**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 
| **ý****ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**                                 |
|-----------------------------------------------------------------------------------------------------|
| **SECURITIES EXCHANGE ACT OF 1934**                                                                 |
|                                                                                                |
| **For the fiscal year ended****December 31, 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 its charter)

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

 

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

 

Securities registeredpursuant to Section 12(b) of the Act:

 
| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|----------------------------------------|------------|-----------------------------------------------------------------------------|
| None                                   |       |                                                                        |

 

| **Outstanding at February 28, 2006,**                 |
|---------------------------------------------------------------------------|
| **all of which were held by DPL Inc.** |
| 41,172,173                                                                |

 

Securities registeredpursuant to Section 12(g) of the Act:  **None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.Yes ý   Noo

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Exchange Act.

Yes o   Noý

 

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

Yes ý   Noo

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ý

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

 
| Large accelerated filer  o |   | Accelerated  filer o |   | Non-accelerated  filer ý |
|----------------------------|--------|----------------------|--------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o   Noý

 

Theaggregate market value of the registrant’s common stock held by non-affiliatesof the registrant as of June 30, 2005 was none.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

None.

 

 

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THE DAYTON POWER ANDLIGHT COMPANY

 

Index to Annual Report onForm 10-K

# Fiscal Year EndedDecember 31, 2005

 
| ** ** | ** **                                                                                                          | **Page No.** |
|------------|---------------------------------------------------------------------------------------------------------------------|-------------------|
| ** ** | **Part I**                                                                                                          | ** **        |
| Item 1     | Business                                                                                                            | 3                 |
| Item 1a    | Risk Factors                                                                                                        | 15                |
| Item  1b   | Unresolved  Staff Comments                                                                                          | 19                |
| Item 2     | Properties                                                                                                          | 20                |
| Item 3     | Legal  Proceedings                                                                                                  | 20                |
| Item  4    | Submission  of Matters to a Vote of Security Holders                                                                | 22                |
|       |                                                                                                                |              |
| ** ** | **Part II**                                                                                                         | ** **        |
| Item  5    | Market  for Registrant’s Common Equity, Related Shareholder Matters and Issuer  Purchases of Equity Securities | 22                |
| Item 6     | Selected  Financial Data                                                                                            | 23                |
| Item  7    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 23                |
| Item 7A    | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 37                |
| Item 8     | Financial  Statements and Supplementary Data                                                                        | 38                |
| Item 9     | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 73                |
| Item 9A    | Controls and  Procedures                                                                                            | 73                |
| Item 9B    | Other  Information                                                                                                  | 73                |
|       |                                                                                                                |              |
| ** ** | **Part III**                                                                                                        | ** **        |
| Item 10    | Directors  and Executive Officers of the Registrant                                                                 | 74                |
| Item 11    | Executive  Compensation                                                                                             | 76                |
| Item 12    | Security  Ownership of Certain Beneficial Owners and Management and Related Shareholder  Matters                    | 87                |
| Item 13    | Principal  Accountant Fees and Services                                                                             | 88                |
|       |                                                                                                                |              |
|       |                                                                                                                |              |
| ** ** | **Part IV**                                                                                                         | ** **        |
| Item 15    | Exhibits and  Financial Statement Schedules                                                                         | 90                |
|       |                                                                                                                |              |
| ** ** | **Other**                                                                                                           | ** **        |
|       | Signatures                                                                                                          | 97                |
|       | Schedule II Valuation and Qualifying Accounts                                                                       | 99                |
|       | Subsidiaries of DP&L                                                                                            |              |
|       |                                                                                                                |              |

## ** **

## **Available Information**

The Dayton Power and Light Company (DP&L, the Company, we, us, our,or ours unless the context indicates otherwise) files current, annual andquarterly reports, and other information required by the Securities ExchangeAct of 1934, as amended, with the Securities and Exchange Commission(SEC).  You may read and copy anydocument we file at the SEC’s public reference room located at 100 F Street, N.E.,Washington, D.C. 20549, USA.  Please callthe SEC at (800) SEC-0330 for further information on the public referencerooms.  Our SEC filings are alsoavailable to the public from the SEC’s web site at http://www.sec.gov.

 

Our public internet site is http://www.dplinc.com.  We make available, free of charge, throughour internet site, our annual reports on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K, and amendments to those reports filed orfurnished pursuant to the Securities Exchange Act of 1934, as amended, as soonas reasonably practicable after we electronically file such material with, orfurnish it to, the SEC.

 

In addition, our public internet site includes other items related tocorporate governance matters, including, among other things, our governanceguidelines, charters of various committees of the Board of Directors and ourcode of business conduct and ethics applicable to all employees, officers anddirectors.  You may obtain copies ofthese documents, free of charge, by sending a request, in writing, to DP&LInvestor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.

 

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## ** **

## **PARTI**

## ** **

**Item 1 – Business**

** **

**THE DAYTON POWER AND LIGHTCOMPANY**

 

We are a public utilityincorporated in 1911 under the laws of Ohio and are a wholly-owned subsidiaryof DPL Inc. (DPL).  Our executive officesare located at 1065 Woodman Drive, Dayton, Ohio 45432 - telephone (937)224-6000.

 

We sell electricity to residential, commercial, industrial andgovernmental customers in a 6,000 square mile area of West Central Ohio.  Electricity for our 24-county service area isprimarily generated at eight coal-fired power plants and is distributed to morethan 500,000 retail customers.  We alsopurchase retail peak load requirements from DPL Energy, LLC (DPLE), awholly-owned subsidiary of DPL. Principal industries served include automotive, food processing, paper,plastic manufacturing and defense.  Oursales reflect the general economic conditions and seasonal weather patterns ofthe area.  In addition, we sell anyexcess energy and capacity into the wholesale market.

 

We have one significant subsidiary, DPL Finance Company, Inc., which iswholly-owned and provides financing to us and other affiliated companies.  We conduct our principal business in onebusiness segment - Electric.

 

The Company employed 1,368 persons as of December 31, 2005, ofwhich 1,134 were full-time employees and 234 were part-time employees.

 

All of our outstanding shares of common stock are held by DPL, whichbecame the Company’s corporate parent, effective April 21, 1986.

 

**SIGNIFICANT DEVELOPMENTS**

 

**Rate Stabilization Surcharge**

On April 4, 2005, we filed a request atthe Public Utilities Commission of Ohio (PUCO) to implement a new ratestabilization surcharge effective January 1, 2006 to recover costincreases associated with environmental capital and related Operations andMaintenance costs, and fuel expenses.  OnNovember 3, 2005, we entered into a settlement agreement that extended our ratestabilization period through December 31, 2010. During this time, the Company will continue to provide retail electricservice at fixed rates with the ability to recover increased fuel andenvironmental costs through surcharges and riders.  Specifically, the agreement provides for:

•                  A rate stabilization surcharge equal to 11%of generation rates beginning January 1, 2006 and continuing through December2010.  Based on 2004 sales, this rider isexpected to result in approximately $65 million in net revenues per year.

•                  A new environmental investment rider to beginJanuary 1, 2007 equal to 5.4% of generation rates, with incremental increasesequal to 5.4% each year through 2010. Based on 2004 sales, this rider is expected to result in approximately$35 million in annual net revenues beginning January 2007, growing toapproximately $140 million by 2010.

•                  An increase to the residential generationdiscount from January 1, 2006 through December 31, 2008 which is expected toresult in a revenue decrease of approximately $7 million per year for threeyears, based on 2004 sales.  Theresidential discount will expire on December 31, 2008.

On December 28, 2005, the PUCO adopted thesettlement with certain modifications (RSS Stipulation).  The PUCO ruled that the environmental riderwill be bypassable by all customers who take service from alternate generationsuppliers.  Future additional revenuesare dependent upon actual sales and levels of customer switching.  On February 22, 2006, the PUCO deniedapplications

 

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for rehearing filed by the Office of the OhioConsumers’ Counsel (OCC), as well as Ohio Partners for Affordable Energy.

 

**Collective Bargaining Agreement Ratification**

On December 2, 2005, Local 175 of the Utility Workers of Americaratified a new three year collective bargaining agreement with us.  Major components include: 3%, 2% and 2.5% annualwage increases over three years, improvements to the pension and 401(k)programs, increases in our contribution to employees’ healthcare costs,employment security for three years, measurable productivity and serviceimprovements, an emergency response program targeted to enhance customerservice response time and changes in our illness benefits.  On December 31, 2005, 760 employees weremembers of Local 175.

 

**Governmental and Regulatory Inquiries**

On April 7, 2004, DPL received notice that the staff of the PUCO wasconducting an investigation into our financial condition as a result of previouslydisclosed matters raised by one of DPL’s executives during the 2003 year-endfinancial closing process (the Memorandum). On May 27, 2004, the PUCO ordered us to file a plan of utility financialintegrity that outlined the actions DPL had taken or will take to insulate ourutility operations and customers from its unregulated activities.  We were required to file this plan by March2, 2005.  On February 4, 2005, we filedthe protection plan with the PUCO.  OnJune 29, 2005, the PUCO closed its investigation citing significantpositive actions DPL had taken including changes in its Board of Directors aswell as our executive management, and that no apparent diminution of servicequality had occurred because of the events that initiated the investigation.

 

On March 3, 2005, we received a notice that the Federal EnergyRegulatory Commission (FERC) had instituted an operational audit of usregarding our compliance with the Code of Conduct within the transmission andgeneration areas.  On October 7, 2005, theFERC issued its Findings and Conclusions, stating that we “generally compliedwith the FERC Standard of Conduct” except for three areas, all of which werecorrected to the satisfaction of the FERC prior to the issuance of theseFindings and Conclusions.

 

**COMPETITION AND REGULATION**

 

We have historically operated in a rate-regulated environment providingelectric generation and energy delivery, consisting of transmission anddistribution services, as a single product to our retail customers.  Prior to the legislation discussed below, wedid not have retail competitors in our service territory.

 

In October 1999, legislation became effective in Ohio that gaveelectric utility customers a choice of energy providers beginning on January 1,2001.  Under this legislation, electricgeneration, power marketing, and power brokerage services supplied to retailcustomers in Ohio are deemed to be competitive and are not subject tosupervision and regulation by the PUCO.

 

We filed an Electric Transition Plan with the PUCO and receivedregulatory approval of the plan on September 21, 2000 which provided for athree-year market development period and specified rates, which included therecovery of approximately $600 million in transition costs.

 

On October 28, 2002, wefiled with the PUCO a request for an extension of its market development periodthrough December 31, 2005.  On September2, 2003, the PUCO adopted a Stipulation entered into by us and certain partiesto the proceeding with modifications (the MDP Stipulation).  The MDP Stipulation also provided thatbeginning January 1, 2006, rates may be modified by up to 11% of generationrates to reflect increased costs associated with fuel, environmentalcompliance, taxes, regulatory changes, and security measures.  Further, the PUCO conditionally approved anincrease to the residential generation discount commencing January 1,2006.  The PUCO’s decision was appealedto the Ohio Supreme Court.  On December17, 2004, the Ohio Supreme Court affirmed the PUCO’s Order, approving the MDPStipulation.

 

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On April 4, 2005, we filed a request atthe Public Utilities Commission of Ohio (PUCO) to implement a new ratestabilization surcharge effective January 1, 2006 to recover cost increasesassociated with environmental capital and related Operations and Maintenancecosts, and fuel expenses.  On November 3,2005, we entered into a settlement agreement that extended our ratestabilization period through December 31, 2010. During this time, we will continue to provide retail electric service atfixed rates with the ability to recover increased fuel and environmental coststhrough surcharges and riders. Specifically, the agreement provides for:

•                  A rate stabilization surcharge equal to 11% ofgeneration rates beginning January 1, 2006 and continuing through December2010.  Based on 2004 sales, this rider isexpected to result in approximately $65 million in net revenues per year.

•                  A new environmental investment rider to beginJanuary 1, 2007 equal to 5.4% of generation rates, with incremental increasesequal to 5.4% each year through 2010. Based on 2004 sales, this rider is expected to result in approximately$35 million in annual net revenues beginning January 2007, growing toapproximately $140 million by 2010.

•                  An increase to the residential generationdiscount from January 1, 2006 through December 31, 2008 which is expected toresult in a revenue decrease of approximately $7 million per year for threeyears, based on 2004 sales.  The residentialdiscount will expire on December 31, 2008.

On December 28, 2005, the PUCO adopted thesettlement with certain modifications (RSS Stipulation).  The PUCO ruled that the environmental riderwill be bypassable by all customers who take service from alternate generationsuppliers.  Future additional revenuesare dependent upon actual sales and levels of customer switching.  On February 22, 2006, the PUCO deniedapplications for rehearing filed by the Office of the Ohio Consumers’ Counsel(OCC), as well as Ohio Partners for Affordable Energy.

 

As a part of the MDP Stipulation, we agreed to implement a VoluntaryEnrollment Process that would provide customers with an option to choose acompetitive supplier to provide their retail generation service shouldswitching not reach 20% in each customer class by October 2004.  During 2005, approximately 51 thousandresidential customers that volunteered for the program were bid out toCompetitive Retail Electric Service (CRES) providers who were registered in ourservice territory.  In August 2005, thefourth and final bid took place, however no bids were received and the 2005program ended.  As part of the RSSStipulation, we agreed to implement the Voluntary Enrollment Program again in2006 and 2007.  The magnitude of anycustomer switching and the financial impact of this program were not materialto our results of operations, cash flows or financial position in 2005.  Future period effects cannot be determined atthis time.

 

On February 20, 2003,the PUCO requested comments from interested stakeholders on the proposed rulesfor the conduct of a competitive bidding process that will take place at theend of the rate stabilization period.  Wesubmitted comments in March 2003.  ThePUCO issued final rules on December 23, 2003. Under our RSS Stipulation discussed above, these rules will not affectus until January 1, 2011.  However, the PUCO retains the authorityto, at any time, require an Ohio electric utility to conduct a competitivebidding process to measure the market price of competitive retail generation.

 

As of December 31, 2005, four unaffiliated marketers were registered asCRES providers in our service territory; to date, there has been no significantactivity from these suppliers.  DPL Energy Resources, Inc. (DPLER), anaffiliated company, is also a registered CRES provider and accounted for nearlyall load served by CRES providers within our service territory in 2005. In addition, several communities in our service area have passed ordinances allowingthe communities to become government aggregators for the purpose of offeringalternative electric generation supplies to their citizens.  To date, none of these communities haveaggregated their generation load.

 

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There was a complaint filed on January 21, 2004 at the PUCO concerningthe pricing of our billing services.  Previously,on December 16, 2003, a complaint was filed at the PUCO alleging that we hadestablished improper barriers to competition. On October 13, 2004, the parties reached a settlement on the pricing ofour billing services that we will charge CRES providers.  Additionally, on October 19, 2004, we enteredinto a settlement that resolves all matters in the barrier to competitioncomplaint.  This settlement provides thatwe will modify the manner in which customer partial payments are applied tobilling charges and we will no longer offer to purchase the receivables of CRESproviders who operate in our certified territory.  On February 2, 2005, the PUCO issued an Orderapproving both settlements with minor modifications.  This Order gives us the right to defer costsof approximately $16 million and later file for recovery over a five yearperiod, subject to PUCO approval.  TheOffice of the Ohio Consumers’ Counsel (OCC) filed a Motion for Rehearing whichwas later denied by the PUCO and on May 23, 2005, the OCC appealed theorder to the Ohio Supreme Court.  On June17, 2005, we filed a subsequent case, requesting PUCO approval for recovery of thedeferred billing costs plus carrying charges beginning January 1, 2006.  If approved as proposed, this new rider willresult in approximately $7 million in additional annual revenue through 2010.  A hearing was held on January 23, 2006, and aPUCO decision is pending in this case. On August 16, 2005, the OCC filed a Complaint against us in MercerCounty Common Pleas Court relating to billing costs that may be charged toresidential customers.  We filed a motionto dismiss the case.  On February 24, 2006,the OCC filed a notice of voluntary dismissal of the Mercer County proceeding.

 

On September 1, 2005, we filed an application requesting the PUCO grantus authority to recover distribution costs associated with storm restorationefforts for ice storms that took place in December 2004 and January 2005.  On February 10, 2006, we filed updatedschedules in support of our application upon discussions with PUCO Staff.  If approved as proposed, this new rider isdesigned to recover over $6.5 million in previously deferred costs pluscarrying costs, for a total of $8.6 million over a two year period.

 

Like other electric utilities and energy marketers, we may sell orpurchase electric products on the wholesale market.  We compete with other generators, power marketers,privately and municipally-owned electric utilities, and rural electriccooperatives when selling electricity. Our ability to sell this electricity will depend on how our price, termsand conditions compare to those of other suppliers.

 

As part of Ohio’s electric deregulation law, all of the state’sinvestor-owned utilities are required to join a Regional TransmissionOrganization (RTO).  In October 2004, wesuccessfully integrated our 1,000 miles of high-voltage transmission into thePJM Interconnection, L.L.C. (PJM) RTO. The role of the RTO is to administer an electric marketplace and insurereliability.  PJM ensures the reliabilityof the high-voltage electric power system serving 51 million people in all orparts of Delaware, Indiana, Illinois, 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 the world’slargest competitive wholesale electricity market and plans regionaltransmission expansion improvements to maintain grid reliability and relievecongestion.

 

As a member of PJM, thevalue of our generation capacity may be affected by a PJM proposal pendingbefore The Federal Energy Regulatory Commission (FERC).  The proposal introduces a new ReliabilityPricing Model (RPM) that would change the way generation capacity is priced andplanned for by PJM.  The outcome of thisproceeding is uncertain at this time.

 

We provide transmissionand wholesale electric service to twelve municipal customers in ourservice territory, which distributes electricity principally within theirincorporated limits.  We also maintain aninterconnection agreement with one municipality that has the capability togenerate a portion of its own energy requirements.  Sales to these municipalities representedless than 1% of total electricity sales in 2005.  Our contract with one municipality expired inFebruary 2005, creating reduced future generation sales to municipalities.

 

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As of December 31, 2004,we had invested a total of approximately $18.0 million in our efforts to join anRTO.  On March 8, 2005, we, along withCommonwealth Edison and American Electric Power Service Corporation, filed torecover a portion of integration expenses to join an RTO.  On May 6, 2005, FERC approved the filingsubject to certain modifications, allowing for recovery to begin in 2005.  Recovery of these costs is dependent onpending settlement discussions.

 

Effective October 1, 2004, PJM began to assess a FERC-approvedadministrative fee on every megawatt consumed by our customers.  On October 26, 2004, we filed an applicationwith the PUCO for authority to modify our accounting procedures to defercollection of this PJM administrative fee, plus carrying charges, until suchtime we obtained the authority to adjust our rates to recover this cost fromcustomers (i.e., after January 1, 2006). On June 1, 2005, the PUCO authorized us to defer the PJM administrativefee, plus carrying charges incurred after the date of our application.  On July 1, 2005, the OCC filed an Applicationfor Rehearing, which was subsequently denied by the PUCO, and on September 9,2005 the case was appealed to the Ohio Supreme Court.  On July 1, 2005, we filed a subsequent caserequesting PUCO authority for recovery of the PJM administrative fee fromretail customers.  On January 25, 2006,the PUCO issued an order approving the tariff as filed, which should result inapproximately $8 million in additional revenue per year for three yearsbeginning in February 2006.  On February 13, 2006, the OCC filed anapplication for rehearing claiming the PUCO erred by not conducting a hearingand rejecting the OCC’s request for intervention.  Commission action onthe rehearing application is pending.

 

On July 23, 2003, the FERC issued an Order that the rates fortransmission service of seven companies, including us, may be unjust,unreasonable, or unduly discriminatory or preferential.  We are operating under FERC-approved ratesthrough December 2008.  In addition, theFERC ordered transitional payments, known as Seams Elimination ChargeAdjustment (SECA), effective December 1, 2004 through March 31, 2006, subjectto refund. Through this proceeding, we are obligated to pay SECA charges toother utilities but we receive a net benefit from these transitionalpayments.  Several parties have soughtrehearing of the FERC orders and there likely will be appeals filed in thematter.  All motions for rehearing arepending.  The hearing is scheduled totake place in May 2006.

 

Beginning May 2005, webegan receiving these FERC ordered transitional payments and have received over$23 million of SECA collections, net of SECA charges, through December 2005.  Our management believes that appropriatereserves have been established in the event that SECA collections are requiredto be refunded.  The ultimate outcome ofthe proceeding establishing SECA rates is uncertain at this time. However,based on the amount of reserves established for this item, the results of thisproceeding are not expected to have a material adverse effect on our financialcondition, results of operations or cash flows.

 

On May 31, 2005, theFERC instituted a proceeding under Federal Power Act Section 206 concerning thejustness and reasonableness of PJM’s rate design.  This proceeding sets the rates for hearingand requests that all of PJM members, which include us, address the justnessand reasonableness of the current rate design. On November 22, 2005, we, along with ten other transmission owners,filed in support of PJM’s existing rate design. We cannot determine what effect, if any, the outcome of this proceedingmay have on our future recovery of transmission revenues.  An April 18, 2006 hearing is scheduled in thiscase.

 

On August 8, 2005, theEnergy Policy Act of 2005 (the 2005 Act) was enacted.  This new law encompasses several areasincluding, but not limited to:  electricreliability, repeal of the Public Utility Holding Company Act of 1935,promotion of energy infrastructure, preservation of a diverse fuel supply forelectricity generation and energy efficiency. As a result of this legislation, the PUCO initiated an investigation toreview their actions with respect to net metering, smart metering and demandresponse, cogeneration, and interconnection standards.  The PUCO received comments on this proceedingand has established a series of technical conferences.  At the conclusion of the conferences, partieswill have an opportunity to provide additional comments by April 28, 2006.  The PUCO could approve new regulatoryrequirements as a result of this proceeding. Also in response to

 

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the Energy Policy Act of2005, on September 1, 2005, the FERC issued a Notice of Proposed Rulemaking toamend its regulations to incorporate the criteria any entity must satisfy toqualify to be an Electric Reliability Organization (ERO) that will propose andenforce reliability standards subject to FERC approval.  The proposed rule also included relatedmatters on delegating ERO authority, the creation of advisory bodies andreporting requirements.  Other rulemakingsare expected as a result of the Energy Policy Act of 2005, such that we cannotat this time measure the financial, operating and reporting impact of this newlaw.

 

 On October 11, 2005, the FERC issued aproposed rulemaking relating to significant modifications to the FERC’sregulations on the Public Utility Regulatory Policies Act (PURPA).  A final rule was issued on February 2, 2006that supports the development of new cogeneration facilities that trulyconserve energy.  The new rules (1)assume new cogeneration facilities of 5 megawatts or less satisfy therequirement that the thermal output of the new cogeneration facility is used ina productive and beneficial manner; (2) ensure that there is continuingprogress in the development of efficient electric energy generating technologyand extend existing efficiency standards from gas and oil-fired qualifiedfacilities to coal-fired qualifying facilities; (3) partially eliminatequalifying facility exemptions from regulation under the Federal Power; and (4)require that fifty percent of the annual energy output of the facility will beused for industrial, commercial, institutional or residential purposes and notsold to a utility.  The impact of thisrule change on us is unclear at this time.

 

On March 3, 2005, we received a notice that the FERC had instituted anoperational audit of us regarding our compliance with our Code of Conductwithin the transmission and generation areas. On October 7, 2005, the FERC issued its Findings and Conclusions,stating that we “generally complied with the FERC’s Standard of Conduct” with afew recommendations that were corrected to the satisfaction of the FERC priorto the issuance of their Findings and Conclusions.

 

OnApril 7, 2004, we received notice that the staff of the PUCO was conducting aninvestigation into our financial condition as a result of financial reportingand governance issues raised by the Memorandum. On May 27, 2004, the PUCO ordered us to file a plan of utility financialintegrity that outlines the actions DPL has taken or will take to insulate ourutility operations and customers from DPL’s unregulated activities.  We were required to file this plan by March2, 2005.  On February 4, 2005, we filedour protection plan with the PUCO and expressed our intention to continue tocooperate with the PUCO in their investigation. On March 29, 2005, the OCC filed comments with the PUCO on our financialplan of integrity, requesting the PUCO continue the investigation and monitorour progress toward implementation of our financial plan of integrity.  On June 29, 2005, the PUCO closed itsinvestigation, citing significant positive actions taken by us includingchanges in the Board of Directors as well as our executive management, and thatno apparent diminution of service quality has occurred because of the eventsthat initiated the investigation.

 

**CONSTRUCTION ADDITIONS**

 

Construction additions were $178 million,$93 million and $98 million in 2005, 2004 and 2003, respectively, andare expected to approximate $360 million in 2006.  Planned construction additions for 2006relate to our environmental compliance program, power plant equipment, andtransmission and distribution system.

 

Capital projects are subject to continuing review andare revised in light of changes in financial and economic conditions, loadforecasts, legislative and regulatory developments and changing environmentalstandards, among other factors.  Over thenext three years, we are projecting to spend an estimated $745 million incapital projects, approximately 61% of which is to meet changing environmentalstandards.  Our ability to completecapital projects and the reliability of future service will be affected by ourfinancial condition, the availability of internal funds and the reasonable costof external funds, and adequate and timely return on these capital investments.  We expect to finance our constructionadditions in 2006 with a combination of cash and short-term investments onhand, tax-exempt debt and internally-generated funds.

 

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See ENVIRONMENTAL CONSIDERATIONS for a description of environmentalcontrol projects and regulatory proceedings that may change the level of futureconstruction additions.  The potentialeffect of these events on our operations cannot be estimated at this time.

 

**ELECTRIC OPERATIONS AND FUELSUPPLY**

 

Our present summergenerating capacity – including Peaking Units - is approximately 3,291 MW.  Of this capacity, approximately 2,856 MW or87% is derived from coal-fired steam generating stations and the balance ofapproximately 435 MW or 13% consists of combustion turbine and diesel peakingunits.  Combustion turbine output isdependent on ambient conditions and is higher in the winter than in thesummer.  Our all-time net peak load was3,243 MW, occurring July 25, 2005.

 

Approximately 87% of theexisting steam generating capacity is provided by certain units owned as tenants in common withThe Cincinnati Gas & Electric Company (CG&E) or its subsidiary, UnionHeat, Light & Power and Columbus Southern Power Company (CSP).   As tenants in common, each company owns aspecified undivided share of each of these units, is entitled to its share ofcapacity and energy output, and has a capital and operating cost responsibilityproportionate to its ownership share. Our remaining steam generating capacity (approximately 365 MW) isderived from a generating station owned solely by us.  Additionally, we, CG&E and CSP own astenants in common, 884 circuit miles of 345,000-volt transmission lines.  We have several interconnections with othercompanies for the purchase, sale and interchange of electricity.

 

In 2005, we generated over99% of our electric output from coal-fired units and less than 1% from oil ornatural gas-fired units.

 

The following table setsforth our generating stations and, where indicated, those stations which we ownas tenants in common.

 
| ** **                                    | ** ** | ** **     | ** ** | ** **    | ** ** | ** **       | ** ** | **Approximate Summer** | ** ** |
|-----------------------------------------------|------------|----------------|------------|---------------|------------|------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | ** **     | ** ** | **Operating** | ** ** | ** **       | ** ** | **MW Rating**          | ** ** |
| **Station**                                   | ** ** | **Ownership*** | ** ** | **Company**   | ** ** | **Location**     | ** ** | **DP&L Portion**   | ** ** | **Total** | ** ** |
| Coal Units                                    |       |           |       |          |       |             |       |                        |       |   |   |   |   |
| Hutchings                                     |       | W              |       | DP&L      |       | Miamisburg, OH   |       | 365                         |       |   | 365 |   |   |
| Killen                                        |       | C              |       | DP&L      |       | Wrightsville, OH |       | 412                         |       |   | 615 |   |   |
| Stuart                                        |       | C              |       | DP&L      |       | Aberdeen, OH     |       | 832                         |       |   | 2,376 |   |   |
| Conesville-Unit  4                            |       | C              |       | CSP           |       | Conesville, OH   |       | 129                         |       |   | 780 |   |   |
| Beckjord-Unit 6                               |       | C              |       | CG&E      |       | New Richmond, OH |       | 207                         |       |   | 414 |   |   |
| Miami Fort-Units  7 & 8                   |       | C              |       | CG&E      |       | North Bend, OH   |       | 360                         |       |   | 1,000 |   |   |
| East Bend-Unit 2                              |       | C              |       | CG&E      |       | Rabbit Hash, KY  |       | 186                         |       |   | 600 |   |   |
| Zimmer                                        |       | C              |       | CG&E      |       | Moscow, OH       |       | 365                         |       |   | 1,300 |   |   |
|                                          |       |           |       |          |       |             |       |                        |       |   |   |   |   |
| Combustion  Turbines or Diesel                |       |           |       |          |       |             |       |                        |       |   |   |   |   |
| Hutchings                                     |       | W              |       | DP&L      |       | Miamisburg, OH   |       | 23                          |       |   | 23 |   |   |
| Yankee Street                                 |       | W              |       | DP&L      |       | Centerville, OH  |       | 107                         |       |   | 107 |   |   |
| Monument                                      |       | W              |       | DP&L      |       | Dayton, OH       |       | 12                          |       |   | 12 |   |   |
| Tait Diesels                                  |       | W              |       | DP&L      |       | Dayton, OH       |       | 10                          |       |   | 10 |   |   |
| Sidney                                        |       | W              |       | DP&L      |       | Sidney, OH       |       | 12                          |       |   | 12 |   |   |
| Tait Units 1-3                                |       | W              |       | DP&L      |       | Moraine, OH      |       | 256                         |       |   | 256 |   |   |
| Killen                                        |       | C              |       | DP&L      |       | Wrightsville, OH |       | 12                          |       |   | 18 |   |   |
| Stuart                                        |       | C              |       | DP&L      |       | Aberdeen, OH     |       | 3                           |       |   | 10 |   |   |
| Total  approximate summer generating capacity |       |           |       |          |       |             |       | 3,291                       |       |   | 7,898 |   |   |

 

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*W = Wholly-Owned

C = Commonly-Owned

 

We have approximately 95% of the totalexpected coal volume needed for 2006 under contract.  The percentage of coal under contract at ourindividual facilities is as low as 80%. Contracted coal

 

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volumes at certain facilities exceed 100% ofthe expected need.  Due to thedifferences in contracted volumes at various facilities, it is expected we willbe in the spot market for more than 5% of our 2006 coal volume at somefacilities while we may make no spot purchases at other facilities.  We may have excess coal volumes to meet 2007needs at some facilities.  The majorityof our contracted coal is purchased at fixed prices.  Some contracts provide for periodicadjustment and some are priced based on market indices.  Substantially all contracts have featuresthat limit price escalations in any given year. Our 2006 emission allowance (SO2) consumption is expected tobe similar to 2005.  Our holdings of 2006 SO2 allowances areapproximately equal to our expected needs.  There may be small exchangesof allowances between 2006 and future years to balance our 2006 position. We do not expect to purchase allowances outright for 2006.  The exact consumption of SO2 allowances will depend on market prices forpower, availability of our generating units and the actual sulfur content ofthe coal burned.

 

The average cost of fuel used per kilowatt-hour (kWh) generated was 1.84¢in 2005, 1.53¢ in 2004 and 1.29¢ in 2003.

 

**SEASONALITY**

 

The power generation and delivery business is seasonal and weatherpatterns have a material impact on operating performance.  In the region served by us, demand forelectricity is generally greater in the summer months associated with coolingand in the winter months associated with heating as compared to other times of theyear.  Historically, our power generationand delivery operations have generated less revenue and income when weatherconditions are warmer in the winter and cooler in the summer.

 

**RATE REGULATION AND GOVERNMENTLEGISLATION**

 

Our sales to retail customers are subject to rate regulation by thePUCO.  Our wholesale electric rates tomunicipal corporations and other distributors of electric energy are subject toregulation by the FERC under the Federal Power Act.

 

Ohio law establishes the process for determining rates charged bypublic utilities.  Regulation of ratesencompasses the timing of applications, the effective date of rate increases,the cost basis upon which the rates are based and other related matters.  Ohio law also established the Office of theOhio Consumers’ Counsel (OCC), which has the authority to represent residentialconsumers in state and federal judicial and administrative rate proceedings.

 

Ohio legislation extends the jurisdiction of the PUCO to the recordsand accounts of certain public utility holding company systems, includingDPL.  The legislation extends the PUCO’ssupervisory powers to a holding company system’s general condition andcapitalization, among other matters, to the extent that they relate to thecosts associated with the provision of public utility service.  Based on existing PUCO authorization,regulatory assets and liabilities are recorded on the Consolidated BalanceSheets.  (See Note 3 of Notes toConsolidated Financial Statements.)

 

See COMPETITION ANDREGULATION for more detail regarding the effect of legislation.

 

**ENVIRONMENTAL CONSIDERATIONS**

 

Our operations, including our commonly-owned facilities, are subject toa wide range of federal, state, and local environmental regulations and laws asto air and water quality, disposal of solid waste and other environmentalmatters.  Governance also includes thelocation, construction and operation of new and existing electric generatingfacilities and most electric transmission lines.  As such, existing environmental regulationsmay be periodically revised and new legislation could be enacted that mayaffect our estimated construction expenditures. See CONSTRUCTION ADDITIONS.  Inthe normal course of business, we have ongoing programs and activities underwayat these facilities to comply, or to determine compliance, with such existing,new and/or proposed regulations and legislation.

 

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We have been identified, either by a government agency or by a privateparty seeking contribution to site clean-up costs, as a potentially responsibleparty (PRP) at two sites pursuant to state and federal laws.  We record liabilities for probable estimatedloss in accordance with Statement of Financial Accounting Standards No. 5 (SFAS5), “Accounting for Contingencies.”  Tothe extent a probable loss can only be estimated by reference to a range ofequally probable outcomes, and no amount within the range appears to be abetter estimate than any other amount, we accrue for the low end of the range.  Because of uncertainties related to thesematters, accruals are based on the best information available at the time.  We evaluate the potential liability relatedto probable losses quarterly and may revise our estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on the Company’s results ofoperations and financial position.

 

**Air and Water Quality**

In November 1999, the United States EnvironmentalProtection Agency (USEPA) filed civil complaints and Notices of Violations(NOVs) against operators and owners of certain generation facilities foralleged violations of the Clean Air Act (CAA). Generation units operated by CG&E (Beckjord 6) and Columbus SouthernPower Company (CSP) (Conesville 4) and co-owned by us were referenced in theseactions.  Numerous northeast states havefiled complaints or have indicated that they will be joining the USEPA’s actionagainst CG&E and CSP.  We were notidentified in the NOVs, civil complaints or state actions.

 

On March 1, 2000, the United States Department of Justice filed acomplaint against Cinergy Corporation and two subsidiaries (USA v. CinergyCorp. et al.) for alleged violations of the CAA at various generation unitsoperated by PSI Energy, Inc. and CG&E. The complaint was amended June 24, 2004 and includes generation unitsoperated by CG&E and co-owned by us (Beckjord 6 and Miami Fort 7).  The suit seeks (1) injunctive relief to require installation ofpollution control technology on various generating units at****CG&E’sW.C. Beckjord and Miami Fort Stations, and PSI’s Cayuga, Gallagher, Wabash River, and Gibson Stations, and(2) civil penalties in amounts of up to $27,500 per day for eachviolation.  In addition, three northeast states and two environmentalgroups have intervened in the case.  In August 2005, the districtcourt issued a ruling regarding the emissions test that it will apply to Cinergy at the trial of thecase.  Contrary to Cinergy’sargument, the district court ruled that in determining whether a project wasprojected to increase annual emissions, it would not hold hours of operationconstant.  However, the district court subsequently certified the matterfor interlocutory appeal to the Seventh Circuit Court of Appeals, which has thediscretion to accept the appeal at this time.  Oral arguments have beenscheduled for May 29, 2006.

 

In June 2000, the USEPA issued a NOV to Stuart GeneratingStation (co-owned by us, CG&E, and CSP and operated by us) for allegedviolations of the CAA.  The NOV containedallegations consistent with NOVs and complaints that the USEPA had recentlybrought against numerous other coal-fired utilities in the Midwest.  The NOV indicated EPA may (1) issue an orderrequiring compliance with the requirements of the Ohio SIP or (2) bring a civilaction seeking injunctive relief and civil penalties of up to $27,500 per dayfor each violation.  To date, neitheraction has been taken.

 

On September 21, 2004, the Sierra Club filed a lawsuitagainst us and the other owners of the Stuart Generating Station in the UnitedStates District Court for the Southern District of Ohio for alleged violationsof the CAA.  The case is currently indiscovery; a trial date has not been set.

 

On July 27, 2004, various residents of the Village ofMoscow, Ohio notified CG&E, as the operator of Zimmer (co-owned byCG&E, CSP, and us), of their intent to sue for alleged violations of theCAA and air pollution nuisances.  OnNovember 17, 2004, a citizens’ suit was filed against CG&E (Freeman v.CG&E).  We believe theallegations are meritless and believe CG&E, on behalf of all co-owners,will vigorously defend the matter.  The plaintiffs have filed a number ofadditional notices of intent to sue and two lawsuits raising claims similar tothose in the original claim.  One lawsuit was dismissed on proceduralgrounds and the remaining two have been consolidated.  The plaintiffs have filed for class actionstatus; a decision has not yet been reached on this matter.

 

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On November 18, 2004, the State of New York and seven other statesfiled suit against the American Electric Power Corporation (AEP) and varioussubsidiaries, alleging various CAA violations at a number of AEP electricgenerating facilities, including Conesville Unit 4 (co-owned by CG&E, CSP,and us).  We believe the allegations arewithout merit and that AEP, on behalf of all co-owners, will vigorously defendthe matter.  On January 6, 2006, thecourt ordered the consolidation of this case with another similar suit; a trialdate for the remedy phase of the consolidated cases has not yet been set.

 

On October 27, 2003,the USEPA published its final rules regarding the equipment replacementprovision (ERP) of the routine maintenance, repair and replacement (RMRR)exclusion of the CAA.  Subsequently, on December 24, 2003, the UnitedStates Court of Appeals for the D.C. Circuit stayed the effective date of therule pending its decision on the merits of the lawsuits filed by numerousstates and environmental organizations challenging the final rules. As a resultof the stay, the Ohio Environmental Protection Agency (Ohio EPA) delayed itspreviously announced intent to adopt the RMRR rule.  On October 20, 2005,USEPA proposed to revise the emissions test for existing electric generatingunits.  At this time, we are unable to determine the impact of the ERPappeal or the outcome of the proposed emissions test.

 

In September 1998, the USEPAissued a final rule requiring states to modify their State Implementation Plans(SIPs) under the CAA.  On July 18, 2002, the Ohio EPA adopted rules thatconstitute Ohio’s NOx SIP, which is substantially similar to the federal CAASection 126 rulemaking and federal NOx SIP.  On August 5, 2003, the USEPApublished its conditional approval of Ohio’s nitrogen oxide (NOx) SIP, with aneffective date of September 4, 2003.  Ohio’s SIP requires NOx reductionsat coal-fired generating units effective May 31, 2004.  On May 31, 2004, DP&L began operation ofits SelectiveCatalytic Reduction equipment (SCRs).  DP&L’s NOxreduction strategy and incurred expenditures to meet the federal reductionrequirements should satisfy the Ohio SIP NOx reduction requirements.

 

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, 2005and were published on May 12, 2005.  OnAugust 24, 2005, the USEPA proposed additional revisions to the CAIR andinitiated reconsideration on one issue.  Althoughwe cannot predict the outcome of the reconsideration proceedings, the petitionsor the pending litigation, CAIR has had and will have a material effect on ouroperations.  We anticipate that Phase Iof CAIR will require the installation of flue gas desulphurization (FGD)equipment and continual operation of the currently-installed SCR.  As a result, DP&L is proceeding with theinstallation of FGD equipment at various generating units.

 

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 andwas published on May 18, 2005. The final rules will have a material effect onour operations.  We anticipate that theFGD being planned to meet the requirements of CAIR may be adequate to meet thePhase I requirements of CAM-R. We expect that additional controls will beneeded to meet the Phase II requirements of CAM-R that go into effect January1, 2018. On March 29, 2005, nine states sued USEPA, opposing the regulatoryapproach taken by USEPA.  On March 31,2005, various groups requested that USEPA stay implementation of CAM-R.  On August 4, 2005, the United States Court ofAppeals for the District of Columbia denied the motion for stay.  EPA is expected to initiate reconsiderationproceedings on one or more issues.  Wecannot predict the outcome of the reconsideration proceedings or pendinglitigation.

