that customersare billed monthly, the Company believes it is unlikely that materiallydifferent results will occur in future periods when these amounts aresubsequently billed.

 

Additionally, the Company is subject to regulatory orders addressingthe justness and reasonableness of the PJM and Midwest Independent TransmissionSystem Operator (MISO) rates and related revenue distribution protocols.  Beginning May 2005, the Company beganreceiving Seams Elimination Charge Adjustment (SECA) payments and has recorded$10.6 million of SECA collections net of SECA charges.  DP&L’smanagement is required to make assumptions, estimates and judgments relatingthe possibility of refund of these revenues. These assumptions, estimates andjudgments are based on management’s experience and assumptions that arebelieved to be

 

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reasonable at thetime.  As a result of these assumptions,estimates and judgments, the Company is deferring a portion of these revenuesfor which management believes is subject to refund.  The deferred amount recorded during thesecond quarter 2005 was $9.9 million and is anticipated to be approximately$21.8 million for the entire year of 2005. The above amount collected under the SECA rates are subject to refund,the ultimate outcome of the proceeding establishing SECA rates is uncertain,and the results of this proceeding may affect the Company’s financialcondition, results of operations and cash flows.

 

**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 made a part hereof.

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**OPERATINGSTATISTICS**

 
| ** **                          | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|-------------|----------------------|------------|
| ** **                          | ** ** | **June 30,**           | ** **  | **June 30,**         | ** ** |
| ** **                          | ** ** | **2005**               | ** **  | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Electric**                        |       |                   |        |                 |       |   |   |   |   |
|                                |       |                   |        |                 |       |   |   |   |   |
| Sales (millions of kWh)             |       |                   |        |                 |       |   |   |   |   |
| Residential                         | ** ** | **1,101**              |        | 1,090                | ** ** | **2,636** |   | 2,621 |   |
| Commercial                          | ** ** | **966**                |        | 936                  | ** ** | **1,851** |   | 1,840 |   |
| Industrial                          | ** ** | **1,097**              |        | 1,139                | ** ** | **2,107** |   | 2,177 |   |
| Other retail                        | ** ** | **366**                |        | 357                  | ** ** | **697** |   | 690 |   |
| Other miscellaneous revenues        | ** ** | **—**             |        | —               | ** ** | **—** |   | — |   |
| Total retail                        | ** ** | **3,530**              |        | 3,522                | ** ** | **7,291** |   | 7,328 |   |
|                                |       |                   |        |                 |       |   |   |   |   |
| Wholesale                           | ** ** | **577**                |        | 1,039                | ** ** | **1,194** |   | 2,021 |   |
|                                |       |                   |        |                 |       |   |   |   |   |
| Total sales                         | ** ** | **4,107**              |        | 4,561                | ** ** | **8,485** |   | 9,349 |   |
|                                |       |                   |        |                 |       |   |   |   |   |
| Revenues ($ in thousands)      |       |                   |        |                 |       |   |   |   |   |
| Residential                         | ** ** | **$**                  | **100,025** |                 | $          | 98,587 | ** ** | **$** | **225,957** |   | $ | 224,579 |   |
| Commercial                          | ** ** | **62,323**             |        | 59,666               | ** ** | **119,497** |   | 117,263 |   |
| Industrial                          | ** ** | **31,931**             |        | 32,886               | ** ** | **61,715** |   | 63,716 |   |
| Other retail                        | ** ** | **20,979**             |        | 20,570               | ** ** | **39,863** |   | 39,503 |   |
| Other miscellaneous revenues        | ** ** | **2,283**              |        | 4,286                | ** ** | **5,065** |   | 8,161 |   |
| Total retail                        | ** ** | **217,541**            |        | 215,995              | ** ** | **452,097** |   | 453,222 |   |
|                                |       |                   |        |                 |       |   |   |   |   |
| Wholesale                           | ** ** | **56,400**             |        | 66,786               | ** ** | **111,462** |   | 129,960 |   |
|                                |       |                   |        |                 |       |   |   |   |   |
| RTO ancillary revenues              | ** ** | **17,451**             |        | —               | ** ** | **32,952** |   | — |   |
|                                |       |                   |        |                 |       |   |   |   |   |
| Total revenues                      | ** ** | **$**                  | **291,392** |                 | $          | 282,781 | ** ** | **$** | **596,511** |   | $ | 583,182 |   |
|                                |       |                   |        |                 |       |   |   |   |   |
| Electric customers at end of period | ** ** | **511,393**            |        | 507,395              | ** ** | **511,393** |   | 507,395 |   |

 

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

 

See the “Market Risk” section of Item 2.

