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**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

**x****   ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the fiscal year ended****December 31, 2009**

 

**OR**

 

**o****    TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition period from                        to                        **

 

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

 

Each ofthe following classes or series of securities registered pursuant to Section 12(b) of the Act is registered on the New York Stock Exchange:

 

| **Registrant**                          |       | **Description**                                                        |
|-----------------------------------------|------------|------------------------------------------------------------------------|
|                                    |       |                                                                   |
| **DPL  Inc.**                      | ** ** | **Common  Stock, $0.01 par value and Preferred Share Purchase Rights** |
| ** **                              | ** ** | ** **                                                             |
| **The  Dayton Power and Light Company** | ** ** | **None**                                                               |

 

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

 

Indicateby check mark if each registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.

 

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

 

Indicateby check mark if each registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of each registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.

 

| DPL Inc.                           |   | o |   |
|------------------------------------|--------|---|--------|
| The Dayton Power and Light Company |   | o |   |

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

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

 

The aggregate market value of DPL Inc.’s common stockheld by non-affiliates of DPL Inc. as of June 30, 2009 was approximately$2.7 billion based on a closing sale price of $23.17 on that date as reportedon the New York Stock Exchange.  All ofthe common stock of The Dayton Power and Light Company is owned by DPL Inc.  As of February 10, 2010, each registranthad the following shares of common stock outstanding:

 
| **Registrant**                          | ** ** | **Description**                                                        | ** ** | **Shares Outstanding** |
|-----------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------|
|                                    |       |                                                                   |       |                   |
| **DPL  Inc.**                      | ** ** | **Common  Stock, $0.01 par value and Preferred Share Purchase Rights** |       | 119,083,640            |
| ** **                              | ** ** | ** **                                                             |       |                   |
| **The  Dayton Power and Light Company** | ** ** | **Common  Stock, $0.01 par value**                                     |       | 41,172,173             |

 

        Thiscombined Form 10-K is separately filed by DPL Inc. and The Dayton Powerand Light Company.  Information containedherein relating to any individual registrant is filed by such registrant on itsown behalf.  Each registrant makes norepresentation as to information relating to a registrant other than itself.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portionsof **DPL**’s definitive proxy statement forits 2010 Annual Meeting of Shareholders are incorporated by reference in Part IIIof this Form 10-K.

 

 

 

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DPL Inc. and The DaytonPower and Light Company

Index to Annual Report on Form 10-K

# Fiscal Year Ended December 31, 2009

 
| ** **            | ** **                                                                                                          | **Page No.** |
|-----------------------|---------------------------------------------------------------------------------------------------------------------|-------------------|
| ** **            | ** **                                                                                                          |              |
| **Glossary of Terms** | 3                                                                                                                   |
| ** **            | ** **                                                                                                          |              |
| ** **            | **Part I**                                                                                                     |              |
| Item 1                | Business                                                                                                            | 5                 |
| Item 1A               | Risk Factors                                                                                                        | 22                |
| Item 1B               | Unresolved Staff  Comments                                                                                          | 31                |
| Item 2                | Properties                                                                                                          | 31                |
| Item 3                | Legal Proceedings                                                                                                   | 31                |
| Item 4                | Submission of  Matters to a Vote of Security Holders                                                                | 31                |
|                  |                                                                                                                |              |
| ** **            | **Part II**                                                                                                    |              |
| Item 5                | Market for  Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases  of Equity Securities | 32                |
| Item 6                | Selected Financial  Data                                                                                            | 35                |
| Item 7                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 36                |
| Item 7A               | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 66                |
| Item 8                | Financial  Statements and Supplementary Data                                                                        | 66                |
| Item 9                | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               | 138               |
| Item 9A               | Controls and Procedures                                                                                             | 138               |
| Item 9B               | Other Information                                                                                                   | 138               |
|                  |                                                                                                                |              |
| ** **            | **Part III**                                                                                                   |              |
| Item 10               | Directors and  Executive Officers of the Registrant                                                                 | 139               |
| Item 11               | Executive  Compensation                                                                                             | 139               |
| Item 12               | Security  Ownership of Certain Beneficial Owners and Management and Related Shareholder  Matters                    | 139               |
| Item 13               | Certain  Relationships and Related Transactions                                                                     | 139               |
| Item 14               | Principal  Accountant Fees and Services                                                                             | 139               |
|                  |                                                                                                                |              |
| ** **            | **Part IV**                                                                                                    |              |
| Item 15               | Exhibits and  Financial Statement Schedules                                                                         | 140               |
|                  |                                                                                                                |              |
| ** **            | **Other**                                                                                                           |              |
|                  | Signatures                                                                                                          | 149               |
|                  | Schedule II  Valuation and Qualifying Accounts                                                                      | 151               |
|                  | Subsidiaries of  DPL Inc. and The Dayton Power and Light Company                                                    |              |
|                  | Consent of  Independent Registered Public Accounting Firm                                                           |              |