 

Under the CAIR and CAM-R capand trade programs for SO2, NOx and mercury, we estimate we willspend more than $453 million from 2006 through 2008 to install the necessarypollution controls.  If

 

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CAM-R litigation results inplant specific mercury controls, our costs may be higher.  Due to the ongoing uncertainties associatedwith the litigation of the CAM-R, we cannot project the final costs at thistime.

 

On July 15, 2003, the OhioEPA submitted to the USEPA its recommendations for eight-hour ozonenonattainment boundaries for the metropolitan areas within Ohio.  On April15, 2004, the USEPA issued its list of ozone nonattainment designations. We own and/or operate a number of facilities in counties designated asnonattainment with the ozone national ambient air quality standard.  We donot know at this time what future regulations may be imposed on our facilitiesand will closely monitor the regulatory process.  Ohio EPA will have untilApril 15, 2007 to develop regulations to attain and maintain compliance withthe eight-hour ozone national ambient air quality standard.  Numerousparties have filed petitions for review.  We cannot predict the outcome ofUSEPA’s reconsideration petitions.

 

On January 5, 2005, theUSEPA published its final nonattainment designations for the national ambientair quality standard for Fine Particulate Matter 2.5 (PM 2.5)designations.  These designations included counties and partial countiesin which we operate and/or own generating facilities.  On March 4, 2005,we and other Ohio electric utilities and electric generators filed a petitionfor review in the D.C. Circuit Court of Appeals, challenging the final rulecreating these designations.  On November 30, 2005, the court orderedUSEPA to decide on all petitions for reconsideration by January 20, 2006.  On January 20, 2006, USEPA denied thepetitions for reconsideration.  The OhioEPA will have three years to develop regulations to attain and maintaincompliance with the PM 2.5 national ambient air quality standard.  Wecannot determine the outcome of the petition for review or the effect such OhioEPA regulations will have on our operations.

 

In April 2002, the USEPAissued proposed rules governing existing facilities that have cooling waterintake structures.  Final rules were published in the Federal Register onJuly 9, 2004.  A number of parties appealed the rules to the federal Courtof Appeals for the Second Circuit in New York.  We anticipate that futurestudies may be needed at certain generating facilities.  We cannot predictthe impact such studies may have on future operations or the outcome oflitigation proceedings.

 

On May 5, 2004, the USEPAissued its proposed regional haze rule, which addresses how states shoulddetermine the best available retrofit technology (BART) for sources coveredunder the regional haze rule.  Final rules were published July 6, 2005,providing States with several options for determining whether sources in theState should be subject to BART.   In the final rule, USEPA made thedetermination that CAIR achieves greater progress than BART and may be used byStates as a BART substitute.  Numerous units owned and operated by us willbe impacted by BART.  We cannot determine the extent of the impact untilOhio determines how BART will be implemented.

 

On May 4, 2004, the Ohio EPAissued a final National Pollutant Discharge Elimination System permit for J.M.Stuart Station that continues the station’s 316(a) variance.  During the three-year term of the draftpermit, we will conduct a thermal discharge study to evaluate the technicalfeasibility and economic reasonableness of water cooling methods other thancooling towers.

 

On October 13, 2005, theUSEPA issued a proposed rule concerning the test for measuring whethermodifications to electric generating units should trigger application of NewSource Review (NSR) standards under the CAA. The proposed rule seeks comments on two different hourly emissions testoptions as well as the USEPA’s current method of measuring previous actualemission levels to projected actual emission levels after themodification.  A third option that testsemissions increase based upon emissions per unit of energy output is alsoavailable for comment.  We cannot predictthe outcome of this rulemaking or its impact on current environmentallitigation.

 

**Land Use**

In September 2002, we andother parties received a special notice that the USEPA considers us to be PRPsfor the clean-up of hazardous substances at the South Dayton Dump landfillsite. On August 4,

 

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2005, we and other partiesreceived a general notice regarding the performance of a Remedial Investigationand Feasibility Study (RI/FS) under a Superfund Alternative approach.  On October 5, 2005, we received a specialnotice letter inviting us to enter into negotiations with USEPA to conduct theRI/FS.  Although the information available to us does not demonstratethat we contributed hazardous substances to the site, we will seek from USEPA ade minimis settlement at the site.  Should USEPA pursue a civil action, wewill vigorously challenge it.

 

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**THE DAYTON POWER AND LIGHTCOMPANY**

**OPERATING STATISTICS**

**ELECTRIC OPERATIONS**

** **
| ** **                                | ** ** | **Years Ended December 31,** | ** **    |
|-------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                                | ** ** | **2005**                                    | ** **    | **2004** | ** ** | **2003** | ** ** |
| Electric Sales  (millions of kWh)         |       |                                        |          |   |   |   |   |
| Residential                               | ** ** | **5,520**                                   |          | 5,140 |   | 5,071 |   |
| Commercial                                | ** ** | **3,901**                                   |          | 3,777 |   | 3,699 |   |
| Industrial                                | ** ** | **4,332**                                   |          | 4,393 |   | 4,330 |   |
| Other retail                              | ** ** | **1,437**                                   |          | 1,407 |   | 1,409 |   |
| Total retail                              | ** ** | **15,190**                                  |          | 14,717 |   | 14,509 |   |
|                                      |       |                                        |          |   |   |   |   |
| Wholesale                                 | ** ** | **2,716**                                   |          | 3,748 |   | 4,836 |   |
|                                      |       |                                        |          |   |   |   |   |
| Total                                     | ** ** | **17,906**                                  |          | 18,465 |   | 19,345 |   |
|                                      |       |                                        |          |   |   |   |   |
| Operating  Revenues ($ in thousands) |       |                                        |          |   |   |   |   |
| Residential                               | ** ** | **$**                                       | **478,226**   |   | $ | 449,411 |   | $ | 442,238 |   |
| Commercial                                | ** ** | **247,912**                                 |          | 239,952 |   | 243,474 |   |
| Industrial                                | ** ** | **126,506**                                 |          | 128,059 |   | 160,801 |   |
| Other retail                              | ** ** | **81,877**                                  |          | 80,623 |   | 81,644 |   |
| Other  miscellaneous revenues             | ** ** | **10,317**                                  |          | 15,914 |   | 13,053 |   |
| Total retail                              | ** ** | **944,838**                                 |          | 913,959 |   | 941,210 |   |
|                                      |       |                                        |          |   |   |   |   |
| Wholesale                                 | ** ** | **257,632**                                 |          | 260,341 |   | 242,232 |   |
|                                      |       |                                        |          |   |   |   |   |
| RTO ancillary  revenues                   | ** ** | **74,419**                                  |          | 17,905 |   | — |   |
|                                      |       |                                        |          |   |   |   |   |
| Total                                     | ** ** | **$**                                       | **1,276,889** |   | $ | 1,192,205 |   | $ | 1,183,442 |   |
|                                      |       |                                        |          |   |   |   |   |
| Electric  Customers at End of Period      |       |                                        |          |   |   |   |   |
| Residential                               | ** ** | **456,146**                                 |          | 453,653 |   | 450,958 |   |
| Commercial                                | ** ** | **48,853**                                  |          | 48,172 |   | 47,253 |   |
| Industrial                                | ** ** | **1,837**                                   |          | 1,851 |   | 1,863 |   |
| Other                                     | ** ** | **6,304**                                   |          | 6,337 |   | 6,322 |   |
|                                      |       |                                        |          |   |   |   |   |
| Total                                     | ** ** | **513,140**                                 |          | 510,013 |   | 506,396 |   |

 

**Item 1a – Risk Factors**

 

This annual report and other documents that we file with the SEC andother regulatory agencies, as well as other oral or written statements we maymake from time to time, contain information based on management’s beliefs andinclude forward-looking statements (within the meaning of the PrivateSecurities Litigation Reform Act of 1995) that involve a number of known andunknown risks, uncertainties and assumptions. These forward-looking statementsare not guarantees of future performance, and there are a number of factorsincluding, but not limited to, those listed below, which could cause actualoutcomes and results to differ materially from the results contemplated by suchforward-looking statements. We do not undertake any obligation to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise. These forward-looking statements areidentified by terms and phrases such as “anticipate”, “believe”, “intend”, “estimate”,“expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will”,and similar expressions.

 

The following is a listing of risk factorsthat we consider to be the most significant to your decision to invest in ourstock.  If any of these events occurs,our business, financial position or results of operation could be materiallyaffected.

 

**The electric industry inOhio is partially deregulated**

 

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Before2001, electric utilities provided electric generation, transmission anddistribution services as a single product to retail customers at prices set byThe Public Utilities Commission of Ohio (PUCO). But in 1999, Ohio enacted legislation, effective January 1, 2001, thatpartially deregulated utility service, making retail generation service acompetitive service.  Customers maychoose to take generation service from competitive retail electric service(CRES) providers that register with the PUCO but are otherwise unregulated.  In connection with this partial deregulationof the electric industry in Ohio, electric utilities have had to restructuretheir service and their rates to accommodate competition.

 

Manyof the requirements of the Ohio deregulation law were premised on theassumption that the wholesale generation market and, in turn, the retailgeneration market, would fully develop by the end of 2005, and that the pricefor generation for even those customers who choose to continue to purchase theservice from the regulated utility would be set purely by the market.  But that did not occur.  As a result, the Commission and theutilities, including us, have worked out plans to provide market-based pricingfor generation service, but also to stabilize those rates for several years.  What we may propose, and what the PUCO willapprove, in the future regarding pricing and cost recovery will depend on thedegree to which the wholesale and retail electric generation markets havedeveloped.

 

Moreover,the uncertainty of the future of the wholesale and retail markets could causethe Ohio General Assembly to revisit the issue of competition and customerchoice.

 

**Although there has not yetbeen significant switching by our customers to CRES providers, that could occurin the future.**

 

Althoughretail generation service has been a competitive service since January 1, 2001,the competitive generation market has not developed in our service territory toany significant degree.  But there arefactors that could result in increased switching by customers to CRES providersin the future:

 

•                   Voluntary Enrollment Procedure

As part of a settlement in a PUCO proceeding, weinitiated, in November 2004, a voluntary enrollment procedure (VEP) toencourage customers to change electric suppliers.  Although the VEP did not result in a significantincrease in the number of customers switching to CRES providers, the VEP willbe initiated again in 2006 and 2007 and could produce different results.

 

•                  CRES Supplier Initiatives

Even without the VEP, customers can elect totake generation service from a competitive retail electric service (CRES)provider.  As of December 31, 2005, fiveCRES providers have been certified by the PUCO to provide generation service inour service territory.  One of thosefive, DPL Energy Resources, Inc. (DPLER), is an affiliate of DP&L.  Although DPLER has accounted for nearly allof the load served by CRES providers in our service territory since retailcompetition began in 2001, that could change. Depending on the development of the wholesale market and the level ofwholesale prices, CRES providers could become more active in our serviceterritory and could begin to offer better prices than they do now.  This could result in more switching by ourcustomers and a further loss by us of our generation business.

 

•                  Governmental Aggregation Programs

Another possible way in which we could losegeneration customers is through “governmental aggregation,” which was permittedin the restructuring legislation.  Underthis program, municipalities may contract with a CRES provider to providegeneration service to the customers located within the municipalboundaries.  Several communities in ourservice territory have passed ordinances allowing them to become governmentaggregators.  Although

 

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none has yet implemented an aggregation program,that, too, could change if CRES providers are able to make lower-priced offersas a result of decreasing prices in the wholesale market.

 

**Our ability to increase ourrates to recover increased costs is limited.**

 

As a result of the failure of the market todevelop as anticipated, we have proposed to stabilize our market-basedgeneration rates rather than subject customers to the volatile rates that wouldotherwise be applicable in the absence of the rate stabilization plan.  Our distribution rates will be unchangedthrough December 31, 2008 and our generation rates will be maintained throughDecember 31, 2008.  Although the PUCO hasapproved several riders that will permit us to offset increases in fuel andenvironmental costs, the environmental rider is not payable by customers thattake generation service from a CRES provider. Thus, a significant migration of customers from our generation serviceto CRES providers could affect our ability to recover those costs.  Moreover, we will not be able to adjust ourrates during the rate stabilization period for increases in other expenses orto recover capital expenditures.

 

**We have agreed to provide service atpre-determined rates through December 31, 2010, which limits our ability topass through our costs to customers.**

 

We have provided service atrates governed by the PUCO-approved transition, market development, and ratestabilization plans.  Those rates haveincluded a statutorily-required 5% residential rate reduction in the generationcomponent of its rates, a further 2.5% reduction to the residential generationrate, with its generation rates frozen through December 31, 2010, andguaranteed distribution rates through December 31, 2008.  The protection afforded by retail fuel clauserecovery mechanisms was eliminated effective January 1, 2001 by theimplementation of customer choice in Ohio. The RSS Stipulation (as defined above), although subject to judicialreview, extends our commitment to maintain pre-determined rates for  distribution through December 31, 2008,with limited ability to recover certain costs after December 31,2005.  Likewise, through the RSSStipulation, we extended our commitment to maintain pre-determined rates forgeneration through December 31, 2010, and in exchange are permitted to chargetwo new rate riders to offset increases in fuel and environmental costs.  Beginning January 1, 2006, a new RateStabilization Surcharge was implemented that should recover approximately $65 million additional revenue in 2006,net of customer discounts and considering less than a full twelve monthsrecovery due to the timing of the PUCO order. The new environmental investment rider could result inapproximately $35 million additional revenue in 2007, net of customer discountsand assuming no customer switching.  ThePUCO ruled this rider will be bypassable by all customers who take service fromalternative generation suppliers.  Accordingly,the rates we are allowed to charge may or may not match our expenses at any giventime.  Therefore, during this period (orpossibly earlier by order of the PUCO), and, thereafter, while we will besubject to prevailing market prices for electricity, it would not necessarilybe able to charge rates that produce timely or full recovery of itsexpenses.  We have historicallymaintained our rates at consistent levels since 1994 when the last phase of ourlast traditional rate case was implemented. However, as we operate under our PUCO-approved RSS Stipulation, therecan be no assurance that we would be able to timely or fully recoverunanticipated levels of expenses, including but not limited to those relatingto fuel, coal and purchased power, compliance with environmental regulation,reliability initiatives, and capital expenditures for the maintenance or repairof our plants or other properties.

 

**There are uncertainties relating to the ultimatedevelopment of Regional Transmission Organizations (RTOs), including the PJM towhich we have given control of our transmission functions.**

 

On October 1, 2004, wegave PJM control of our transmission functions and fully integrated intoPJM.  Problems or delays that may arisein the formation and operation of RTOs may restrict our ability to sell power producedby our generating capacity to certain markets if there is insufficienttransmission capacity otherwise available. The rules governing the various regional power markets may also

 

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change from time to timewhich could affect our costs and revenues. While RTO rates are designed to be revenue neutral, our revenues fromcustomers to whom we currently provide transmission services coulddecrease.  We will incur fees andincreased costs to participate in an RTO, we may be limited with respect to theprice at which power may be offered for sale from certain generating units, andwe may be required to expand our transmission system according to decisionsmade by an RTO rather than by our internal planning process.  Because the RTO market rules are continuingto evolve, it remains unclear which companies will be participating in thevarious regional power markets, or how RTOs will develop or what region theywill cover, we cannot fully assess the impact that these power markets or otherongoing RTO developments may have on us.

 

**We rely principally oncoal as the fuel to operate virtually all of the power plants that serve ourcustomers daily.  We are dependant on ourcoal suppliers to continually supply our power plants to avoid an interruptionin our generation of electricity.**

 

Some of our coal suppliershave not performed their contracts as promised and have failed to timelydeliver all coal as specified under their contracts.  Such failure could significantly reduce ourinventory of coal and may cause us to purchase higher priced coal on the spotmarket.  When the failure is for a shortperiod of time, we can absorb the irregularity due to existing inventorylevels.  However, we cannot tolerate anextended contract breach by a coal supplier who supplies a substantial portionof a power plant under our operation.  Ifwe are required to purchase coal on the spot market, it may affect our cost ofoperations.  

 

**There are additionalfactors, including, but not limited to, regulation and competition, economicconditions, reliance on third  parties,operating results fluctuations, regulatory uncertainties and litigation,internal controls and environmental compliance, that may affect our futureresults.**

 

**Regulation/Competition**

 

We operate in a rapidlychanging industry with evolving industry standards and regulations.  In recent years a number of federal and statedevelopments aimed at promoting competition triggered industryrestructuring.  Regulatory factors, suchas changes in the policies and procedures that set rates; changes in tax laws,tax rates, and environmental laws and regulations; changes in our ability torecover expenditures for environmental compliance, fuel and purchased powercosts and investments made under traditional regulation through rates; andchanges to the frequency and timing of rate increases can affect our results ofoperations and financial condition.  Changesin our customer base, including municipal customer aggregation, could lead tothe entrance of competitors in our marketplace, affecting our results ofoperations and financial condition.  Additionally,financial or regulatory accounting principles or policies imposed by governingbodies can increase our operational and monitoring costs affecting our resultsof operations and financial condition.

 

Changes in our customerbase, including aggregation, could lead to the entrance of competitors in ourmarketplace affecting our results of operations and financial condition.

 

**Economic Conditions**

 

Economic pressures, as wellas changing market conditions and other factors related to physical energy andfinancial trading activities, which include price, credit, liquidity,volatility, capacity, transmission, and interest rates can have a significanteffect on our operations and the operations of our retail, industrial andcommercial customers.

 

On October 8, 2005, DelphiCorporation filed for Chapter 11 bankruptcy protection in the U.S. BankruptcyCourt for the Southern District of New York. Delphi represents approximately 1% of our annual revenues.

 

18

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**Reliance on Third Parties**

 

We rely on many suppliers for the purchase and delivery of inventory,including coal, and equipment components to operate our energy production,transmission and distribution functions. Unanticipated changes in our purchasing processes, delays and supplieravailability may affect our business and operating results.  In addition, we rely on others to provideprofessional services, such as, but not limited to, actuarial calculations,internal audit services, payroll processing and various consulting services.

 

**Operating Results Fluctuations**

 

Future operating results aresubject to fluctuations based on a variety of factors, including but notlimited to: unusual weather conditions; catastrophic weather-related damage;unscheduled generation outages; unusual maintenance or repairs; changes in coalcosts, gas supply costs, emissions allowance costs, or availabilityconstraints; environmental compliance; and electric transmission systemconstraints.

 

**Regulatory Uncertainties and Litigation**

 

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  Additionally, we are subject to diverse andcomplex laws and regulations, including those relating to corporate governance,public disclosure and reporting, and taxation, which are rapidly changing andsubject to additional changes in the future. As further described in Item 3-”Legal Proceedings,” we are alsocurrently involved in various pieces of litigation in which the outcome isuncertain.  Compliance with these rapidchanges may substantially increase costs to our organization and could affectour future operating results.

 

**Internal Controls**

 

Our internal controls,accounting policies and practices, and internal information systems aredesigned to enable us to capture and process transactions in a timely andaccurate manner in compliance with accounting principles generally accepted inthe United States of America (GAAP), laws and regulations, taxationrequirements, and federal securities laws and regulations.  We implemented corporate governance, internalcontrol and accounting rules issued in connection with the Sarbanes-Oxley Actof 2002.  Our internal controls andpolicies have been and continue to be closely monitored by management and our Boardof Directors to ensure continued compliance with Section 404 of the Act.  We believe these controls, policies,practices and systems are adequate to verify data integrity, unanticipated andunauthorized actions of employees, temporary lapses in internal controls due toshortfalls in oversight or resource constraints could lead to improprieties andundetected errors that could impact our financial condition, cash flows orresults of operations.

 

**Environmental Compliance**

 

Our generating facilities (both wholly-ownedand co-owned with others) are subject to continuing federal and stateenvironmental laws and regulations.  Webelieve that we currently comply with all existing federal and stateenvironmental laws and regulations.  Weown a non-controlling, minority interest in several generating stationsoperated by The Cincinnati Gas & Electric Company (CG&E) or its affiliate,Union Heat, Light & Power, and Columbus Southern Power Company (CSP).  Either or both of these parties are likely totake steps to ensure that these stations remain in compliance with applicableenvironmental laws and regulations.  Asnon-controlling owners in these generating stations, we will be responsible forour pro rata share of these expenditures based upon our ownership interest.

 

**Item 1b– Unresolved Staff Comments**

None

 

19

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**Item 2 - Properties**

** **

**Electric**

Information relating toour properties is contained in Item 1 – CONSTRUCTION ADDITIONS, and ELECTRICOPERATIONS AND FUEL SUPPLY, and Note 10 of Notes to Consolidated FinancialStatements.

 

Substantially all of our property and plant is subject to the lien ofthe mortgage securing our First and Refunding Mortgage, dated as of October 1,1935 with the Bank of New York, as Trustee (Mortgage).

 

**Item 3 - Legal Proceedings**

 

In the normal course of business, we are subject to various lawsuits,actions, proceedings, claims and other matters asserted under laws andregulations.  We believe the amountsprovided in our consolidated financial statements, as prescribed by GAAP, forthese matters are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that theactual amounts may be required to satisfy alleged liabilities from variouslegal proceedings, claims, and other matters discussed below, and to complywith applicable laws and regulations will not exceed the amounts reflected inour Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amountsprovided as of December 31, 2005, cannot be reasonably determined.

 

On August 24, 2004, we,DPL and MVE, filed a Complaint against Mr. Forster, Ms. Muhlenkampand Mr. Koziar (the Defendants) in the Court of Common Pleas of MontgomeryCounty, Ohio asserting legal claims against them relating to the termination ofthe Valley Partners Agreements, challenging the validity of the purportedamendments to the deferred compensation plans and to the employment andconsulting agreements with the Defendants, and the propriety of thedistributions from the plans to the Defendants, and alleging that theDefendants breached their fiduciary duties and breached their consulting andemployment contracts.  We, DPL and MVEseek, among other things, damages in excess of $25,000, disgorgement of allamounts improperly withdrawn by the Defendants from the plans and a court orderdeclaring that we, DPL and MVE have no further obligations under the consultingand employment contracts due to those breaches.

 

TheDefendants filed motions to dismiss the Complaint, which the Court subsequentlydenied.  On June 15, 2005, Defendantsfiled their answers denying liability and filed counterclaims against us, DPL,MVE, various compensation plans (the Plans), and against the then-currentmembers of our Board of Directors and two of our former Board members.  These counterclaims allege generally that we,DPL, MVE, the Plans and the individual defendants breached the terms of theemployment and consulting contracts of the Defendants, and the terms of thePlans.  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 the Plans. Defendants’ counterclaims also demand payment of attorneys’ fees.Motions to dismiss certain of the counterclaims were denied on February 23,2006.

 

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 us and DPL concerningpurported entitlements in connection with the purchase of thoseinvestments.  We, DPL and MVE are notdefendants in that case; however, the three of us are parties to anindemnification agreement with respect to the purchaser defendants.  We, DPL and MVE filed a Motion forPreliminary Injunction in the Ohio case, requesting that the court issue apreliminary injunction against Mr. Forster and Ms. Muhlenkamp regarding the NewYork lawsuit.  On August 18,

 

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2005,the Ohio court issued a preliminary injunction against Mr. Forster and Ms.Muhlenkamp that precludes them from pursuing certain key issues raised by Mr.Forster and Ms. Muhlenkamp in their New York lawsuit that are identical to theissues raised in the pending Ohio lawsuit in the New York court or any otherforum other than the Ohio litigation.  Inaddition, the New York court has stayed the New York litigation pending theoutcome of the Ohio litigation.  Mr.Forster and Ms. Muhlenkamp have appealed the preliminary injunction and theappeal is pending at the Ohio Supreme Court.

 

Theparties continue to proceed with the discovery phase of the litigation, and anumber of motions have been filed and briefed with respect to documentdiscovery and depositions.  The trialcourt granted some and overruled some of these pending motions on February 23,2006.

 

We continue to evaluate all of the mattersrelevant to this litigation and are considering other claims againstDefendants, Forster, Muhlenkamp and Koziar that include, but are not limitedto, breach of fiduciary duty or other claims relating to personal and DPLinvestments, the calculation of benefits under the Supplemental ExecutiveRetirement Program (SERP) and financial reporting with respect to suchbenefits, and with respect to Mr. Koziar, the fulfillment of duties owed to usas our legal counsel.  Cumulatively throughDecember 31, 2005, we have accrued for accounting purposes, obligations ofapproximately $52 million to reflect claims regarding deferred compensation,estimated MVE incentives and/or legal fees that Defendants assert are payableper contracts.  We dispute Defendants’entitlement to any of those sums and, as noted above, are pursuing litigationagainst them contesting all such claims.

 

On or about June 24, 2004, the SEC commenced a formal investigationinto the issues raised by the Memorandum. We are cooperating with the investigation. (See Note 13 of Notes toConsolidated Financial Statements.)

 

On April 7, 2004, DPL received notice that the staff of the PUCO was conductingan investigation into our financial condition as a result of the issues raisedby the Memorandum.  On May 27, 2004, thePUCO ordered us to file a plan of utility financial integrity that outlines theactions DPL has taken or will take to insulate our utility operations andcustomers from its unregulated activities. We were required to file this plan by March 2, 2005.  On February 4, 2005, we filed our protectionplan with the PUCO.  On June 29, 2005,the PUCO closed its investigation, citing significant positive actions DPL hadtaken including changes in the Board of Directors as well as our executivemanagement, and that no apparent diminution of service quality had occurredbecause of the events that initiated the investigation.

 

On May 28, 2004, the U.S. Attorney’s Office for the Southern Districtof Ohio, assisted by the Federal Bureau of Investigation, notified us that ithas initiated an inquiry involving the subject matters covered by our internalinvestigation.  We are cooperating withthis investigation.

 

On June 24, 2004, the Internal RevenueService (IRS) began an audit of tax years 1998 through 2003 and issued a seriesof data requests to us including issues raised in the Memorandum.  The staff of the IRS has requested that weprovide certain documents, including but not limited to, matters concerningexecutive/director deferred compensation plans, management stock incentiveplans and MVE financial statements.  OnSeptember 1, 2005, the IRS issued an audit report for tax years 1998 through2003 that shows proposed changes to our federal income tax liability for each ofthose years.  The proposed changes resultin a total tax deficiency, penalties and interest of approximately $23.9million as of December 31, 2005.  OnNovember 4, 2005, we filed a written protest to one of the proposed changes.  We believe we are adequately reserved for anytax deficiency, penalties and interest resulting from the proposed changes andas a result, the proposed changes did not adversely affect our results fromoperations.

 

We are also under audit review by variousstate agencies for tax years 2002 through 2004. We have also filed an appeal to the Ohio Board of Tax Appeals for taxyears 1998 through 2001.  Depending uponthe outcome of these audits and the appeal, we may be required to increase ordecrease our 

 

21

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reserves.  We believe we have adequate reserves in each tax jurisdiction but cannotpredict the outcome of these audits.

 

On February 13, 2006, we received correspondence from the OhioDepartment of Taxation (ODT) notifying us that ODT has completed theirexamination and review of our Ohio Corporation Franchise Tax Returns for taxyears 2002 through 2004 and that the final proposed audit adjustments result ina balance due of $90.8 million before interest and penalties.  We have reviewed the proposed auditadjustments and plan to vigorously contest the ODT findings and forthcomingnotice of assessment through all administrative and judicial meansavailable.  We believe we have recordedadequate tax reserves related to the proposed adjustments; however, we cannotpredict the outcome, which could be material to our results of operations andcash flows.

 

On December 12, 2003, the Office of Federal Contract CompliancePrograms (OFCCP) notified us by letter alleging we had discriminated in thehiring of meter readers during 2000-2001 by utilizing credit checks todetermine if applicants had paid their electric bills.  On February 12, 2004, we and the OFCCPentered into a Conciliation Agreement whereby we agreed to distributeapproximately $0.2 million in compensation to certain affected applicants.  We have completed these payments to theaffected applicants and supplied to the OFCCP all follow-up reports requiredunder the Conciliation Agreement.

 

In June 2002, a contractor’s employee received a verdict against us forinjuries he sustained while working at a power station.  The Adams County Court of Common Pleasawarded the contractor’s employee compensatory damages of approximately $0.8million and prejudgment interest of approximately $0.6 million.  On April 28, 2004, the 4th District Court ofAppeals upheld this verdict except the award for prejudgment interest.  On September 1, 2004, the Ohio Supreme Courtrefused to hear the case, so the matter was remanded to the Adams County Courtof Common Pleas for a re-determination of the amount of prejudgment interestthat should be awarded.  The trial courtheard this matter on October 15, 2004. On November 1, 2004, we paid approximately $976,000 to the contractor’semployee to satisfy the judgment and post-judgment interest.  On December 6, 2004, the Adams County Courtof Common Pleas ruled that the prejudgment interest should be reduced toapproximately $30 thousand.  Both partiesappealed this decision. On January 25, 2006, the Fourth District Court ofAppeals ruled in our favor, finding it owed no prejudgment interest to thePlaintiff.

 

Additional informationrelating to legal proceedings involving DP&L is contained in Item 1–ENVIRONMENTAL CONSIDERATIONS, and Item 8 – Note 11 of Notes to ConsolidatedFinancial Statements.

 

In November 2005, AMP-Ohio, a wholesalesupplier of electricity to its thirteen member municipalities, requestedarbitration of its power supply agreement with us.  AMP-Ohio alleges it has a right to receivecertain capacity credits.  We disagreewith this position and have agreed to arbitrate the dispute.  The arbitration is pending.  We are unable at this time to determinewhether this will have any material impact on our results of operations, cashflows or financial position.

 

**Item 4 -****Submission of Matters to a Vote of Security Holders**

 

NONE

 

**PART II**

** **

**Item 5 -****Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities**

 

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Ourcommon stock is held solely by our parent DPL and, as a result, is not listedfor trading on any stock exchange.

 

As long as any preferred stock is outstanding, our Amended Articles ofIncorporation contain provisions restricting the payment of cash dividends onany of its common stock if, after giving effect to such dividend, the aggregateof all such dividends distributed subsequent to December 31, 1946 exceeds ournet income available for dividends on our common stock subsequent to December31, 1946, plus $1.2 million.  As ofyear-end, all of our earnings reinvested in the business were available forcommon stock dividends.  We expect all2006 earnings reinvested in our business to be available for our common stockdividends, payable to DPL.

 

On April 30, 2004, we and DPL announced that we suspended ourquarterly dividend payments.  On December1, 2004, we and DPL resumed our regular quarterly dividends, including paymentsnormally made in June and September.

 

Additional information concerning dividends paid on DP&L preferredstock is set forth in Item 8 - Selected Quarterly Information and Financial andStatistical Summary.

 

Information regarding DP&L’s equity compensation plans as ofDecember 31, 2005, is disclosed in Item 12 – Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.

 

**Item 6 -****Selected Financial Data**

 

Selected financial data is set forth in Item 8 – Selected QuarterlyInformation Financial and Statistical Summary.

 

**Item 7 - Management’s Discussionand Analysis of Financial Condition and         Resultsof Operations**

 

Certain statementscontained in this discussion are “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report that relateto events or developments that are expected to occur in the future, includingmanagement’s expectations, strategic objectives, business prospects,anticipated economic performance and financial condition and other similarmatters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs,assumptions and expectations of our future economic performance, taking intoaccount the information currently available to management.  These statements are not statements ofhistorical fact.  Such forward-looking statementsare subject to risks and uncertainties and investors are cautioned thatoutcomes and results may vary materially from those projected due to variousfactors beyond our control, including but not limited to:  abnormal or severe weather; unusual maintenanceor repair requirements; changes in fuel costs and purchased power, coal,environmental emissions, gas and other commodity prices; increased competition;regulatory changes and decisions; changes in accounting rules; financial marketconditions; and general economic conditions.

 

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

 

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**GENERAL OVERVIEW**

The electric utility industryhas historically operated in a regulated environment.  However, in recent years, there have been anumber of federal and state regulatory and legislative decisions aimed atpromoting competition and providing customer choice.  Market participants have therefore creatednew business models to exploit opportunities. The marketplace is now comprised of independent power producers, energymarketers and traders, energy merchants, transmission and distribution providersand retail energy suppliers.  There havealso been new market entrants and activity among the traditional participants,such as mergers, acquisitions, asset sales and spin-offs of lines of business.  In addition, transmission systems are beingoperated by Regional Transmission Organizations (RTOs).

 

As part of Ohio’s electricderegulation law, all of the state’s investor-owned utilities were required tojoin an RTO.  DP&L successfullyintegrated its 1,000 miles of high-voltage transmission into the PJMInterconnection, L.L.C. (PJM) RTO in October 2004.  As an RTO, PJM’s role is to administer anelectric marketplace and ensure the reliability of the high-voltage electricpower system serving 51 million people in all or parts of Delaware, Indiana,Illinois, Kentucky, Maryland, Michigan, New Jersey, Ohio, Pennsylvania,Tennessee, Virginia, West Virginia and the District of Columbia.  PJM coordinates and directs the operation ofthe region’s transmission grid; administers the world’s largest competitivewholesale electricity market, and plans regional transmission expansionimprovements to maintain grid reliability and relieve congestion.

 

On December28, 2005, the PUCO approved DP&L’s Rate Stabilization Plan with certainmodifications.  The new Rate StabilizationPlan will phase into rates two new rate riders related to increasing fuel andenvironmental costs over a five-year period that runs from January 1, 2006through December 31, 2010.  Theenvironmental portion of the increase, which goes into effect in 2007 and runsthrough 2010, will be avoidable for customers who switch generationproviders.  This Plan provides customerswith price protection through capped generation prices through 2010 andprovides some level of revenue stability for us.

 

Fuel costs are impacted by changes in volumeand price and are driven by a number of variables including weather,reliability of coal deliveries, scheduled outages and generation plantmix.  Based on weather normalized sales, fuel costs are forecasted to beflat in 2006 compared to 2005 and are forecasted to increase approximately 5%in 2007 compared to 2006.  Thisforecast assumes coal prices will increase approximately 10% in 2006 ascompared to 2005 and remain flat in 2007 as compared to 2006.

 

See Item 8 - Notes to FinancialStatements and the Management’s Discussion and Analysis section “FACTORS THATMAY AFFECT FUTURE RESULTS.”

 

**RESULTS OF OPERATIONS**

**IncomeStatement Highlights**

** **
| **$ in millions**                   | ** ** | **2005**   | ** **  | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|------------|-------------|----------|------------|----------|------------|
|                                     |       |       |        |     |       |     |       |
| Revenues:                                |       |       |        |     |       |     |       |
| Retail                                   | ** ** | **$**      | **944.9**   |     | 914.0      |     | 941.2      |   |
| Wholesale                                | ** ** | **257.6**  |        | 260.3    |       | 242.2    |       |
| RTO ancillary (a)                        | ** ** | **74.4**   |        | 17.9     |       | —   |       |
| Total Revenues                           | ** ** | **$**      | **1,276.9** |     | $          | 1,192.2  |       | $ | 1,183.4 |   |
| Less: Fuel                               | ** ** | **317.9**  |        | 257.0    |       | 226.2    |       |
| Purchased power (b)                      | ** ** | **147.1**  |        | 116.4    |       | 92.7     |       |
| Net margins (c)                          | ** ** | **$**      | **811.9**   |     | $          | 818.8    |       | $ | 864.5 |   |
|                                     |       |       |        |     |       |     |       |
| Net margins  as a percentage of revenues | ** ** | **63.6**   | %           | 68.7     | %          | 73.1     | %          |
|                                     | ** ** | ** ** |        |     |       |     |       |
| Operating  income                        | ** ** | **$**      | **382.6**   |     | $          | 369.4    |       | $ | 394.8 |   |

 

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*(a)**              Revenues include PJMrevenues, discussed as ‘RTO ancillary revenues’ in the detail provided in Item1 - Business.*

*(b)**              Purchased powerincludes charges from PJM of $48.5 million, $12.3 million and $0 for 2005, 2004and 2003 respectively.*

*(c)**               For purposes ofdiscussing operating results, we present and discuss net margins. This formatis useful to investors because it allows analysis and comparability ofoperating trends and includes the same information that is used by managementto make decisions regarding our financial performance.*

 

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**Revenues**

Revenues increased 7% to $1,276.9 million for2005 compared to $1,192.2 million for 2004, reflecting an increase of $84.7million.  This increase was primarily theresult of increased retail sales volume, higher average rates for wholesale andretail revenues, and ancillary revenues associated with participation in PJMthat was partially offset by lower wholesale sales volume.  Retail revenues increased $30.9 million,primarily resulting from increased sales volume of $28.9 million and $7.6million in higher average rates, partially offset by $5.6 million in lowermiscellaneous retail revenues reflecting transmission services provided in 2004that are now provided through PJM. Residential customers comprised the bulk of the increase in sales volumereflecting greater weather extremes experienced in 2005 compared to 2004 ascooling degree days were up 39% to 1,075 in 2005 compared to 771 in 2004 andheating degree days were up 4% to 5,702 in 2005 compared to 5,500 in 2004.  Wholesale revenue decreased $2.7 million, primarilyrelated to a $71.6 million decline in sales volume that was nearly offset by a$68.9 million increase related to higher average market rates.  For 2005, ancillary revenues from RTOs were$74.4 million compared to $17.9 million for 2004, as we did not participate inPJM until October 2004.  RTO ancillaryrevenues primarily consist of compensation for use of our transmission assets,regulation services, reactive supply and operating reserves.

 

Revenues increased $8.8million to $1,192.2 million in 2004 compared to $1,183.4 million in 2003.  Wholesale revenues increased $18.1 million or7% in 2004 resulting from higher average market rates. The increase inwholesale revenues was largely offset by decreases in retail revenues of $27.2or 3% in 2004 that reflected lower average rates, primarily driven fromindustrial customers buying generation from alternative suppliers.  Ancillaryrevenues from PJM increased $17.9 million as we did not participate in PJM in2003.  Coolingdegree-days increased 12% to 771 in 2004 compared to 687 in 2003.

 

## **Margins,Fuel and Purchased Power**

For 2005, net margin of$811.9 million decreased by $6.9 million from $818.8 million for 2004.  As a percentage of total revenues, net margindecreased by 5.1 percentage points to 63.6% from 68.7%.  This decline is primarily the result of a$91.6 million increase in fuel and purchased power costs, offset by an $84.7increase in revenues (see discussion of revenue variance above).  Fuel costs, which include coal, gas, oil andemission allowance costs, increased by $60.9 million for 2005 compared to thesame period in 2004 primarily resulting from higher average fuel prices as wellas an increased volume of electric generation. Purchased power costs increased by $30.7 million for 2005 compared tothe same period in 2004 primarily resulting from increased charges of $36.2million associated with moving power across PJM (we did not participate in PJMuntil October 2004) as well as increases related to higher average marketprices, partially offset by lower purchased power volume.

 

For 2004, netmargin of $818.8 million decreased by $45.7 million from $864.5 million for2003.  This decline in net margin wasprimarily the result of a lower volume of retail sales and increased fuel andpurchased power costs, partially offset by a slight increase in wholesale salesand ancillary PJM revenues.  As apercentage of total revenues, net margin decreased by 4.4 percentage points to68.7% in 2004 from 73.1% in 2003.  Thisdecrease in net margin was primarily attributable to higher fuel and purchasedpower costs per kWh.  Fuel costsincreased by $30.8 million or 14% in 2004 compared to 2003 primarily related torising prices in the coal market. Purchased power costs

 

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including PJMcosts increased by $23.7 million or 26% in 2004 compared to 2003, primarilyresulting from higher average market prices.

 

**Operationand Maintenance**

** **
| **$ in millions**                                     | ** ** | **2005 vs. 2004 change** | ** ** | **2004 vs. 2003 change** | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                                       |       |                     | ** ** |                     |       |   |   |
| Electric production, transmission and distribution costs   | ** ** | **$**                    | **4.1**    | ** **               |       | $ | 13.1 |   |   |
| Pension and benefits                                       | ** ** | **0.6**                  | ** ** |                     | 7.7        |   |   |
| Reduction in capitalized insurance and claims costs        | ** ** | **(0.3**                 | **)**      |                     | 2.4        |   |   |
| PJM Administrative fees                                    | ** ** | **(1.6**                 | **)**      |                     | 2.9        |   |   |
| Sarbanes-Oxley compliance and external/internal audit fees | ** ** | **(3.5**                 | **)**      |                     | 6.4        |   |   |
| Executive and management compensation                      | ** ** | **(10.2**                | **)**      |                     | (13.8      | ) |   |
| Directors’ & Officers’ liability insurance   | ** ** | **(14.8**                | **)**      |                     | 6.1        |   |   |
| Other – net (decrease) / increase                     | ** ** | **(0.4**                 | **)**      |                     | 1.9        |   |   |
| **Total**                                                  | ** ** | **$**                    | **(26.1**  | **)**                    |       | $ | 26.7 |   |   |

 

Operation andmaintenance expense decreased $26.1 million or 12% in 2005 compared to2004 as a result of lower corporate costs that was partially offset byincreased electric production, transmission and distribution expenses.  Corporate costs declined from the prior yearprimarily resulting from a decrease of $14.8 million in Directors’ andOfficers’ liability insurance premiums; $10.2 million in lower executive andmanagement compensation costs; $3.5 million in reduced Sarbanes-Oxley 404compliance costs and external / internal audit fees; and $1.6 million in lowerPJM administrative fees resulting from a PUCO order to defer these costs untilthey can be recovered through rates starting in February 2006.  These decreases were partially offset by a$4.1 million increase in electric production, transmission, and distributioncosts, primarily related to generation operations costs for lime used forpollution control and electric production boiler maintenance costs as well ashigher costs related to electric distribution operation and maintenance.  In addition, pension and benefits costs roseby $0.6 million reflecting an increase in pension costs of $2.0 million thatwas nearly offset by a $1.4 million decrease for other post employmentbenefits, principally a 2004 adjustment in disability reserves.