 

**Item 4.****  Controls and Procedures**

 

TheCompany’s management evaluated, with the participation of the Chief ExecutiveOfficer and Chief Financial Officer, the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures were effective as of the end of the period covered by thisreport.  There has been no change in the Company’s internal control overfinancial reporting that occurred during the quarter covered by this reportthat has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**Part II. Other Information**

 

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

 

On August 24, 2004, theCompany, DPL and MVE filed a Complaint against Mr. 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 thepurported amendments to the deferred compensation plans and to the employmentand consulting agreements with Messrs. Forster and Koziar andMs. Muhlenkamp, and the propriety of the distributions from the plans toMessrs. Forster and Koziar and Ms. Muhlenkamp, 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 thousand, disgorgement of all amountsimproperly withdrawn by Messrs. Forster and Koziar and Ms. Muhlenkamp fromthe deferred compensation plans and a court order declaring that the Company,DPL and MVE have no further obligations under the consulting and employmentcontracts due to those breaches.

 

DefendantsForster, Koziar and Muhlenkamp filed motions to dismiss the Complaint andmotions to stay discovery pending a ruling on the motions to dismiss.  The Company and DPL filed briefs opposingthose motions.  In addition, pursuant toapplicable statutes, regulations and agreements, the Company and DPL have beenadvancing certain of Defendants’ attorneys’ fees and expenses with respect tovarious matters other than the litigation between Defendants and the Companyand DPL in Florida and Ohio, and believe that other requested advances are not required.  On February 7, 2005, Mr. Forster and Ms.Muhlenkamp filed a motion in the Company’s and DPL’s Ohio litigation seeking tocompel DPL, MVE and the Company to pay all attorneys’ fees and expenses thathave not been advanced to them.  TheCompany, DPL and MVE have filed a brief opposing that motion.  On May 10, 2005, the Court denied Defendants’motions to dismiss.  Defendants Forsterand Muhlenkamp’s motion regarding fees remains pending.  On June 15, 2005, Defendants Forster andMuhlenkamp filed an answer and filed counterclaims against the Company, DPL,MVE, and individually against the current members of the Board of Directors ofDPL as well as a former Board member and various compensation plans of DP&Land DPL.  On June 15, 2005, DefendantKoziar filed his answer and filed counterclaims against the Company, DPL andindividually against the current members of the Board of Directors of DPL and aformer Board member of DPL.  On June 29,2005, the Company, DPL and MVE filed an amended complaint against theDefendants.   On July 18, 2005,Defendants filed answers to that amended complaint and Defendant Koziar filedamended counterclaims that included claims against various compensation plansof DPL and DP&L that he had not named in his initial counterclaims.  Defendants’ answers substantially deny theallegations made by the Company, DPL and MVE and deny any liability.  The counterclaims and amended counterclaimsallege that the Company, DPL, MVE, various compensation plans and the individualdefendants breached the terms of the employment and consulting contracts ofDefendants Forster, Muhlenkamp and Koziar, and the terms of the compensationplans.  They further allege theories ofbreach of fiduciary duty, breach of contract, promissory estoppel, tortiousinterference, conversion, replevin and violations of ERISA under which theyseek distribution of deferred compensation balances, conversion of stockincentive units, exercise of options and payment of amounts allegedly owedunder the contracts and plans.  Forster,Muhlenkamp and Koziar also seek payment of attorneysfees and expenses on claims similar to those filed in the Forster andMuhlenkamp motion for attorneys fees and expenses.