 

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**GLOSSARY OF TERMS**

 

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

 
| **Abbreviation  or Acronym** | ** ** | **Definition**                                                                                                                                                                                                                         |
|------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         |       |                                                                                                                                                                                                                                   |
| AOCI                         |       | Accumulated  Other Comprehensive Income                                                                                                                                                                                                |
|                         |       |                                                                                                                                                                                                                                   |
| ARO                          |       | Asset Retirement  Obligation                                                                                                                                                                                                           |
|                         |       |                                                                                                                                                                                                                                   |
| ASU                          |       | Accounting  Standards Update                                                                                                                                                                                                           |
|                         |       |                                                                                                                                                                                                                                   |
| CAA                          |       | Clean Air Act                                                                                                                                                                                                                          |
|                         |       |                                                                                                                                                                                                                                   |
| CAIR                         |       | Clean Air  Interstate Rule                                                                                                                                                                                                             |
|                         |       |                                                                                                                                                                                                                                   |
| CO2                          |       | Carbon Dioxide                                                                                                                                                                                                                         |
|                         |       |                                                                                                                                                                                                                                   |
| CCEM                         |       | Customer  Conservation and Energy Management                                                                                                                                                                                           |
|                         |       |                                                                                                                                                                                                                                   |
| CRES                         |       | Competitive  Retail Electric Service                                                                                                                                                                                                   |
|                         |       |                                                                                                                                                                                                                                   |
| DPL                          |       | DPL Inc., the  parent company                                                                                                                                                                                                          |
|                         |       |                                                                                                                                                                                                                                   |
| DPLE                         |       | DPL Energy, LLC,  a wholly owned subsidiary of DPL which engages in the operation of peaking  generation facilities                                                                                                                    |
|                         |       |                                                                                                                                                                                                                                   |
| DPLER                        |       | DPL Energy  Resources, Inc., a wholly owned subsidiary of DPL which sells retail  electric energy and other energy services                                                                                                       |
|                         |       |                                                                                                                                                                                                                                   |
| DP&L                     |       | The Dayton Power  and Light Company, the principal subsidiary of DPL and a public utility which  sells electricity to residential, commercial, industrial and governmental  customers in a 6,000 square mile area of West Central Ohio |
|                         |       |                                                                                                                                                                                                                                   |
| DSM                          |       | Demand-Side  Management, a program under which customers typically receive a discount,  rebate or other form of incentive in return for agreeing to reduce their  electricity consumption upon request by the utility.                 |
|                         |       |                                                                                                                                                                                                                                   |
| EIR                          |       | Environmental  Investment Rider                                                                                                                                                                                                        |
|                         |       |                                                                                                                                                                                                                                   |
| EITF                         |       | Emerging Issues  Task Force                                                                                                                                                                                                            |
|                         |       |                                                                                                                                                                                                                                   |
| EPS                          |       | Earnings Per  Share                                                                                                                                                                                                                    |
|                         |       |                                                                                                                                                                                                                                   |
| ESOP                         |       | Employee Stock  Ownership Plan                                                                                                                                                                                                         |
|                         |       |                                                                                                                                                                                                                                   |
| ESP                          |       | Electric  Security Plans, filed with the PUCO, pursuant to Ohio law                                                                                                                                                                    |
|                         |       |                                                                                                                                                                                                                                   |
| FASB                         |       | Financial  Accounting Standards Board                                                                                                                                                                                                  |
|                         |       |                                                                                                                                                                                                                                   |
| FASC                         |       | FASB Accounting  Standards Codification                                                                                                                                                                                                |
|                         |       |                                                                                                                                                                                                                                   |
| FERC                         |       | Federal Energy  Regulatory Commission                                                                                                                                                                                                  |
|                         |       |                                                                                                                                                                                                                                   |
| FGD                          |       | Flue Gas  Desulfurization                                                                                                                                                                                                              |
|                         |       |                                                                                                                                                                                                                                   |
| GAAP                         |       | Generally  Accepted Accounting Principles in the United States                                                                                                                                                                         |
|                         |       |                                                                                                                                                                                                                                   |
| GHG                          |       | Greenhouse Gas                                                                                                                                                                                                                         |
|                         |       |                                                                                                                                                                                                                                   |
| kWh                          |       | Kilowatt hours                                                                                                                                                                                                                         |
|                         |       |                                                                                                                                                                                                                                   |
| MTM                          |       | Mark to Market                                                                                                                                                                                                                         |
|                         |       |                                                                                                                                                                                                                                   |
| MVIC                         |       | Miami Valley  Insurance Company, a wholly owned insurance subsidiary of DPL that provides  insurance services to DPL and its subsidiaries                                                                                              |
|                         |       |                                                                                                                                                                                                                                   |
| mWh                          |       | Megawatt hours                                                                                                                                                                                                                         |
|                         |       |                                                                                                                                                                                                                                   |
| NERC                         |       | North American  Electric Reliability Corporation                                                                                                                                                                                       |
|                         |       |                                                                                                                                                                                                                                   |
| NOV                          |       | Notice of  Violation                                                                                                                                                                                                                   |
|                         |       |                                                                                                                                                                                                                                   |
| NOx                          |       | Nitrogen Oxide                                                                                                                                                                                                                         |
|                         |       |                                                                                                                                                                                                                                   |
| NYMEX                        |       | New York  Mercantile Exchange                                                                                                                                                                                                          |
|                         |       |                                                                                                                                                                                                                                   |
| OAQDA                        |       | Ohio Air Quality  Development Authority                                                                                                                                                                                                |
|                         |       |                                                                                                                                                                                                                                   |
| OCC                          |       | Ohio Consumers’  Counsel                                                                                                                                                                                                          |
|                         |       |                                                                                                                                                                                                                                   |
| ODT                          |       | Ohio Department  of Taxation                                                                                                                                                                                                           |