 

Operation andmaintenance expense increased $26.7 million or 14% in 2004 compared to 2003 asa result of higher corporate costs and increased electric production,transmission, and distribution expenses. Corporate costs exceeded the prior year primarily resulting from anincrease of $7.7 million in pension and benefits expenses, $6.4 million higherSarbanes-Oxley 404 compliance costs and external / internal audit fees, $6.1million in higher Directors’ and Officers’ liability insurance premiums, and a$2.4 million reduction in capitalized insurance and claims costs.  Electric production, transmission anddistribution expenses increased $13.1 million, primarily related toplanned maintenance during scheduled outages, ash disposal and other maintenancecharges.  PJM administrative fees of $2.9million in 2004 for scheduling, system control, and dispatch services alsocontributed to the increase in expense. These increases were partially offset by a $13.8 million decrease inexecutive and management compensation.

 

**Depreciationand Amortization**

Depreciationand amortization expense was $2.8 million higher in 2005 as compared to 2004primarily as a result of completed projects in the distribution area (includingnew services, line transformers, poles, station equipment, and overhead andunderground conductor) and in the production area (mainly due to the SCRs forStuart, Killen and Zimmer) that were put into service in the second quarter of2004.

 

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Depreciation andamortization expense was $5.0 million or 4% higher in 2004 compared to 2003, asa result of completed construction projects and a full year of depreciation onenvironmental compliance equipment installations completed in 2003.

 

**Amortizationof Regulatory Assets**

Amortizationof regulatory assets increased $1.3 million to $2.0 million in 2005 as comparedto the prior year primarily resulting from PJM start-up costs amortization of$1.1 million and PJM integration costs amortization of $0.2 million reflectingDP&L’s entrance into the PJM market on October 1, 2004.

 

Amortizationof regulatory assets decreased $48.3 million in 2004 from 2003 primarilyreflecting the completion in 2003 of the three-year regulatory transition costrecovery period granted by the Public Utilities Commission of Ohio.

 

**GeneralTaxes**

** **
| **$ in millions** | ** ** | **2005**   | ** ** | **2004** | ** ** | **2005 vs. 2004  change** | ** ** | **2003** | ** ** | **2004 vs. 2003  change** | ** ** |
|------------------------|------------|------------|------------|----------|------------|---------------------------|------------|----------|------------|---------------------------|------------|
|                   |       |       |       |     |       |                      |       |     |       |                      |       |
| kWh excise             | ** ** | **$**      | **52.9**   |     | $          | 50.5                      |       | $        | 2.4        |                      | $          | 49.6 |   | $ | 0.9 |   |
| Property               | ** ** | **43.3**   |       | 44.8     |       | (1.5                      | )          | 45.3     |       | (0.5                      | )          |
| Other                  | ** ** | **8.9**    |       | 7.9      |       | 1.0                       |       | 6.5      |       | 1.4                       |       |
| Excise                 | ** ** | **—** |       | —   |       | -                         |       | 5.4      |       | (5.4                      | )          |
| **Total**              | ** ** | **$**      | **105.1**  |     | $          | 103.2                     |       | $        | 1.9        |                      | $          | 106.8 |   | $ | (3.6 | ) |

 

General taxesincreased $1.9 million or 2% in 2005 compared to 2004.  The increase is primarily from $2.4 millionincreased expense for the kWh excise tax resulting from higher sales volumesfrom electric retail customers.  Theincrease in other taxes of $1.0 million includes higher payroll taxes, PUCOmaintenance and the new State of Ohio Commercial Activities Tax.  These increases were partially offset bylower property tax expense.

 

General taxesdeclined $3.6 million or 3% in 2004 compared to 2003 primarily as a result of a2003 excise tax of $5.4 million related to the three year regulatory transitionperiod that ended in 2003.

 

## **InvestmentIncome**

Investmentincome increased by $1.2 million in 2005 compared to 2004 primarily resultingfrom an increase in interest and dividend income.

 

Investmentincome decreased by $21.7 million in 2004 compared to 2003.  This decrease is primarily the result of a2003 realized gain on interest rate hedges of $21.2 million that did not recurin 2004, as well as a $0.5 million decrease in interest income in 2004 comparedto 2003.

 

**InterestExpense**

Interest expensedecreased $5.4 million or 12% compared to 2004 primarily from $2.6 million oflower debt service charges associated with our early retirement of ESOP debt;lower amortization of $1.1 million associated with reacquired debt; $1.0million from the elimination of the interest penalty on the $470 million 5.125%Series First Mortgage Bonds resulting from the delayed exchange offerregistration of those securities; and $0.2 million of greater capitalizedinterest in 2005 as compared to 2004.

 

Interestexpense decreased $8.3 million or 16% in 2004 compared to 2003 primarilyresulting from the refinancing of debt in 2004 and 2003 for which interestexpense was lower by $11.7 million, despite $2.0 million of additional interestincurred in 2004 relating to the failure to file exchange offer registrationstatements and the failure to timely file the 2003 Form 10-K.  This decrease in interest expense waspartially offset by lower capitalized interest in 2004 compared to 2003 of $6.6million.

 

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**Charge for EarlyRedemption of Debt**

In 2005, we recorded $4.1million in charges resulting from premiums paid for the early redemption ofdebt, including write-offs of unamortized debt expense and debt discounts.  (See Note 7 of Notes to Consolidated FinancialStatements).

 

**OtherIncome**

Other income was $7.6 million greater than2004 primarily reflecting $3.5 million of additional gains in 2005 over 2004from sales of pollution control emission allowances; $1.3 million of lowermanagement fees relating to investments; and $4.6 million drop in miscellaneousincome deductions; offset by $1.8 million drop in gains from propertydisposals.

 

Other incomedecreased $4.2 million in 2004 compared to 2003 primarily from bank and legalfees associated with DP&L’s revolving credit facilities and non-operatingincome realized in 2003.  In addition,$8.3 million of management fees were offset by an $8.9 million gain on the saleof emission allowances.

 

## **IncomeTax Expense**

Income tax expense for 2005 increased $17.3million compared to prior year resulting from higher income, increased accrualfor open tax years and lower state coal tax credits.

 

On June 30, 2005, Governor Taft signed HouseBill 66 into law which significantly changed the tax structure in Ohio. The major provisions of the bill include phasing-out the Ohio Franchise Tax,phasing-out the Personal Property Tax for non-utility taxpayers and phasing-ina Commercial Activities Tax.  As a resultof House Bill 66, income taxes were reduced by $1.6 million.  Other applicable provisions of House Bill 66have been reflected in the consolidated financial statements.

 

For 2004, income tax expense decreased $29.6 million compared to 2003primarily reflecting lower pre-tax book income, the recognition of $11.7million of available state tax credits related to the consumption of coal minedin Ohio and a 2003 adjustment for non-deductible compensation.

 

## **CumulativeEffect of Accounting Change, Net of Tax**

In 2005, the cumulative effectof an accounting change resulted in a charge of $3.2 million related to theadoption of the provisions of FASB Interpretation No. 47, “Accounting forConditional Asset Retirement Obligations an interpretation of FASB StatementNo. 143” (FIN 47).  (See Note 1 of Notesto Consolidated Financial Statements.)

 

The cumulative effect of anaccounting change in 2003 resulted in a credit of $17.0 million reflecting theadoption of the provisions of FASB Statement of Financial Accounting StandardsNo. 143, “Accounting for Asset Retirement Obligations” (SFAS 143).  (See Note 1 of Notes to ConsolidatedFinancial Statements.)

 

**FINANCIAL CONDITION, LIQUIDITY AND CAPITALREQUIREMENTS**

 

Our cash and cashequivalents totaled $46.2 million at December 31, 2005, compared to $17.2million at December 31, 2004.  The increasein cash and cash equivalents of $29.0 million was primarily attributed to $366.8million from operating activities.  Theseproceeds were used for capital expenditures of $178.4 million and dividendspaid to our parent of $150.0 million.

 

We generatednet cash from operating activities of $366.8 million, $381.2 million, and$363.6 million in 2005, 2004 and 2003, respectively.  The net cash provided by operating activities for 2005 was primarilythe result of operating profitability, partially offset by cash used forworking capital, specifically for accounts payable, accounts receivable, andthe timing of tax payments.  The net cashprovided by operating activities in 2004 was primarily the result of operatingprofitability, and cash

 

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provided fromworking capital, specifically the timing of tax payments, offset by the risingcost of coal inventories.

 

Net cash flows provided byinvesting activities were $178.4 million, $79.9 million, and $65.1 million in2005, 2004, and 2003, respectively.  Netcash flows provided by investing activities for 2005 were primarily due tocapital expenditures.  Our capitalexpenditures increased in 2005 as compared to 2004 in response to morestringent environmental regulations. These increased capital expenditures are expected to continue for thenext three years.  Net cash flows provided by investingactivities for 2004 were primarily due to capital expenditures, offset by theproceeds from the sale of property.  Netcash flows provided by investing activities in 2003 were primarily due tocapital expenditures, offset by the settlement of interest rate hedges.

 

Net cash flows used forfinancing activities were $159.4 million, $301.3 million, and $298.4 million in2005, 2004 and 2003, respectively.  Netcash flows used for financing activities for 2005 were primarily the result ofcash used to retire $218.9 million of long-term debt and pay common stockdividends to DPL of $150.0 million. These uses of cash were partially offset by the net cash received fromthe issuance of long-term debt.   Netcash flows used for financing activities for 2004 were for the paymentof common and preferred dividends and the retirement of long-term debt.  Net cash flows used for financing activitiesin 2003 primarily related to common stock dividends paid to DPL and the earlyretirement of long-term debt.  These useswere largely offset by the net proceeds related to the issuance oflower-interest long-term debt.

 

We have obligations to make futurepayments for capital expenditures, debt agreements, lease agreements, capitalcalls and other long-term purchase obligations, and have certain contingentcommitments such as guarantees. We believe our cash flows from operations, thecredit facilities (existing or future arrangements), and other short andlong-term debt financing, will be sufficient to satisfy our future workingcapital, capital expenditures and other financing requirements for theforeseeable future.  Our ability togenerate positive cash flows from operations is dependent on general economicconditions, competitive pressures, and other business and risk factorsdescribed in “Risk Factors” and “Factors That May Affect Future Results.”  If we are unable to generate sufficient cashflows from operations, or otherwise comply with the terms of our creditfacilities and the senior notes, we may be required to refinance all or aportion of our existing debt or seek additional financing alternatives.  A discussion of each of our critical liquiditycommitments is outlined below.

 

**CapitalRequirements**

Construction additions were $178 million,$93 million and $98 million in 2005, 2004 and 2003, respectively, andare expected to approximate $360 million in 2006.  Planned construction additions for 2006relate to our environmental compliance program, power plant equipment, and ourtransmission and distribution system.  During the last three years, capitalexpenditures of $144 million have been incurred to meet DPL’s state and federalstandards for Nitrogen Oxide (NOx), Sulfur Dioxide (SO2) and mercury emissions from power plants.

 

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 three years, weare projecting to spend an estimated $745 million in capital projects,approximately 61% of which is to meet changing environmental standards.  Our ability to complete our capital projectsand the reliability of future service will be affected by our financialcondition, the availability of internal and external funds at reasonable cost,and adequate and timely return on these capital investments.  We expect to finance our constructionadditions in 2006 with a combination of cash and short-term investments onhand, tax-exempt debt and internally-generated funds.

 

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**Debtand Debt Covenants**

At December 31,2005, our scheduled maturities of long-term debt, including capital leaseobligations, over the next five years are $0.9 million in 2006, $0.9 million in2007, $0.7 million in 2008, $0.7 million in 2009 and $0.7 million in2010.  Substantially all of our propertyis subject to the mortgage lien securing the first mortgage bonds.  Debt maturities in 2006 are expected to befinanced with internal funds and tax-exempt financing.  Certain debt agreements contain reporting andfinancial covenants for which we are in compliance as of December 31, 2005 andexpect to be in compliance during the near term.

 

On September 29, 2003,we issued $470 million principal amount of First Mortgage Bonds, 5.125% Seriesdue 2013.  The net proceeds from the saleof the bonds, after expenses, were used on October 30, 2003, to (i) redeem $226million principal amount of our First Mortgage Bonds, 8.15% Series due 2026, ata redemption price of 104.075% of the principal amount plus accrued interest tothe redemption date and (ii) redeem $220 million principal amount of our FirstMortgage Bonds, 7.875% Series due 2024, at a redemption price of 103.765% ofthe principal amount plus accrued interest to the redemption date.  The 5.125% Series due 2013 were not registeredunder the Securities Act of 1933, but were offered and sold through a privateplacement in compliance with Rule 144A under the Securities Act of 1933.  The bonds include step-up interest provisionsrequiring us to pay additional interest if (i) our registration statement wasnot declared effective by the SEC within 180 days from issuance of new bonds or(ii) the exchange offer was not completed within 210 days from the issuance ofthe new bonds.  The registrationstatement was not declared effective and the exchange offer was not timelycompleted and, as a result, we were required to pay additional interest of0.50% until a registration statement was declared effective, at which point theadditional interest was reduced by 0.25%. The remaining additional interest of 0.25% continued until the exchangeoffer was completed.  The exchange offerregistration statement for these securities was filed and declared effective onMay 20, 2005 and the exchange was completed on June 23, 2005.

 

Issuance of additionalamounts of first mortgage bonds by us is limited by the provisions of ourmortgage; however, management believes that we continue to have sufficientcapacity to issue first mortgage bonds to satisfy our requirements inconnection with our current refinancing and construction programs.  The amounts and timing of future financingswill depend upon market and other conditions, rate increases, levels of salesand construction plans.

 

In May 2005, we obtained a $100 millionunsecured revolving credit agreement that extended and replaced our previousrevolving credit agreement of $100 million. The new agreement, renewable annually, expires on May 30, 2010 andprovides credit support for our business requirements during this period.  This may be increased up to $150million.  The facility contains onefinancial covenant:  total debt to totalcapitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  We had no outstanding borrowings under thiscredit facility at December 31, 2005. Fees associated with this credit facility are approximately $0.2 millionper year.  Changes in credit ratings,however, may affect the applicable interest rate for our revolving creditagreement.

 

In August 2005, we completed the refinancing of$214.4 million of pollution control bonds. The specific issues refinanced consisted of:

•                  $41.3 million of OhioWater Development Authority (OWDA) bonds;

•                  $137.8 million of OhioAir Quality Development Authority (OAQDA) bonds; and

•                  $35.3 million of BooneCounty, Kentucky (Boone County) bonds.

 

InAugust, 2005, we entered into a separate loan agreement with the OWDA, OAQDAand Boone County for new pollution control bonds with a weighted averageinterest rate of 4.78%.  The proceeds ofthe bonds were used to repay the previously existing pollution control bondswith a weighted average interest rate of 6.26% on September 16, 2005.  To secure the repayment of our obligations tothe OWDA, OAQDA and Boone County, we entered into a 43rdSupplemental Indenture to our First and Refunding Mortgage for a like amount($214.4 million) of First Mortgage Bonds with The Bank of New York serving asTrustee.

 

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On February17, 2006, we renewed our $10 million Master Letter of Credit Agreementwith a financial lending institution. This agreement supports performance assurance needs in the ordinarycourse of business.  We have certaincontractual agreements for the sale and purchase of power, fuel and relatedenergy services that contain credit rating related clauses allowing the counterparties to seek additional surety under certain conditions.  As of December 31, 2005, we had twooutstanding letters of credit for a total of $2.2 million.

 

There are nointer-company debt collateralizations or debt guarantees between us and ourparent.  None of our debt obligations areguaranteed or secured by affiliates and no cross-collateralization existsbetween any subsidiaries.

 

**CreditRatings**

Currently, oursenior secured debt credit ratings are as follows:

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

 

**Rate Stabilization Surcharge**

On April 4, 2005, we filed a request atthe Public Utilities Commission of Ohio (PUCO) to implement a new ratestabilization surcharge effective January 1, 2006 to recover costincreases associated with environmental capital and related Operations andMaintenance costs, and fuel expenses.  OnNovember 3, 2005, we entered into a settlement agreement that extended our ratestabilization period through December 31, 2010. During this time, we will continue to provide retail electric service atfixed rates with the ability to recover increased fuel and environmental costs throughsurcharges and riders.  Specifically, theagreement provides for:

•                  A rate stabilization surcharge equal to 11%of generation rates beginning January 1, 2006 and continuing through December2010.  Based on 2004 sales, this rider isexpected to result in approximately $65 million in net revenues per year.

•                  A new environmental investment rider to beginJanuary 1, 2007 equal to 5.4% of generation rates, with incremental increasesequal to 5.4% each year through 2010. Based on 2004 sales, this rider is expected to result in approximately$35 million in annual net revenues beginning January 2007, growing toapproximately $140 million by 2010.

•                  An increase to the residential generationdiscount from January 1, 2006 through December 31, 2008 which is expected toresult in a revenue decrease of approximately $7 million per year for threeyears, based on 2004 sales.  Theresidential discount will expire on December 31, 2008.

On December 28, 2005, thePUCO adopted the settlement with certain modifications (RSS Stipulation).  The PUCO ruled that the environmental riderwill be bypassable by all customers who take service from alternate generationsuppliers.  Future additional revenuesare dependent upon actual sales and levels of customer switching.  On February 22, 2006, the PUCO deniedapplications for rehearing filed by the Office of the Ohio Consumers’ Counsel(OCC), as well as Ohio Partners for Affordable Energy.

 

**Off-BalanceSheet Arrangements**

We do not have anyoff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on our financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat are material to investors.

 

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**ContractualObligations and Commercial Commitments**

We enter into variouscontractual obligations and other commercial commitments that may affect theliquidity of our operations.  At December31, 2005, these include:

 
| ** **                                        | ** ** | **Payment Year** | ** ** |
|---------------------------------------------------|------------|------------------|------------|
| **Contractual Obligations  ($ in millions)** | ** ** | **Total**        | ** ** | **Less Than  1 Year** | ** ** | **2 – 3  Years** | ** ** | **4 – 5  Years** | ** ** | **More Than 5  Years** | ** ** |
| Long-term  debt                                   |       | $                | 682.9      |   | $ | — |   | $ | — |   | $ | — |   | $ | 682.9 |   |
| Interest  payments                                |       | 463.9            |       | 34.3 |   | 68.7 |   | 68.7 |   | 292.2 |   |
| Pension and  postretirement payments              |       | 240.3            |       | 22.8 |   | 46.3 |   | 47.4 |   | 123.8 |   |
| Capital  leases                                   |       | 3.9              |       | 0.9 |   | 1.7 |   | 1.3 |   | — |   |
| Operating  leases                                 |       | 0.5              |       | 0.4 |   | 0.1 |   | — |   | — |   |
| Coal  contracts (a)                               |       | 795.1            |       | 390.1 |   | 273.0 |   | 87.0 |   | 45.0 |   |
| Other  contractual obligations                    |       | 505.8            |       | 358.3 |   | 147.5 |   | — |   | — |   |
|                                              |       |             |       |   |   |   |   |   |   |   |   |
| Total  contractual obligations                    |       | $                | 2,692.4    |   | $ | 806.8 |   | $ | 537.3 |   | $ | 204.4 |   | $ | 1,143.9 |   |

 

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(a)DP&L-operated units

 

Long-termdebt:

Long-termdebt as of December 31, 2005, consists of first mortgage bonds, tax-exemptpollution control bonds and includes an unamortized debt discount.  (See Note 7 of Notes to ConsolidatedFinancial Statements.)

 

Interestpayments:

Interestpayments associated with the Long-term debt described above.

 

Pensionand postretirement payments:

Asof December 31, 2005, we had estimated future benefit payments as outlined inNote 5 of Notes to Consolidated Financial Statements.  These estimated future benefit payments areprojected through 2015.

 

Capitalleases:

Asof December 31, 2005, we had two capital leases that expire in November 2007and September 2010.

 

Operatingleases:

Asof December 31, 2005, we had several operating leases with various terms andexpiration dates.  Not included in thistotal is approximately $88,000 per year related to right of way agreements thatare assumed to have no definite expiration dates.

 

Coalcontracts:

Wehave entered into various long-term coal contracts to supply portions of ourcoal requirements for our generating plants. Contract prices are subject to periodic adjustment, and have features thatlimit price escalation in any given year.

 

Othercontractual obligations:

InJanuary 2006, we entered into a contract for limestone that is expected togenerate an obligation of $6.0 million in 2006 through 2008, $10.5 million in2009 through 2010 and $42.2 million thereafter. As of December 31, 2005, we had various other contractual obligationsincluding non-cancelable contracts to purchase goods and services with variousterms and expiration dates.

 

We also enter into various commercialcommitments, which may affect the liquidity of our operations.  At December 31, 2005, these include:

 

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Creditfacilities:

InMay 2005, we replaced our previous $100 million revolving credit agreement witha $100 million, 364-day unsecured credit facility that is renewable annuallyand expires on May 30, 2010.  At December31, 2005, there were no borrowings outstanding under this creditagreement.  The new facility may beincreased up to $150 million.

 

Guarantees:

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

 

 

**MARKET RISK**

 

As a result of itsoperating, investing and financing activities, we are subject to certain marketrisks, including changes in commodity prices for electricity, coal,environmental emissions and gas; and fluctuations in interest rates.  Commodity pricing exposure includes theimpacts of weather, market demand, increased competition and other economicconditions.  For purposes of potentialrisk analysis, we use sensitivity analysis to quantify potential impacts ofmarket rate changes on the results of operations. The sensitivity analysisrepresents hypothetical changes in market values that may or may not occur inthe future.

 

**CommodityPricing Risk**

Approximately 10 percent of our 2005 electric revenues were from salesof excess energy and capacity in the wholesale market.  Energy and capacity in excess of the needs ofexisting retail customers are sold in the wholesale market when we can identifyopportunities with positive margins. As of December 31, 2005, ahypothetical increase or decrease of 10% in annual wholesale revenues couldresult in approximately a $16 million increase or decrease to net income,assuming no increases in fuel and purchased power costs.

 

Fuel (including coal, gas, oiland emission allowances) and purchased power costs as a percent of totaloperating costs in 2005 and 2004 were 52% and 45%, respectively.   We have approximately 95% of thetotal expected coal volume needed for 2006 under contract.  The percentage of coal under contract at ourindividual facilities is as low as 80%. Contracted coal volumes at certain facilities exceed 100% of theexpected need.  Due to the differences incontracted volumes at various facilities, it is expected we will be in the spotmarket for more than 5% of our 2006 coal volume at some facilities while we maymake no spot purchases at other facilities. We may have excess coal volumes to meet 2007 needs at some facilities.  The majority of our contracted coal ispurchased at fixed prices.  Somecontracts provide for periodic adjustment and some are priced based on marketindices.  Substantially all contractshave features that limit price escalations in any given year.  Our 2006 emission allowance (SO2)consumption is expected to be similar to 2005.  Our holdings of 2006 SO2allowances are approximately equal to its expected needs.  There may besmall exchanges of allowances between 2006 and future years to balance our 2006position.  We do not expect to purchase allowances outright for 2006.  The exact consumption of SO2 allowances will depend on market prices for power, availability of ourgenerating units and the actual sulfur content of the coal burned.  Fuel costs are impacted by changes in volumeand price and are driven by a number of variables including weather,reliability of coal deliveries, scheduled outages and generation plantmix.  Based on weather normalized sales, fuel costs are forecasted to beflat in 2006 compared to 2005 and are forecasted to increase approximately 5%in 2007 compared to 2006.  This forecast assumes coal prices willincrease approximately 10% in 2006 as compared to 2005 and remain flat in 2007as compared to 2006.

 

Purchasedpower costs depend, in part, upon the timing and extent of planned andunplanned outages of our generating capacity. We will purchase power on a discretionary basis when wholesale marketconditions provide opportunities to obtain power at a cost below our internalproduction costs.

 

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As of December31, 2005, a hypothetical increase or decrease of 10% in annual fuel andpurchased power costs could result in approximately a $25 million increase ordecrease to net income.

 

**InterestRate Risk**

As a result ofour normal borrowing and leasing activities, our results are exposed tofluctuations in interest rates, which we manage through our regular financingactivities.  We maintain both cash ondeposit and investments in cash equivalents that may be affected by adverseinterest rate fluctuations.  Ourlong-term debt represents publicly held secured notes with fixed interestrates.  At December 31, 2005, we had noshort-term borrowings.

 

The carryingvalue of our debt was $686.8 million at December 31, 2005, consisting of ourfirst mortgage bonds, our tax-exempt pollution control bonds, and our capitalleases.  The fair value of this debt was$685.2 million, based on current market prices or discounted cash flows usingcurrent rates for similar issues with similar terms and remainingmaturities.  The principal cashrepayments and related weighted average interest rates by maturity date forlong-term, fixed-rate debt at December 31, 2005, are as follows:

** **

| ** **                  | ** ** | **Long-term Debt**               | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| **Expected Maturity  Date** | ** ** | **Amount  ($ in millions)** | ** ** | **Average Rate** | ** ** |
| ** **                  |
|                        |       |                             |       |   |   |
| 2006                        |       | $                                |  0.9  |   | 5.3% |   |
| 2007                        |       | 0.9                              |       | 5.3% |   |
| 2008                        |       | 0.7                              |       | 5.8% |   |
| 2009                        |       | 0.7                              |       | 5.8% |   |
| 2010                        |       | 0.7                              |       | 5.8% |   |
| Thereafter                  |       | 682.9                            |       | 5.0% |   |
| Total                       |       | $                                | 686.8      |   |   |   |
|                        |       |                             |       |   |   |
| Fair Value                  |       | $                                | 685.2      |   |   |   |

 

Debtmaturities in 2006 are expected to be financed with internal funds.

 

Debt retirements occurringin 2005 are discussed under FINANCIAL CONDITION, LIQUIDITY AND CAPITALREQUIREMENTS, and DEBT AND DEBT COVENANTS.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

Ourconsolidated financial statements are prepared in accordance with GAAP. In connectionwith the preparation of these financial statements, our management is requiredto make assumptions, estimates and judgments that affect the reported amountsof assets, liabilities, revenues, expenses and the related disclosure ofcontingent liabilities. These assumptions, estimates and judgments are based onour historical experience and assumptions that we believed to be reasonable atthe time. However, because future events and their effects cannot be determinedwith certainty, the determination of estimates requires the exercise ofjudgment. Our critical accounting estimates are those which require assumptionsto be made about matters that are highly uncertain.

 

Differentestimates could have a material effect on our financial results. Judgments anduncertainties affecting the application of these policies and estimates mayresult in materially different amounts being reported under differentconditions or circumstances.  Significantitems subject to such judgments include: the carrying value of property, plant and equipment; unbilled revenues;the valuation of derivative instruments; valuation allowances for receivablesand deferred income taxes; the valuation of reserves related to currentlitigation; and assets and liabilities related to employee benefits.

 

**Long-LivedAssets:**  Inaccordance with Statement of Financial Accounting Standards No. 144 “Accountingfor the Impairment or Disposal of Long-Lived Assets” (SFAS 144), long-livedassets to be

 

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held and used are reviewed forimpairment whenever events or circumstances indicate that the carrying amountmay not be recoverable. When required, impairment losses on assets to be heldand used are recognized based on the fair value of the asset. We determine thefair value of these assets based upon estimates of future cash flows, marketvalue of similar assets, if available, or independent appraisals, if required.In analyzing the fair value and recoverability using future cash flows, we makeprojections based on a number of assumptions and estimates of growth rates,future economic conditions, assignment of discount rates and estimates ofterminal values. An impairment loss is recognized if the carrying amount of thelong-lived asset is not recoverable from its undiscounted cash flows. Themeasurement of impairment loss is the difference between the carrying amountand fair value of the asset. Long-lived assets to be disposed of and/or heldfor sale are reported at the lower of carrying amount or fair value less costto sell. We determine the fair value of these assets in the same manner asdescribed for assets held and used.

 

**Revenue Recognition:**  Weconsider revenue realized, or realizable, and earned when persuasive evidenceof an arrangement exists, the products or services have been provided to thecustomer, the sales price is fixed or determinable, and collectibility isreasonably assured.  Our utilityoperating companies****recordelectric revenues when delivered to customers.  Customers are billedthroughout the month as electric meters are read.  We recognize revenuesfor retail energy sales that have not yet been billed, but where electricityhas been consumed.  This is termed “unbilled revenues” and is a widelyrecognized and accepted practice for utilities.  Our estimates of unbilledrevenues use systems that consider various factors to calculate retail customerconsumption at the end of each month.  Given the use of these systems andthe fact that customers are billed monthly, we believe it is unlikely thatmaterially different results will occur in future periods when these amountsare subsequently billed.

 

Additionally, DP&L is subject toregulatory orders addressing the justness and reasonableness of the PJM andMidwest Independent Transmission System Operator (MISO) rates and relatedrevenue distribution protocols. DP&L’s management is required to make assumptions, estimates andjudgments relating to the possibility of refund of these revenues.  These assumptions, estimates and judgmentsare based on management’s experience and are believed to be reasonable at thetime.  As a result of these assumptions,estimates and judgments, DP&L is deferring a portion of these revenues forwhich management believes is subject to refund. The deferred amount recorded was $20.5 million for 2005.  The above amount collected under the SeamsElimination Charge Adjustment (SECA) rates are subject to refund, and theultimate outcome of the proceeding establishing SECA rates is uncertain at thistime.  However, based on the amount ofreserves established for this item, the results of this proceeding are notexpected to have a material adverse effect on our financial condition, resultsof operations or cash flows.

 

**IncomeTaxes:**  We applythe provisions of FASB Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes” (SFAS 109). SFAS 109 requires an asset andliability approach for financial accounting and reporting of income taxes withtax effects of differences, based on currently enacted income tax rates betweenthe financial reporting and tax basis of accounting reported as Deferred Taxesin the Consolidated Balance Sheets. Deferred Tax Assets are recognized for deductible temporary differences.Valuation reserves are provided unless it is more likely than not that theasset will be realized.

 

Investment tax credits, whichhave been used to reduce federal income taxes payable, have been deferred forfinancial reporting purposes.  Thesedeferred investment tax credits are amortized over the useful lives of theproperty to which they are related.  Forrate-regulated operations, additional deferred income taxes and offsettingregulatory assets or liabilities are recorded to recognize that the income taxeswill be recoverable / refundable through future revenues.

 

DPL files a consolidated U.S.federal income tax return in conjunction with its subsidiaries.  The consolidated tax liability is allocatedto each subsidiary as specified in the DPL tax allocation

 

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agreement which provides aconsistent, systematic and rational approach. (See Note 4 of Notes toConsolidated Financial Statements.)

 

**Depreciationand Amortization:** Depreciation expense is calculated using the straight-line method, whichdepreciates the cost of property over its estimated useful life.  For generation, transmission and distributionassets, straight-line depreciation is applied on an average annual compositebasis using group rates that approximated 3.2% in 2005 and 3.3% in 2004 and2003.

 

**RegulatoryAssets and Liabilities:**  Application of FASB Statement of FinancialAccounting Standards No. 71, “Accounting for the Effects of Certain Types ofRegulation”**(SFAS 71), depends on our ability tocollect cost-based rates from customers. The recognition of regulatory assets requires a continued assessment ofthe recovery of the costs based on actions of the regulators.  We capitalize incurred costs as deferredregulatory assets when there is a probable expectation that the costs incurredwill be recovered in future revenues as a result of the regulatory process.Regulatory liabilities represent current recovery of expected future costs.When applicable we apply judgment in the use of these principles and theseestimates are based on expected usage by a customer class over the designatedrecovery period. See Note 3 of Notes to Consolidated Financial Statements forfurther disclosure of regulatory amounts.

 

**AssetRetirement Obligations: **Inaccordance with FASB Statement of Financial Accounting Standards No.143,“Accounting for Asset Retirement Obligations” (SFAS 143) and FASB Interpretation No. 47 (FIN No. 47),“Accounting for Conditional Asset Retirement Obligations, an interpretation ofFASB Statement No. 143,” legal obligations associated with theretirement of long-lived assets are required to be recognized at their fairvalue at the time those obligations are incurred.  Upon initial recognition of a legalliability, costs are capitalized as part of the related long-lived asset and allocatedto expense over the useful life of the asset. SFAS 143 also requires that components of previously recordeddepreciation related to the cost of removal of assets upon retirement, whetherlegal asset retirement obligations or not, must be removed from a company’saccumulated depreciation reserve.  Wemake assumptions, estimates and judgments that affect the reported amounts ofassets, liabilities and expenses as they relate to asset retirementobligations. These assumptions and estimates are based on historical experienceand assumptions that are believed to be reasonable at the time.

 

**UnbilledRevenues:**  Werecord revenue for retail and other energy sales under the accrual method.  For retail customers, revenues are recognizedwhen the services are provided on the basis of periodic cycle meter readingsand include an estimated accrual for the value of electricity provided from themeter reading date to the end of the reporting period. These estimates arebased on the volume of energy delivered, historical usage and growth bycustomer class, and the effect of weather variations on usage patterns.

 

**Pension and PostretirementBenefits:**  We account for ourpension and postretirement benefit obligations in accordance with theprovisions of Statement of Financial Accounting Standards No. 87, “Employers’Accounting for Pensions” and No. 106 “Employers’ Accounting for PostretirementBenefits Other than Pensions.”  Thesestandards require the use of assumptions, such as the discount rate andlong-term rate of return on assets, in determining the obligations, annualcost, and funding requirements of the plans. We disclose our pension and postretirement benefit plans as prescribedby Statement of Financial Accounting Standards No. 132, “Employers’ Disclosuresabout Pensions and Other Postretirement Benefits, an amendment of FASBStatements No. 87, 88, and 106.”

 

In 2006, we aremaintaining our long-term rate of return assumptions of 8.50% for pension and6.75% for other postretirement benefits assets that reflect the effect ofrecent trends on our long-term view.  Weare also maintaining our assumed discount rate of 5.75% for pension andpostretirement benefits expense to reflect current interest rate conditions.  Changes in other components used in the

 

36

----

 

determination of pensionand postretirement benefits costs will result in an overall increase ofapproximately $2 million in such costs in 2006 compared to 2005.

 

Infuture periods, differences in the actual return on pension plan assets andassumed return, or changes in the discount rate, will affect the timing ofcontributions to the pension plan, if any. We provide postretirement healthcare benefits to employees who retiredprior to 1987.  A one percentage pointchange in the assumed healthcare trend rate would affect postretirement benefitcosts by approximately $0.1 million.

 

## **LEGAL AND OTHER MATTERS**

A discussion of LEGAL AND OTHERMATTERS is described in Note 14 of Notes to Consolidated Financial Statementsand in Item 3 - LEGAL PROCEEDINGS.  Suchdiscussions are incorporated by reference in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations and made a parthereof.

 

**Recently Issued AccountingPronouncements**

A discussion of recently issuedaccounting pronouncements is described in Note 1 of Notes to ConsolidatedFinancial Statements and such discussion is incorporated by reference in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and made a part hereof.