 

OnMarch 15, 2005, Mr. Forster and Ms. Muhlenkamp filed a lawsuit in New Yorkstate court against the purchasers of the private equity investments in thefinancial asset portfolio and against outside counsel to the Company and DPLconcerning purported entitlements in connection with the purchase of thoseinvestments.  They assert that theCompany, DPL and MVE had ongoing obligations to make certain payments to thembased on the financial asset portfolio’s returns and that any purchaser ofportfolio investments should have been obligated to assume thoseobligations.  The Company, DPL and MVEare not defendants in that case; however, they are parties to anindemnification agreement with respect to the purchaser defendants.  Those defendants have requested that theCompany, DPL and MVE indemnify them in connection with that litigation, and theCompany, DPL and MVE have acknowledged indemnity obligations.  On March 28, 2005, the Company, DPL and MVEfiled a Motion for Preliminary Injunction in the Ohio case, requesting that thecourt issue a preliminary injunction against Mr. Forster and Ms. Muhlenkamp regardingthe lawsuit.  Since certain key issuesraised by Mr. Forster and Ms. Muhlenkamp in their New York lawsuit areidentical to the issues raised in the pending Ohio lawsuit, DPL, MVE and theCompany believe that those issues should be heard and resolved in the pendingOhio lawsuit. Mr. Forster and Ms. Muhlenkamp filed a brief opposing thepreliminary injunction on April 15, 2005. The Company, DPL and MVE filed their reply brief on April 25, 2005.  The court heard the motion on May 6, 2005 andhas not yet issued a ruling.  Inaddition, the defendants in the New York action filed motions to stay ordismiss that case.  The New York courtheard those motions on June 23, 2005 and on July 5, 2005 entered an ordersevering the claims brought against the purchaser defendants and granting thepurchaser defendants’ motion to stay those claims temporarily.  On July 14, 2005, the New York court held atelephonic conference with the parties. The court continued the stay of the New York case as to the purchaserdefendants until further argument could be held on their motion to stay ordismiss.  The New York court has not yetruled on the motion filed by outside counsel to the Company and DPL.  Counsel for

 

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Mr.Forster and Ms. Muhlenkamp have informed the New York court that they intend tofile a motion seeking unspecified relief from the stay.

 

Counselto Mr. Forster and Ms. Muhlenkamp have begun sending their attorneys’ invoicesfor the New York action to DPL and the Company for fee advancement and havecontinued to send monthly invoices for the Ohio action to DPL and the Companyfor fee advancement.  DPL and the Companycontinue to maintain that they are not required to advance payment with respectto any of those charges.

 

Cumulativelythrough June 30, 2005, the Company has accrued for accounting purposes,obligations of approximately $50 million to reflect claims regarding deferredcompensation, estimated MVE incentives and/or legal fees that Defendants assertare payable per contracts.  The Company disputesDefendants entitlement to any of those sums and, as noted above is pursuinglitigation against them contesting all such claims.

 

**Item 4.****  Submission of Matters to a Voteof Security Holders**

 

There were no submissions to the security holder in the second quarter.

 

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

 

None

 

**Item 6.****  Exhibits**

 

(a)                                  The following exhibits are filed herewith:

 

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

 

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

 

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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:      | July 29, 2005 |   /s/ James V. Mahoney                                                                                                                               |       |
|       |          |   James V. Mahoney    President and Chief Executive Officer    (principal executive officer)                                     |
|       |          |                                                                                                                                                           |       |
|       |          |                                                                                                                                                           |       |
|       | July 29, 2005 |   /s/  John J. Gillen                                                                                                                                |       |
|       |          |   John  J. Gillen    Senior Vice President and Chief Financial Officer    (principal financial and principal accounting officer) |
|       |          |                                                                                                                                                           |       |
|       |          |                                                                                                                                                           |       |
|       | July 29, 2005 |   /s/  Daniel L. Thobe                                                                                                                               |       |
|       |          |   Daniel  L. Thobe                                                                                                                                   |
|       |          |   Corporate  Controller                                                                                                                              |
|            |               |                                                                                                                                                                |            |  |

 

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