 

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| **Abbreviation or Acronym** | ** ** | **Definition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Ohio EPA                    |       | Ohio  Environmental Protection Agency                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| OTC                         |       | Over-The-Counter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| OVEC                        |       | Ohio Valley  Electric Corporation, an electric generating company in which **DP&L** holds a 4.9% equity interest                                                                                                                                                                                                                                                                                                                                                                                       |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| PJM                         |       | PJM  Interconnection, L.L.C., a regional transmission organization                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| PRP                         |       | Potentially  Responsible Party                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| PUCO                        |       | Public Utilities  Commission of Ohio                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| RSU                         |       | Restricted Stock  Units                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| RTO                         |       | Regional  Transmission Organization                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| RPM                         |       | Reliability  Pricing Model                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| SB 221                      |       | Ohio Senate Bill  221, an Ohio electric energy bill that was signed by the Governor on  May 1, 2008 and went into effect July 31, 2008.  This law required all Ohio distribution  utilities to file either an electric security plan or a market rate option to  be in effect January 1, 2009.  The  law also contains, among other things, annual targets relating to advanced  energy portfolio standards, renewable energy, demand reduction and energy  efficiency standards. |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| SCR                         |       | Selective  Catalytic Reduction                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| SEC                         |       | Securities and  Exchange Commission                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| SECA                        |       | Seams  Elimination Charge Adjustment                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| SFAS                        |       | Statement of  Financial Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| SO2                         |       | Sulfur Dioxide                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Stipulation                 |       | A Stipulation  and Recommendation filed by **DP&L** with  the PUCO on February 24, 2009 regarding **DP&L’s**  ESP filing pursuant to SB 221.  The  Stipulation was signed by the Staff of the PUCO, the Office of the Ohio  Consumers’ Counsel and various intervening parties.  The PUCO approved the Stipulation on  June 24, 2009.  The material terms  of this Stipulation are discussed further in this report.                                            |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| TCRR                        |       | Transmission  Cost Recovery Rider                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| USEPA                       |       | U.S.  Environmental Protection Agency                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| USF                         |       | Universal  Service Fund                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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## **PART I**