 

**Item 7A — Quantitative and Qualitative Disclosures about Market Risk**

The information required bythis item of Form 10-K is set forth in the MARKET RISK section under Item 7 -Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

37

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**Item 8 – Financial Statements and Supplementary Data**

**THE DAYTON POWER AND LIGHT COMPANY**

** **

**Consolidated Statements of Results of Operations**

 
| ** **                                                                 | ** ** | **For the years ended December 31,** | ** **  |
|----------------------------------------------------------------------------|------------|--------------------------------------|-------------|
| **$ ****in millions**                                                 | ** ** | **2005**                             | ** **  | **2004** | ** ** | **2003** | ** ** |
|                                                                       |       |                                 | ** **  |   |   |   |   |
| **Revenues**                                                               | ** ** | **$**                                | **1,276.9** | ** ** | $ | 1,192.2 |   | $ | 1,183.4 |   |
|                                                                       |       |                                 | ** **  |   |   |   |   |
| **Operating  Expenses**                                                    |       |                                 | ** **  |   |   |   |   |
| Fuel                                                                       | ** ** | **317.9**                            | ** **  | 257.0 |   | 226.2 |   |
| Purchased  power                                                           | ** ** | **147.1**                            | ** **  | 116.4 |   | 92.7 |   |
| Operation  and maintenance                                                 | ** ** | **198.3**                            | ** **  | 224.4 |   | 197.7 |   |
| Depreciation  and amortization                                             | ** ** | **123.9**                            | ** **  | 121.1 |   | 116.1 |   |
| Amortization  of regulatory assets, net                                    | ** ** | **2.0**                              | ** **  | 0.7 |   | 49.1 |   |
| General  taxes                                                             | ** ** | **105.1**                            | ** **  | 103.2 |   | 106.8 |   |
| Total operating expenses                                                   | ** ** | **894.3**                            | ** **  | 822.8 |   | 788.6 |   |
|                                                                       |       |                                 | ** **  |   |   |   |   |
| **Operating  Income**                                                      | ** ** | **382.6**                            | ** **  | 369.4 |   | 394.8 |   |
|                                                                       |       |                                 | ** **  |   |   |   |   |
| Investment  income                                                         | ** ** | **2.2**                              | ** **  | 1.0 |   | 22.7 |   |
| Charge for  early redemption of debt                                       | ** ** | **(4.1**                             | **)**       | — |   | — |   |
| Other income  (deductions)                                                 | ** ** | **10.5**                             | ** **  | 2.9 |   | 7.1 |   |
| Interest  expense                                                          | ** ** | **(38.1**                            | **)**       | (43.5 | ) | (51.8 | ) |
| ** **                                                                 | ** ** | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Income Before Income Taxes and Cumulative  Effect of Accounting Change** | ** ** | **353.1**                            | ** **  | 329.8 |   | 372.8 |   |
|                                                                       |       |                                 | ** **  |   |   |   |   |
| Income tax  expense                                                        | ** ** | **138.1**                            | ** **  | 120.8 |   | 150.4 |   |
|                                                                       |       |                                 | ** **  |   |   |   |   |
| **Income  Before Cumulative Effect of Accounting Change**                  | ** ** | **215.0**                            | ** **  | 209.0 |   | 222.4 |   |
|                                                                       |       |                                 | ** **  |   |   |   |   |
| Cumulative  effect of accounting change, net of tax                        | ** ** | **(3.2**                             | **)**       | — |   | 17.0 |   |
|                                                                       |       |                                 | ** **  |   |   |   |   |
| **Net  Income**                                                            | ** ** | **211.8**                            | ** **  | 209.0 |   | 239.4 |   |
|                                                                       |       |                                 | ** **  |   |   |   |   |
| Preferred  dividends                                                       | ** ** | **0.9**                              | ** **  | 0.9 |   | 0.9 |   |
|                                                                       |       |                                 | ** **  |   |   |   |   |
| **Earnings  on Common Stock**                                              | ** ** | **$**                                | **210.9**   | ** ** | $ | 208.1 |   | $ | 238.5 |   |

 

*  See Notes to Consolidated FinancialStatements.*

 

38

----

 

**THE DAYTON POWER AND LIGHT COMPANY**

 

**Consolidated Statements of Cash Flows**

 
| ** **                                          | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|
| **$ in millions**                              | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                |       |                                 | ** ** |   |   |   |   |
| **Operating  Activities**                           |       |                                 | ** ** |   |   |   |   |
| Net income                                          | ** ** | **$**                                | **211.8**  | ** ** | $ | 209.0 |   | $ | 239.4 |   |
| Adjustments:                                        |       |                                 | ** ** |   |   |   |   |
| Depreciation and amortization                       | ** ** | **123.9**                            | ** ** | 121.1 |   | 116.1 |   |
| Amortization of regulatory assets, net              | ** ** | **2.0**                              | ** ** | 0.7 |   | 49.1 |   |
| Deferred income taxes                               | ** ** | **(13.3**                            | **)**      | (16.2 | ) | (13.5 | ) |
| Income from interest rate hedges                    |       | —                               | ** ** | — |   | (21.2 | ) |
| Gain on sale of property                            | ** ** | **—**                           | ** ** | (1.8 | ) | — |   |
| Cumulative effect of accounting change, net  of tax | ** ** | **3.2**                              | ** ** | — |   | (17.0 | ) |
| Charge for early redemption of debt                 | ** ** | **4.1**                              | ** ** | — |   | — |   |
| Changes in  working capital:                        |       |                                 | ** ** |   |   |   |   |
| Accounts receivable                                 | ** ** | **(17.1**                            | **)**      | 6.6 |   | (1.0 | ) |
| Accounts payable                                    | ** ** | **6.5**                              | ** ** | 11.5 |   | 7.3 |   |
| Net intercompany receivables from parent            | ** ** | **(0.1**                             | **)**      | (0.2 | ) | 0.4 |   |
| Accrued taxes payable                               | ** ** | **31.5**                             | ** ** | 58.4 |   | (30.6 | ) |
| Accrued interest payable                            | ** ** | **(0.9**                             | **)**      | 0.5 |   | (8.8 | ) |
| Prepayments                                         | ** ** | **2.3**                              | ** ** | 0.6 |   | (8.2 | ) |
| Inventories                                         | ** ** | **(7.9**                             | **)**      | (20.2 | ) | 4.5 |   |
| Deferred compensation assets                        | ** ** | **0.7**                              | ** ** | 8.8 |   | 50.4 |   |
| Deferred compensation obligations                   | ** ** | **6.7**                              | ** ** | 5.2 |   | (46.8 | ) |
| Other                                               | ** ** | **13.4**                             | ** ** | (2.8 | ) | 43.5 |   |
| Net cash  provided by operating activities          | ** ** | **366.8**                            | ** ** | 381.2 |   | 363.6 |   |
|                                                |       |                                 | ** ** |   |   |   |   |
| **Investing  Activities**                           |       |                                 | ** ** |   |   |   |   |
| Capital  expenditures                               | ** ** | **(178.4**                           | **)**      | (82.2 | ) | (116.5 | ) |
| Settlement  of interest rate hedges                 | ** ** | **—**                           | ** ** | — |   | 51.4 |   |
| Proceeds  from sale of property                     | ** ** | **—**                           | ** ** | 2.3 |   | — |   |
| Net cash  used for investing activities             | ** ** | **(178.4**                           | **)**      | (79.9 | ) | (65.1 | ) |
|                                                |       |                                 | ** ** |   |   |   |   |
| **Financing  Activities**                           |       |                                 | ** ** |   |   |   |   |
| Dividends  paid on common stock                     | ** ** | **(150.0**                           | **)**      | (300.0 | ) | (298.7 | ) |
| Issuance of  long-term debt, net of issue costs     | ** ** | **210.4**                            | ** ** | — |   | 465.1 |   |
| Retirement  of long-term debt                       | ** ** | **(218.9**                           | **)**      | (0.4 | ) | (463.9 | ) |
| Dividends  paid on preferred stock                  | ** ** | **(0.9**                             | **)**      | (0.9 | ) | (0.9 | ) |
| Net cash used  for financing activities             | ** ** | **(159.4**                           | **)**      | (301.3 | ) | (298.4 | ) |
|                                                |       |                                 | ** ** |   |   |   |   |
| **Cash and  Cash Equivalents:**                     |       |                                 | ** ** |   |   |   |   |
| Net change                                          | ** ** | **29.0**                             | ** ** | — |   | 0.1 |   |
| Balance at  beginning of year                       | ** ** | **17.2**                             | ** ** | 17.2 |   | 17.1 |   |
| Balance at  end of year                             | ** ** | **$**                                | **46.2**   | ** ** | $ | 17.2 |   | $ | 17.2 |   |
|                                                |       |                                 | ** ** |   |   |   |   |
| **Cash  Paid During the Year For:**                 |       |                                 | ** ** |   |   |   |   |
| Interest                                            | ** ** | **$**                                | **36.5**   | ** ** | $ | 39.5 |   | $ | 56.2 |   |
| Income taxes                                        | ** ** | **$**                                | **119.0**  | ** ** | $ | 79.9 |   | $ | 200.1 |   |

 

*See Notesto Consolidated Financial Statements.*

 

39

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**THE DAYTON POWER AND LIGHT COMPANY**

 

**Consolidated Balance Sheets**

 
| ** **                                                                                     | ** ** | **At December 31,** | ** **  |
|------------------------------------------------------------------------------------------------|------------|---------------------|-------------|
| **$****in millions**                                                                           | ** ** | **2005**            | ** **  | **2004** | ** ** |
|                                                                                           |       |                |        |   |   |
| ***Assets***                                                                                   |       |                |        |   |   |
|                                                                                           |       |                |        |   |   |
| **Property:**                                                                                  |       |                |        |   |   |
| Property, plant and equipment                                                                  | ** ** | **$**               | **4,118.0** |   | $ | 3,944.6 |   |
| Less: Accumulated depreciation and  amortization                                               | ** ** | **(1,973.3**        | )           | (1,864.4 | ) |
| Net property                                                                                   | ** ** | **2,144.7**         |        | 2,080.2 |   |
|                                                                                           |       |                |        |   |   |
| **Current  Assets:**                                                                           |       |                |        |   |   |
| Cash and cash equivalents                                                                      | ** ** | **46.2**            |        | 17.2 |   |
| Accounts receivable, less provision for  uncollectible accounts of $1.0 and $1.1, respectively | ** ** | **182.7**           |        | 153.8 |   |
| Inventories, at average cost                                                                   | ** ** | **77.7**            |        | 69.8 |   |
| Prepaid taxes                                                                                  | ** ** | **45.9**            |        | 46.4 |   |
| Other current assets                                                                           | ** ** | **19.3**            |        | 24.8 |   |
| Total current assets                                                                           | ** ** | **371.8**           |        | 312.0 |   |
|                                                                                           |       |                |        |   |   |
| **Other  Assets**                                                                              |       |                |        |   |   |
| Regulatory assets                                                                              | ** ** | **83.8**            |        | 74.0 |   |
| Other deferred assets                                                                          | ** ** | **138.3**           |        | 175.2 |   |
| Total other assets                                                                             | ** ** | **222.1**           |        | 249.2 |   |
|                                                                                           |       |                |        |   |   |
| **Total  Assets**                                                                              | ** ** | **$**               | **2,738.6** |   | $ | 2,641.4 |   |

 

*See Notesto Consolidated Financial Statements.*

 

40

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**THE DAYTON POWER AND LIGHT COMPANY**

 

**Consolidated Balance Sheets**

(continued)

 
| ** **                                | ** ** | **At December 31,** | ** **  |
|-------------------------------------------|------------|---------------------|-------------|
| **$****in millions**                      | ** ** | **2005**            | ** **  | **2004** | ** ** |
|                                      |       |                |        |   |   |
| ***Capitalization and Liabilities***      |       |                |        |   |   |
|                                      |       |                |        |   |   |
| **Capitalization:**                       |       |                |        |   |   |
| Common  shareholder’s equity         |       |                |        |   |   |
| Common stock                              | ** ** | **$**               | **0.4**     |   | $ | 0.4 |   |
| Other paid-in capital                     | ** ** | **783.4**           |        | 782.9 |   |
| Accumulated other comprehensive income    | ** ** | **5.1**             |        | 43.1 |   |
| Earnings reinvested in the business       | ** ** | **290.5**           |        | 229.7 |   |
| Total common shareholder’s equity    | ** ** | **1,079.4**         |        | 1,056.1 |   |
|                                      |       |                |        |   |   |
| Preferred  stock                          | ** ** | **22.9**            |        | 22.9 |   |
|                                      |       |                |        |   |   |
| Long-term  debt                           | ** ** | **685.9**           |        | 686.6 |   |
| Total capitalization                      | ** ** | **1,788.2**         |        | 1,765.6 |   |
|                                      |       |                |        |   |   |
| **Current  Liabilities:**                 |       |                |        |   |   |
| Accounts payable                          | ** ** | **116.2**           |        | 107.8 |   |
| Accrued taxes                             | ** ** | **167.7**           |        | 124.8 |   |
| Accrued interest                          | ** ** | **9.8**             |        | 10.7 |   |
| Other current liabilities                 | ** ** | **28.4**            |        | 22.1 |   |
| Total current liabilities                 | ** ** | **322.1**           |        | 265.4 |   |
|                                      |       |                |        |   |   |
| **Deferred  Credits:**                    |       |                |        |   |   |
| Deferred taxes                            | ** ** | **323.2**           |        | 365.8 |   |
| Unamortized investment tax credit         | ** ** | **46.4**            |        | 49.3 |   |
| Other deferred credits                    | ** ** | **258.7**           |        | 195.3 |   |
| Total deferred credits                    | ** ** | **628.3**           |        | 610.4 |   |
|                                      |       |                |        |   |   |
| **ContingenciesNote  11**                 |       |                |        |   |   |
|                                      |       |                |        |   |   |
| **Total  Capitalization and Liabilities** | ** ** | **$**               | **2,738.6** |   | $ | 2,641.4 |   |

* *

*See Notesto Consolidated Financial Statements.*

 

41

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**THE DAYTON POWER AND LIGHT COMPANY**

 

**Consolidated Statements of Shareholder‘s Equity**

 
| ** **                                                                                             | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | **Earnings** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------|--------------|----------------------|------------|------------|------------|-------------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                             | *** *** | **Common Stock (a)** | ** ** | ** ** | ** ** | **Other**         | ** ** | **Reinvested**    | ** ** | ** **   | ** ** |
| ** **                                                                                             | ** **   | **Outstanding**      | ** ** | ** ** | ** ** | **Other Paid-In** | ** ** | **Comprehensive** | ** ** | **In the**   | ** ** | ** ** | ** ** |
| **$ in millions**                                                                                 | ** **   | **Shares**           | ** ** | **Amount** | ** ** | **Capital**       | ** ** | **Income**        | ** ** | **Business** | ** ** | **Total**  | ** ** |
|                                                                                                   |         |                 |       |       |       |              |       |              |       |         |       |       |       |
| 2003 Beginning balance                                                                                 |         | 41,172,173           |       | $          | 0.4        |              | $          | 780.1             |       | $            | (0.8       | )          | $          | 381.9 |   | $ | 1,161.6 |   |
|                                                                                                   |         |                 |       |       |       |              |       |              |       |         |       |       |       |
| 2003 :                                                                                                 |         |                 |       |       |       |              |       |              |       |         |       |       |       |
| Net income                                                                                             |         |                 |       |       |       |              |       |              |       | 239.4        |       |       |       |
| Net change in unrealized gains  (losses) on financial instruments, net of reclassification adjustments |         |                 |       |       |       |              |       | 17.0              |       |         |       |       |       |
| Net change in deferred gains on  cash flow hedges                                                      |         |                 |       |       |       |              |       | 29.5              |       |         |       |       |       |
| Minimum pension liability                                                                              |         |                 |       |       |       |              |       | (0.2              | )          |         |       |       |       |
| Deferred income taxes related  to unrealized gains (losses)                                            |         |                 |       |       |       |              |       | (7.3              | )          |         |       |       |       |
| Total comprehensive income                                                                        |         |                 |       |       |       |              |       |              |       |         |       | 278.4      |       |
| Common stock dividend                                                                                  |         |                 |       |       |       |              |       |              |       | (298.7       | )          | (298.7     | )          |
| Preferred stock dividend                                                                               |         |                 |       |       |       |              |       |              |       | (0.9         | )          | (0.9       | )          |
| Parent company capital contribution                                                                    |         |                 |       |       |       |              |       |              |       |         |       |       |       |
| Employee / Director stock plans                                                                        |         |                 |       |       |       | 0.3               |       |              |       |         |       | 0.3        |       |
| Other                                                                                                  |         |                 |       |       | ** ** | 0.1               |       | ** **        | ** ** | ** **   | ** ** | 0.1        | ** ** |
|                                                                                                   |         |                 |       |       |       |              |       |              |       |         |       |       |       |
| Ending balance                                                                                         |         | 41,172,173           |       | $          | 0.4        |              | $          | 780.5             |       | $            | 38.2       |       | $          | 321.7 |   | $ | 1,140.8 |   |
| ** **                                                                                             | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| 2004:                                                                                                  | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net income                                                                                             |         |                 |       |       |       |              |       |              |       | 209.0        |       |       |       |
| Net change in unrealized gains  (losses) on financial instruments, net of reclassification adjustments |         |                 |       |       |       |              |       | 12.6              |       |         |       |       |       |
| Net change in deferred gains on  cash flow hedges                                                      |         |                 |       |       |       |              |       | (1.5              | )          |         |       |       |       |
| Minimum pension liability                                                                              |         |                 |       |       |       |              |       | (0.4              | )          |         |       |       |       |
| Deferred income taxes related  to unrealized gains (losses)                                            |         |                 |       |       |       |              |       | (5.8              | )          |         |       |       |       |
| Total comprehensive income                                                                        |         |                 |       |       |       |              |       |              |       |         |       | 213.9      |       |
| Common stock dividend                                                                                  |         |                 |       |       |       |              |       |              |       | (300.0       | )          | (300.0     | )          |
| Preferred stock dividend                                                                               |         |                 |       |       |       |              |       |              |       | (0.9         | )          | (0.9       | )          |
| Parent company capital contribution                                                                    |         |                 |       |       |       |              |       |              |       |         |       |       |       |
| Employee / Director stock plans                                                                        |         |                 |       |       |       | 2.3               |       |              |       |         |       | 2.3        |       |
| Other                                                                                                  |         |                 |       |       |       | 0.1               |       |              |       | (0.1         | )          |       |       |
|                                                                                                   |         |                 |       |       |       |              |       |              |       |         |       |       |       |
| Ending balance                                                                                         |         | 41,172,173           |       | $          | 0.4        |              | $          | 782.9             |       | $            | 43.1       |       | $          | 229.7 |   | $ | 1,056.1 |   |
| ** **                                                                                             | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| **2005:**                                                                                              | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net income                                                                                             | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** | **211.8**    | ** ** | ** ** | ** ** |
| Net change in unrealized gains  (losses) on financial instruments, net of reclassification adjustments | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | **1.9**           | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net change in deferred gains on  cash flow hedges                                                      | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | **(3.4**          | **)**      | ** **   | ** ** | ** ** | ** ** |
| Minimum pension liability                                                                              | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | **(63.0**         | **)**      | ** **   | ** ** | ** ** | ** ** |
| Deferred income taxes related  to unrealized gains (losses)                                            | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | **26.4**          | ** ** | ** **   | ** ** | ** ** | ** ** |
| Total comprehensive income                                                                   | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** | ** **   | ** ** | **173.7**  | ** ** |
| Common stock dividend                                                                                  | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** | **(150.0**   | **)**      | **(150.0** | **)**      |
| Preferred stock dividend                                                                               | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** | **(0.9**     | **)**      | **(0.9**   | **)**      |
| Employee / Director stock plans                                                                        | ** **   | ** **           | ** ** | ** ** | ** ** | **0.5**           | ** ** | ** **        | ** ** | ** **   | ** ** | **0.5**    | ** ** |
| Other                                                                                                  | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | **0.1**           | ** ** | **(0.1**     | **)**      | ** ** | ** ** |
| ** **                                                                                             | ** **   | ** **           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| Ending balance                                                                                         | ** **   | **41,172,173**       | ** ** | **$**      | **0.4**    | ** **        | **$**      | **783.4**         | ** ** | **$**        | **5.1**    | ** ** | **$**      | **290.5** | ** ** | **$** | **1,079.4** | ** ** |

* *

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*(a)  50,000,000 sharesauthorized*

 

*See Notes to Consolidated Financial Statements.*

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**Notes to Consolidated Financial Statements**

** **

| *1.  Summary of Significant  Accounting Policies and Overview* |
|---------------------------------------------------------------------|

 

**Description of Business**

 

The Dayton Power and Light Company is a wholly-owned subsidiary of DPLInc. (DPL). DP&L is a public utility incorporated in 1911 under the laws ofOhio. We conduct our principal business in one business segment - Electric.DP&L sells electricity to residential, commercial, industrial andgovernmental customers in a 6,000 square mile area of West Central Ohio.Electricity for DP&L’s 24 county service area is primarily generated ateight coal-fired power plants and is distributed to more than 500,000 retailcustomers. DP&L also purchases retail peak load requirements from DPLEnergy LLC (DPLE). Principal industries served include automotive, foodprocessing, paper, plastic manufacturing, and defense. DP&L’s sales reflectthe general economic conditions and seasonal weather patterns of the area.DP&L sells any excess energy and capacity into the wholesale market.

 

**Basis of Consolidation**

We prepare our consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America(GAAP). The consolidated financial statements include the accounts of DP&Land its majority-owned subsidiaries. Investments that are not majority ownedare accounted for using the equity method when our investment allows us theability to exert significant influence, as defined by GAAP. Undivided interestsin jointly-owned generation facilities are consolidated on a pro rata basis.All material intercompany accounts and transactions are eliminated inconsolidation.

 

**Estimates, Judgments and Reclassifications**

The preparation of financial statements in conformity with GAAPrequires us to make estimates and judgments that affect the reported amounts ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the financial statements and the revenue and expenses of the periodreported. Different estimates could have a material effect on our 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 subjectto such estimates and judgments include the carrying value of property, plantand equipment; unbilled revenues; the valuation of derivative instruments; thevaluation of insurance and claims costs; valuation allowances for receivablesand deferred income taxes; reserves recorded for income tax exposures; litigation;and assets and liabilities related to employee benefits. Actual results maydiffer from those estimates. Certain amounts from prior periods have beenreclassified to conform to the current reporting presentation.

 

## **Revenues**

We record revenue for services provided but not yet billed to moreclosely match revenues with expenses. Accounts receivable on the ConsolidatedBalance Sheets include unbilled revenue of $57.5 million and $53.8 million in2005 and 2004, respectively. Also included in revenues are amounts charged tocustomers through a surcharge for recovery of uncollected amounts from certaineligible low-income households. These charges were $6.2 million for 2005, $8.3million for 2004 and $6.3 million for 2003.

 

**Allowance for Uncollectible Accounts**

We establish provisions for uncollectible accounts using bothhistorical average credit loss percentages of accounts receivable balances toproject future losses and specific provisions for known credit issues.

 

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**Property, Plant and Equipment**

We record our ownership share of our undivided interest in jointly-heldplants as an asset in property, plant and equipment. Property, plant andequipment are stated at cost. For regulated property, cost includes directlabor and material, allocable overhead costs and an allowance for funds usedduring construction (AFUDC). AFUDC represents the cost of borrowed funds andequity used to finance regulated construction projects. Capitalization of AFUDCceases at either project completion or as of the date specified by regulators.AFUDC capitalized related to borrowed funds was zero in 2005 and 2004 and $0.1million in 2003. AFUDC capitalized for equity funds was zero in 2005, $0.5million in 2004 and $0.6 million in 2003.

 

For unregulated property, cost includes direct labor, material andoverhead costs and interest capitalized during construction. Capitalizedinterest was $2.6 million in 2005, $1.8 million in 2004 and $8.3 million in2003.

 

For substantially all depreciable property, when a unit of property isretired, the original cost of that property less any salvage value is chargedto Accumulated Depreciation and Amortization.

 

Property is evaluated for impairment when events or changes incircumstances indicate that its carrying amount may not be recoverable.

 

## **Depreciation**

Depreciation expense is calculated using the straight-line method,which depreciates the cost of property over its estimated useful life. Forgeneration, transmission, and distribution assets, straight-line depreciationis applied on an average annual composite basis using group rates thatapproximated 3.2% in 2005, 3.3% in 2004 and 3.3% in 2003. Depreciation expensewas $123.9 million in 2005, $121.1 million in 2004, and $116.1 million in 2003.

 

The following is a summary of property, plant and equipment withcorresponding composite depreciation rates at December 31, 2005 and 2004:

 
| **$ in millions**         | ** ** | **2005**  | ** **  | **Composite  Rate** | ** ** | **2004**   | ** ** | **Composite  Rate** | ** ** |
|-------------------------------------|------------|-----------|-------------|---------------------|------------|------------|------------|---------------------|------------|
| Regulated:                          |       |      |        |                |       |       |       |                |       |
| Transmission                        | ** ** | **$**     | **341.8**   | ** **          | **2.6%**   | ** ** | $          | 337.8               |       | 2.6% |   |
| Distribution                        | ** ** | **968.9** | ** **  | **3.4%**            | ** ** | 929.6      |       | 3.6%                |       |
| General                             | ** ** | **63.1**  | ** **  | **9.5%**            | ** ** | 58.9       |       | 8.7%                |       |
| Non-depreciable                     | ** ** | **54.0**  | ** **  | **0.0%**            | ** ** | 54.4       |       | 0.0%                |       |
| Total regulated                     | ** ** | **$**     | **1,427.8** |                |       | ** ** | $          | 1,380.7             |       |   |   |
|                                |       |      |        |                | ** ** |       |       |                |       |
| Unregulated:                        |       |      |        |                | ** ** |       |       |                |       |
| Production                          | ** ** | **$**     | **2,509.8** | ** **          | **3.0%**   | ** ** | $          | 2,476.8             |       | 3.1% |   |
| Non-depreciable                     | ** ** | **15.3**  | ** **  | **0.0%**            | ** ** | 15.1       |       | 0.0%                |       |
| Total unregulated                   | ** ** | **$**     | **2,525.1** |                |       | ** ** | $          | 2,491.9             |       |   |   |
|                                |       |      |        |                | ** ** |       |       |                |       |
| Total property in service           | ** ** | **$**     | **3,952.9** | ** **          | **3.2%**   | ** ** | $          | 3,872.6             |       | 3.3% |   |
| Construction work in process        | ** ** | **165.1** | ** **  | **0.0%**            | ** ** | 72.0       |       | 0.0%                |       |
|                                |       |      |        |                | ** ** |       |       |                |       |
| Total property, plant and equipment | ** ** | **$**     | **4,118.0** |                |       |       | $          | 3,944.6             |       |   |   |

 

## **Asset RetirementObligations**

We adopted the provisions of the Financial Accounting Standards Board(FASB) Statement of Financial Accounting Standards No. 143, “Accounting forAsset Retirement Obligations” (SFAS 143) during 2003. SFAS 143 requires legalobligations associated with the retirement of long-lived assets to berecognized at their fair value at the time those obligations are incurred. Uponinitial recognition of a legal liability, costs are capitalized as part of therelated long-lived asset and allocated to expense over the useful life of theasset. SFAS 143 also requires that components of previously recordeddepreciation related to the cost of removal of assets upon retirement, whetherlegal asset retirement obligations or not, must be removed from a company’saccumulated depreciation reserve. Our legal

 

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obligations associated with the retirement of our long-lived assets underSFAS 143 consisted primarily of river intake and discharge structures, coalunloading facilities, loading docks, ice breakers and ash disposal facilities.Application of SFAS 143 in 2003 resulted in an increase in net property, plantand equipment of $0.8 million, the recognition of an asset retirementobligation of $4.6 million and reduced our accumulated depreciation reserve by$32.1 million due to cost of removal related to the non-regulated generationassets. Beginning in January 2003, depreciation rates were reduced to reflectthe discontinuation of the cost of removal accrual for applicable non-regulatedgeneration assets. In addition, costs for the removal of retired assets arecharged to operation and maintenance when incurred. Since the generation assetsare not subject to Ohio regulation, we recorded the net effect of adopting thisstandard in our Consolidated Statement of Results of Operations. The totalcumulative effect of the adoption of SFAS 143 increased net income andshareholders’ equity by $28.3 million before tax in 2003.

 

InMarch of 2005, the FASB issued FASB Interpretation No. 47 (FIN No. 47),“Accounting for Conditional Asset Retirement Obligations, an interpretation ofFASB Statement No. 143.”  We implementedFIN No. 47 in the fourth quarter of 2005 effective January 1, 2005 for certainasset retirement obligations, primarily the removal of asbestos, at some of ourgeneration stations. Application of FIN No. 47 resulted in an increase in ournet property, plant and equipment of $1.8 million and an increase in our assetretirement obligation of $7.2 million. The difference of $5.3 millionrepresents the before tax ($3.2 million after tax) cumulative effect of theadoption of FIN No. 47, as of January 1, 2005 on 2005 net income. The beforetax impact on 2005 net income was $0.9 million ($0.5 million after tax) whichconsisted of $0.6 million of accretion expense and $0.3 million depreciationexpense. The following table sets forth the effect of the accounting change onnet income as previously reported for 2004 and 2003 as adjusted, if FIN No. 47had been applied effective January 1, 2003.

 
| **$ in millions**                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Reported net  income                    |       | $        | 209.0      |     | $          | 239.4 |   |
| Earnings  effect of adopting FIN No. 47 |       | (0.5     | )          | (0.4     | )          |
| Adjusted net  income                    |       | $        | 208.5      |     | $          | 239.0 |   |

 

IfFIN No. 47 had been applied as of January 1, 2003, our asset retirementobligation would have increased by $9.4 million and $10.3 million at January 1,2004 and December 31, 2004, respectively. Our asset retirement obligation was$13.2 million at December 31, 2005, which consisted of $5.4 million related tothe adoption of SFAS 143 in 2003 and $7.8 million related to the adoption ofFIN No. 47 in 2005.

 

We continue to record cost of removal for our regulated transmissionand distribution assets through our depreciation rates and recover thoseamounts in rates charged to our customers. There are no known legal assetretirement obligations associated with these assets. We have recorded $81.7million and $77.5 million in estimated costs of removal atDecember 31, 2005 and 2004, respectively as regulatory liabilities for ourtransmission and distribution property. (See Note 3 of Notes to ConsolidatedFinancial Statements.)

 

**Regulatory Accounting**

We apply the provisions of FASB Statement of Financial AccountingStandards No. 71, (SFAS 71) “Accounting for the Effects of Certain Types ofRegulation”. In accordance with SFAS 71, regulatory assets and liabilities arerecorded in the Consolidated Balance Sheets. Regulatory assets are the deferralof costs expected to be recovered in future customer rates and regulatoryliabilities represent current recovery of expected future costs.

 

We evaluate our regulatory assets each period and believe recovery ofthese assets is probable. We have received or requested a return on certainregulatory assets for which we are currently recovering or seeking recoverythrough rates. (See Note 3 of Notes to Consolidated Financial Statements).

 

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If we were required to terminate application of SFAS 71 for all of ourregulated operations, we would have to record the amounts of all regulatoryassets and liabilities in the Consolidated Statement of Results of Operationsat that time. (See Note 3 of Notes to Consolidated Financial Statements.)

 

**Accounts Receivable**

Our accounts receivable includes utility customer receivables, amountsdue from our partners for jointly-owned property, wholesale and subsidiarycustomer receivables and electric unbilled revenue. We also include miscellaneousaccounts receivables such as refundable Franchise taxes. The amount ispresented net of a provision for uncollectible accounts on the accompanyingbalance sheets.

 

**Inventory**

Inventories, carried at average cost, include coal, emission allowances,oil and gas used for electric generation, and materials and supplies forutility operations.

 

## **Emission Allowances**

Weaccount for our emission allowances as inventory, and record emission allowanceinventory at historical cost. We calculate the weighted average cost by eachvintage (year) for which emission allowances can be used, and charge to fuelcosts the weighted average cost of emission allowances used each quarter.Emission allowances are added to inventory when the EPA issues us emissionallowances at no cost or when we purchase emission allowances. Purchasedemission allowances are recorded in inventory at the purchase price, includingany related transaction fees. Emission allowances are deducted from inventorywhen used in the production of electricity or when we sell excess emissionallowances. Emission allowances used during the production of electricity arecharged to fuel costs at the weighted average cost for that vintage. The excess/ (shortfall) of the sales price over the weighted average cost for anyemission allowances sold, less related fees, is recorded as a gain / (loss) inother income. Emission allowances received as part of an exchange of emissionallowances are recorded at the carrying cost of the emission allowances givenup, with no gain or loss recorded.

 

## **Repairs and Maintenance**

Costs associated with all planned work and maintenance activities,primarily power plant outages, are recognized at the time the work isperformed. These costs, which include labor, materials and supplies, andoutside services required to maintain equipment and facilities, are eithercapitalized or expensed based on defined units of property as required by theFederal Energy Regulatory Commission (FERC).

 

**Income Taxes**

We apply the provisions of FASB Statement of Financial AccountingStandards No. 109, “Accounting for Income Taxes” (SFAS 109). SFAS 109 requiresan asset and liability approach for financial accounting and reporting ofincome taxes with tax effects of differences, based on currently enacted incometax rates between the financial reporting and tax basis of accounting reportedas Deferred Taxes in the Consolidated Balance Sheets. Deferred tax assets arerecognized for deductible temporary differences. Valuation reserves areprovided unless it is more likely than not that the asset will be realized.

 

Investment tax credits, which have been used to reduce federal incometaxes payable, have been deferred for financial reporting purposes. Thesedeferred investment tax credits are amortized over the useful lives of theproperty to which they are related. For rate-regulated operations, additionaldeferred income taxes and offsetting regulatory assets or liabilities arerecorded to recognize that the income taxes will be recoverable / refundablethrough future revenues.

 

DPLfiles a consolidated U. S. federal tax return in conjunction with itssubsidiaries, including the Company.  The consolidated tax liability isallocated to DPL and its subsidiaries as specified in the

 

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DPLtax allocation agreement which provides a consistent, systematic and rationalapproach. (See Note 4 of Notes to Consolidated Financial Statements.)

 

**Cash and Cash Equivalents**

## **Cash and cash equivalents are stated at cost, which approximatesfair value. All highly liquid short-term investments with original maturitiesof three months or less are considered cash equivalents. Cash and cashequivalents were $46.2 million at December 31, 2005 and $17.2 million atDecember 31, 2004.**

## ** **

### ***Financial Derivatives***

Wefollow FASB Statement of Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments and Hedging Activity” (SFAS 133), as amended. SFAS133 requires that all derivatives be recognized as either assets or liabilitiesin the Consolidated Balance Sheets and be measured at fair value, and changesin the fair value be recorded in earnings, unless they are designated as a cashflow hedge of a forecasted transaction.

 

The FASB issued Statement of Financial Accounting Standards No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(SFAS 149). SFAS 149 amends and clarifies financial accounting and reportingfor derivative instruments, including those embedded in other contracts, andfor hedging activities and is effective for contracts entered into or modifiedafter June 30, 2003. This standard did not have a material effect on us.

 

We use forward contracts and options to reduce our exposure to changesin energy and commodity prices and as a hedge against the risk of changes incash flows associated with expected electricity purchases. These purchases arerequired to meet full load requirements during times of peak demand or duringplanned and unplanned generation facility outages. We also hold forward salescontracts that hedge against the risk of changes in cash flows associated withpower sales during periods of projected generation facility availability. TheFASB concluded that electric utilities could apply the normal purchases andsales exception for option-type contracts and forward contracts in electricitysubject to specific criteria for the power buyers and sellers under capacitycontracts. Accordingly, we apply the normal purchases and sales exception asdefined in SFAS 133 and account for these contracts upon settlement.

 

In May 2003, DP&L entered into 60-day interest rate swaps designedto capture existing favorable interest rates in anticipation of futurefinancings of $750 million first mortgage bonds. These hedges were settled inJuly 2003, at a fair value of $51.4 million, reflecting increasing U.S.Treasury interest rates, and as a result, DP&L received this amount. During2003, the ultimate effectiveness of the hedges resulted in a gain of $30.2million and was recorded in Accumulated Other Comprehensive Income on theConsolidated Balance Sheets. This amount is amortized into income as areduction to interest expense over the ten- and fifteen-year lives of thehedges. The ineffective portion of the hedge of $21.2 million was recognizedas Other Income on the Consolidated Statement of Results of Operations during2003.

 

We held emission allowance options, which were in effect until December31, 2004, that were classified as derivatives not subject to hedge accounting.The fair value of these contracts is reflected as Other Current Assets or OtherCurrent Liabilities on the Consolidated Balance Sheets and changes in fairvalue are recorded as Other Income on the Consolidated Statements of Results ofOperations. The effect was not material to results of operations during 2003through 2004. We did not hold any emission allowance options in 2005.

 

**Financial Instruments**

Weapply the provision of FASB Statement of Financial Accounting Standards No.115, “Accounting for Certain Investments in Debt and Equity Securities”**(SFAS 115), for our investments in debt and equityfinancial instruments of publicly traded entities and classify the securitiesinto different categories: held-to-maturity and available-for-sale.Available-for-sale securities are carried at fair

 

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valueand unrealized gains and losses on those securities, net of deferred incometaxes, are presented as a separate component of shareholders’ equity.Other-than-temporary declines in value are recognized currently in earnings.Financial instruments classified as held-to-maturity are carried at amortizedcost. The valuation of public equity security investments is based upon marketquotations. The cost basis for public equity security and fixed maturityinvestments is average cost and amortized cost, respectively.

 

**Pension and Postretirement Benefits**

Weaccount for our pension and postretirement benefit obligations in accordancewith the provisions of Statement of Financial Accounting Standards No. 87,“Employers’ Accounting for Pensions” and No. 106 “Employers’ Accounting forPostretirement Benefits Other than Pensions.” These standards require the use of assumptions, such as the discountrate and long-term rate of return on assets, in determining the obligations,annual cost, and funding requirements of the plans. We disclose our pension andpostretirement benefit plans as prescribed by Statement of Financial AccountingStandards No. 132, “Employers’ Disclosures about Pensions and Other PostretirementBenefits, an amendment of FASB Statements No. 87, 88, and 106.”

 

**Legal, Environmental and Regulatory Contingencies**

In the normal course of business, we are subject to various lawsuits,actions, proceedings, claims and other matters asserted under laws andregulations. We believe the amounts provided in our consolidated financialstatements, as prescribed by GAAP, adequately reflect probable and estimablecontingencies. However, there can be no assurances that the actual amountsrequired to satisfy alleged liabilities from various legal proceedings, claims,and other matters, and to comply with applicable laws and regulations, will notexceed the amounts reflected in our consolidated financial statements or willnot have a material adverse effect on our consolidated results of operations,financial condition or cash flows. As such, costs, if any, that may be incurredin excess of those amounts provided as of December 31, 2005, cannot currentlybe reasonably determined.

 

**Recently Issued Accounting Standards**

 

***Stock-Based Compensation***

In December 2004, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standard 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 requires apublic entity to measure the cost of employee services received and paid for byequity instruments to be based on the fair-value of such equity on the grantdate. This cost is recognized in results of operations over the period in whichemployees are required to provide service. Liabilities initially incurred willbe based on the fair-value of equity instruments and then be re-measured ateach subsequent reporting date until the liability is ultimately settled. Thefair-value for employee share options and other similar instruments at thegrant date will be estimated using option-pricing models and excess taxbenefits will be recognized as an addition to paid-in capital. Cash retainedfrom the excess tax benefits will be presented in the statement of cash flowsas financing cash inflows. The provisions of this Statement shall be effectivefor fiscal periods beginning after December 31, 2005. We are currentlyaccounting for such share-based transactions related to DPL Inc. common stock grantedafter January 1, 2003, using SFAS 123, “Accounting for Stock-BasedCompensation.”

 

Weuse the Black-Scholes option-pricing model to determine the fair value of each DPLInc. common stock option as of the date of grant for expense incurred. Inapplying the Black-Scholes option-pricing model, the following assumptions wereused:

 

Dividendyield - 3.8%

Risk-freeinterest rate - 3.6%

Expectedoption terms ranging from 0.5 to 4.5 years

 

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Volatilityfactors ranging from 14% to 28%

Shareprice as of December 31, 2005- $26.01

Optionstrike prices ranging from $14.95 to $29.63

 

SFAS123R permits public companies to adopt its requirements using one of twomethods; “modified prospective” method and “modified retrospective” method.Under the “modified prospective” method, compensation cost is recognizedbeginning with the effective date (a) based on the requirements of SFAS 123Rfor all new awards and for awards modified, repurchased, or canceledafter the effective date, and (b) for all awards granted to employeesprior to the effective date of SFAS 123R that remain unvested on the effectivedate. The “modified retrospective” method includes the requirements of themodified prospective method described above, but also permits entities torestate based on the amounts previously recognized under SFAS 123 for purposesof pro forma disclosures for either (a) all prior periods presented or (b)prior interim periods of the year of adoption. We plan to adopt SFAS 123R usingthe modified prospective method. The adoption of SFAS 123R’s fair value methodis expected to have an immaterial impact on our operating expenses for fiscalyear 2006.

 

TheStock Incentive Units (SIUs) related to DPL Inc. common stock that meet therequirements of a liability will be marked to market each quarter. The SIUsthat are fully vested will continue to be marked to market on a quarterlybasis. Under SFAS 123, these SIUs were valued at the quarter-end market pricefor DPL’s common shares. If SFAS 123R had been adopted at December 31, 2005,then a credit of $0.2 million would have been booked to comply with the new valuationmethod. The first quarter financials for 2006 will reflect the newvaluation method and we are anticipating that a credit to compensation expenseof approximately $0.2 million will be needed to comply with SFAS 123R.

 

***Inventory Costs***

In November 2004, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 151, (SFAS 151) “InventoryCosts, an amendment of ARB No. 43, Chapter 4”. The amendments made by SFAS 151clarify that abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials (spoilage) should be recognized as current-periodcharges and require the allocation of fixed production overheads to inventorybased on the normal capacity of the production facilities. The guidance is effectivefor inventory costs incurred during fiscal years beginning after June 15, 2005.Earlier application is permitted for inventory costs incurred during fiscalyears beginning after November 23, 2004. The adoption of SFAS 151 had no impacton our results of operations, cash flows and 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 APBOpinion No. 29, “Accounting for Nonmonetary Transactions”, is based on theprinciple that exchanges of nonmonetary assets should be measured based on thefair value of the assets exchanged. The guidance in that Opinion, however,included certain exceptions to that principle. SFAS 153 amends Opinion 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. The provisions of SFAS 153 shall beeffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. The adoption of SFAS 153 had no impact on our results ofoperations, cash flows and financial position.

 

***Discontinued Operations***

InNovember 2004, the Emerging Issues Task Force (EITF) issued EITF 03-13,“Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accountingfor the Impairment or Disposal of Long-Lived Assets, in Determining Whether toReport Discontinued Operations” (SFAS No. 144). This guidance should be appliedto a component of an enterprise that is either disposed of or

 

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classifiedas held for sale in fiscal periods beginning after December 15, 2004. Theadoption of EITF 03-13 had no impact on our results of operations, cash flowsor financial 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 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 applies to financial statements for periodsending after the date the Act was enacted. The Act provides a deduction up to 9percent (when fully phased-in) of the lesser of (a) qualified productionactivities income (as defined by the Act) or (b) taxable income (after thededuction for the utilization of any net operating loss carryforwards). Thistax deduction is limited to 50 percent of W-2 wages paid by the taxpayer. TheAct also creates a temporary incentive for U.S. corporations to repatriateaccumulated income earned abroad by providing an 85 percent dividends receiveddeduction for certain dividends from controlled foreign corporations. We have incorporated all applicable provisionsof the Act in our 2005 financial statements. The incorporation of these ‘Section199’ provisions generated a tax benefit of $1.6 million during 2005.

 

***Ohio House Bill 66***

OnJune 30, 2005, Governor Taft signed House Bill 66 into law which significantlychanged how we are taxed in Ohio. The major provisions of the bill includedphasing-out the Ohio Franchise Tax, phasing-out the Ohio Personal Property Taxfor non-utility taxpayers and phasing-in a Commercial Activities Tax. The OhioFranchise Tax phase-out required second quarter 2005 adjustments to income taxexpense. Income taxes from continuing operations were reduced by $1.5 millionwhile income taxes from discontinued operations were increased by $1.3 millionas a result of the tax law change. Other applicable provisions of House Bill 66have been reflected in our consolidated financial statements.

 

***Accounting Changes and Error Corrections***

InJune 2005, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 154, (SFAS 154)  “Accounting Changes and Error Corrections - areplacement of APB Opinion No. 20 and FASB Statement No. 3”. This Statementreplaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3,“Reporting Accounting Changes in Interim Financial Statements,” and changes therequirements for the accounting for and reporting of a change in accountingprinciple.  This Statement applies to all voluntary changes in accountingprinciple.  It also applies to changes required by an accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions.  When a pronouncement includes specifictransition provisions, those provisions should be followed. This Statementshall be effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005.

 

***Accounting for Conditional Asset Retirement Obligations***

In March 2005, the Financial Accounting StandardsBoard issued FASB Interpretation No. 47, (FIN No. 47) “Accounting forConditional Asset Retirement Obligations”. This Interpretation clarifies thatthe term ‘conditional asset retirement obligation’ as used in FASB StatementNo. 143, (SFAS 143) “Accounting for Asset Retirement Obligations”*,* refers to a legal obligation to perform an assetretirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and (or) methodof settlement. Thus, the timing and (or) method of settlement may beconditional on a future event. Accordingly, an entity is required to recognizea liability for the fair value of a conditional asset retirement obligation ifthe fair value of the liability can be reasonably estimated. The fair value ofa liability for the conditional asset retirement obligation should berecognized when incurred–generally upon acquisition, construction, ordevelopment and (or) through the normal operation of the asset. Uncertaintyabout the timing and (or) method of settlement of a conditional assetretirement obligation should be

 

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factored into the measurement of the liability whensufficient 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 clarifieswhen an entity would have sufficient information to reasonably estimate thefair value of an asset retirement obligation. We adopted FIN No. 47 during thefourth quarter 2005, effective January 1, 2005. (See Asset RetirementObligations in Note 1 to Notes to Consolidated Financial Statements).

 

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*2.Supplemental Financial Information*

* *

| ** **                                              | ** ** | **At December 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|
| **$  in millions**                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|                                                    |       |                          |       |   |   |
| **Accounts  receivable, net**                           |       |                          |       |   |   |
| Utility  customers                                      | ** ** | **$**                         | **71.1**   |   | $ | 62.7 |   |
| Unbilled revenue                                        | ** ** | **57.5**                      |       | 53.8 |   |
| Partners in  commonly-owned plants                      | ** ** | **37.7**                      |       | 29.5 |   |
| Refundable  franchise tax                               | ** ** | **11.8**                      |       | — |   |
| Wholesale  customers                                    | ** ** | **3.4**                       |       | 4.3 |   |
| Other                                                   | ** ** | **2.2**                       |       | 4.6 |   |
| Provision for  uncollectible accounts                   | ** ** | **(1.0**                      | **)**      | (1.1 | ) |
| **Total  accounts receivable, net**                     | ** ** | **$**                         | **182.7**  |   | $ | 153.8 |   |
|                                                    |       |                          |       |   |   |
| **Inventories,  at average cost:**                      |       |                          |       |   |   |
| Fuel and emission  allowances                           | ** ** | **$**                         | **48.6**   |   | $ | 29.1 |   |
| Plant materials  and supplies                           | ** ** | **29.1**                      |       | 40.1 |   |
| Other                                                   | ** ** | **—**                    |       | 0.6 |   |
| **Total  inventories, at average cost**                 | ** ** | **$**                         | **77.7**   |   | $ | 69.8 |   |
|                                                    |       |                          |       |   |   |
| **Other  current assets:**                              |       |                          |       |   |   |
| Prepayments                                             | ** ** | **$**                         | **7.6**    |   | $ | 11.2 |   |
| Deposits and  other advances                            | ** ** | **5.8**                       |       | 1.6 |   |
| Current deferred  income taxes                          | ** ** | **4.9**                       |       | 6.8 |   |
| Other                                                   | ** ** | **1.0**                       |       | 5.2 |   |
| **Total  other current assets**                         | ** ** | **$**                         | **19.3**   |   | $ | 24.8 |   |
|                                                    |       |                          |       |   |   |
| **Other  deferred assets:**                             |       |                          |       |   |   |
| Master Trust  assets                                    | ** ** | **$**                         | **107.7**  |   | $ | 106.4 |   |
| Unamortized loss  on reacquired debt                    | ** ** | **22.0**                      |       | 23.8 |   |
| Unamortized debt  expense                               | ** ** | **7.4**                       |       | 5.6 |   |
| Prepaid pension                                         | ** ** | **—**                    |       | 38.2 |   |
| Other                                                   | ** ** | **1.2**                       |       | 1.2 |   |
| **Total  other deferred assets**                        | ** ** | **$**                         | **138.3**  |   | $ | 175.2 |   |
|                                                    |       |                          |       |   |   |
| **Other  current liabilities:**                         |       |                          |       |   |   |
| Customer  security deposits and other advances          | ** ** | **$**                         | **19.2**   |   | $ | 17.3 |   |
| Payroll taxes  payable                                  | ** ** | **2.3**                       |       | 0.0 |   |
| Current portion  of Long-term debt                      | ** ** | **0.9**                       |       | 1.5 |   |
| Unearned  revenues                                      | ** ** | **0.4**                       |       | 0.3 |   |
| Other                                                   | ** ** | **5.6**                       |       | 3.0 |   |
| **Total  other current liabilities**                    | ** ** | **$**                         | **28.4**   |   | $ | 22.1 |   |
|                                                    |       |                          |       |   |   |
| **Other  deferred credits:**                            |       |                          |       |   |   |
| Asset retirement  obligations – regulated property | ** ** | **$**                         | **81.7**   |   | $ | 77.5 |   |
| Trust  obligations                                      | ** ** | **74.5**                      |       | 68.2 |   |
| Retirees health  and life benefits                      | ** ** | **32.9**                      |       | 32.4 |   |
| Pension  liability                                      | ** ** | **23.5**                      |       | — |   |
| SECA net revenue  subject to refund                     | ** ** | **20.5**                      |       | — |   |
| Asset retirement  obligations - generation              | ** ** | **13.2**                      |       | 5.1 |   |
| Legal reserves                                          | ** ** | **3.0**                       |       | 3.3 |   |
| Environmental  reserves                                 | ** ** | **0.1**                       |       | 0.1 |   |
| Other                                                   | ** ** | **9.3**                       |       | 8.7 |   |
| **Total  other deferred credits**                       | ** ** | **$**                         | **258.7**  |   | $ | 195.3 |   |

 

*3. RegulatoryMatters*

 

We apply the provisionsof SFAS 71 to our regulated operations. This accounting standard defines regulatoryassets as the deferral of costs expected to be recovered in future customerrates and regulatory liabilities as current cost recovery of expected futureexpenditures.

 

52

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Regulatory liabilitiesare reflected on the Consolidated Balance Sheets under the caption entitled “DeferredCredits – Other”. Regulatory assets and liabilities on the Consolidated BalanceSheets include:

 
| ** **                                       | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|
| **$  in millions**                | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| **Regulatory  Assets:**                          |       |                          |       |   |   |
| Deferred  recoverable income taxes               | ** ** | **$**                         | **28.8**   |   | $ | 32.5 |   |
| Electric Choice  systems costs                   | ** ** | **19.8**                      |       | 19.8 |   |
| Regional  transmission organization costs        | ** ** | **12.9**                      |       | 13.6 |   |
| PJM  administrative costs                        | ** ** | **5.6**                       |       | — |   |
| PJM integration  costs                           | ** ** | **1.9**                       |       | — |   |
| Deferred storm  costs                            | ** ** | **6.5**                       |       | 1.0 |   |
| Power plant  emission fees                       | ** ** | **3.8**                       |       | 3.6 |   |
| Other costs                                      | ** ** | **4.5**                       |       | 3.5 |   |
| **Total  regulatory assets**                     | ** ** | **$**                         | **83.8**   |   | $ | 74.0 |   |
|                                             |       |                          |       |   |   |
| **Regulatory  Liabilities:**                     |       |                          |       |   |   |
| Asset retirement  obligations-regulated property | ** ** | **81.7**                      |       | 77.5 |   |
| SECA net revenue  subject to refund              | ** ** | **20.5**                      |       | — |   |
| **Total  regulatory liabilities**                | ** ** | **$**                         | **102.2**  |   | $ | 77.5 |   |

 

**RegulatoryAssets**

We evaluate ourregulatory assets each period and believe recovery of these assets is probable.We have received or requested a return on certain regulatory assets for whichwe are currently recovering or seeking recovery through rates.

 

Deferred recoverableincome taxes represent deferredincome tax assets recognized from the normalization of flow-through items asthe result of amounts previously provided to customers. Since currentlyexisting temporary differences between the financial statements and the relatedtax basis of assets will reverse in subsequent periods, deferred recoverableincome taxes are amortized.

 

Electric Choice systemscosts represent costs incurred to modify the customer billingsystem for unbundled rates and electric choice bills relative to othergeneration suppliers, supplier energy settlements, and information reportsprovided to the state administrator of the low-income electric program. In February2005, the PUCO approved a stipulation allowing us to recover certain costsincurred for modifications to its billing system from all customers in itsservice territory. The case was appealed to the Ohio Supreme Court, and isstill pending. We filed a subsequent case to implement the PUCO’s order tobegin charging customers for billing costs. A hearing took place on January 23,2006 in this case. A PUCO order is still pending.

 

Regional transmissionorganization costs represent costs incurred to join a RegionalTransmission Organization that controls the receipts and delivery of bulk powerwithin the service area and are being recovered over a 10-year period thatcommenced in October 2004.

 

PJM administration costscontain the administrative fees billed by PJM to DP&L as a member of thePJM Interconnection, LLC Regional Transmission Organization (RTO). Pursuant toa PUCO order issued on January 25, 2006, these deferred costs will be recoveredover a 3-year period from retail ratepayers beginning February 2006.

 

PJM integration costsinclude infrastructure costs and other related expenses incurred by PJM tointegrate us into the RTO. Pursuant to a FERC order, the costs are beingrecovered over a 10-year period beginning May 2005 from wholesale customers withinPJM.

 

Deferred storm costs(2004 and 2005) include costs incurred by us to repair damage from the December2004 and the January 2005 ice storms. We filed to recover these costs fromretail ratepayers over a two year period. A PUCO order is pending.

 

53

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Power plant emission feesrepresent costs paid to the State of Ohio for environmental oversight that areor will be recovered over various periods under a PUCO rate rider fromcustomers.

 

Other costsinclude consumer education advertising regarding electric deregulation andcosts pertaining to the recent rate case and are or will be recovered overvarious periods.

 

**RegulatoryLiabilities**

Asset retirementobligations reflect an estimate of amounts recovered in ratesthat are expected to be expended to remove existing regulated transmission anddistribution property from service upon retirement.

 

SECA (Seams Elimination Charge Adjustment) netrevenue subject to refund represents our estimate of probable refunds fornet revenue collected in 2005. SECA revenue and expenses represent FERC-orderedtransitional payments for the use of transmission lines within PJM. Thesetransitional payments are subject to refund, depending on the results of a FERChearing in mid 2006. DP&L began receiving and paying these transitionalpayments in May of 2005. DP&L received $23 million net SECA revenue in2005.

 

*4.**              Income Taxes*

 
| ** **                                        | ** ** | **For the years ended  December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **$  in millions**                 | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Computation  of Tax Expense**                   |       |                                                      | ** ** |   |   |   |   |
| Federal income  tax (a)                           | ** ** | **$**                                                     | **123.6**  | ** ** | $ | 115.4 |   | $ | 130.5 |   |
|                                              |       |                                                      | ** ** |   |   |   |   |
| Increases  (decreases) in tax resulting from-     |       |                                                      | ** ** |   |   |   |   |
| State income  taxes, net of federal effect (b)    | ** ** | **7.4**                                                   | ** ** | 7.0 |   | 10.2 |   |
| Depreciation                                      | ** ** | **(1.3**                                                  | **)**      | (3.9 | ) | (2.3 | ) |
| Investment tax  credit amortized                  | ** ** | **(2.9**                                                  | **)**      | (2.9 | ) | (2.9 | ) |
| Non-deductible  compensation                      | ** ** | **0.2**                                                   | ** ** | — |   | 13.3 |   |
| Section 199 –  domestic production deduction | ** ** | **(1.6**                                                  | **)**      | — |   | — |   |
| Accrual for open  tax years (c)                   | ** ** | **11.2**                                                  | ** ** | 5.3 |   | 4.6 |   |
| Other, net                                        | ** ** | **1.5**                                                   | ** ** | (0.1 | ) | (3.0 | ) |
| Total tax  expense (d)                            | ** ** | **$**                                                     | **138.1**  | ** ** | $ | 120.8 |   | $ | 150.4 |   |
|                                              |       |                                                      | ** ** |   |   |   |   |
| **Components  of Tax Expense**                    |       |                                                      | ** ** |   |   |   |   |
| Taxes currently  payable (b)                      | ** ** | **$**                                                     | **149.4**  | ** ** | $ | 136.8 |   | $ | 163.9 |   |
| Deferred taxes–                              | ** ** | ** **                                                | ** ** | ** ** |   |   |   |   |   |   |
| Regulatory  assets                                | ** ** | **—**                                                | ** ** | — |   | (17.3 | ) |
| Depreciation and amortization                     | ** ** | **(16.4**                                                 | **)**      | (10.0 | ) | (10.2 | ) |
| Other                                             | ** ** | **8.0**                                                   | ** ** | (3.1 | ) | 16.9 |   |
| Deferred  investment tax credit, net              | ** ** | **(2.9**                                                  | **)**      | (2.9 | ) | (2.9 | ) |
| Total tax  expense (d)                            | ** ** | **$**                                                     | **138.1**  | ** ** | $ | 120.8 |   | $ | 150.4 |   |

 

**Componentsof Deferred Tax Assets and Liabilities**

 
| ** **                                | ** ** | **At December 31,** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| **$  in millions**         | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| **Net  Non-Current Assets (Liabilities)** |       |                          |       |   |   |
| Depreciation/property  basis              | ** ** | **$**                         | **(367.6** | ) | $ | (381.8 | ) |
| Income taxes  recoverable                 | ** ** | **(10.1**                     | )          | (11.4 | ) |
| Regulatory  assets                        | ** ** | **(9.4**                      | )          | (6.5 | ) |
| Investment tax  credit                    | ** ** | **16.3**                      |       | 17.3 |   |
| Compensation and  employee benefits       | ** ** | **38.7**                      |       | 34.9 |   |
| Other (e)                                 | ** ** | **8.9**                       |       | (18.3 | ) |
| Net non-current  (liabilities)            | ** ** | **$**                         | **(323.2** | ) | $ | (365.8 | ) |
|                                      |       |                          |       |   |   |
| **Net  Current Asset**                    |       |                          |       |   |   |
| Other                                     | ** ** | **$**                         | **4.9**    |   | $ | 6.8 |   |
| Net Current  Asset                        | ** ** | **$**                         | **4.9**    |   | $ | 6.8 |   |

 

54

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----

*(a)**       The statutory tax rate of35% was applied to pre-tax income before preferred dividends.*

*(b)**       We have recorded $(2.1)million, $11.7 million and $1.8 million in 2005, 2004 and 2003, respectively,for state tax credits available related to the consumption of coal mined inOhio.*

*(c)**        Wehave recorded $11.2 million, $5.3 million and $4.6 million in 2005,2004 and 2003, respectively, of tax provision for tax deduction or incomeposition taken in prior tax returns that we believe were properly treated onsuch tax returns but for which it is possible that these positions may becontested. The Internal Revenue Service has issued an examination report fortax years 1998 through 2003 that shows**proposedchanges to our federal income tax liability for each of those years. (See Note11 of Notes to Consolidated Financial Statements.)*

*(d)**       Excludes$(2.1) million in 2005 and $11.3 million in 2003 of income taxes recorded ascumulative effect of accounting charge, net of income taxes.*

*(e)**        Theother non-current liabilities caption includes deferred tax assets related tostate tax net operating loss carryforwards, net of related valuation allowancesof zero in 2005 and 2004.**Themajority of these net operating losses are Ohio franchise tax losscarryforwards that expire after the phase-out of the Ohio franchise tax iscompleted in 2008. Remaining Ohio franchise tax loss carryforwards after 2008can be used to offset the Ohio Commercial Activity Tax liability and do notexpire until after 2029.*

 

*5. Pensionand Postretirement Benefits*

 

We sponsor a definedbenefit plan for substantially all employees. For collective bargainingemployees, the defined benefits are based on a specific dollar amount per yearof service. For all other employees, the defined benefit plan is basedprimarily on compensation and years of service. We fund pension plan benefitsas accrued in accordance with the minimum funding requirements of the EmployeeRetirement Income Security Act of 1974 (ERISA). In addition, we have aSupplemental Executive Retirement Plan (SERP) for certain active and retiredkey executives. Benefits under this SERP have been frozen and no additionalbenefits can be earned.

 

Qualified employees whoretired prior to 1987 and their dependents are eligible for health care andlife insurance benefits. We have funded the union-eligible health benefit usinga Voluntary Employee Beneficiary Association Trust.

 

We use a December 31measurement date for the majority of our plans.

 

The following tables setforth our pension and postretirement benefit plans obligations, assets andamounts recorded on the Consolidated Balance Sheets as of December 31. Theamounts presented in the following tables for pension include both the definedbenefit pension plan and the Supplemental Executive Retirement Plan in theaggregate.

 
| **Change in Projected Benefit Obligation**                                      | ** ** | **Pension** |       | **Postretirement** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| **($ in millions)**                                                                       | ** ** | **2005**    | ** ** | **2004**           |       | **2005** | ** ** | **2004** | ** ** |
| Projected  benefit obligation at January 1                                                          | ** ** | **$**       | **280.5**  | ** **         | $          | 264.5 |   | **$** | **32.0** | ** ** | $ | 33.5 |   |
| Service cost                                                                                        | ** ** | **3.9**     | ** ** | 3.5                |       | **—** | ** ** | — |   |
| Interest cost                                                                                       | ** ** | **15.7**    | ** ** | 16.0               |       | **1.8** | ** ** | 1.9 |   |
| Plan amendments                                                                                     | ** ** | **9.3**     | ** ** | —             |       | **—** | ** ** | — |   |
| Actuarial (gain)  loss                                                                              | ** ** | **8.2**     | ** ** | 15.0               |       | **0.4** | ** ** | (0.3 | ) |
| Benefits paid                                                                                       | ** ** | **(18.5**   | **)**      | (18.5              | )          | **(3.1** | **)** | (3.1 | ) |
| Projected  benefit obligation at December 31                                                        | ** ** | **$**       | **299.1**  | ** **         | $          | 280.5 |   | **$** | **31.1** | ** ** | $ | 32.0 |   |
|                                                                                                | ** ** | ** **  | ** ** |               |       | ** ** | ** ** |   |   |
| **Change in Plan Assets ($ in millions)**                             | ** ** | ** **  | ** ** | ** **         |       | ** ** | ** ** | ** ** | ** ** |
| Fair value of  plan assets at January 1                                                             | ** ** | **$**       | **265.9**  | ** **         | $          | 258.9 |   | **$** | **8.9** | ** ** | $ | 9.7 |   |
| Actual return on  plan assets                                                                       | ** ** | **12.2**    | ** ** | 25.1               |       | **0.1** | ** ** | 0.2 |   |
| Contributions to  plan assets                                                                       | ** ** | **0.4**     | ** ** | 0.4                |       | **2.0** | ** ** | 2.1 |   |
| Benefits paid                                                                                       | ** ** | **(18.5**   | **)**      | (18.5              | )          | **(3.1** | **)** | (3.1 | ) |
| Fair value of  plan assets at December 31                                                           | ** ** | **$**       | **260.0**  | ** **         | $          | 265.9 |   | **$** | **7.9** | ** ** | $ | 8.9 |   |
|                                                                                                |       |        | ** ** |               |       |   | ** ** |   |   |
| **Reconciliation to the  Consolidated Balance Sheets ($in millions)** | ** ** | ** **  | ** ** | ** **         |       | ** ** | ** ** | ** ** | ** ** |
| Funded status of  the plan                                                                          | ** ** | **$**       | **(39.1**  | **)**              | $          | (14.6 | ) | **$** | **(23.2** | **)** | $ | (23.1 | ) |
| Unrecognized  transition (asset) liability                                                          | ** ** | **—**  | ** ** | —             |       | **0.4** | ** ** | 0.5 |   |

 

55

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| Unrecognized  prior service cost                                                                                        | ** ** | **17.1**   | ** ** | 10.2       | ** ** | **—** | ** ** | —     |       |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Unrecognized net  (gain) loss                                                                                           | ** ** | **78.4**   | ** ** | 64.9       | ** ** | **(9.6**   | **)**      | (11.2      | )          |
| Net amount  recognized                                                                                                  | ** ** | **$**      | **56.4**   | ** ** | $          | 60.5       | ** ** | **$**      | **(32.4**  | **)** | $ | (33.8 | ) |
|                                                                                                                    |       |       | ** ** |       |       |       | ** ** |       |       |
| **Total Amounts Recognized in the  Consolidated Balance Sheets ($in millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other deferred  assets                                                                                                  | ** ** | **$**      | **—** | ** ** | $          | 56.6       | ** ** | **$**      | **—** | ** ** | $ | — |   |
| Accumulated  other comprehensive income                                                                                 | ** ** | **66.9**   | ** ** | 3.9        | ** ** | **—** | ** ** | —     |       |
| Other deferred  credits                                                                                                 | ** ** | **(10.5**  | **)**      | —     | ** ** | **(32.4**  | **)**      | (33.8      | )          |
| Net amount  recognized                                                                                                  | ** ** | **$**      | **56.4**   | ** ** | $          | 60.5       | ** ** | **$**      | **(32.4**  | **)** | $ | (33.8 | ) |

 

The accumulated benefitobligation for our defined benefit plans was $287.6 million and $269.4 millionat December 31, 2005, and 2004, respectively.

 

The net periodic benefitcost (income) of the pension and postretirement benefit plans atDecember 31 were:

 
| **Net Periodic Benefit (Income) Cost** | ** ** | **Pension** |       | **Postretirement** | ** ** |
|------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| **($ in millions)**                              | ** ** | **2005**    | ** ** | **2004**           | ** ** | **2003** |   | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost                                               | ** ** | **$**       | **3.9**    | ** **         | $          | 3.5 |   | $ | 3.3 |   | **$** | **—** | ** ** | $ | — |   | $ | — |   |
| Interest cost                                              | ** ** | **15.7**    | ** ** | 16.0               |       | 16.3 |   | **1.8** | ** ** | 1.9 |   | 2.1 |   |
| Expected return  on assets (a)                             | ** ** | **(21.5**   | **)**      | (21.7              | )          | (25.1 | ) | **(0.5** | **)** | (0.6 | ) | (0.7 | ) |
| Amortization of  unrecognized:                             |       |        | ** ** |               |       |   |   |   | ** ** |   |   |   |   |
| Actuarial (gain)  loss                                     | ** ** | **3.8**     | ** ** | 2.0                |       | 0.1 |   | **(0.8** | **)** | (1.1 | ) | (1.3 | ) |
| Prior service  cost                                        | ** ** | **2.3**     | ** ** | 2.7                |       | 2.8 |   | **—** | ** ** | **—** |   | **—** |   |
| Transition  obligation                                     | ** ** | **—**  | ** ** | **—**         | ** ** | **—** |   | **0.2** | ** ** | 0.2 |   | 0.2 |   |
| Net pension  benefit cost (income) before adjustments      | ** ** | **4.2**     | ** ** | 2.5                |       | (2.6 | ) | **0.7** | ** ** | 0.4 |   | 0.3 |   |
| Special  termination benefit cost (b)                      | ** ** | **0.2**     | ** ** | —             |       | - |   | **—** | ** ** | — |   | — |   |
| Curtailment cost  (c)                                      | ** ** | **0.1**     | ** ** | **—**         | ** ** | **—** |   | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Net pension  benefit cost (income) after adjustments       | ** ** | **$**       | **4.5**    | ** **         | $          | 2.5 |   | $ | (2.6 | ) | **$** | **0.7** | ** ** | $ | 0.4 |   | $ | 0.3 |   |

 

----

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

*(b)**       In2005, a special termination benefit cost was recognized as a result of 16employees who participated in a voluntary early retirement program and retiredat various dates during 2005.*

*(c)**        In2005, a curtailment cost was recognized as a result of a freeze in benefits forthe remaining active employee participating in the Supplemental ExecutiveRetirement Plan.*

 

Our pension andpostretirement plan assets were comprised of the following asset categories atDecember 31:

 
| ** **                          | ** ** | **Pension** |       | **Postretirement** | ** ** |
|-------------------------------------|------------|-------------|------------|--------------------|------------|
| **Asset Category**             | ** ** | **2005**    | ** ** | **2004**           |       | **2005** | ** ** | **2004** | ** ** |
| Common stocks                       | ** ** | **9**       | **%**      | ** **         | 9          | % |   | **—** | ** ** | ** ** | **—** | ** ** | ** ** |
| Mutual funds                        | ** ** | **87**      | **%**      | ** **         | 84         | % |   | **—** | ** ** | ** ** | **—** | ** ** | ** ** |
| Cash and cash  equivalents          | ** ** | **1**       | **%**      | ** **         | 3          | % |   | **—** | ** ** | ** ** | **4** | **%** | ** ** |
| Fixed income  government securities | ** ** | **—**  | ** ** | ** **         | —     |   |   | **100** | **%** | ** ** | **96** | **%** | ** ** |
| Alternative  investments            | ** ** | **3**       | **%**      | ** **         | 4          | % |   | **—** | ** ** | ** ** | **—** | ** ** | ** ** |
| Total                               | ** ** | **100**     | **%**      | ** **         | 100        | % |   | **100** | **%** | ** ** | **100** | **%** | ** ** |

 

Plan assets are investedusing a total return investment approach whereby a mix of equity securities, mutualfunds, fixed income investments, alternative investments, and cash and cashequivalents are used to preserve asset values, diversify risk and achieve ourtarget investment return benchmark. Investment strategies and asset allocationsare based on careful consideration of plan liabilities, the plan’s fundedstatus and our financial condition. Investment performance and asset allocationare measured and monitored on an ongoing basis. At December 31, 2005, $23.4million of our common stock was held as plan assets.

 

56

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Our expected return onplan asset assumptions, used to determine benefit obligations, are based onhistorical long-term rates of return on investment, which uses the widelyaccepted capital market principle that assets with higher volatility generate agreater return over the long run. Current market factors, such as inflation andinterest rates, as well as asset diversification and portfolio rebalancing, areevaluated when long-term capital market assumptions are determined. Peer dataand historical returns are reviewed to verify reasonability andappropriateness.

 

Our overall expectedlong-term rate of return on assets is approximately 8.50% for pension planassets and approximately 6.75% for retiree welfare plan assets. This expectedreturn is based exclusively on historical returns, without adjustments. Therecan be no assurance of our ability to generate that rate of return in thefuture.

 

Our overall discount ratewas evaluated in relation to the December 31, 2005 Hewitt Yield Curve. The Hewitt Yield Curverepresents a portfolio of top-quartile AA-rated bonds used to settle pensionobligations and supported a weighted average discount rate of 5.75% at December31, 2005. Peer data and historical returns were also reviewed to verifythe reasonability and appropriateness of our discount rate used in thecalculation of benefit obligations and expense.

 

The weighted averageassumptions used to determine benefit obligations for the years ended December31 were:

 
| **Benefit Obligation Assumptions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **                         | ** ** | **2005**    | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Discount rate for obligations      | ** ** | **5.75%**   |       | 5.75%              |       | **5.75%** |   | 5.75% |   |
| Rate of compensation increases     | ** ** | **4.00%**   |       | 4.00%              |       | **—** |   | — |   |

 

The weighted-averageassumptions used to determine net periodic benefit cost (income) for the yearsended December 31 were:

 
| **Net Periodic Benefit (Income)** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|--------------------------------------------------|------------|-------------|------------|--------------------|------------|
| **Cost Assumptions**                        | ** ** | **2005**    | ** ** | **2004**           | ** ** | **2003** | ** ** | **2005** |   | **2004** | ** ** | **2003** | ** ** |
| Discount rate                                    | ** ** | **5.75%**   | ** ** | 6.25%              |       | 6.75% | ** ** | **5.75%** |   | 6.25% |   | 6.75% |   |
| Expected rate of  return on plan assets          | ** ** | **8.50%**   | ** ** | 8.50%              |       | 8.75% | ** ** | **6.75%** |   | 6.75% |   | 6.75% |   |
| Rate of  compensation increases                  | ** ** | **4.00%**   | ** ** | 4.00%              |       | 4.00% | ** ** | **—** |   | — |   | — |   |

 

The assumed health carecost trend rates at December 31 are as follows:

 
| ** **                                        | ** ** | **Expense** | ** ** | **Benefit Obligations** | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------------------------|------------|
| **Health Care Cost Assumptions**   | ** ** | **2005**    | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                              |       |        |       |                         |       |   |   |   |   |
| Current health  care cost trend rate              | ** ** | **10.00**   | **%**      | ** **                   | 10.00      | % |   | **10.00** | **%** | ** ** | 10.00 | % |   |
| Ultimate health  care cost trend rate             | ** ** | **5.00**    | **%**      | ** **                   | 5.00       | % |   | **5.00** | **%** | ** ** | 5.00 | % |   |
| Ultimate health  care cost trend rate — year | ** ** | **2010**    | ** ** | ** **                   | 2009       |   |   | **2011** | ** ** | ** ** | 2010 |   |   |

 

The assumed health carecost trend rates have a significant effect on the amounts reported for thehealth care plans. A one-percentage point change in assumed health care costtrend rates would have the following effects on the net periodic postretirementbenefit cost and the accumulated postretirement benefit obligation:

 
| **Effect of Change in Health   Care Cost Trend Rate ($ in millions)** | ** ** | **Increase 1%** | ** ** | **Decrease 1%** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
|                                                                                                                    |       |                 |       |                 |       |
| Service cost  plus interest cost                                                                                        |       | $ 0.1           |       | $ (0.1)         |       |
| Benefit  obligation                                                                                                     |       | $ 1.7           |       | $ (1.6)         |       |

 

The following benefitpayments, which reflect future service, are expected to be paid as follows:

 

57

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| **Estimated Future Benefit  Payments** | ** ** | ** **  | ** ** | ** **         | ** ** |
|----------------------------------------|------------|-------------|------------|--------------------|------------|
| **($ in millions)**               | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|                                   |       |        |       |               |       |
| 2006                                   |       | $           | 19.8       |               | $          | 3.0 |   |
| 2007                                   |       | $           | 20.0       |               | $          | 3.1 |   |
| 2008                                   |       | $           | 20.2       |               | $          | 3.0 |   |
| 2009                                   |       | $           | 20.5       |               | $          | 3.0 |   |
| 2010                                   |       | $           | 21.0       |               | $          | 2.9 |   |
| 2011 – 2015                       |       | $           | 112.1      |               | $          | 11.7 |   |

 

We expect to contribute$0.4 million to our pension plan and $3.0 million to our other postretirementbenefit plan in 2006.

 

*6.             Preferred Stock*

 

$25par value, 4,000,000 shares authorized, no shares outstanding; and $100 parvalue, 4,000,000 shares authorized, 228,508 shares without mandatory redemptionprovisions outstanding.

 
| **Preferred Stock  Rate** | ** ** | ** ** | ** ** | **Current  Redemption  Price** | ** ** | **Current Shares  Outstanding at  December 31,  2005** | ** ** | **Par Value  At December  31, 2005  ($ in millions)** | ** ** | **Par Value  At December  31, 2004  ($ in millions)** | ** ** |
|--------------------------------|------------|------------|------------|--------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Series A                       | 3.75       | %          |       |                           |       | $                                                                     | 102.50     |                                                                 | 93,280     | ** **                                                           | **9.3**    |   | 9.3 |   |
| Series B                       | 3.75       | %          |       |                           |       | $                                                                     | 103.00     |                                                                 | 69,398     | ** **                                                           | **7.0**    |   | 7.0 |   |
| Series C                       | 3.90       | %          |       |                           |       | $                                                                     | 101.00     |                                                                 | 65,830     | ** **                                                           | **6.6**    |   | 6.6 |   |
| Total                          |       |       |       |                           |       |                                                                  |       | 228,508                                                              | ** ** | **$**                                                                | **22.9**   |   | $ | 22.9 |   |
|                                |            |            |            |                                |            |                                                                       |            |                                                                      |            |                                                                      |            |  |  |  |  |  |

 

The preferred stock maybe redeemed at our option at the per share prices indicated, plus cumulativeaccrued dividends.

 

As long as any preferredstock is outstanding, our Amended Articles of Incorporation contain provisionsrestricting the payment of cash dividends on any of our Common Stock if, aftergiving effect to such dividend, the aggregate of all such dividends distributedsubsequent to December 31, 1946 exceeds the net income available for dividendson its Common Stock subsequent to December 31, 1946, plus $1.2 million. Asof year-end, all earnings reinvested in the business were available for CommonStock dividends. We record dividends on our preferred stock as part of interestexpense. We expect all 2006 earnings reinvested in the business to be availablefor common stock dividends, payable to DPL.

 

*7.     Long-termDebt and Notes Payable*

 
| ** **                                                        | ** ** | **At 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)      | ** ** | **—**                    |       | 104.4 |   |
| Pollution  control series maturing  through 2034 – 4.78% (a) | ** ** | **214.4**                     |       | — |   |
|                                                              | ** ** | ** **                    |       |   |   |
|                                                              |       | **684.4**                     |       | 574.4 |   |
| Guarantee of Air  Quality Development                             |       | ** **                    |       |   |   |
| Obligations 6.10%  Series due 2030                                | ** ** | **—**                    |       | 110.0 |   |
| Obligations for  capital leases                                   | ** ** | **3.0**                       |       | 3.8 |   |
| Unamortized debt  discount and premium (net)                      | ** ** | **(1.5**                      | )          | (1.6 | ) |
| Total                                                             | ** ** | **$**                         | **685.9**  |   | $ | 686.6 |   |

----

(a) Weighted average interest rates for 2005 and 2004.

58

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The amounts of maturitiesand mandatory redemptions for first mortgage bonds, notes and the capitalleases are $0.9 million in 2006, $0.9 million in 2007, $0.7 million in 2008, $0.7million in 2009 and $0.7 million in 2010. Substantially all of our property issubject to the mortgage lien securing the first mortgage bonds.

 

On September 29, 2003, weissued $470 million principal amount of First Mortgage Bonds, 5.125% Series due2013. The net proceeds from the sale of the bonds, after expenses, were used onOctober 30, 2003, to (i) redeem $226 million principal amount of our FirstMortgage Bonds, 8.15% Series due 2026, at a redemption price of 104.075% of theprincipal amount plus accrued interest to the redemption date and (ii) redeem$220 million principal amount of our First Mortgage Bonds, 7.875% Series due2024, at a redemption price of 103.765% of the principal amount plus accruedinterest to the redemption date. The 5.125% Series due 2013 were not registeredunder the Securities Act of 1933, but were offered and sold through a privateplacement in compliance with Rule 144A under the Securities Act of 1933. Thebonds include step-up interest provisions requiring us to pay additionalinterest if (i) our registration statement was not declared effective by theSEC within 180 days from issuance of new bonds or (ii) the exchange offer wasnot completed within 210 days from the issuance of the new bonds. Theregistration statement was not declared effective and the exchange offer wasnot timely completed and, as a result, we were required to pay additionalinterest of 0.50% until a registration statement was declared effective, atwhich point the additional interest was reduced by 0.25%. The remainingadditional interest of 0.25% continued until the exchange offer was completed. Theexchange offer registration for these securities was filed and declaredeffective on May 20, 2005 and the exchange was completed on June 23, 2005.

 

In February 2004, weentered into a $20 million Master Letter of Credit Agreement with afinancial lending institution. On February 24, 2005, we entered into anamendment to extend the term of this Agreement for one year and reduce themaximum dollar volume of letters of credit to $10 million. On February 17,2006, we entered into a second amendment to extend the term of this agreementfor another year. This agreement supports performance assurance needs in theordinary course of business. We have certain contractual agreements for thesale and purchase of power, fuel and related energy services that containcredit rating related clauses allowing the counterparties to seek additionalsurety under certain conditions. As of December 31, 2005, we had twooutstanding letters of credit for a total of $2.2 million.

 

In May 2005, we obtaineda $100 million unsecured revolving credit agreement that extended and replacedits previous revolving credit agreement, of $100 million. The new agreement,renewable annually, expires on May 30, 2010 and provides credit support of ourbusiness requirements during this period. This may be increased up to $150million. The facility contains one financial covenant: total debt to totalcapitalization ratio is not to exceed 0.65 to 1.00. This covenant is currentlymet. We had no outstanding borrowings under this credit facility at December31, 2005. Fees associated with this credit facility are approximately $0.2million per year. Changes in credit ratings, however, may affect the applicableinterest rate for our revolving credit agreement.

 

OnAugust 17, 2005, we completed the refinancing of $214.4 million of pollutioncontrol bonds. The specific issues refinanced consisted of:

 

•                  $41.3million of Ohio Water Development Authority (OWDA) bonds;

•                  $137.8million of Ohio Air Quality Development Authority (OAQDA) bonds; and

•                  $35.3million of Boone County, Kentucky (Boone County) bonds.

 

On August 17, 2005, weentered into a separate loan agreement with the OWDA, OAQDA and Boone Countyfor new pollution control bonds with a weighted average interest rate of 4.78%.The proceeds of the bonds were used to repay the previously existing pollutioncontrol bonds with a weighted average interest rate of 6.26% on September 16,2005. To secure the repayment of our obligations to the OWDA,

 

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OAQDA and Boone County, weentered into a 43rd Supplemental Indenture to our First andRefunding Mortgage for a like amount ($214.4 million) of First Mortgage Bondswith The Bank of New York serving as Trustee.

 

In 2005, we recorded $4.1million of charges resulting from premiums paid for the early redemption ofdebt, including write-offs of unamortized debt expense.

 

There are nointer-company debt collateralizations or debt guarantees between us and our parent.None of our debt obligations are guaranteed or secured by affiliates and nocross-collateralization exists between any subsidiaries.

 

*8.             Stock-Based Compensation*

 

In 2000, DPL’s Board ofDirectors adopted and its shareholders approved The DPL Inc. Stock Option Plan,which is the basis for our stock-based compensation expense. The plan providesthat “no single Participant shall receive Options with respect to more than2,500,000 shares.”  The exercise price ofoptions granted approximates the market price of the stock on the date of grant.Options granted in 2000 and 2001 represent three-year awards, which vested overfive years from the grant date, and expire ten years from the grant date. Optionsgranted in 2002 vested over three years and expire ten years from the grantdate. Options granted in 2003 vest over five years and expire ten years fromthe grant date. In 2004, 200,000 options were granted that vest over nineteenmonths and expire approximately 6.5 years from the grant date; 20,000 optionswere granted that vest in five months and expire ten years from the grant dateand 30,000 options were granted that vest over three years and expire ten yearsfrom the grant date. In 2005, 350,000 options were granted that vest in June2006 and expire three years from the grant date. At December 31, 2005, therewere 1,488,500 options available for grant.