 

**Item 1 — Business**

 

This report includes thecombined filing of **DPL** and **DP&L.  DP&L**isthe principal subsidiary of **DPL**providingapproximately 98% of **DPL’s**totalconsolidated revenue and approximately 95% of **DPL’s**totalconsolidated asset base.  Throughout thisreport, the terms “we,” us,” “our” and “ours” are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in the section.

 

**WEBSITEACCESS TO REPORTS**

 

**DPL** and **DP&L**file current, annual and quarterly reports and other information required bythe Securities Exchange Act of 1934, as amended, with the SEC.  You may read and copy any document we file atthe SEC’s public reference room located at 100 F Street N.E., Washington, D.C.20549, USA.  Please call the SEC at (800)SEC-0330 for further information on the public reference rooms.  Our SEC filings are also available to thepublic from the SEC’s website at http://www.sec.gov.

 

Ourpublic internet site is http://www.dplinc.com. We make available, free of charge, through our internet site, our annualreports on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, and Forms 3, 4 and 5 filed on behalf of our directors andexecutive officers and amendments to those reports filed or furnished pursuantto the Securities Exchange Act of 1934, as amended, as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the SEC.

 

In addition, our public internet site includes otheritems related to corporate governance matters, including, among other things,our governance guidelines, charters of various committees of the Board ofDirectors and our code of business conduct and ethics applicable to allemployees, officers and directors.  Youmay obtain copies of these documents, free of charge, by sending a request, inwriting, to DPL Investor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.

 

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

 

**ORGANIZATION**

 

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

 

**DPL’s** principal subsidiary is **DP&L**.  **DP&L**is a public utility incorporated in 1911 under the laws of Ohio.  **DP&L**sells electricity to residential, commercial, industrial and governmentalcustomers in a 6,000 square mile area of West Central Ohio.  Electricity for **DP&L’s** 24 county service area is primarily generated ateight coal-fired power plants and is distributed to more than 500,000 retailcustomers.  Principal industries servedinclude automotive, food processing, paper, plastic, manufacturing anddefense.  **DP&L’s** sales reflect the general economic conditions andseasonal weather patterns of the area.  **DP&L** sells any excess energy andcapacity into the wholesale market.  **DP&L** also sells electricity to DPLER, an affiliate, tosatisfy the electric requirements of its retail customers.

 

**DPL’s** other significant subsidiaries (all of which are wholly-owned)include: DPLE, which engages in the operation of peaking generating facilitiesand sells power in wholesale markets; DPLER, which sells retail electric energyunder contract to major industrial and commercial customers in West CentralOhio; and MVIC, which is our captive insurance company that provides insuranceto us and our subsidiaries.

 

**DPL** also has a wholly-owned business trust,DPL Capital Trust II, formed for the purpose of issuing trust capitalsecurities to investors.

 

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**DPL** and **DP&L** conducttheir principal business in one business segment — Electric.  **DP&L’s**electric transmission and distribution businesses are subject to rateregulation by federal and state regulators while its generation business is notsubject to such regulation.  Accordingly,**DP&L** applies the accountingstandards for regulated operations to its electric transmission anddistribution businesses and records regulatory assets when incurred costs areexpected to be recovered in future customer rates, and regulatory liabilitieswhen current recoveries in customer rates relate to expected future costs.