 

Summarized stock optionactivity was as follows:

 
| ** **                                 | ** ** | **2005**   | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
| Options:                                   |       |       |       |      |       |      |       |
| Outstanding at  beginning of year          |       | 6,165,500  |       | 6,895,500 |       | 7,143,500 |       |
| Granted                                    |       | 350,000    |       | 250,000   |       | 100,000   |       |
| Exercised                                  |       | (1,025,000 | )          | —    |       | —    |       |
| Forfeited                                  |       | (4,000     | )          | (980,000  | )          | (348,000  | )          |
| Outstanding at  year-end (a)               |       | 5,486,500  |       | 6,165,500 |       | 6,895,500 |       |
| Exercisable at  year-end                   |       | 4,100,000  |       | —    |       | —    |       |
|                                       |       |       |       |      |       |      |       |
| Weighted average  option prices per share: |       |       |       |      |       |      |       |
| Outstanding at  beginning of year          |       | $          | 21.39      |      | $          | 21.19     |       | $ | 21.47 |   |
| Granted                                    |       | $          | 26.82      |      | $          | 21.86     |       | $ | 15.88 |   |
| Exercised                                  |       | $          | 21.18      |      | —     |      | —     |   |
| Forfeited                                  |       | $          | 29.63      |      | $          | 20.07     |       | $ | 24.99 |   |
| Outstanding at  year-end                   |       | $          | 21.86      |      | $          | 21.39     |       | $ | 21.19 |   |
| Exercisable at  year-end                   |       | $          | 20.98      |      | —     |      | —     |   |

 

----

*(a)**       DPL originally granted300,000 options during 2002 to Mr. Peter H. Forster, formerly DPL’s Chairman,that caused the number of options to be held by Mr. Forster to exceed themaximum number allowed to be held by one participant under the option planapproved by the shareholders. Therefore, 200,000 options representing theexcess over the allowable maximum have been revoked. The number of optionsforfeited has been increased by 980,000 in 2004 and 64,668 in 2003 to reflectadditional forfeitures.**The980,000 options forfeited in 2004 and 3,620,000 options outstanding are indispute due to our ongoing litigation with Mr. Forster, Mr. Koziar and Ms.Muhlenkamp.*

 

The weighted-average fairvalue of options granted was $3.80, $4.23 and $2.68 per share in 2005, 2004 and2003, respectively. The fair values of the options were estimated as of thedates of grant using a Black-Scholes option pricing model utilizing thefollowing assumptions:

 

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| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |
| Volatility               | ** ** | **25.6** | %          | 28.5     | %          | 24.0     | %          |
| Expected life  (years)   | ** ** | **2.2**  |       | 6.4      |       | 8.0      |       |
| Dividend yield  rate     | ** ** | **3.7**  | %          | 4.8      | %          | 4.5      | %          |
| Risk-free  interest rate | ** ** | **3.8**  | %          | 3.9      | %          | 3.7      | %          |

 

Thefollowing table reflects information about stock options outstanding atDecember 31, 2005:

 
| ** **                              | ** ** | ** **      | ** ** | **Options Outstanding**              | ** ** | **Options Exercisable**            | ** ** |
|-----------------------------------------|------------|-----------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Outstanding** | ** ** | **Weighted-  Average  Contractual  Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                    |       |            |       |                                      |       |                                    |       |   |   |   |   |
| $14.95-$21.00                           |       | 4,700,000       |       | 4.5 years                                 |       | $                                       | 20.44      |   | 4,060,000 |   | $ | 20.94 |   |
| $21.01-$29.63                           |       | 786,500         |       | 3.7 years                                 |       | $                                       | 28.01      |   | 40,000 |   | $ | 24.48 |   |

 

We account for stockoptions granted on or after January 1, 2003, under the fair-value method setforth in FASB Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (SFAS 123). This standard requires therecognition of compensation expense for stock-based awards to reflect the fairvalue of the award on the date of grant. We follow Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (Opinion 25) andrelated Accounting Principles Board and FASB interpretations in accounting forstock-based compensation granted before January 1, 2003. If we had used thefair-value method of accounting for stock-based compensation granted prior to2003, net income and earnings per share would have been reported as follows:

 
| ** **                                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **$ in millions**                                                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income, as  reported                                                                      |       | $                                          | 211.8      |   | $ | 209.0 |   | $ | 239.4 |   |
| Adjustments:                                                                                  |       |                                       |       |   |   |   |   |
| Total  stock-based compensation expense determined under APB 25, net of related tax  effects  |       | (0.5                                       | )          | — |   | — |   |
| Total  stock-based compensation expense determined under FAS 123, net of related tax  effects |       | 2.0                                        |       | (3.0 | ) | (2.7 | ) |
| Pro-forma net  income                                                                         |       | $                                          | 213.3      |   | $ | 206.0 |   | $ | 236.7 |   |

 

*9.             Ownership of Facilities*

 

DP&L and other Ohioutilities have undivided ownership interests in seven electric generatingfacilities and numerous transmission facilities. Certain expenses, primarilyfuel costs for the generating units, are allocated to the owners based on theirenergy usage. The remaining expenses, as well as investments in fuel inventory,plant materials and operating supplies, and capital additions, are allocated tothe owners in accordance with their respective ownership interests. As ofDecember 31, 2005, we had $119 million of construction in progress at suchfacilities. Our share of the operating cost of such facilities is included inthe Consolidated Statement of Results of Operations, and its share of theinvestment in the facilities is included in the Consolidated Balance Sheets.

 

Our undivided ownershipinterest in such facilities at December 31, 2005, is as follows:

 
| ** **                            | ** ** | ** **         | ** ** | ** **     | ** ** | **DP&L**             | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------|------------|--------------------------|------------|
| ** **                            | ** ** | **DP&L Share** | ** ** | **Investment** | ** ** |
| ** **                            | ** ** | ** **         | ** ** | **Production** | ** ** | **Gross Plant**          | ** ** |
| ** **                            | ** ** | **Ownership**      | ** ** | **Capacity**   | ** ** | **In Service**           | ** ** |
| ** **                            | ** ** | **(%)**            | ** ** | **(MW)**       | ** ** | **($ in millions)** | ** ** |
| Production Units:                     |       |               |       |           |       |                     |       |
| Beckjord Unit 6                       |       | 50.0               |       | 207            |       | $                        | 62         |   |
| Conesville Unit  4                    |       | 16.5               |       | 129            |       | 33                       |       |
| East Bend  Station                    |       | 31.0               |       | 186            |       | 195                      |       |
| Killen Station                        |       | 67.0               |       | 412            |       | 421                      |       |
| Miami Fort Units  7&8             |       | 36.0               |       | 360            |       | 194                      |       |
| Stuart Station                        |       | 35.0               |       | 832            |       | 365                      |       |
| Zimmer Station                        |       | 28.1               |       | 365            |       | 1,041                    |       |
|                                  |       |               |       |           |       |                     |       |
| Transmission (at varying percentages) |       |               |       |           |       | 88                       |       |
|                                       |            |                    |            |                |            |                          |            |  |

 

*10. Financial Instruments*

 

# The fair value of ourfinancial instruments is based on current public market prices, discounted cashflows using current rates for similar issues with similar terms and remainingmaturities, or independent party valuations, which are believed to approximatemarket. The basis on which the cost of a security sold or the amountreclassified out of accumulated other comprehensive income was determined byspecific identification. The table below presents the fair value, unrealizedgains and losses, and cost of these instruments at December 31, 2005 and 2004.

#  

 
| ** **                     | ** ** | **At December 31,** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                     | ** ** | ** **                    | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** | ** ** | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | ** **                    | ** ** | **Gains** | ** ** | **Losses** | ** ** | ** ** | ** ** | ** ** | ** ** | **Gains** | ** ** | **Losses** | ** ** | ** ** | ** ** |
| **$ in millions**    | ** ** | **Fair Value**           | ** ** | ** ** | ** ** | **less  than 12  months** | ** ** | **more  than 12 months** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** | ** ** | ** ** | **less  than 12  months** | ** ** | **more  than 12  months** | ** ** | **Cost** | ** ** |
| **Assets**                     |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale  securities | ** ** | **$**                         | **100.4**  | ** ** | **$** | **36.7** | ** ** | **$** | **—** | ** ** | **$** | **(3.1** | **)** | **$** | **66.8** |   | $ | 92.4 |   | $ | 34.5 |   | $ | — |   | $ | (2.9 | ) | $ | 60.8 |   |
| Other                          | ** ** | **—**                    | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** |   | 0.8 |   | 0.8 |   | — |   | — |   | — |   |
|                                |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| *Held-to-maturity  debt securities (a)* | ** ** | **7.9** | ** ** | **—** | ** ** | **(0.2** | **)**  | **—** | ** ** | **8.1** |   | 14.7      |   | — |   | (0.1   | )      | — |   | 14.8   |   |
|-----------------------------------------|------------|---------|------------|------------|------------|----------|--------|------------|------------|---------|--------|-----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                    |       |    |       |       |       |     |   |       |       |    |   |      |   |   |   |   |   |   |   |   |   |
| Total assets                            | ** ** | **$**   | **108.3**  | ** ** | ** ** |     |   |       |       |    | **$**  | **74.9**  |   | $      | 107.9  |   |   |   |   |   |   |   | $ | 75.6 |   |
|                                    |       |    |       |       |       |     |   |       |       |    |   |      |   |   |   |   |   |   |   |   |   |
| **Liabilities**                         |       |    |       |       |       |     |   |       |       |    |   |      |   |   |   |   |   |   |   |   |   |
| *Long-term  debt (b)*                   | ** ** | **$**   | **685.2**  | ** ** | ** ** |     |   |       |       |    | **$**  | **686.8** |   | $      | 681.9  |   |   |   |   |   |   |   | $ | 688.1 |   |

 

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*(a)          Maturities range from 2006 to 2035.*

*(b)          Includes current maturities.*

 

Realized gains and(losses) for available-for-sale securities were zero and $(0.1) million in2005, $0.1 million and less than $(0.1) million in 2004, and $1.1 million and$(0.8) million in 2003, respectively.

 

In the normal course ofbusiness, we enter into various financial instruments, including derivativefinancial instruments. These instruments consist of forward contracts andoptions that are used to reduce our exposure to changes in energy and commodityprices. These financial instruments are designated at inception as highlyeffective cash-flow hedges and are measured for effectiveness both at inceptionand on an ongoing basis, with gains or losses deferred in Accumulated OtherComprehensive Income until the underlying hedged transaction is realized, canceledor otherwise terminated. The forward contracts and options generally maturewithin twelve months.

 

*11.          Commitments and Contingencies*

 

**Contingencies**

 

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations. We believe the amountsprovided in our consolidated financial statements, as prescribed by GAAP, areadequate in light of the probable and estimable contingencies. (See Note 1 ofNotes to Consolidated Financial Statements.) However, there can be no assurances that the actual amounts required tosatisfy alleged liabilities from various legal proceedings, claims, taxexaminations, and other matters discussed below, and to comply with applicablelaws and regulations, will not exceed the amounts reflected in our ConsolidatedFinancial Statements. As such, costs, if any, that may be incurred in excess ofthose amounts provided as of December 31, 2005, cannot be reasonablydetermined.

 

**Environmental Matters**

 

We and our subsidiaries’facilities and operations are subject to a wide range of environmentalregulations and law. In the normal course of business, we have investigatoryand remedial activities underway at these facilities to comply, or to determinecompliance, with such regulations. We have been identified, either by agovernment agency or by a private party seeking contribution to site clean-upcosts, as a potentially responsible party (PRP) at two sites pursuant to stateand federal laws. We record liabilities for probable estimated loss inaccordance with Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accountingfor Contingencies.”  To the extent aprobable loss can only be estimated by reference to a range of equally probableoutcomes, and no amount within the range appears to be a better estimate thanany other amount, we accrue for the low end of the range. Because ofuncertainties related to these matters accruals are based on the bestinformation available at the time. We evaluate the potential liability relatedto probable losses quarterly and may revise its estimates. Such revisions inthe estimates of the potential liabilities could have a material effect on theCompany’s results of operations and financial position.

 

**Legal Matters**

 

OnAugust 24, 2004, we, DPL and MVE, filed a Complaint againstMr. Forster, Ms. Muhlenkamp and Mr. Koziar (the “Defendants”) inthe Court of Common Pleas of Montgomery County, Ohio asserting legal claimsagainst them relating to the termination of the Valley Partners Agreements,challenging the validity of the purported amendments to the deferredcompensation

 

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plansand to the employment and consulting agreements with the Defendants, and thepropriety of the distributions from the plans to the Defendants, and allegingthat the Defendants breached their fiduciary duties and breached theirconsulting and employment contracts. We, DPL and MVE seek, among other things,damages in excess of $25,000, disgorgement of all amounts improperly withdrawnby the Defendants from the plans and a court order declaring that we, DPL andMVE have no further obligations under the consulting and employment contractsdue to those breaches.

 

The Defendants filed motions to dismiss theComplaint, which the Court subsequently denied. On June 15, 2005, Defendantsfiled their answers denying liability and filed counterclaims against us, DPL,MVE, various compensation plans (the “Plans”), and against the then-currentmembers of our Board of Directors and two of our former Board members. Thesecounterclaims allege generally that DPL, DP&L, MVE, the Plans and theindividual defendants breached the terms of the employment and consultingcontracts of the Defendants, and the terms of the 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 the Plans. Defendants’ counterclaims also demandpayment of attorneys’ fees. Motions to dismiss certain of the counterclaimswere denied on February 23, 2006.

 

On March 15, 2005, Mr. Forster and Ms.Muhlenkamp filed a lawsuit in New York state court against the purchasers ofthe private equity investments in the financial asset portfolio and againstoutside counsel to us and DPL concerning purported entitlements in connectionwith the purchase of those investments. We, DPL and MVE are not defendants inthat case; however, the three of us are parties to an indemnification agreementwith respect to the purchaser defendants. We, DPL and MVE filed a Motion for PreliminaryInjunction in the Ohio case, requesting that the court issue a preliminaryinjunction against Mr. Forster and Ms. Muhlenkamp regarding the New Yorklawsuit. On August 18, 2005, the Ohio court issued a preliminary injunctionagainst Mr. Forster and Ms. Muhlenkamp that precludes them from pursuingcertain key issues raised by Mr. Forster and Ms. Muhlenkamp in their New Yorklawsuit that are identical to the issues raised in the pending Ohio lawsuit inthe New York court or any other forum other than the Ohio litigation. Inaddition, the New York court has stayed the New York litigation pending theoutcome of the Ohio litigation. Mr. Forster and Ms. Muhlenkamp have appealedthe preliminary injunction and the appeal is pending at the Ohio Supreme Court.

 

The parties continue to proceed with thediscovery phase of the litigation, and a number of motions have been filed andbriefed with respect to document discovery and depositions. The trial courtgranted some and overruled some of these pending motions on February 23, 2006.

 

Wecontinue to evaluate all of the matters relevant to this litigation and areconsidering other claims against Defendants, Forster, Muhlenkamp and Koziarthat include, but are not limited to, breach of fiduciary duty or other claimsrelating to personal and DPL investments, the calculation of benefits under theSupplemental Executive Retirement Program (SERP) and financial reporting withrespect to such benefits, and with respect to Mr. Koziar, the fulfillment ofduties owed to us as our legal counsel. Cumulatively through December 31, 2005,we have accrued for accounting purposes, obligations of approximately $52million to reflect claims regarding deferred compensation, estimated MVEincentives and/or legal fees that Defendants assert are payable per contracts. Wedispute Defendants’ entitlement to any of those sums and, as noted above, we arepursuing litigation against them contesting all such claims.

 

On or about June 24,2004, the SEC commenced a formal investigation into the issues raised by theMemorandum. We are cooperating with the investigation. (See Note 13 of Notes toConsolidated Financial Statements.)

 

On April 7, 2004, DPLreceived notice that the staff of the PUCO is conducting an investigation intoour financial condition as a result of the issues raised by the Memorandum. OnMay 27, 2004, the PUCO ordered us to file a plan of utility financial integritythat outlines the actions DPL has taken or

 

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will take to insulate ourutility operations and customers from its unregulated activities. We wererequired to file this plan by March 2, 2005. On February 4, 2005, we filed ourprotection plan with the PUCO. On June 29, 2005, the PUCO closed itsinvestigation, citing significant positive actions DPL had taken includingchanges in the Board of Directors as well as our executive management, and thatno apparent diminution of service quality had occurred because of the eventsthat initiated the investigation.

 

On May 28, 2004, the U.S.Attorney’s Office for the Southern District of Ohio, assisted by the FederalBureau of Investigation, notified us that it has initiated an inquiry involvingthe subject matters covered by our internal investigation. We are cooperatingwith this investigation.

 

OnJune 24, 2004, the Internal Revenue Service (IRS) began an audit of tax years1998 through 2003 and issued a series of data requests to us including issuesraised in the Memorandum. The staff of the IRS has requested that we providecertain documents, including but not limited to, matters concerningexecutive/director deferred compensation plans, management stock incentiveplans and MVE financial statements. On September 1, 2005, the IRS issued anaudit report for tax years 1998 through 2003 that shows proposed changes to ourfederal income tax liability for each of those years. The proposed changesresult in a total tax deficiency, penalties and interest of approximately $23.9million as of December 31, 2005. On November 4, 2005, we filed a writtenprotest to one of the proposed changes. We believe we are adequately reservedfor any tax deficiency, penalties and interest resulting from the proposedchanges and as a result, the proposed changes did not adversely affect ourresults from operations.

 

Weare also under audit review by various state agencies for tax years 2002through 2004. We have also filed an appeal to the Ohio Board of Tax Appeals fortax years 1998 through 2001. Depending upon the outcome of these audits and theappeal, we may be required to increase our tax provision if actual amountsultimately determined exceed recorded reserves. We believe we have adequatereserves in each tax jurisdiction but cannot predict the outcome of theseaudits.

 

On February 13, 2006, wereceived correspondence from the Ohio Department of Taxation (ODT) notifying usthat ODT has completed their examination and review of our Ohio CorporationFranchise Tax Returns for tax years 2002 through 2004 and that the finalproposed audit adjustments result in a balance due of $90.8 million beforeinterest and penalties. We have reviewed the proposed audit adjustments andplan to vigorously contest the ODT findings and forthcoming notice ofassessment through all administrative and judicial means available. We believewe have recorded adequate tax reserves related to the proposed adjustments;however, we cannot predict the outcome, which could be material to our resultsof operations and cash flows.

 

On December 12, 2003, theOffice of Federal Contract Compliance Programs (OFCCP) notified us by letter,alleging we had discriminated in the hiring of meter readers during 2000-2001by utilizing credit checks to determine if applicants had paid their electricbills. On February 12, 2004, we and the OFCCP entered into a ConciliationAgreement whereby we agreed to distribute approximately $0.2 million incompensation to certain affected applicants. We have completed these paymentsto the affected applicants and supplied to the OFCCP all follow-up reportsrequired under the Conciliation Agreement.

 

In June 2002, acontractor’s employee received a verdict against us for injuries he sustainedwhile working at a power station. The Adams County Court of Common Pleasawarded the contractor’s employee compensatory damages of approximately $0.8million and prejudgment interest of approximately $0.6 million. On April 28,2004, the 4th District Court of Appeals upheld this verdict except the awardfor prejudgment interest. On September 1, 2004, the Ohio Supreme Court refusedto hear the case, so the matter was remanded to the Adams County Court ofCommon Pleas for a re-determination of the amount of prejudgment interest thatshould be awarded. The trial court heard this matter on October 15, 2004. OnNovember 1, 2004, we paid approximately $976,000 to the contractor’s employeeto satisfy the judgment and post-judgment interest. On December 6, 2004, the

 

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Adams County Court ofCommon Pleas ruled that the prejudgment interest should be reduced toapproximately $30 thousand. Both parties appealed this decision. On January 25,2006, the Fourth District Court of Appeals ruled in our favor, finding we owedno prejudgment interest to the Plaintiff.

 

**ContractualObligations and Commercial Commitments**

We enter into variouscontractual obligations and other commercial commitments that may affect theliquidity of our operations. At December 31, 2005, these include:

 

 
| ** **                                                  | ** ** | **Payment Year** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|
| **Contractual Obligations  ($ in millions)** | ** ** | **Total**             | ** ** | **Less Than  1 Year** | ** ** | **2 - 3  Years** | ** ** | **4 - 5  Years** | ** ** | **More Than  5 Years** | ** ** |
| Long-term debt                                              |       | $                     | 682.9      |   | $ | — |   | $ | — |   | $ | — |   | $ | 682.9 |   |
| Interest  payments                                          |       | 463.9                 |       | 34.3 |   | 68.7 |   | 68.7 |   | 292.2 |   |
| Pension and  postretirement payments                        |       | 240.3                 |       | 22.8 |   | 46.3 |   | 47.4 |   | 123.8 |   |
| Capital leases                                              |       | 3.9                   |       | 0.9 |   | 1.7 |   | 1.3 |   | — |   |
| Operating leases                                            |       | 0.5                   |       | 0.4 |   | 0.1 |   | — |   | — |   |
| Coal contracts  (a)                                         |       | 795.1                 |       | 390.1 |   | 273.0 |   | 87.0 |   | 45.0 |   |
| *Other  contractual obligations*                            |       | 505.8                 |       | 358.3 |   | 147.5 |   | — |   | — |   |
| Total  contractual obligations                              |       | $                     | 2,692.4    |   | $ | 806.8 |   | $ | 537.3 |   | $ | 204.4 |   | $ | 1,143.9 |   |

 

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(a)DP&L-operated units

 

Long-term debt:

Long-term debt as of December 31, 2005, consists offirst mortgage bonds, tax-exempt pollution control bonds and includes anunamortized debt discount. (See Note 7 of Notes to Consolidated FinancialStatements.)

 

Interest payments:

Interest payments associated with the Long-term debtdescribed above.

 

Pension and postretirement payments:

As of December 31, 2005, we had estimated futurebenefit payments as outlined in Note 5 of Notes to Consolidated FinancialStatements. These estimated future benefit payments are projected through 2015.

 

Capital leases:

Asof December 31, 2005, we had two capital leases that expire in November 2007and September 2010.

 

Operating leases:

Asof December 31, 2005, we had several operating leases with various terms andexpiration dates. Not included in this total is approximately $88,000 per yearrelated to right of way agreements that are assumed to have no definiteexpiration dates.

 

Coal contracts:

Wehave entered into various long-term coal contracts to supply portions of ourcoal requirements for our generating plants. Contract prices are subject toperiodic adjustment, and have features that limit price escalation in any givenyear.

 

Other contractual obligations:

InJanuary 2006, we entered into a contract for limestone that is expected togenerate an obligation of $6.0 million in 2006 through 2008, $10.5 million in2009 through 2010 and $42.2 million thereafter. As of December 31, 2005, we hadvarious other contractual obligations including non-cancelable contracts topurchase goods and services with various terms and expiration dates.

 

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Wealso enter into various commercial commitments, which may affect the liquidityof our operations. At December 31, 2005, these include:

 

Credit facilities:

InMay 2005, we replaced our previous $100 million revolving credit agreement witha $100 million, 364-day unsecured credit facility that is renewable annuallyand expires on May 30, 2010. At December 31, 2005, there were no borrowingsoutstanding under this credit agreement. The new facility may be increased upto $150 million.

 

Guarantees:

Weown a 4.9% equity ownership interest in an electric generation company. As ofDecember 31, 2005, we could be responsible for the repayment of 4.9%, or $14.9million, of a $305 million debt obligation and also 4.9%, or $2.9 million, of aseparate $60 million debt obligation. Both obligations mature in 2006.

 

*12.          Certain Relationships and Related Transactions*

 

On March 13, 2000,affiliates of Kohlberg Kravis Roberts & Co. LLC (KKR), purchased acombination of trust preferred securities issued by a trust established by DPL,DPL voting preferred shares and warrants to purchase DPL’s common shares. Thetrust preferred securities were redeemed at par in 2001. The DPL Series Bvoting preferred shares had voting power not exceeding 4.9% of the totaloutstanding voting power of our voting securities. The warrants to purchaseapproximately 31.6 million DPL common shares (representing approximately 19.9%of the common shares then outstanding) have a term of 12 years and an exerciseprice of $21 per share. In connection with the March 13, 2000 transaction, weand KKR also entered into an agreement under which we paid KKR an annualmanagement, consulting and financial services fee of $1.0 million. Theagreement also stated that DPL would provide KKR with an opportunity to provideinvestment banking services on such terms as the parties may agree and at suchtime as any such services may be required.  DPL also agreed to reimburseKKR and their affiliates for all reasonable expenses incurred in connectionwith the services provided under this agreement, including travel expenses andexpenses of its counsel.  DPL and KKR terminated this agreement on January12, 2005. During December 2004 through January 2005, KKR initiated a series ofagreements to transfer all of the warrants to an unaffiliated third party. Thistransferee subsequently transferred a large portion of the warrants to multipleunrelated third parties. In January 2005, as part of one of these transfers,KKR sold back to DPL all of the outstanding Series B voting preferred shares.Under the DPL Securityholders and Registration Rights Agreement, KKR had theright to designate one person for election to, and one person to attend as anon-voting observer at all meetings of, the DP&L and DPL Boards ofDirectors for as long as they and their affiliates continue to beneficially ownat least 12.64 million of DPL’s common shares, including shares issuableupon exercise of warrants.  As a result of the transfer of warrants fromKKR to an unaffiliated third party during December 2004 through January 2005,KKR no longer owned any warrants or common stock of DPL. Accordingly, KKR nolonger had the right to appoint one member and one observer to both DP&Land DPL Boards of Directors and the DPL Securityholders and Registration RightsAgreement was amended to delete these, and other, rights.

 

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*13.          Other Matters*

 

**AuditCommittee Investigation and Related Matters**

On March 10, 2004, ourCorporate Controller sent a memorandum (the Memorandum) to the Chairman of theAudit Committee of our Board of Directors (the Audit Committee). The Memorandumexpressed the Corporate Controller’s “concerns, perspectives and viewpoints”regarding financial reporting and governance issues within the Company.

 

On March 15, 2004, ourAudit Committee retained the law firm of Taft, Stettinius & Hollister LLP(TS&H) to represent the Audit Committee in an independent review of each ofthe matters raised by the Memorandum. TS&H subsequently retained anaccounting firm as a forensic accountant to assist in this review. OnApril 27, 2004, TS&H submitted a written report of its findings to themembers of the Audit Committee (the Report). A copy of the Report was filed asan exhibit to our 2003 Form 10-K. While TS&H stated that it did notuncover and no person had indicated to it any uncorrected material inaccuraciesin our books and records, it did, however, recommend further follow-up by theAudit Committee and improvements relating to disclosures, communication, accessto information, internal controls and the culture of the Company in certain areas.Based upon information received after issuing the Report, TS&H revised itsanalysis and prepared a supplement to the Report, dated May 25, 2004 (theSupplement). A copy of the Supplement was filed as an exhibit to our 2003 Form10-K.

 

Our Audit Committeeconsidered the Report and Supplement at a meeting held on May 16, 2004. Afterits review and consideration, the Audit Committee recommended that the fullBoard of Directors accept the Report and the Supplement. At a meeting held onMay 16, 2004, our Board of Directors accepted the Report and Supplement,including the findings and recommendations set forth therein. Mr. Forster andMs. Muhlenkamp resigned and Mr. Koziar retired on May 16, 2004, andsubsequently the Company has been involved in litigation with them  (See Note 14 of Notes to ConsolidatedFinancial Statements.)  In addition, in2004 corrective action was taken with regard to internal controls, processissues and tone at the top as identified in the Report.

 

**Governmentaland Regulatory Inquiries**

On April 7, 2004, DPLreceived notice that the staff of the PUCO was conducting an investigation intoour financial condition as a result of previously disclosed matters raised by oneof our executives during the 2003 year-end financial closing process (theMemorandum). On May 27, 2004, the PUCO ordered us to file a plan of utilityfinancial integrity that outlines the actions DPL has taken or would take toinsulate our utility operations and customers from DPL’s unregulated activities.We were required to file this plan by March 2, 2005. On February 4, 2005, wefiled our protection plan with the PUCO and expressed our intention to continueto cooperate with the PUCO in their investigation. On March 29, 2005, the OhioConsumers Counsel (OCC) filed comments with the PUCO on our financial plan ofintegrity, requesting the PUCO continue the investigation and monitor ourprogress toward implementation of DPL’s financial plan of integrity. On June29, 2005, the PUCO closed its investigation, citing significant positiveactions taken by us including changes in DPL’s Board of Directors as well as ourexecutive management, and that no apparent diminution of service quality hasoccurred because of the events that initiated the investigation.

 

On May 28, 2004, the U.S.Attorney’s Office for the Southern District of Ohio, assisted by the FederalBureau of Investigation, notified us that it had initiated an inquiry involvingmatters connected to our internal investigation. We are cooperating with thisinvestigation.

 

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Onor about June 24, 2004, the SEC commenced a formal investigation into theissues raised by the Memorandum. We are cooperating with the investigation.

 

On March 3, 2005, wereceived a notice that the FERC had instituted an operational audit of usregarding our compliance with our Code of Conduct within the transmission andgeneration areas. On October 7, 2005, the FERC issued its Findings andConclusions, stating that we “generally complied with the FERC Standard ofConduct” except for three (3) areas, all of which were corrected to thesatisfaction of the FERC prior to the issuance of these Findings andConclusions.

 

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**Reportof Independent Registered Public Accounting Firm**

** **

The Board of Directors and Shareholder ofThe Dayton Power and Light Company:

 

We have audited the accompanying consolidated balancesheets of The Dayton Power and Light Company and subsidiaries (DP&L) as ofDecember 31, 2005 and 2004, and the related consolidated statements of resultsof operations, shareholders’ equity, and cash flows for each of the years inthe three-year period ended December 31, 2005. In connection with our audits ofthe consolidated financial statements, we have audited the consolidatedfinancial statement schedule, “Schedule II – Valuation and Qualifying Accounts”for each of the years in the three-year period ended December 31, 2005. Theseconsolidated financial statements and the financial statement schedules are theresponsibility of the DP&L’s management. Our responsibility is to expressan opinion on these consolidated financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of DP&L as of December 31, 2005and 2004, and the consolidated results of their operations and their cash flowsfor each of the years in the three-year period ended December 31, 2005, inconformity with United States generally accepted accounting principles. Also,in our opinion, the related financial statement schedules when considered inrelation to the basic consolidated financial statements taken as a whole,present fairly in all material respects, the information set forth therein.

 

Asdiscussed in Note 1 to the consolidated financial statements, effective January1, 2005 the Company adopted FASB Interpretation No. 47, Accounting forConditional Asset Retirement Obligations, an Interpretation of Statement ofFinancial Accounting Standards No. 143.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness of theCompany’s internal controls over financial reporting as of December 31, 2005,based on criteria established in*InternalControl – Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated February 27,2006 expressed an unqualified opinion on management’s assessment of, and theeffective operation of, internal control over financial reporting.

 
| /s/  KPMG              |   |
|------------------------|--------|
|                   |
|                   |
| KPMG                   |
| Kansas  City, Missouri |
| February  27, 2006     |

 

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**Report of Independent RegisteredPublic Accounting Firm on Internal Controls**

 

The Board of Directors and Shareholders ofThe Dayton Power and Light Company:

 

We have auditedmanagement’s assessment, included in the Management’s Report on InternalControl Over Financial Reporting appearing under Item 9A, that The Dayton Powerand Light Company and subsidiaries (DP&L) maintained effective internalcontrol over financial reporting as of December 31, 2005, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). DP&L’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness ofDP&L’s internal control over financial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion,management’s assessment that DP&L maintained effective internal controlover financial reporting as of December 31, 2005, is fairly stated, in allmaterial respects, based on criteria established in *InternalControl - Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion, DP&Lmaintained, in all material respects, effective internal controls overfinancial reporting as of December 31, 2005, based on criteria established in *Internal Control – Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission COSO.

 

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We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of DP&L asof December 31, 2005 and 2004, and the related consolidated statements ofresults of operations, shareholders’ equity, and cash flows for the three-yearperiod ended December 31, 2005, and our report dated February 27, 2006,expressed an unqualified opinion on those consolidated financial statements.

 
| /s/ KPMG              |   |
|-----------------------|--------|
|                  |
|                  |
| KPMG                  |
|                  |
| Kansas City, Missouri |
| February 27, 2006     |

 

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**S e l e c t e d   Q u a r t e r l y   I n f o r m a t i o n   (Unaudited)**

 
| ** **                                                             | ** ** | **For the three months ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                             | ** ** | **March 31,**                                 | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                                            | ** ** | **2005**                                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005 (****a)** | ** ** | **2004** | ** ** |
| Revenues                                                               | ** ** | **$**                                              | **305.1**  |   | $ | 300.4 | ** ** | **$** | **291.4** |   | $ | 282.8 | ** ** | **$** | **355.5** |   | $ | 310.2 | ** ** | **324.9** |   | $ | 298.8 |   |
| Operating Income                                                       | ** ** | **91.4**                                           |       | 106.9 | ** ** | **76.0** |   | 89.6 | ** ** | **112.1** |   | 106.7 | ** ** | **103.1** |   | 66.2 |   |
| Income Before  Income Taxes and Cumulative Effect of Accounting Change | ** ** | **87.9**                                           |       | 99.3 | ** ** | **65.1** |   | 77.7 | ** ** | **100.8** |   | 95.3 | ** ** | **99.3** |   | 57.5 |   |
| Income Before  Cumulative Effect of Accounting Change                  | ** ** | **53.3**                                           |       | 62.0 | ** ** | **35.9** |   | 47.0 | ** ** | **63.1** |   | 55.5 | ** ** | **62.7** |   | 44.5 |   |
| Net Income                                                             | ** ** | **53.3**                                           |       | 62.0 | ** ** | **35.9** |   | 47.0 | ** ** | **63.1** |   | 55.5 | ** ** | **59.5** |   | 44.5 |   |
| Earnings on  Common Stock                                              | ** ** | **53.1**                                           |       | 61.8 | ** ** | **35.7** |   | 47.0 | ** ** | **62.9** |   | 55.5 | ** ** | **59.2** |   | 43.8 |   |
| Cash Dividends  Paid                                                   | ** ** | **75.0**                                           |       | 75.0 | ** ** | **—** |   | 75.0 | ** ** | **—** |   | — | ** ** | **75.0** |   | 150.0 |   |
|                                                                        |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*(a) Earningsin the fourth quarter of 2005 were $15.4 million more than the fourth quarterof 2004 primarily due to higher net margins of $13.7 million (higher revenuesof $26.1 million offset by higher fuel and purchased power costs of $12.4million); lower O&M expense of $19.2 million as a result of lower corporatecosts; a $3.7 million reduction of interest expense due largely to**lower debtservice charges associated with our early retirement of ESOP debt, loweramortization associated with losses on reacquired debt whose amortizationperiods have expired, and the elimination of the interest penalty on the $470million 5.125% Series First Mortgage Bonds resulting from the delayed exchangeoffer registration of those securities; offset by higher taxes of $23.6million. *                 

 

**F i n a n c i a l   a n d S t a t i s t i c a l  S u m m a ry  (Unaudited)**

** **
| **For the years ended December 31,** | ** ** | **2005**   | ** **  | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|---------------------------------------------------------------|------------|------------|-------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                          |       |       |        |     |       |     |       |     |       |     |       |
| Revenues  (millions)                                          | ** ** | **$**      | **1,276.9** |     | 1,192.2    |     | 1,183.4    |     | 1,175.8    |     | 1,188.2    |   |
| Earnings on common  stock (millions)                          | ** ** | **$**      | **210.9**   |     | 208.1      |     | 238.5      |     | 244.7      |     | 232.7      |   |
|                                                          |       |       |        |     |       |     |       |     |       |     |       |
| Cash dividends  paid (millions)                               | ** ** | **$**      | **150.0**   |     | 300.0      |     | 298.7      |     | 204.5      |     | 82.4       |   |
|                                                          |       |       |        |     |       |     |       |     |       |     |       |
| Electric sales  (millions of kWh)—                       |       |       |        |     |       |     |       |     |       |     |       |
| Residential                                                   | ** ** | **5,520**  |        | 5,140    |       | 5,071    |       | 5,302    |       | 4,909    |       |
| Commercial                                                    | ** ** | **3,901**  |        | 3,777    |       | 3,699    |       | 3,710    |       | 3,618    |       |
| Industrial                                                    | ** ** | **4,332**  |        | 4,393    |       | 4,330    |       | 4,472    |       | 4,568    |       |
| Other retail                                                  | ** ** | **1,437**  |        | 1,407    |       | 1,409    |       | 1,405    |       | 1,369    |       |
| Total retail                                                  | ** ** | **15,190** |        | 14,717   |       | 14,509   |       | 14,889   |       | 14,464   |       |
| Wholesale                                                     | ** ** | **2,716**  |        | 3,748    |       | 4,836    |       | 4,358    |       | 3,591    |       |
| Total                                                         | ** ** | **17,906** |        | 18,465   |       | 19,345   |       | 19,247   |       | 18,055   |       |
|                                                          |       |       |        |     |       |     |       |     |       |     |       |
| At December 31,                                               |       |       |        |     |       |     |       |     |       |     |       |
| Total assets  (millions)                                      | ** ** | **$**      | **2,738.6** |     | 2,641.4    |     | 2,660.1    |     | 2,757.3    |     | 2,792.1    |   |
| Long-term debt  (millions)                                    | ** ** | **$**      | **685.9**   |     | 686.6      |     | 687.3      |     | 665.5      |     | 666.6      |   |
|                                                          |       |       |        |     |       |     |       |     |       |     |       |
| First mortgage  bond ratings–                            |       |       |        |     |       |     |       |     |       |     |       |
| Fitch Ratings                                                 | ** ** | **A-**     |        | BBB      |       | A        |       | A        |       | AA       |       |
| Moody’s  Investors Service                               | ** ** | **Baa1**   |        | Baa3     |       | Baa1     |       | A2       |       | A2       |       |
| Standards &  Poor’s Corporation                      | ** ** | **BB**     |        | BB-      |       | BBB-     |       | BBB      |       | BBB+     |       |
|                                                          |       |       |        |     |       |     |       |     |       |     |       |
| Number of  Preferred Shareholders                             | ** ** | **329**    |        | 357      |       | 402      |       | 426      |       | 476      |       |

 

72

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**Item 9 - Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A – Controls and Procedures**

 

**Disclosure Controls and Procedures**

The Company’s Chief Executive Officer (CEO) and Chief Financial Officer(CFO) are responsible for establishing and maintaining the Company’s disclosurecontrols and procedures.  These controlsand procedures were designed to ensure that material information relating tothe Company and its subsidiaries are communicated to the CEO and CFO.  The Company evaluated these disclosurecontrols and procedures as of the end of the period covered by this reportunder the supervision of our CEO and CFO. Based on this evaluation, our CEO and CFO concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information required to be included in our periodic reports filed withthe Securities and Exchange Commission.  

 

There was no change in our internal control over financial reportingduring the most recently completed fiscal period that has materially affected,or is reasonably likely to materially affect, internal control over reporting.  

 

The following report is our report on internal control over financialreporting as of December 31, 2005.

 

**Management’s Report on Internal Control OverFinancial Reporting**

We are responsible forestablishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with theparticipation of management, including the principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour internal control over financial reporting based on the framework in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Based on an evaluation under the framework in*Internal Control - Integrated Framework,*weconcluded that the Company’s internal control over financial reporting waseffective as of December 31, 2005. 

 

Our assessment of the effectiveness of our internalcontrol over financial reporting as of December 31, 2005, has been audited byKPMG LLP, an independent registered public accounting firm, as stated in theirreport which is included herein.

** **

**Item 9B – Other Information**

 

None.