 

**DPL**and its subsidiaries employed 1,581persons as of January 31, 2010, of which 1,403 were full-timeemployees and 178 were part-time employees. At that date, 1,396 of these full-time employees and all of thepart-time employees were employed by **DP&L**.  Approximately 55% of the employees are undera collective bargaining agreement.

 

**SIGNIFICANT DEVELOPMENTS**

 

**Credit Ratings**

 

Thefollowing table outlines the debt credit ratings and outlook of each company,along with the effective dates of each rating and outlook for **DPL**and **DP&L**.

 
| ** **                             | ** ** | **DPL****(a)** | ** ** | **DP&L****(b)** | ** ** | **Outlook** | ** ** | **Effective**      | ** ** |
|----------------------------------------|------------|----------------|------------|---------------------|------------|-------------|------------|--------------------|------------|
|                                   |       |           |       |                |       |        |       |               |       |
| Fitch Ratings                          |       | A-             |       | AA-                 |       | Stable      |       | November 2009 |       |
| Moody’s  Investors Service        |       | Baa1           |       | Aa3                 |       | Stable      |       | August 2009   |       |
| Standard &  Poor’s Corp. |       | BBB+           |       | A                   |       | Stable      |       | April 2009    |       |

 

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

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

 

**Long-TermDebt Redemption**

 

On March 31, 2009,**DPL** paid $175 million of the 8.00% Senior Notes when thenotes became due.  In addition, on December 21,2009, **DPL** paid down $52.4 million of the $195million 8.125% Note to DPL Capital Trust II which is due 2031.

 

**NewRevolving Credit Facility**

 

On April 21, 2009, **DP&L** entered into a $100 millionunsecured revolving credit agreement with a syndicated bank group.  The agreement is for a 364-day term expiringon April 20, 2010.  The facilitycontains one financial covenant: **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  As of December 31, 2009, this covenantis met with a ratio of 0.40 to 1.00.  Asof December 31, 2009, there were no borrowings outstanding under thisfacility.

 

**WarrantsRepurchased and Exercised**

 

During the year ended December 31,2009, **DPL** repurchased a total of 8.6 millionof its warrants at an average price of $2.94 each.  The repurchased warrants were cancelled by **DPL**on the dates they were repurchased.  Also during this period, warrant holdersexercised a total of 9.2 million warrants, of which 5.5 million were exercisedunder cashless transactions and 3.7 million were exercised for cash.  As a result of these warrant exercisetransactions, **DPL** issued a total of 5.0 millionshares of common stock from treasury stock and in turn received total cashproceeds of $77.7 million.

 

**StockRepurchase Program**

 

On October 28, 2009,the **DPL** Board of Directors approved a StockRepurchase Program under which **DPL** may useproceeds from the exercise of warrants (discussed above) to repurchase commonstock and warrants from time to time in the open market, through privatetransactions or otherwise. The Stock Repurchase Program will run through June 30,2012, which is approximately three months after the end of the warrant exerciseperiod.  Through December 31, 2009, **DPL** repurchased approximately 2.4 million shares of commonstock under the Stock Repurchase Program at an average price per share of$26.96.

 

**Approvalof Stipulation**

 

In compliance with SB221, **DP&L**filed its ESP at the PUCO on October 10,2008. Subsequently on February 24, 2009, **DP&L**filed the Stipulation signed by the Staff of the PUCO, the Office of the OCCand various intervening parties.  On June 24,2009, the PUCO issued an order granting approval of the Stipulation.