 

73

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**PART III**

 

**Item 10 - Directors and ExecutiveOfficers of the Registrant (Company)**

 

**Directors and Executive Officers**

** **
| **Name**                               | ** ** | **Age** | ** ** | **Background and Experience**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|----------------------------------------|------------|---------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Robert D. Biggs                        |       | 63      |       | Director since 2004;  Executive Chairman since May 16, 2004. Retired Managing Partner,  PricewaterhouseCoopers LLP, Indianapolis, Indiana, since October 1999;  Managing Partner, PricewaterhouseCoopers LLP, July 1992 to October 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                   |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Paul R. Bishop                         |       | 62      |       | Director since 2003.  Chairman and Chief Executive Officer, H-P Products, Inc., Louisville, Ohio  (manufacturer of central vacuum, VACUFLO, and fabricated tubing and fittings  for industry) since 2001; President, H-P Products, Inc. from 1996 to 2001.  Mr. Bishop is a Director of Hawk Corporation and is a member of Stark  Development Board, Mt. Union College Board and Aultman Health  Foundation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                   |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Barbara  S. Graham                     |       | 57      |       | Director since 2005;  Senior Vice President, Pepco Holdings, Inc. (utility holding company formed  with the merger of Pepco and Conectiv) from June 2002 to July 2003; Senior  Vice President of Shared Services and CIO, Conectiv (electric and gas utility  formed with 1998 merger of Atlantic Energy, Inc. and Delmarva Power and Light  Company) from January 1999 to June 2002; Senior Vice President, Conectiv from  March 1998 to January 1999. Ms. Graham is a Director of Artisans’ Bank and  Chair of the Executive Committee of Swingin’ With a Star (a non-profit  organization).                                                                                                                                                                                                                                                                                                                                                                  |
|                                   |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Ernie Green                            |       | 67      |       | Director since 1991. President and Chief Executive  Officer, Ernie Green Industries, Dayton, Ohio (automotive components  manufacturer) since 1981. Mr. Green is a Director of Pitney Bowes Inc. and  Eaton Corp. Mr. Green is also Chairman of the Central State University  Foundation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                   |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Glenn E. Harder                        |       | 55      |       | Director since 2004. President of GEH Advisory  Services, LLC (a firm specializing in strategic advisory services) since  October 2002; Executive Leader, Business Services of Baptist State Convention  of North Carolina (the largest non-profit organization in North Carolina,  involving over 4,000 churches and over one million members) since February  2004; Executive Vice President and Chief Financial Officer of Coventor, Inc.  from May 2000 through October 2002; Executive Vice President and Chief  Financial Officer of Carolina Power and Light from October 1995 through March  2000. Prior to that, Mr. Harder held a variety of financial positions during  his 16 years with Entergy Corporation, including Vice President of Financial  Strategies, Vice President of Accounting and Treasurer.                                                                                                                                                  |
|                                   |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| W August Hillenbrand                   |       | 65      |       | Director since 1992; Vice-Chairman since  May 16, 2004. Principal, Hillenbrand Capital Partners and Retired  President and Chief Executive Officer, Hillenbrand Industries, Batesville,  Indiana (a diversified public holding company that manufactures caskets,  hospital furniture, hospital supplies and provides funeral planning services)  since 2001; Chief Executive Officer, Hillenbrand Industries from 1989 to  2000. Mr. Hillenbrand is a Director of Hillenbrand Industries and Pella  Corporation and is a Trustee of Batesville Girl Scouts and Trustee Emeritus  of Denison University.                                                                                                                                                                                                                                                                                                                                                             |
|                                   |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Lester L. Lyles,  General, USAF (Ret.) |       | 59      |       | Director since 2004.  Commander of Air Force Materiel Command from April 2000 to August 2003, the  27th Vice Chief of Staff of the United States Air Force from 1999 to 2000.  General Lyles is a Trustee of Wright State University, a Director and member  of the Audit Committee of General Dynamics Corp. and Director of MTC  Technologies. He is also a member of The President’s Commission on U.S. Space  Policy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                   |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| James V. Mahoney                       |       | 60      |       | Director since 2004.  President and Chief Executive Officer of DPL Inc. and DP&L since  May 16, 2004; President, DPL Energy LLC, a wholly-owned subsidiary  responsible for wholesale and retail energy sales and marketing from January  2003 to September 2004; President, Energy Market Solutions, an energy  consulting firm from August 2002 to January 2003; President and Chief  Executive Officer, EarthFirst Technologies, Incorporated, a company that  licenses evolving technologies for environmental and alternate energy  solutions from August 2001 to August 2002; Senior Vice President, PG&E  National Energy Group, a wholesale power supplier from May 1999 to July 2001;  Senior Vice President, U.S. Generating Company from March 1998 to May 1999.  Mr. Mahoney serves on the boards of Rebuilding Together Dayton, Culture Works,  Dayton Development Coalition and the Dayton Business Committee. Mr. Mahoney  joined us in 2003. |
|                                   |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Ned J. Sifferlen, Ph. D.               |       | 64      |       | Director since 2004;  President Emeritus, Sinclair Community College from September 2003 to  present; President, Sinclair Community College from September 1997 to August  2003. Dr. Sifferlen is Chairman of the Board of Trustees of Good Samaritan  Hospital and Samaritan Health Partners and is a Director on the Board for  both Premier Health Partners and Think TV Public Television.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

 

74

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**Executive Officers who are not Directors**

 
| **Name**           | ** ** | **Age** | ** ** | **Position, Principal Occupation,  Business Experience and Directorships**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------------------|------------|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Miggie E. Cramblit |       | 50      |       | Vice President, General Counsel and Corporate  Secretary, DPL Inc. and DP&L since January 2005; Vice President and  General Counsel, DPL Inc. and DP&L from June 2003 to December 2004;  Counsel and Corporate Secretary, Greater Minnesota Synergy from October 2001  to June 2003; Chief Operating Officer, Family Financial Strategies from June  1999 to May 2001; Vice President and General Counsel, Reliant  Energy/Minnegasco from December 1990 to May 1999. Ms. Cramblit is on the  Executive Advisory Board of a Special Wish Foundation, a virtual mentor with  Menttium Corporation, and a board member of the Foodbank, the Dayton  Philharmonic Orchestra and the Miami Valley Child Development Centers. Ms.  Cramblit joined us in 2003. |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| John J. Gillen     |       | 52      |       | Senior Vice President and Chief Financial Officer,  DPL Inc. and DP&L since December 2004; Consultant, October 2003 to November  2004; Partner, PricewaterhouseCoopers LLP, from October 1990 to September  2003. Mr. Gillen is a member of the American Institute of Certified Public  Accountants. He is also a member of the President’s Council of the Magee  Rehabilitation Centre. Mr. Gillen joined us in 2004.                                                                                                                                                                                                                                                                                                                                   |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Arthur G. Meyer    |       | 56      |       | Vice President, Corporate and Regulatory Affairs,  DPL Inc. and DP&L from January 2005; Vice President and Corporate  Secretary, DPL Inc. and DP&L from August 2002 to December 2004; Vice  President, Legal and Corporate Affairs, DP&L from November 1997 to August  2002. Mr. Meyer is Chair of the Greater Dayton Public Television Board of  Trustees and is a member of the Wilberforce University Board of Trustees. He  also serves on the Ohio Electric Utility Institute Board of Directors, the  Miami Valley Regional Planning Commission Board of Directors, and the Capitol  Square Foundation Board of Directors. Mr. Meyer joined us in 1992.                                                                                         |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Gary Stephenson    |       | 41      |       | Vice President-Commercial Operations, DPL Inc. and  DP&L since September 2004; Vice President, Commercial Operations,  InterGen from April 2002 to September 2004; Vice President, Portfolio  Management, PG&E National Energy Group (successor to PG&E Energy  Trading) from January 2000 to April 2002; Director, Portfolio Management,  PG&E Energy Trading from January 1998 to December 1999. Mr. Stephenson  joined us in 2004.                                                                                                                                                                                                                                                                                                             |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Patricia K. Swanke |       | 47      |       | Vice President, Operations, DP&L since September  1999 (responsible for electric transmission and distribution operations);  Managing Director, DP&L from September 1996 to September 1999. Ms. Swanke  serves on the Board of Trustees of the Dayton Arts Center Foundation, the  Greene County Community Foundation, the K12 Gallery for Youth, and the  Mayor’s Commission on Adult Literacy. Ms. Swanke joined us in 1990.                                                                                                                                                                                                                                                                                                                       |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| W. Steven Wolff    |       | 52      |       | President, Power Production, DPL Inc. and DP&L  since 2003; Vice President, Power Production, DPL Inc. and DP&L from  August 2002 to January 2003; Director, Power Production, DP&L from  January 2002 to August 2002; Manager, O.H. Hutchings Station, DP&L from  August 2001 to January 2002; Captain, U.S. Navy from November 1996 to August  2001. Mr. Wolff is a member of the Victoria Theater Board of Directors, the  Executive Boards of the Miami Valley Council of the Boy Scouts of America and  the Cox Arboretum Board of Trustees. Mr. Wolff joined us in 2001.                                                                                                                                                                    |

 

 

**Director and Management Changes**

 

Mrs. Jane G. Haley, Chairman, President and ChiefExecutive Officer, Gosiger Inc., and a director since 1978, did not stand forre-election in 2005.

 

On April 26, 2005, Ms. Barbara S. Graham was electedto the Board of Directors for both DPL Inc. and the Company.

 

On August 29, 2005, we and DPL appointed Joseph R.Boni III as Treasurer.

 

On September 15, 2005, James F. Dicke, II,resigned from the Board of Directors for both DPL Inc. and the Company.

 

**Audit Committee**

 

DPL has a separately-designated standing audit committee (the AuditCommittee) that oversees our auditing, accounting, financial reporting andinternal control functions, appoints our independent public accounting firm andapproves its services.  One of itsfunctions is to assure that the independent public accountants have thefreedom, cooperation and opportunity necessary to accomplish theirfunctions.  The Audit Committee alsoassures that appropriate action is taken on the recommendations of theindependent public accountants.  DPL’srevised Charter of the Audit Committee, which describes all of the AuditCommittee’s responsibilities, is posted on DPL’s website at www.dplinc.com.

 

The Audit Committee currently consists of the following independentdirectors:  W August Hillenbrand, Chair, GlenE. Harder, Vice Chair, Ernie Green and Ned Sifferlen.  The Board of Directors has determined thateach member of the Audit Committee meets the independence requirementscontained in the New York Stock Exchange (NYSE) Corporate Governance Rules andRule 10A-3(b)(1) of the Exchange Act and is financially literate asdefined by the NYSE.  In addition, Mr.Harder qualifies as an “audit committee financial expert” within the meaning ofSEC regulations.

 

75

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**Code of Business Conduct and Ethics**

 

All of our directors, officers and employees must act ethically at alltimes and in accordance with DPL’s Code of Business Conduct and Ethics.  This code satisfies the definition of “codeof ethics” pursuant to the rules and regulations of the SEC and complies withthe requirements of the NYSE.

 

Any changes or waivers to the Code of Business Conduct and Ethics forour officers or directors may only be made by the Board or a committee thereofand must be disclosed promptly to shareholders.

 

DPL’s Corporate Governance Guidelines, Code of Business Conduct andEthics, and the charters of the Audit Committee, Compensation Committee and theNominating and Corporate Governance Committee are posted on DPL’s website atwww.dplinc.com.

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

Section 16(a) of the Securities Exchange Act of 1934, as amended,requires our directors and executive officers to file reports of ownership andchanges of ownership of DPL common shares and common share units with theSEC.  We believe that during fiscal 2005all filing requirements applicable to its directors and executive officers weretimely met.

 

**Shareholder Communications**

 

Shareholders and other interested persons may contact thenon-management directors individually or as a group by writing to suchdirector(s) at The Dayton Power and Light Company, c/o Corporate Secretary,1065 Woodman Drive, Dayton, Ohio 45432. Shareholders may also send communications within the meaning of Item7(h) of Schedule 14A under the Exchange Act to one or more members of the Boardby writing to such director(s) or to the whole Board at The Dayton Power andLight Company, c/o Corporate Secretary, 1065 Woodman Drive, Dayton,Ohio 45432.

 

 

**Item 11 -****Executive Compensation**

 

**Summary Compensation Table**

Set forth below is certain informationconcerning the compensation of the Chief Executive Officer and each of our fourmost highly compensated executive officers for the last three fiscal years, forservices rendered in all capacities.

 
| ** **                                               | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation** | ** ** | ** **                             | ** ** |
|----------------------------------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------|------------|----------------------------------------|------------|
| **Name and  Principal Position**                         | ** ** | **Year**   | ** ** | **Salary  ($)**         | ** ** | **Bonus  ($)**              | ** ** | **Other  Annual Compensation (1) ($)** | ** ** | **Securities  underlying Options (#)** | ** ** | **LTIP (2)  ($)** | ** ** | **All  Other Compensation (3) ($)** | ** ** |
| James V. Mahoney                                         |       | 2005       |       | 515,000                 |       | 650,000                     |       | 49,109                                 |       | — |   | 586,000 | (5) | — |   |
| President and  Chief                                     |       | 2004       |       | 471,000                 |       | 269,000                     |       | 35,992                                 |       | 20,000 |   | 398,000 | (4) | — |   |
| Executive Officer  DPL Inc. and DP&L                 |       | 2003       |       | 425,000                 |       | 150,000                     |       | 5,179                                  |       | 100,000 |   | 184,000 |   | 259,653 |   |
|                                                     |       |       |       |                    |       |                        |       |                                   |       |   |   |   |   |   |   |
| Robert D. Biggs                                          |       | 2005       |       | 500,000                 |       | 1,500,000                   | (7)        | 259,077                                |       | 350,000 |   | — |   | 101,560 |   |
| Executive  Chairman                                      |       | 2004       |       | 149,000                 |       | 500,000                     |       | 65,759                                 |       | 200,000 |   | — |   | 1,936,925 |   |
| DPL Inc. and  DP&L                                   |       | 2003       |       | —                  |       | —                      |       | —                                 |       | — |   | — |   | — |   |
|                                                     |       |       |       |                    |       |                        |       |                                   |       |   |   |   |   |   |   |
| John J. Gillen                                           |       | 2005       |       | 319,000                 |       | 300,000                     |       | 95,791                                 |       | — |   | 85,300 | (6) | 50,934 |   |
| Senior Vice  President                                   |       | 2004       |       | —                  |       | —                      |       | —                                 |       | 30,000 |   | — |   | — |   |
| Chief Financial Officer  DPL Inc. and DP&L |       | 2003       |       | —                  |       | —                      |       | —                                 |       | — |   | — |   | — |   |
|                                                     |       |       |       |                    |       |                        |       |                                   |       |   |   |   |   |   |   |
| Patricia K. Swanke                                       |       | 2005       |       | 258,000                 |       | 250,000                     |       | 2,503                                  |       | — |   | 205,000 |   | 119,998 |   |
| Vice President,                                          |       | 2004       |       | 249,000                 |       | 143,000                     |       | 4,539                                  |       | — |   | 270,000 | (4) | 67,692 |   |
| Operations  DP&L                                     |       | 2003       |       | 230,000                 |       | 80,000                      |       | 1,061                                  |       | — |   | 193,000 |   | 35,797 |   |
|                                                     |       |       |       |                    |       |                        |       |                                   |       |   |   |   |   |   |   |
| W. Steven Wolff  President,                              |       | 2005       |       | 271,000                 |       | 200,000                     |       | 85,884                                 |       | — |   | 205,000 |   | — |   |
| DPL Power  Production                                    |       | 2004       |       | 263,000                 |       | 119,000                     |       | 33,562                                 |       | — |   | 234,000 | (4) | — |   |
| DPL Inc. and  DP&L                                   |       | 2003       |       | 250,000                 |       | 113,000                     |       | 14,905                                 |       | — |   | 279,000 |   | — |   |

----

(1)   See details of “Other Annual Compensation” inthe following table.

(2)   Amounts in this column represent annualizedincentives earned based on achievement of predetermined total return toshareholder measures and under a long-term incentive program.  In 2005, 2004 and 2003, total return toshareholders met the criteria, and incentive amounts were earned.

(3)   See details of “All Other Compensation” inthe table on the following page.

(4)   Includes interest on the 2004 LTIP awards asfollows: Mr. Mahoney - $4,000; Ms. Swanke - $10,000; and Mr. Wolff - $14,000.

(5)   Mr. Mahoney’s LTIP award for 2005 was$576,000 of which one third ($192,000) was payable immediately upon grant andthe remaining two-third will vest equally at the end of 2006 and 2007.

(6)   Mr. Gillen’s LTIP award for 2005 was $256,000of which one third ($86,300) was payable immediatedly upon grant and theremaining two-thirds will vest equally at the end of 2006 and 2007. 

(7)   Includes $500,000 paid in recognition of Mr.Biggs’ significant efforts in leading the effort to sell DPL’s financial assetportfolio.

 

76

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| **DPL  Inc.  Other Annual Compensation Detail**

** ** | ** ** |
|-------------------------------------------------------------|------------|
| **Officer/ Director**                                       | ** ** | **Year** | ** ** | **Personal  Use of Plane (No Gross-Up) ($)** | ** ** | **Commuting  Plane Use (Gross-Up) ($)** | ** ** | **Medical  Expenses (Gross-Up) ($)** | ** ** | **Corporate  Car Usage (Gross-Up) ($)** | ** ** | **Group  Term Life Insurance ($)** | ** ** | **Financial  Planning (Gross-Up) ($)** | ** ** | **ESOP/  401(k) ($)** | ** ** | **TOTAL** | ** ** |
|                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mahoney                                                     |       | 2005 |   | 32,859 |   | — |   | 7,726 |   | — |   | 7,524 |   | — |   | 1,000 |   | 49,109 |   |
|                                                        |       | 2004 |   | 8,338 |   | — |   | 21,751 |   | — |   | 4,903 |   | — |   | 1,000 |   | 35,992 |   |
|                                                        |       | 2003 |   | — |   | — |   | — |   | — |   | 4,179 |   | — |   | 1,000 |   | 5,179 |   |
|                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Biggs                                                       |       | 2005 |   | 58,738 |   | 191,402 |   | — |   | 4,535 |   | 4,402 |   | — |   | — |   | 259,077 |   |
|                                                        |       | 2004 |   | 18,751 |   | 42,038 |   | — |   | 3,201 |   | 1,769 |   | — |   | — |   | 65,759 |   |
|                                                        |       | 2003 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gillen                                                      |       | 2005 |   | — |   | 81,017 |   | — |   | 11,342 |   | 2,432 |   | — |   | 1,000 |   | 95,791 |   |
|                                                        |       | 2004 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                        |       | 2003 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Swanke                                                      |       | 2005 |   | — |   | — |   | 1,413 |   | — |   | 90 |   | — |   | 1,000 |   | 2,503 |   |
|                                                        |       | 2004 |   | — |   | — |   | 3,449 |   | — |   | 90 |   | — |   | 1,000 |   | 4,539 |   |
|                                                        |       | 2003 |   | — |   | — |   | — |   | — |   | 61 |   | — |   | 1,000 |   | 1,061 |   |
|                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Wolff                                                       |       | 2005 |   | 790 |   | — |   | 65,963 |   | — |   | 138 |   | 17,993 |   | 1,000 |   | 85,884 |   |
|                                                        |       | 2004 |   | 3,041 |   | — |   | 22,249 |   | — |   | 133 |   | 7,139 |   | 1,000 |   | 33,562 |   |
|                                                        |       | 2003 |   | 6,659 |   | — |   | — |   | — |   | 141 |   | 7,105 |   | 1,000 |   | 14,905 |   |
|                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **DPL  Inc.  All Other Compensation Detail** | ** ** |
|----------------------------------------------|------------|
|                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Officer/ Director**                        | ** ** | **Year** | ** ** | **Annuity  ($)** | ** ** | **Annuity  Gross-Up Amount ($)** | ** ** | **Board  Fees ($)** | ** ** | **Temporary  Living & Relocation (Gross-Up) ($)** | ** ** | **Legal  Services ($)** | ** ** | **SIUs ($)** | ** ** | **TOTAL ($)** | ** ** |
|                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mahoney                                      |       | 2005 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                         |       | 2004 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                         |       | 2003 |   | — |   | — |   | — |   | 259,653 |   | — |   | — |   | 259,653 |   |
|                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Biggs                                        |       | 2005 |   | — |   | — |   | — |   | 52,431 |   | 49,129 |   | — |   | 101,560 |   |
|                                         |       | 2004 |   | 897,345 | (1)  | 671,166 |   | 348,000 |   | 20,414 |   | — |   | — |   | 1,936,925 |   |
|                                         |       | 2003 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gillen                                       |       | 2005 |   | — |   | — |   | — |   | 50,934 |   | — |   | — |   | 50,934 |   |
|                                         |       | 2004 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                         |       | 2003 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Swanke                                       |       | 2005 |   | — |   | — |   | — |   | — |   | — |   | 119,998 |   | 119,998 |   |
|                                         |       | 2004 |   | — |   | — |   | — |   | — |   | — |   | 67,692 |   | 67,692 |   |
|                                         |       | 2003 |   | — |   | — |   | — |   | — |   | — |   | 35,797 |   | 35,797 |   |
|                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Wolff                                        |       | 2005 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                         |       | 2004 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                         |       | 2003 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   See the description of Mr. Biggs’ employmentagreement in the section of this Form 10-K entitled “Employment Agreements” fora description of the annunity.

 

**Option Grants in Last Fiscal Year**

 

The following table sets forth informationconcerning individual grants of stock options made to the named executiveofficer(s) during the fiscal year ended December 31, 2005.

 
| ** **      | **Individual Grants** |                                                     |
|-----------------|-----------------------|----------------------------------------------------------|
| **Name**        | ** **            | **Number  of Securities Underlying Options Granted (#)** | ** ** | **% of  Total Options Granted to Employees in Fiscal Year** | ** ** | **Exercise  Price ($/Sh)** | ** ** | **Expiration  Date** | ** ** | **Grant  Date Present Value (1) ($)** | ** ** |   |
| Robert D. Biggs |                  | 350,000 (2                                               | ) | 100% |   | $ | 26.82 |   | 08/31/08 |   | $ | 1,330,000 |   |
|                 |                       |                                                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)   The grantdate present value was determined using the Black-Scholes pricing model.  Significant assumptions used in the modelwere:  expected volatility 26%, risk-freerate of return 3.8%, dividend yield of 3.7% and time of exercise 3 years.

(2)   Optionsgranted pursuant to our Stock Option Plan on August 31, 2005.  These options vest and become exercisable onJune 30, 2006.

 

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**Aggregated Option Exercises in Last Fiscal Yearand Fiscal Year-End Option Values**

 

The following table sets forth information concerningexercise of stock options during fiscal year 2005 by each of the namedexecutive officers and the fiscal year-end value of unexercised options.

 
| **Name**           | ** ** | **Shares acquired on exercise  (#)** | ** ** | **Value realized  ($)** | ** ** | **Number of securities underlying unexercised options at fiscal year end  (#)** | ** ** | **Value of unexercised in-the-  money options at fiscal  year end (1)  (#)** | ** ** |
|--------------------|------------|--------------------------------------|------------|-------------------------|------------|---------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **         | ** ** | ** **                           | ** ** | ** **              | ** ** | **Exercisable**                                                                 | ** ** | **Unexercisable**                                                            | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| James V. Mahoney   |       | —                               |       | —                  |       | 80,000                                                                          |       | 40,000                                                                       |       | 630,000 |   | 405,200 |   |
| Robert D. Biggs    |       | —                               |       | —                  |       | 100,000                                                                         |       | 450,000                                                                      |       | 507,000 |   | 225,000 |   |
| John J. Gillen     |       | —                               |       | —                  |       | 10,000                                                                          |       | 20,000                                                                       |       | 10,100 |   | 20,200 |   |
| Patricia K. Swanke |       | —                               |       | —                  |       | 50,000                                                                          |       | —                                                                       |       | — |   | — |   |

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(1)  Unexercised options were in-the-money if the fair market value ofthe underlying shares exceeded the exercise price of the option at December 31,2005.

 

 

**Pension Plans**

 

The following table sets forth the estimatedtotal annual benefits payable under the DP&L retirement income plan and theSupplemental Executive Retirement Plan (SERP), if applicable, to executiveofficers at normal retirement date (age 65) based upon years of creditedservice and final average annual compensation (including base and incentivecompensation) for the three highest years during the last five years:

 
| **Final Average**

**Annual Earnings ($)** | ** ** | **Total Annual Retirement Benefits for  Years of Credited Service at Age 65 ($)** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **10 Years**                                                                      | ** ** | **15 Years** | ** ** | **20 Years** | ** ** | **30 Years** | ** ** |
| 210,000                                    |       | 49,398                                                                            |       | 74,097 |   | 98,796 |   | 132,417 |   |

 

The years of creditedservice are:  Mr. Mahoney – 2 years;Mr. Biggs – (not applicable due to employment agreement); Mr. Gillen –0 years; Ms. Swanke – 14 years; and Mr. Wolff –3 years.  Benefits are computed on astraight-life annuity basis, are subject to deduction for Social Securitybenefits and may be reduced by benefits payable under retirement plans of otheremployers.

 

 

**Deferred Compensation Distributions**

 

We maintain a Key Employee DeferredCompensation Plan (the DCP) and a 1991 Amended Directors’ Deferred CompensationPlan (the Directors’ DCP and collectively with the DCP, the DeferredCompensation Plans) for certain officers, directors and other keyemployees.  The Deferred CompensationPlans generally enable participants to defer all or a portion of their cashcompensation earned in a particular year. If an individual elects to defer any amount, such deferred amounts arereported as compensation in the year earned and are credited to theindividual’s deferred compensation plan account.  We have provided for our obligations toparticipants through a trust, which is included in the Consolidated BalanceSheet in “Other Assets — Other.” Deferred compensation plan account balances accrue earnings based on theinvestment options selected by the participant. Interest, dividends and market value changes 

 

 

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are reflected in the individual’s deferredcompensation plan account.  Deferredcompensation plan account balances generally are paid following the terminationof the participant’s employment with us, in a lump sum or over time asdetermined by the participant’s deferral election form, and in-servicedistributions generally are not allowed. In certain circumstances the plan provides for a 10% penalty for earlywithdrawal.  Payments under the DCP arein cash or our common shares, provided that distributions attributable toinvestments in our common shares must be paid in common shares.  Certain purported amendments to the DeferredCompensation Plans purportedly made in December 2003 had the effect ofeliminating some of these restrictions for certain former senior executives andfacilitating these former executive officers to receive cash distributions fromtheir deferred compensation balances.  Wehave initiated legal proceedings challenging the validity of these purportedamendments and the distributions.  (See“Certain Legal Proceedings.”)

 

We have also maintained a Management StockIncentive Plan (the MSIP and together with the Deferred Compensation Plans, thePlans) for key employees selected by the Compensation Committee.  New awards under the MSIP were discontinuedin 2000.  Under the MSIP, theCompensation Committee granted Stock Incentive Units (SIUs) to MSIPparticipants, with each SIU representing one DPL common share.  SIUs were earned based on the achievement ofperformance criteria set by the Compensation Committee and vested over time(subject to acceleration of earning and vesting on the occurrence of certainevents or at the discretion of our Chief Executive Officer or the CompensationCommittee).  Earned SIUs were credited toa participant’s account under the MSIP and accrue dividends like our commonshares.  Under the MSIP, earned andvested SIUs were to be paid in our common shares in a lump sum or over time asdetermined by the participant’s deferral election.

 

We have initiated legal proceedings whichchallenge the validity of purported amendments to the MSIP and DCP.  (See “Certain Legal Proceedings.”)  Notwithstanding this challenge to thevalidity of the purported amendments to the Plans, we have accounted for thePlans as they have been administered.

 

We maintain a Supplemental ExecutiveRetirement Plan (SERP).  In February2000, the Compensation Committee approved certain modifications to the SERP.

 

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**Employment Agreements**

 

OnFebruary 23, 2006, our and DPL’s Board of Directors approved a comprehensivemodification to our executive compensation and benefits program.  The new program covers the following nineofficers of the Company and/or DPL:  Presidentand CEO; Senior Vice President and CFO; President, Power Production; VicePresident, Operations; Vice President-Commercial Operations; Vice President,General Counsel and Corporate Secretary; Vice President; Treasurer; andCorporate Controller. As of March 6, 2006, the following officers havesigned their Participation Agreement and Waiver: President and CEO; President,Power Production; Vice President, Operations; Vice President - CommercialOperations; Vice President, General Counsel and Secretary; Vice President;Treasurer; and Corporate Controller.

 

As a result of the passage of the new program, each eligibleofficer, except for Mr. Biggs, who has signed a Participation Agreement andWaiver, will be compensated under the executive compensation and benefitsprogram.  Under the Participation Agreementand Waiver, the officer voluntarily waives and releases all rights he or shehad under his or her employment agreement and certain other compensatoryplans.  In addition to participationunder the executive compensation and benefits program, each eligible officer ispermitted to retain certain benefits uniquely awarded to such officer under theformer employment agreements and compensation plans.  Mr. Biggs’ employment agreement issummarized below.  In addition, theemployment agreements for each of the other named executive officers aresummarized below.  The employmentagreement of Mr. Gillen will remain effective until a Participation Agreementand Waiver is signed.

 

**Robert D.Biggs**

 

Mr. Biggs has served as the Chairman of theBoard of Directors of DPL and DP&L since May 16, 2004, and he wasappointed Executive Chairman of DPL and DP&L pursuant to an employmentagreement, dated July 21, 2004, and effective as of May 16, 2004.  We and DPL signed an amended and restatedemployment agreement with Mr. Biggs on August 31, 2005.  The term of Mr. Biggs’ amended and restatedemployment agreement is through June 30, 2006, unless terminated, with orwithout cause, by us, DPL or Mr. Biggs upon 90 days written notice;provided that we or DPL may terminate Mr. Biggs for cause without priornotice.  The agreement also automaticallyterminates upon Mr. Biggs’ death or disability. Mr. Biggs’ agreement includes non-compete and confidentialityprovisions.

 

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*Compensationand Indemnification*

 

Mr. Biggs’ agreement provides for (i) anannual base salary of $500,000; (ii) his eligibility to receive an annualbonus under the Management Incentive Compensation Plan (MICP) with a guaranteedminimum of at least $500,000; (iii) stock options to purchase 350,000shares of Company common stock at an exercise price to be determined pursuantto our Stock Option Plan and that will vest and become exercisable onJune 30, 2006; and (iv) term life insurance policy with a deathbenefit of $1,000,000.  (We havesatisfied this insurance obligation by purchasing a policy with a death benefitof $500,000 and self-insuring the balance.) In addition, we will provide Mr. Biggs with the use of corporateaircraft in connection with his travel between Dayton and his home in Floridaand will pay a tax gross-up in respect of such use.  Previously in October 2004, pursuant to hisinitial employment agreement, we awarded Mr. Biggs 200,000 options topurchase our common shares at an exercise price determined under the StockOption Plan with half of the options vesting on May 16, 2005, and thebalance vesting on May 16, 2006.

 

Further, Mr. Biggs retired as a ManagingPartner of PricewaterhouseCoopers LLP (PwC) in 1999 and received retirementbenefits from PwC which, if continued, could have affected whether PwCqualified as our independent auditing firm. PwC was our and DPL’s independent auditor until March 2003 and wasrequired to give its consent to the filing of our 2003 Form 10-K.  In order for PwC to continue to qualify as anindependent auditor, Mr. Biggs agreed to accept his retirement benefitfrom PwC in the form of an annuity which provides an annual retirement benefitthat is $71,000 less than the amount he previously received from PwCdirectly.  To compensate Mr. Biggsfor the resulting reduction in his PwC retirement benefits, we and DPLpurchased an annuity that pays Mr. Biggs $71,000 per year for life in additionto the compensation described above.  Weand DPL will also provide Mr. Biggs with gross-up payments for any incometaxes incurred by him in connection with the annuity such that Mr. Biggsis in the same after-tax position as if no income taxes had been imposed.  Upon Mr. Biggs’ death, Mr. Biggs’spouse will receive an annual amount equal to 30% of the total annuity payableto Mr. Biggs for life.  Thisarrangement will continue to be binding even if Mr. Biggs no longer servesas Executive Chairman.

 

Mr. Biggs’ agreement states that we and DPL willindemnify him against any and all losses, liabilities, damages, expenses(including attorney’s fees), judgments and amounts paid in settlement incurredby Mr. Biggs in connection with any claim, action, suit or proceeding (whethercivil, criminal, administrative or investigative), including any action by orin the right of either us or DPL, by reason of any act or omission to act inconnection with the performance of his duties under the agreement to the fullextent that we and DPL are permitted to indemnify a director, officer, employeeor agent against the foregoing under the respective Codes of Regulations of DPLand DP&L and Ohio law, including without limitation, Section 1701.13(E) ofthe Ohio Revised Code.

 

*Termination*

 

If Mr. Biggs’ employment is terminated forany reason, Mr. Biggs’ agreement provides for (i) his annual base salarythrough the date of his termination and (ii) any accrued benefits underour and DPL’s compensation or benefit plans or arrangements in accordance withtheir terms, including any unpaid bonuses payable in respect of a completedfiscal year.

 

If Mr. Biggs’ employment is terminatedwithout cause prior to a change of control, in addition to the payments andbenefits described above, Mr. Biggs’ agreement provides for (i) a lump sumcash payment equal to his annual base salary; (ii) any MICP amounts earnedor otherwise payable as calculated under the agreement; (iii) continuedbenefits for up to one year after employment is terminated; and (iv) thevesting of all awarded stock options; provided that Mr. Biggs executes anddelivers a release pursuant to which he fully and unconditionally releases anyclaims that he may have against us or DPL.

 

*Change ofControl*

 

If on June 30, 2006, we are in discussionswith a potential acquirer relating to a transaction which could result in achange of control, Mr. Biggs can extend his employment contract for six-monthsuccessive periods.  If a change ofcontrol occurs while Mr. Biggs is employed by us, besides the amount he is toreceive as set forth in the first paragraph above under “Termination,” Mr.Biggs’ agreement provides for (i) a lump sum cash payment equal to the sumof (a) 200% of the annual base salary plus an average of the sum of(a) $500,000 and (b) the award payment made to Mr. Biggs under theMICP for the three years preceding the date of termination or for the number ofyears he has participated in the MICP, if less than three, including anydeferrals; (ii) any MICP amounts earned or otherwise payable as calculatedunder the agreement; (iii) a gross-up payment if any excise tax is imposedupon a change of control such that Mr. Biggs is in the same after-tax positionas if no excise tax was imposed; (iv) the continuation of his benefits forup to three years following his termination; and (v) the vesting of all ofhis awarded stock options; provided that Mr. Biggs executes and delivers arelease pursuant to which he fully and unconditionally releases any claims thathe may have against us or DPL.  Ifpayments to Mr. Biggs are made under the first subparagraph above due to achange in control, Mr. Biggs shall also receive one-half of the amountcalculated under the first subparagraph above in consideration of hiscompliance with certain non-compete and confidentiality provisions of hisagreement.

 

The passage of our comprehensive executivecompensation and benefits program on February 23, 2006, does not impactMr. Biggs’ amended and restated employment agreement or management stock optionagreements.

 

 

**James V.Mahoney**

 

Mr. Mahoney served as the President and ChiefExecutive Officer of the Company and DPL from May 16, 2004, pursuant to anemployment agreement dated December 14, 2004.  Prior to this promotion, Mr. Mahoneyserved as President of DPL Energy, LLC from January 2003 until May 16,2004.  The term of Mr. Mahoney’semployment agreement was indefinite until terminated by us or Mr. Mahoney, withor without cause, upon 90 days’ written notice, provided that we can terminatethe agreement with cause without prior notice. The agreement also automatically terminates upon Mr. Mahoney’s death ordisability.

 

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*Compensation*

 

Mr. Mahoney’s agreement provided for(i) an annual base salary of not less than $500,000;(ii) participation in the MICP, in which during 2005, he had theopportunity to earn $250,000 at 100% of the target performance;(iii) participation in the our Long Term Incentive Plan (LTIP), in whichduring 2005, he had the opportunity to earn $450,000 at 100% of target performance;(iv) stock options to purchase up to 20,000 shares of common stock; and(v) such fringe benefits (including medical, life and disability insurancebenefits and qualified retirement benefits) as were generally made available toother executive level employees.  Awardsearned pursuant to the LTIP would vest in three equal installments onDecember 31 of each year, commencing with the year in which an award wasgranted.

 

*Termination*

 

If Mr. Mahoney’s employment was terminated(i) for cause as defined in the employment agreement, or (ii) due tohis death or disability, or (iii) for any reason at any time, Mr.Mahoney’s employment agreement provides for (a) a lump sum cash payment toMr. Mahoney equal to the sum of his unpaid base salary through the date of termination;(b) the amount of any awards, with respect to any completed period which,pursuant to the MICP or LTIP, had been earned but not yet paid; and(c) payment of any other accrued benefits to which Mr. Mahoney is entitledthrough the date of termination.  If Mr.Mahoney terminated his employment for any reason at any time, we agreed to payan additional amount equal to his annual base salary.

 

If we or DPL terminated Mr. Mahoney’semployment without cause and a change of control had not occurred or was notpending, Mr. Mahoney’s employment agreement provided for (i) thebenefits described in the paragraph above; (ii) the amount of any awards,with respect to any completed period which, pursuant to the MICP and LTIP, hadbeen earned but were not vested through the date of termination; and(iii) continued coverage under the health benefit plan for executiveemployees at the same cost and terms as in effect immediately prior to the dateof notice of (a) the first anniversary of his termination date or (b) thedate an essentially equivalent benefit is made available to Mr. Mahoney atsubstantially similar cost, provided that in order to secure these payments,Mr. Mahoney executed and delivered a release pursuant to which he fully andunconditionally released any claims that he may have had against us and ouraffiliates.

 

*Change ofControl*

 

If we terminated Mr. Mahoney’s employmentwithin 12 months of a change of control and (i) such termination iswithout cause or (ii) Mr. Mahoney resigned for “Good Reason” as defined inthe employment agreement (“Good Reason” is defined as (i) assignment ofduties without his express consent inconsistent with the written objectives ofhis position, a change in his reporting responsibilities, his removal from orany failure to re-elect Mr. Mahoney to his position or office; (ii) failure tohave his annual base salary raised when salary adjustments are historicallymade; (iii) a reduction in his base salary; (iv) failure by us or DPLto continue a benefit plan, including incentive plans; (v) the relocation ofour principal executive offices outside of Montgomery County, Ohio, if at thetime of a change of control, Mr. Mahoney is based at the principal offices;(vi) being required to base more than fifty miles from the location he wasbased at the time of the change of control or the failure to reimburse formoving expenses, if Mr. Mahoney consents to moving his base and permanentresidence; (vii) excessive travel that necessitates overnight absences;(viii) the failure by us or DPL to obtain the assumption of his agreementby any successor; (ix) termination without cause or without being providedwith a notice of termination; or (x) we terminate Mr. Mahoney’s employmentwithout cause or without notice of termination), Mr. Mahoney’s employmentagreement provided for (a) the benefits listed in the first paragraphunder “Termination” above; (b) a lump sum cash payment equal to 200% ofthe sum of (A) Mr. Mahoney’s annual base salary (before deduction ofemployee deferrals) at the highest of (aa) the rate in effect on the dateof termination or (bb) the rate in effect at the time of the change incontrol; plus (B) the average of the last three (or the number of years hehas participated if less than three) annual award payments made to him prior tothe date of termination pursuant to the MICP or LTIP, including any portiondeferred to his deferred compensation plan account; (c) the amount of anyMICP or LTIP award earned with respect to a completed period but unvested as oftermination, or if the termination preceded the actual determination of suchincentive compensation (under the MICP or LTIP) or the completion of a periodin which he could have earned such incentive compensation, an amount equal tothe average of the award payments made to him under the MICP or LTIP (asapplicable) for the three years preceding the date of termination (or for thenumber of years he had participated in such plan if less than three), includingany portion deferred to his deferred compensation plan account;(d) continuation of all life, medical, accident and disability insurancefor Mr. Mahoney and his eligible dependents until the third anniversary of thedate of termination or the date an essentially equivalent benefit was madeavailable to Mr. Mahoney by a subsequent employer; thereafter, Mr. Mahoneywould have had the right to have assigned to him at no cost any such insurancecoverage on Mr. Mahoney owned by us; and (e) a gross-up payment equal toany net amounts paid by Mr. Mahoney for any excise tax owed under Section 4999of the Internal Revenue Code of 1986 for payments made to Mr. Mahoney underthis employment agreement, such that Mr. Mahoney was in the same after-taxposition as if no excise tax was imposed.

 

Upon a change of control, Mr. Mahoney’semployment agreement stated that we would transfer cash or other property in anamount sufficient to fund all change of control benefits and payments to theAmended and Restated Master Trust.

 

 

**John J.Gillen**

 

Mr. Gillen servesas one of our executive officers since December 21, 2004 pursuant to anemployment agreement dated as of December 21, 2004.** **The term of Mr. Gillen’s employment agreementis annually renewable but otherwise indefinite until terminated by either Mr.Gillen or us, with or without cause, upon 90 days’ notice; provided that we mayterminate the agreement with cause without prior notice.  The agreement also terminates automaticallyupon Mr. Gillen’s death or disability. If Mr. Gillen executes a ParticipationAgreement and Waiver, whereby he agrees to participate in the new executivecompensation and benefits program previously described, then his employmentagreement terminates.

 

*Compensation*

 

Mr. Gillen’s agreement provides for(i) an annual base salary of not less than $320,000; (ii) participationin such short-term and long-term bonus, incentive compensation, deferredcompensation and similar plans as we or the Compensation Committee determine;and (iii) such fringe benefits as are generally made available to allother employees, the Executive Medical Plan, the annual physical program andfinancial planning services in effect from time to time.  In addition, Mr. Gillen was granted stockoptions allowing Mr. Gillen the opportunity to purchase up to 30,000 shares ofCompany common stock.  Such stock optionsvest ratably over the first three anniversaries of the effective date of hisemployment agreement.

 

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*Termination*

 

If Mr. Gillen’s employment is terminatedwithout “cause,” then the agreement provides for (i) the payment of hisunpaid base salary earned through the date of termination; (ii) any MICPor LTIP with respect to any completed periods or otherwise earned by Mr.Gillen; (iii) any and all accrued benefits in which Mr. Gillen is entitled;(iv) an amount equal to the sum of one years’ base salary and the amountof Mr. Gillen’s target MICP bonus for the year of termination; and(v) continued executive healthcare coverage until either the sooner of oneyear from the date of termination or the date Mr. Gillen receives asubstantially similar health care package at substantially the same cost,provided that Mr. Gillen executes and delivers a release pursuant to which hefully and unconditionally releases any claims he has against us and ouraffiliates.

 

“Cause” for purposes of Mr. Gillen’semployment agreement is defined as (i) commission of a felony;(ii) embezzlement; (iii) the illegal use of drugs; or (iv) inthe absence of a change-in-control, the failure by Mr. Gillen to substantiallyperform his duties hereunder (other than any such failure that resulted fromhis physical or mental illness or other physical or mental incapacity) asreasonably determined by us.  If Mr.Gillen’s employment is terminated for “cause,” he is to receive the compensationlisted in subparagraphs (i) to (iii), inclusive as listed in the immediatelypreceding paragraph.

 

*Change ofControl*

 

If Mr. Gillen’semployment is terminated within 36 months of a change of control, Mr.Gillen’s agreement provides for (i) his receipt of the compensation listedin subparagraphs (i) to (iii), inclusive as listed in the second precedingparagraph; (ii) an amount equal to 200% of the sum of his annual basesalary, before deduction of any deferred amounts, and the average of the awardpayments made under the MICP for the three years preceding the date oftermination or for the number of years he had participated in the plan if lessthan three years, including any portion deferred to his deferred compensationplan account; (iii) the amount of any MICP award earned in respect to acompleted period but unvested as of the date of termination or the amount of aMICP award that could have been earned but was not due to the date oftermination preceding the determination of the MICP, in which case Mr. Gillen isto receive an award equal to the average of his MICP award over the past threeyears preceding the date of termination; (iv) continuation of all life,medical, accident and disability insurance for Mr. Gillen and his eligibledependents until the third anniversary of the date of termination or the datean essentially equivalent benefit is made available to Mr. Gillen by asubsequent employer; and (v) gross-up payments for excise taxes.

 

If Mr. Gillen’semployment is terminated within 36 months of a change in control due tohis disability, his employment agreement provides for benefits under our andDPL’s salary continuation plan or disability insurance in addition to thespecific benefits set forth in the immediately preceding paragraph.

 

 

**Patricia K. Swanke**

 

Ms. Swanke has served as an executiveemployee since September 17, 2003, pursuant to an employment agreementdated September 17, 2003, and a letter agreement dated July 1,2004.  The term of Ms. Swanke’semployment agreement was indefinite until terminated by us, with or withoutcause, upon 30 days’ notice or by Ms. Swanke upon 180 days writtennotice; provided that we could terminate the agreement with cause without priornotice.  The agreement also

 

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terminated automatically upon Ms. Swanke’sdeath or disability.  Ms. Swanke’sletter agreement included non-compete and confidentiality provisions. Ms.Swanke executed a Participation Agreement and Waiver on February 28, 2006,whereby she agreed to terminate her employment agreement and participate in thenew executive compensation and benefits program previously described.

 

*Compensation*

 

Ms. Swanke’s employment agreement providedfor (i) an annual base salary of not less than $230,000; (ii) participationin such short-term and long-term bonus, incentive compensation, deferredcompensation and similar plans as we or the Compensation Committee determined;and (iii) such fringe benefits as are generally made available to allother employees, the Executive Medical Plan, the annual physical program andfinancial planning services in effect from time to time.

 

*Termination*

 

If Ms. Swanke’s employment was terminatedwithout cause and she was not entitled to receive the benefits described below,then the agreement provided for payment of her annual base salary ininstallments over the one-year period after the date of termination; providedthat Ms. Swanke executed and delivered a release pursuant to which she fullyand unconditionally released any claims that she had against us and ouraffiliates.  The definition of “cause” isidentical to the definition provided in Mr. Wolff’s employment agreementsummary as set forth herein.

 

If Ms. Swanke’s employment was terminated forany reason at any time, her letter agreement provided for (i) a lump sumcash payment equal to her full base salary through the date of termination;(ii) the amount of the awards, with respect to any completed period which,pursuant to the MICP or any other incentive plan (other than any deferredcompensation plan in which she made a contrary installment election) that wereearned but not paid; and (iii) payment of any other accrued benefits towhich she was entitled through the date of termination.

 

For a period of one year after termination ofMs. Swanke’s employment, Ms. Swanke’s employment agreements stated that Ms.Swanke was required to provide assistance as may be necessary to facilitate asmooth and orderly transition of duties.

 

*Change ofControl*

 

If Ms. Swanke’s employment was terminated in connection with a changeof control, her letter agreement dated July 1, 2004, provided for paymentsand benefits similar to those described for Mr. Wolff as described herein,except that Ms. Swanke’s non-compete provisions were effective for threeyears after termination, whereas Mr. Wolff’s non-compete provisions wereeffective for two years after termination.

 

 

**W. StevenWolff**

 

Mr. Wolff has served as our executiveemployee since September 17, 2003, pursuant to an employment agreementdated September 17, 2003, and a letter agreement dated November 1,2002.  The term of Mr. Wolff’s employmentagreement was indefinite until terminated by us, with or without cause, upon30 days’ notice or by Mr. Wolff upon 180 days’ written notice;provided that we could terminate the agreement with cause without priornotice.  The agreement also terminatedautomatically upon Mr. Wolff’s death or disability.  Mr. Wolff executed a Participation Agreementand Waiver on February 24, 2006, whereby he agreed to terminate his employmentagreement and participate in the new executive compensation and benefitsprogram previously described.

 

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*Compensation*

 

Mr. Wolff’s agreement provided for(i) an annual base salary of not less than $250,000;(ii) participation in such short-term and long-term bonus, incentivecompensation, deferred compensation and similar plans as we or the CompensationCommittee determined; and (iii) such fringe benefits as were generally madeavailable to all other employees, the Executive Medical Plan, the annualphysical program and financial planning services in effect from time to time.

 

*Termination*

 

If Mr. Wolff’s employment was terminatedwithout “cause” and he was not entitled to receive the benefits describedbelow, then the agreement provided for payment of his annual base salary ininstallments over the one-year period after the date of termination; providedthat Mr. Wolff executed and delivered a release pursuant to which he fully andunconditionally released any claims he had against us and our affiliates.

 

“Cause” for purposes of Mr. Wolff’semployment agreement was defined as (i) commission of a felony;(ii) embezzlement; (iii) the illegal use of drugs; or (iv) thefailure by Mr. Wolff to substantially perform his duties hereunder (other thanany such failure resulting from his physical or mental illness or otherphysical or mental incapacity) as reasonably determined by us.

 

If Mr. Wolff’s employment was terminated forany reason at any time, his letter agreement provided for (i) a lump sumcash payment to Mr. Wolff equal to his full base salary through the date oftermination; (ii) the amount of the awards, with respect to any completedperiod, which pursuant to the MICP or any other incentive plan (other than anydeferred compensation plan in which he made a contrary installment election)had been earned but not paid; and (iii) payment of any other accruedbenefits to which he was entitled through the date of termination.

 

For a period of one year after termination ofMr. Wolff’s employment, Mr. Wolff’s employment agreement stated that Mr. Wolffwas required to provide assistance as necessary to facilitate a smooth andorderly transition of duties.

 

*Change ofControl*

 

If Mr. Wolff’semployment was terminated within 36 months of a change of control, Mr.Wolff’s letter agreement provided for (i) a lump sum cash payment equal tothe sum of (a) the average of the three highest of the last ten annualaward payments made pursuant to the MICP or other incentive plan, including anyportion deferred to his deferred compensation plan account, if the terminationpreceded the actual determination of such incentive compensation or thecompletion of a period in which he could have earned incentive compensation;(b) an amount equal to 200% of the sum of his annual base salary, beforededuction of any deferred amounts, and the average of the three highest of thelast ten annual award payments made under the MICP, including any portiondeferred to his deferred compensation plan account; (c) one-half of theamount payable in clause (b) in consideration of Mr. Wolff’s agreement tonon-compete and confidentiality provisions; (d) any cash or shares of ourcommon stock previously earned under the MICP or pursuant to action by theBoard of Directors but not yet paid; (e) gross-up payments for excisetaxes; and (ii) continuation of all life, medical, accident and disabilityinsurance for Mr. Wolff and his eligible dependents until the third anniversaryof the date of

 

85

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termination or thedate an essentially equivalent benefit was made available to Mr. Wolff by asubsequent employer.

 

Mr. Wolff’s letteragreement stated that the benefits described above would not be available ifsuch termination is by (i) us or DPL for cause or on account of Mr.Wolff’s disability; (ii) Mr. Wolff without “good reason” and the change ofcontrol did not result from the commencement of a tender offer or us or DPLentering into an agreement to merge or consolidate or to sell, lease, exchangeor otherwise transfer or dispose of all or substantially all of our assets;(iii) Mr. Wolff for any reason and the change of control resulted from thecommencement of a tender offer or us or DPL entering into an agreement to mergeor consolidate or to sell, lease, exchange or otherwise transfer or dispose ofall or substantially all of its assets; or (iv) Mr. Wolff’s death.  “Good Reason” for Mr. Wolff was defined as(i) assignment of duties inconsistent with the written objectives of hisposition, a change in his reporting responsibilities, his removal from or anyfailure to re-elect Mr. Wolff to his position or office; (ii) failure tohave his annual base salary raised when salary adjustments are historicallymade; (iii) a reduction in his base salary; (iv) failure by us or DPLto continue a benefit plan, including incentive plans; (v) the relocationof our principal executive offices outside of Montgomery County, Ohio, if atthe time of a change of control, Mr. Wolff was based at the principal offices;(vi) being required to base more than fifty miles from the location he wasbased at the time of the change of control or the failure to reimburse formoving expenses if Mr. Wolff consented to moving his base and permanentresidence; (vii) excessive travel that necessitated overnight absences;(viii) the failure by us or DPL to obtain the assumption of his agreementby any successor; (ix) termination without cause or without being providedwith a notice of termination; and (x) if, within 36 months of a change ofcontrol, Mr. Wolff determined that he could not effectively discharge hisduties.

 

Upon a change ofcontrol, Mr. Wolff’s letter agreement stated that we and DPL would transfercash or other property in an amount sufficient to fund all change of controlbenefits and payments to the master trust. In addition, the letter agreement provided a gross-up payment if anyexcise tax was imposed upon a change of control such that Mr. Wolff was in thesame after-tax position as if no excise tax was imposed.

 

If Mr. Wolff’semployment was terminated within 36 months of a change in control due tohis disability, his letter agreement provided for benefits under our and DPL’ssalary continuation plan or disability insurance.  If Mr. Wolff’s employment was terminated forcause subsequent to a change of control, his letter agreement provided forcompensation for services previously rendered as if he were terminated withoutthe occurrence of a change of control.

 

Further, if a tenderoffer or a potential agreement was abandoned or terminated and a majority ofthe original directors and/or their successors determined that the tender offeror agreement would not effectuate or otherwise result in a change of controland provided written notice of such determination, then a subsequenttermination would not entitle Mr. Wolff to the benefits described above.

 

 

**Compensation of Directors**

 

In 2005, director compensation for eachnon-employee director consisted of an annual retainer of $55,000 (for serviceon our Board and the DPL Board), a committee chair retainer of $10,000, Boardmeeting fees of $5,000 per meeting, committee meeting fees of $4,000 permeeting and a special meeting fee of $3,000 per meeting.  Director compensation retainer, committeechair and meeting fees have remained unchanged from 2003 through 2005.

 

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DPL maintains a Director DeferredCompensation Plan in which payment of directors’ fees may be deferred.  The director fees of those directors who havedesignated their director fees to be deferred are invested in DPL common shareunits.  Under the Director DeferredCompensation Plan, directors are entitled to receive a lump sum payment orpayments in installments over a period of up to 20 years upon their retirementor resignation from the Board.

 

 

**Compensation Committee**

 

DPL’s Compensation Committee makesrecommendations to our Board to (i) set compensation levels for officers,(ii) approve equity incentive and other benefit plans and(iii) negotiate and approve executive level employment and consultingcontracts.  DPL’s revised Charter ofCompensation Committee, which describes all of the Compensation Committee’sresponsibilities, is posted on DPL’s website.

 

The Compensation Committee is currentlycomprised of the following independent directors:  Paul R. Bishop, Chair; Barbara S. Graham,Vice Chair; Glenn E. Harder; W August Hillenbrand; and Lester L.Lyles.  Our Board has determined thateach member of the Compensation Committee meets the independence requirementsof Section 162(m) of the Internal Revenue Code. No member of the Compensation Committee serves, or has served, as anofficer or employee of the Company or DPL. In addition, no interlocking relationship exists between our Board orDPL’s Board or Compensation Committee and the board of directors orcompensation committee of any other company, nor has any such interlockingrelationship existed in the past.

 

 

**Item 12 -****Security Ownership of Certain Beneficial Owners and Management andRelated Shareholder Matters**

 

**Equity Compensation Plan Information**

 

The following table sets forth certaininformation as of December 31, 2005, with respect to the Company’s orDPL’s equity compensation plans under which shares of DPL’s equity securitiesmay be issued.

 
| ** **                                                   | ** ** | **(a)**                                                                                          | ** ** | **(b)**                                                                         | ** ** | **(c)**                                                                                                                                        | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                            | ** ** | **Number of securities to be issued upon exercise of outstanding options,  warrants and rights** | ** ** | **Weighted average exercise price of outstanding options, warrants and rights** | ** ** | **Number of securities remaining available for future issuance under  equity compensation plans excluding securities reflected in column (a)** | ** ** |
| Equity  compensation plan approved by security holders:      |       |                                                                                             |       |                                                                            |       |                                                                                                                                           |       |
|                                                         |       |                                                                                             |       |                                                                            |       |                                                                                                                                           |       |
| DPL Inc. Stock  Option Plan                                  |       | 5,486,500 (4                                                                                     | )          | $                                                                               | 21.86      |                                                                                                                                           | 1,488,500  |   |
|                                                         |       |                                                                                             |       |                                                                            |       |                                                                                                                                           |       |
| Equity  compensation plans not approved by security holders: |       |                                                                                             |       |                                                                            |       |                                                                                                                                           |       |
|                                                         |       |                                                                                             |       |                                                                            |       |                                                                                                                                           |       |
| Directors’  Deferred Stock Compensation Plan (1)        |       | 438,106                                                                                          |       | N/A                                                                             |       | See Notes (1) and (3                                                                                                                           | )          |
|                                                         |       |                                                                                             |       |                                                                            |       |                                                                                                                                           |       |
| Management Stock  Incentive Plan (2)                         |       | 1,237,905 (4                                                                                     | )          | N/A                                                                             |       | 0 (2) and (3                                                                                                                                   | )          |
|                                                         |       |                                                                                             |       |                                                                            |       |                                                                                                                                           |       |
| Total                                                        |       | 7,162,511                                                                                        |       |                                                                            |       |                                                                                                                                           |       |
|                                                              |            |                                                                                                  |            |                                                                                 |            |                                                                                                                                                |            |  |

----

(1)   The Directors’ Deferred Stock CompensationPlan (the Directors’ Stock Plan) provided for the annual award of DPL commonshares to non-employee directors for services as a director.  All shares awarded under the Directors’ StockPlan are transferred to the Master Trust. The Directors’ Stock Plan does not have a stated maximum number ofshares.

(2)   The Management Stock Incentive Plan providedfor the award of SIUs to executives. Earning of SIUs was dependent on the achievement of long-termincentives, including DPL’s performance over various performance periods.  For each SIU that was earned and vested, aparticipant received the equivalent of one DPL common share plus dividendequivalents from the date of award.  Newawards under the Management Stock Incentive Plan were discontinued in 2000 uponapproval of the Stock Option Plan.

(3)   We have secured our obligations under theDirectors’ Deferred Stock Compensation Plan and the Management Stock IncentivePlan by market purchases of our common shares by the Master Trust.  Accordingly, issuance of shares to directorsor executives under these plans will not increase the number of DPL commonshares issued.

(4)   Included under both the Stock Option Plan andthe Management Stock Incentive Plan are options and SIUs awarded to Peter H.Forster, former Chairman; Stephen F. Koziar, former President and ChiefExecutive Officer and Caroline E. Mahlenkamp, Former Group Vice President andinterim Chief Financial Officer.  We haveinitiated legal proceedings to challenge the validity of any options and SIUsawarded.

 

 

87

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**Security Ownership of Management**

 

Set forth below is information concerning thebeneficial ownership of DPL’s common shares by each director, each person namedin the Summary Compensation Table under “Executive Compensation” below and ofall our directors and executive officers as a group as of March 3, 2006.

 
| **Name**                                                                       | ** ** | **Amount and Nature of Beneficial Ownership** | ** ** | **Percent of Class (1) (2) (3)** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|
| Robert D. Biggs                                                                |       | 102,563                                       |       | <1%                           |       |
| Paul R. Bishop                                                                 |       | 29,031                                        |       | <1%                           |       |
| John J. Gillen                                                                 |       | 10,232                                        |       | <1%                           |       |
| Barbara S. Graham                                                              |       | 1,293                                         |       | <1%                           |       |
| Ernie Green                                                                    |       | 182,668                                       |       | <1%                           |       |
| Glenn E. Harder                                                                |       | 2,646                                         |       | <1%                           |       |
| W August Hillenbrand                                                           |       | 195,574                                       |       | <1%                           |       |
| Lester L. Lyles                                                                |       | 6,375                                         |       | <1%                           |       |
| James V. Mahoney                                                               |       | 80,157                                        |       | <1%                           |       |
| Ned J. Sifferlen                                                               |       | 13,764                                        |       | <1%                           |       |
| Patricia K. Swanke                                                             |       | 54,659                                        |       | <1%                           |       |
| W. Steven Wolff                                                                |       | 1,589                                         |       | <1%                           |       |
| All current  directors and executive officers as a group (15 persons) (4) |       | 734,940                                       |       | <1%                           |       |

----

(1)   Ownershippercentages are based on 125,949,404 common shares outstanding as of March 3,2006.

 

(2)   The number of shares shown represents ineach instance <1% of DPL’s outstanding common shares.  There were 734,940 common shares and commonshare units, or <1% of the total number of common shares, beneficially ownedby all directors and executive officers of DPL and DP&L as a group atMarch 3, 2006.  The number of sharesshown includes (i) 65,072 common shares transferred to the Master Trustfor non-employee directors pursuant to the Directors’ Deferred StockCompensation Plan, (ii) 100,000 common shares subject to presentlyexercisable options for current non-employee directors, and (iii) 217,794share units with no voting rights held by non-employee directors under theDirectors’ Deferred Compensation Plan as follows: Mr. Biggs –2,563 units (for share units acquired by Mr. Biggs as a non-employeedirector from February 2004 to May 2004); Mr. Bishop – 29,031 units;Ms. Graham – 1,293 units; Mr. Green – 80,865 units; Mr. Harder 2,646units; Mr. Hillenbrand – 84,557 units; Mr. Lyles – 6,375 units;and Dr. Sifferlen – 10,464 units.

 

(3)   The number of shares shown includescommon shares, restricted share units with no voting rights, and stock optionsthat are exercisable.

 

(4)   These 15 persons include all currentdirectors and executive officers listed under “Information About the Nominees,the Continuing Directors and Executive Officers” below.

 

 

**Item 13 – Principal AccountantFees and Services**

 

The following table presents the aggregatefees billed for professional services rendered to us and DPL by KPMG LLP for2005 and 2004.  Other than as set forthbelow, no professional services were rendered or fees billed by KPMG LLP and PricewaterhouseCoopersLLP during 2005 and 2004.

 
| **KPMG LLP**               | ** ** | **Fees Paid 2005** | ** ** | **Fees Paid 2004** | ** ** |
|----------------------------|------------|--------------------|------------|--------------------|------------|
| Audit Services (1)         |       | $                  | 2,511,912  |               | $          | 2,498,189 |   |
| Audit-Related Services (2) |       | 55,712             |       | 147,136            |       |
| Tax Services (3)           |       | 2,435              |       | 62,966             |       |
| All Other Services (4)     |       | —             |       | —             |       |
| Total                      |       | $                  | 2,570,059  |               | $          | 2,708,291 |   |
|                       |       |               |       |               |       |   |   |
| PricewaterhouseCoopers LLP | ** ** | ** **         | ** ** | ** **         | ** ** |
| Audit Services (1)         |       | $                  | 96,350     |               | $          | 770,074 |   |
| Audit-Related Services (2) |       | 14,400             |       | —             |       |
| Tax Services (3)           |       | —             |       | —             |       |
| All Other Services (4)     |       | —             |       | —             |       |
| Total                      |       | $                  | 110,750    |               | $          | 770,074 |   |

----

(1)   Audit services consist of professionalservices rendered for the audit of our annual financial statements and thereviews of our quarterly financial statements.

(2)   Audit-related services arethose rendered to us for assurance and related services.

(3)   Tax services are thoserendered to us for tax compliance, tax planning and advice.

(4)   Other services performedinclude certain advisory services in connection with accounting research and donot include any fees for financial information systems design andimplementation.

 

 

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## **Pre-Approval Policiesand Procedures of the Audit Committee**

 

Pursuant to its charter, the Audit Committeepre-approves all audit and permitted non-audit services, including engagementfees and terms thereof, to be performed for us by the independent auditors,subject to the exceptions for certain non-audit services that are approved bythe Audit Committee prior to the completion of the audit in accordance withSection 10A of the Securities Exchange Act of 1934, as amended.  The Audit Committee must also pre-approve allinternal control-related services to be provided by the independentauditors.  The Audit Committee willgenerally pre-approve a list of specific services and categories of services,including audit, audit-related and other services, for the upcoming or currentfiscal year, subject to a specified cost level. Any material service that is not included in the approved list ofservices must be separately pre-approved by the Audit Committee.  In addition, all audit and permissiblenon-audit services in excess of the pre-approved cost level, whether or notsuch services are included on the pre-approved list of services, must beseparately pre-approved by the Audit Committee.

 

The Audit Committee may form and delegate toa subcommittee consisting of one or more members (provided that such person(s)are independent directors) its authority to grant pre-approvals of audit,permitted non-audit services and internal control-related services, providedthat decisions of such subcommittee to grant pre-approvals shall be presentedto the full Audit Committee at its next scheduled meeting.

 

 

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**PART IV**

 

**Item 15 - Exhibits, Financial Statement Schedule and Reports on Form8-K**

 
|                                                                                                                               | **Page No.** |
|------------------------------------------------------------------------------------------------------------------------------------|--------------|
| (a)   The following documents are filed as part  of this report:                                                         |         |
|                                                                                                                               |         |
| **1.     Financial  Statements**                                                                               | ** **   |
|                                                                                                                               |         |
| Consolidated Statements of Results of  Operations for each of the three years in the period ended December 31, 2005                | 31           |
| Consolidated Statements of Cash Flows for  each of the three years in the period ended December 31, 2005                           | 32           |
| Consolidated Balance Sheets at December 31,  2005 and 2004                                                                         | 33           |
| Consolidated Statement of Changes to  Shareholders’ Equity for each of the three years in the period ended December  31, 2005 | 35           |
| Notes to Consolidated Financial Statements                                                                                         | 36           |
| Report of  Independent Registered Public Accounting Firm                                                                           | 69           |
| Report of  Independent Registered Public Accounting Firm on Internal Controls                                                      | 70           |
|                                                                                                                               |         |
| **2. Financial  Statement Schedule**                                                                                          | ** **   |
|                                                                                                                               |         |
| For each of the three years in the period  ended December 31, 2005:                                                                |         |
|                                                                                                                               |         |
| Schedule  II – Valuation and Qualifying Accounts                                                                              | 99           |

 

The information requiredto be submitted in Schedules I, III, IV and V is omitted as not applicable ornot required under rules of Regulation S-X.

 

3.               **Exhibits**

 

Exhibits are incorporated by reference as described unless otherwisefiled as set forth herein.

 
| The exhibits  filed as a part of this Annual Report on Form 10-K are: |   |                                                                                                                                                 |
|-----------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                  |   | **Location**                                                                                                                                         |
|                                                                  |   |                                                                                                                                                 |   |   |
| 2(a)                                                                  |   | Copy of  Asset Purchase Agreement, dated December 14, 1999, between The Dayton Power  and Light Company, Indiana Energy, Inc., and Number-3CHK, Inc. |   | Exhibit 2 to  Report on Form 10-Q for the quarter ended September 30, 2000  (File No. 1-9052) |
|                                                                  |   |                                                                                                                                                 |   |   |
| 3(a)                                                                  |   | Copy of  Amended Articles of Incorporation of The Dayton Power and Light Company dated  January 4, 1991                                              |   | Exhibit 3(b)  to Report on Form 10-K for the year ended December 31, 1991  (File No. 1-2385) |
|                                                                  |   |                                                                                                                                                 |   |   |
| 3(b)                                                                  |   | Regulations  of The Dayton Power and Light Company                                                                                                   |   | Exhibit 3(a)  to Report on Form 8-K filed on May 3, 2004 (File No. 1-2385) |

 

90

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| 4(a)   |   | Copy of  Composite Indenture dated as of October 1, 1935, between DP&L and  The Bank of New York, Trustee with all amendments through the Twenty-Ninth  Supplemental Indenture |   | Exhibit 4(a)  to Report on Form 10-K for the year ended December 31, 1985   (File No. 1-2385) |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                    |   |                                                                                               |
| 4(b)   |   | Copy of  Forty-First Supplemental Indenture dated as of February 1, 1999, between  DP&L and The Bank of New York, Trustee                                                      |   | Exhibit 4(m)  to Report on Form 10-K for the year ended December 31, 1998 (File No. 1-2385)        |
|   |   |                                                                                                                                                                                    |   |                                                                                               |
| 4(c)   |   | Copy of  Forty-Second Supplemental Indenture dated as of September 1, 2003,  between DP&L and The Bank of New York, Trustee                                                    |   | Exhibit 4(r)  to Report on Form 10-K for the year ended December 31, 2003  (File No. 1-2385)       |
|   |   |                                                                                                                                                                                    |   |                                                                                               |
| 4(d)   |   | Copy of  Forty-Third Supplemental Indenture dated as of August 1, 2005, between  DP&L and The Bank of New York, Trustee                                                             |   | Exhibit 4.4  to Report on Form 8-K filed on August 24, 2005  (File No. 1-2385)                     |
|   |   |                                                                                                                                                                                    |   |                                                                                               |
| 4(e)   |   | Copy of Rights  Agreement between DPL Inc. and Equiserve Trust Company, N.A.                                                                                                            |   | Exhibit 4 to  Report on Form 8-K dated September 25, 2001 (File No. 1-9052)                   |

 

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| 4(f)   |   | Copy of  Credit Agreement dated as of June 1, 2004 between The Dayton Power and Light  Company, KeyBank National Association (as administrative agent and lead  arranger) and the lending institutions named therein |   | Exhibit  4(ee) to Report on Form 10-K for the year ended December 31, 2003 (File No.  1-2385) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                 |   |                                                                                          |
| 4 (g)  |   | Copy of  Credit Agreement dated as of May 31, 2005 between The Dayton Power and Light  Company, KeyBank National Association (as administrative agent and lead  arranger) and the lending institutions named therein |   | Exhibit 10.1  to Form 8-K filed on June 28, 2005  (File No. 1-9052)                           |

 

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| 10(a)* |   | Copy of  Directors’ Deferred Stock Compensation Plan amended December 31, 2000                                                                                               |   | Exhibit  10(a) to Report on Form 10-K for the year ended December 31, 2000 (File No.  1-9052)     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(b)* |   | Copy of  Directors’ 1991 Amended Deferred Compensation Plan as amended through  December 31, 2000                                                                            |   | Exhibit  10(b) to Report on Form 10-K for the year ended December 31, 2000 (File No.  1-9052)     |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(c)* |   | Amendment  No. 1 to Directors’ 1991 Amended Deferred Compensation Plan as amended  through December 31, 2000 and dated as of December 7, 2004                                |   | Exhibit  10(c) to Report on Form 10-K for the year ended December 31, 2005 (File No.  1-9052)     |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(d)* |   | Copy of  Management Stock Incentive Plan amended December 31, 2000                                                                                                                |   | Exhibit  10(c) to Report on Form 10-K for the year ended December 31, 2000 (File No.  1-9052)     |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(e)* |   | Amendment  No. 1 to Management Stock Incentive Plan amended December 31, 2000 and dated  as of December 7, 2004                                                                   |   | Exhibit 10(e)  to Report on Form 10-K for the year ended December 31, 2005 (File No. 1-9052)      |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(f)* |   | Copy of Key  Employees Deferred Compensation Plan amended December 31, 2000                                                                                                       |   | Exhibit  10(d) to Report on Form 10-K for the year ended December 31, 2000 (File No. 1-9052)      |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(g)* |   | Amendment  No. 1 to Key Employees Deferred Compensation Plan amended December 31, 2000  and dated as of December 7, 2004                                                          |   | Exhibit  10(g) to Report on Form 10-K for the year ended December 31, 2005 (File No.  1-9052)     |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(h)* |   | Copy of  Supplemental Executive Retirement Plan amended February 1, 2000                                                                                                          |   | Exhibit  10(e) to Report on Form 10-K for the year ended December 31, 2003  (File No. 1-2385)     |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(i)* |   | Amendment  No. 1 to Supplemental Executive Retirement Plan amended February 1, 2000 and  dated as of December 7, 2004                                                             |   | Exhibit  10(i) to Report on Form 10-K for the year ended December 31, 2005 (File No.  1-9052)     |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(j)* |   | Copy of  Stock Option Plan                                                                                                                                                        |   | Exhibit  10(f) to Report on Form 10-K for the year ended December 31, 2000 (File No.  1-9052)     |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(k)* |   | 2003  Long-Term Incentive Plan of DPL Inc. dated as of January 20, 2003                                                                                                           |   | Exhibit  10(aa) to Report on Form 10-K for the year ended December 31,2003 (File No. 1-9052) |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(l)* |   | Summary of  Executive Life Insurance Plan                                                                                                                                         |   | Exhibit  10(l) to Report on Form 10-K for the year ended December 31, 2005 (File No.  1-9052)     |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(m)* |   | Summary of  Executive Medical Insurance Plan                                                                                                                                      |   | Exhibit  10(m) to Report on Form 10-K for the year ended December 31, 2005 (File No.  1-9052)     |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(n)* |   | Copy of Executive  Compensation and Benefits Program dated as of February 23, 2006                                                                                                |   | Exhibit 10.1  to Report on Form 8-K/A filed on March 2, 2006 (File No. 1-2386)                    |
|   |   |                                                                                                                                                                              |   |                                                                                              |
| 10(o)* |   | Amended and  Restated Employment Agreement dated as of August 31, 2005 effective as of  January 1, 2005 between DPL Inc., The Dayton Power and Light Company and  Robert D. Biggs |   | Exhibit 10.1  to Report on Form 8-K filed on September 2, 2005  (File No. 1-9052)                 |

 

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| 10(p)*  |   | Letter  Agreement dated as of September 20, 2004 and Management Stock Option  Agreement, as amended, dated as of October 5, 2004, between DPL Inc. and  Robert D. Biggs                                                                       |   | Exhibits  10.2 and 10.3 to Report on Form 8-K filed on October 8, 2004 (File No.  1-9052)     |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| 10(q)*  |   | Management  Stock Option Agreement dated as of August 31, 2005 between DPL Inc. and  Robert D. Biggs                                                                                                                                          |   | Exhibit 10.2  to Report on Form 8-K filed on September 2, 2005 (File No. 1-9052)              |
|    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| 10(r) * |   | Employment  agreement dated as of December 21, 2004 between DPL Inc., The Dayton Power  and Light Company and James V. Mahoney                                                                                                                |   | Exhibit 10.1  to Form 8-K filed on December 28, 2004 (File No. 1-9052)                        |
|    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| 10(s)*  |   | Employment  agreement dated as of January 3, 2003,  between DPL Inc., The Dayton Power and Light Company and James V. Mahoney                                                                                                                 |   | Exhibit  10(j) to Report on Form 10-K for the year ended December 31, 2003  (File No. 1-9052) |
|    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| 10(t)*  |   | Change of  Control Agreement dated as of January 3, 2003, between DPL Inc., The Dayton  Power and Light Company and James V. Mahoney and Management Stock Option  Agreement dated January 3, 2003 between DPL Inc. and James V. Mahoney       |   | Exhibit  10(o) to Report on Form 10-K for the year ended December 31, 2003  (File No.1-9052)  |
|    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| 10(u)*  |   | Employment  agreement dated as of December 14, 2004 between DPL Inc., The Dayton Power  and Light Company and John J. Gillen                                                                                                                  |   | Exhibit 10.2  to Form 8-K filed on December 28, 2004 (File No. 1-9052)                        |
|    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| 10(v)*  |   | Management  Stock Option Agreement dated as of December 29, 2004 between DPL Inc. and  John J. Gillen                                                                                                                                         |   | Exhibit 10(s)  to Report on Form 10-K for the year ended December 31, 2005 (File No. 1-9052)  |
|    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| 10(w)*  |   | Employment  agreement dated as of September 17, 2003, between DPL Inc. and W. Steven  Wolff                                                                                                                                                   |   | Exhibit  10(k) to Report on Form 10-K for the year ended December 31, 2003  (File No.1-9052)  |
|    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| 10(x)*  |   | Change of  Control Agreement dated as of September 10, 2004, between DPL Inc., The  Dayton Power and Light Company and W. Steven Wolff                                                                                                        |   | Exhibit  10(dd) to Report on Form 8-K filed September 23, 2004 (File No. 1-9052)              |
|    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| 10(y)*  |   | Employment  agreement dated as of December 17, 2003, between DPL Inc. and Patricia  K. Swanke                                                                                                                                            |   | Exhibit  10(l) to Report on Form 10-K for the year ended December 31, 2003  (File No.1-9052)  |
|    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| 10(z)*  |   | Change of  Control Agreement dated as of July 1, 2004 between DPL Inc., The Dayton Power  and Light Company and Patricia K. Swanke and Management Stock Option  Agreement dated as of January 1, 2001 between DPL Inc. and Patricia K. Swanke |   | Exhibit  10(s) to Report on Form 10-K for the year ended December 31, 2004  (File No. 1-9052) |

 

94

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| 10(aa)* |   | Employment  Agreement and Change of Control Agreement dated as of September 17, 2004  between DPL Inc., The Dayton Power and Light Company and Gary Stephenson                      |   | Exhibit 10(ee)  to Report on Form 8-K filed on September 23, 2004 (File No. 1-9052)              |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 10(bb)* |   | Employment  agreement dated as of June 9, 2003, as amended by attached letter dated  October 18, 2004, between DPL Inc., The Dayton Power and Light Company and  Miggie E. Cramblit |   | Exhibit  10(gg) to Report on Form 10-K for the year ended December 31, 2003  (File No. 1-9052)   |
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 10(cc)* |   | Change of  Control Agreement dated as of December 15, 2000 between DPL Inc., The Dayton  Power and Light Company and Arthur G. Meyer                                                |   | Exhibit  10(z) to Report on Form 10-K for the year ended December 31, 2005 (File No.  1-9052)    |
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 10(dd)* |   | Management  Stock Option Agreement dated as of January 1, 2001 between DPL Inc. and  Arthur G. Meyer                                                                                |   | Exhibit  10(aa) to Report on Form 10-K for the year ended December 31, 2005 (File No.  1-9052)   |
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 18      |   | Copy of  preferability letter relating to change  in accounting for unbilled revenues from  Price Waterhouse LLP                                                               |   | Exhibit 18  to Report on Form 10-K for the year ended December 31, 1987 (File No.   1-9052) |
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 21      |   | List of  Subsidiaries of the Dayton Power and Light Company                                                                                                                         |   | Filed  herewith as Exhibit 21                                                                    |
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 31(a)   |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a)/15b-14(a) of the  Securities Exchange Act of 1934                                                              |   | Filed  herewith as Exhibit 31(a)                                                                 |
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 31(b)   |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a)/15b-14(a) of the  Securities Exchange Act of 1934                                                              |   | Filed  herewith as Exhibit 31(b)                                                                 |
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 32(a)   |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                 |   | Filed  herewith as Exhibit 32(a)                                                                 |
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 32(b)   |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                 |   | Filed  herewith as Exhibit 32(b)                                                                 |
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 99(a)   |   | Report of  Taft, Stettinius & Hollister LLP, dated April 26, 2004                                                                                                          |   | Exhibit  99(a) to Report on Form 10-K for the year ended December 31, 2003  (File No. 1-9052)    |
|    |   |                                                                                                                                                                                |   |                                                                                             |
| 99(b)   |   | Supplement  to the April 26, 2004 Report of Taft, Stettinius & Hollister LLP,  dated May 15, 2004                                                                     |   | Exhibit  99(b) to Report on Form 10-K for the year ended December 31, 2003  (File No. 1-9052)    |

 

95

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| 99(c) |   | Complaint  filed in Montgomery County Court of Common Pleas, Montgomery County, Ohio —  DPL Inc., The Dayton Power and Light Company and MVE, Inc. v. Peter H.  Forster, Caroline E. Muhlenkamp and Stephen F. Koziar, Jr. |   | Exhibit  99(d) to Report on Form 10-K for the year ended December 31, 2003  (File No. 1-9052) |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|

 

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*Managementcontract or compensatory plan.

 

Pursuantto paragraph (b) (4) (iii) (A) of Item 601 of Regulation S-K, we have not filedas an exhibit to this Form 10-K certain instruments with respect to long-termdebt if the total amount of securities authorized thereunder does not exceed10% of the total assets of us and our subsidiaries on a consolidated basis, butwe hereby agree to furnish to the SEC on request any such instruments.

 

96

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|           | The Dayton  Power and Light Company                                                     |
|----------------|-----------------------------------------------------------------------------------------|
|           |                                                                                    |
|           |                                                                                    |
| March 1,  2006 |                                                                                    |
| By:            | /s/ James V.  Mahoney                                                                   |   |
|           | James V.  Mahoney  President and Chief Executive Officer  (principal executive officer) |

 

97

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Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

 
|                 |                                                                            |           |
|----------------------|---------------------------------------------------------------------------------|----------------|
| /s/ R. D. Biggs      | Director and Executive Chairman                                                 | March 1,  2006 |
| (R. D. Biggs)        |                                                                            |           |
|                 |                                                                            |           |
| /s/ P. R. Bishop     | Director                                                                        | March 1,  2006 |
| (P. R. Bishop)       |                                                                            |           |
|                 |                                                                            |           |
| /s/ E. Green         | Director                                                                        | March 1,  2006 |
| (E. Green)           |                                                                            |           |
|                 |                                                                            |           |
| /s/ G.E. Harder      | Director                                                                        | March 1,  2006 |
| (G. E. Harder)       |                                                                            |           |
|                 |                                                                            |           |
| /s/ W.A. Hillenbrand | Director and Vice-Chairman                                                      | March 1,  2006 |
| (W A. Hillenbrand)   |                                                                            |           |
|                 |                                                                            |           |
| /s/ L.L. Lyles       |                                                                            |           |
| (L. L. Lyles)        | Director                                                                        | March 1,  2006 |
|                 |                                                                            |           |
| /s/ J. V. Mahoney    | Director, President and Chief                                                   | March 1,  2006 |
| (J. V. Mahoney)      | Executive Officer (principal executive officer)                                 |           |
|                 |                                                                            |           |
| /s/ N. J. Sifferlen  |                                                                            |           |
| (N. J. Sifferlen)    | Director                                                                        | March 1,  2006 |
|                 |                                                                            |           |
| /s/ J. J. Gillen     | Senior Vice President and                                                       | March 1,  2006 |
| (J. J. Gillen)       | Chief Financial Officer (principal financial and principal accounting  officer) |           |
|                 |                                                                            |           |
| /s/ D. L. Thobe      | Corporate Controller                                                            | March 1,  2006 |
| (D. L. Thobe)        |                                                                            |           |

 

98

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**ScheduleII**

 

The Dayton Power and Light Company

VALUATION AND QUALIFYING ACCOUNTS

 

For the years ended December 31, 2003 – 2005

 

$ in thousands

 
| **Description**                          | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions** | *** *** | **Deductions  (1)** | ** ** | **Balance at End  of Period** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|---------------|--------------|---------------------|------------|-------------------------------|------------|
|                                     |       |                                 |       |          |         |                |       |                          |       |
| **2005:**                                |       |                                 |       |          |         |                |       |                          |       |
| Deducted  from accounts receivable— |       |                                 |       |          |         |                |       |                          |       |
|                                     |       |                                 |       |          |         |                |       |                          |       |
| Provision for uncollectible accounts     | ** ** | **$**                                | **1,085**  | ** **    | **$**        | **3,582**           | ** ** | **$**                         | **3,623**  | ** ** | **$** | **1,044** | ** ** |
| ** **                               | ** ** | ** **                           | ** ** | ** **    | ** **   | ** **          | ** ** | ** **                    | ** ** |
| 2004:                                    |       |                                 |       |          |         |                |       |                          |       |
| Deducted  from accounts receivable— |       |                                 |       |          |         |                |       |                          |       |
|                                     |       |                                 |       |          |         |                |       |                          |       |
| Provision for uncollectible accounts     |       | $                                    | 3,617      |          | $            | 885                 |       | $                             | 3,417      |   | $ | 1,085 |   |
|                                     |       |                                 |       |          |         |                |       |                          |       |
| 2003:                                    |       |                                 |       |          |         |                |       |                          |       |
| Deducted  from accounts receivable— |       |                                 |       |          |         |                |       |                          |       |
|                                     |       |                                 |       |          |         |                |       |                          |       |
| Provision for uncollectible accounts     |       | $                                    | 10,873     |          | $            | 4,463               |       | $                             | 11,719     |   | $ | 3,617 |   |

* *

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*  (1)Amounts written off, net of recoveries of accounts previously written off.*

 

99

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