 

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**Transmission,Ancillary and Other PJM-related Costs**

 

On February 19,2009, the PUCO approved **DP&L’s**request to defer costs related to transmission, capacity, ancillary service andother costs incurred since July 31, 2008 consistent with the provisions ofSB 221.  Subsequently, the PUCO approvedtwo separate riders in November 2009, one for the recovery of RPM capacitycosts and another rider for the recovery of transmission, ancillary and otherPJM-related costs (TCRR).  Accordingly,during the period ended December 31, 2009, **DP&L**deferred net RTO and other costs in the amount of $25.5 million.  Of this amount, approximately $9.8 millionrelates to the period August 1, 2008 through December 31, 2008, and$15.7 million relates to the twelve month period ended December 31,2009.  The deferral of these costsresulted in a favorable impact to our results of operations.

 

**Increasein Dividends on DPL’s Common Stock**

 

On December 9,2009, **DPL’s** Board of Directorsauthorized a quarterly dividend rate increase of approximately 6%, increasingthe quarterly dividend per **DPL**commonshare from $.2850 to $.3025.  If thisdividend rate is maintained, the annualized dividend would increase from $1.14per share to $1.21 per share.

 

**ELECTRIC SALES AND REVENUES**

 
| ** **                               | ** ** | **DPL**       | ** **    | **DP&L  (a)** | ** ** |
|------------------------------------------|------------|---------------|---------------|-------------------|------------|
| ** **                               | ** ** | **2009**      | ** **    | **2008**          | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Electric sales (millions of kWh)         |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Residential                              | ** ** | **5,120**     |          | 5,533             |       | 5,535 | ** ** | **5,120** |   | 5,533 |   | 5,535 |   |
| Commercial                               | ** ** | **3,678**     |          | 3,959             |       | 3,990 | ** ** | **3,678** |   | 3,959 |   | 3,990 |   |
| Industrial                               | ** ** | **3,353**     |          | 3,986             |       | 4,241 | ** ** | **3,353** |   | 3,986 |   | 4,241 |   |
| Other retail                             | ** ** | **1,386**     |          | 1,454             |       | 1,468 | ** ** | **1,386** |   | 1,454 |   | 1,468 |   |
| Total retail                             | ** ** | **13,537**    |          | 14,932            |       | 15,234 | ** ** | **13,537** |   | 14,932 |   | 15,234 |   |
|                                     |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Wholesale                                | ** ** | **3,130**     |          | 2,240             |       | 3,364 | ** ** | **3,053** |   | 2,173 |   | 3,364 |   |
|                                     |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Total                                    | ** ** | **16,667**    |          | 17,172            |       | 18,598 | ** ** | **16,590** |   | 17,105 |   | 18,598 |   |
|                                     |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Operating revenues ($ in thousands) |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Residential                              | ** ** | **$**         | **560,223**   |              | $          | 544,561 |   | $ | 532,956 | ** ** | **$** | **560,223** |   | $ | 544,561 |   | $ | 532,956 |   |
| Commercial                               | ** ** | **332,808**   |          | 332,010           |       | 321,051 | ** ** | **329,006** |   | 308,934 |   | 301,455 |   |
| Industrial                               | ** ** | **228,458**   |          | 240,041           |       | 244,260 | ** ** | **186,293** |   | 133,832 |   | 132,359 |   |
| Other retail                             | ** ** | **98,781**    |          | 97,592            |       | 94,568 | ** ** | **82,749** |   | 78,905 |   | 77,184 |   |
| Other miscellaneous revenues             | ** ** | **8,766**     |          | 9,042             |       | 13,340 | ** ** | **8,966** |   | 9,046 |   | 13,387 |   |
| Total retail                             | ** ** | **1,229,036** |          | 1,223,246         |       | 1,206,175 | ** ** | **1,167,237** |   | 1,075,278 |   | 1,057,341 |   |
|                                     |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Wholesale                                | ** ** | **122,519**   |          | 149,874           |       | 180,254 | ** ** | **181,871** |   | 293,500 |   | 331,722 |   |
|                                     |       |          |          |              |       |   |   |   |   |   |   |   |   |
| RTO revenues                             | ** ** | **225,677**   |          | 217,357           |       | 118,389 | ** ** | **201,254** |   | 204,074 |   | 118,389 |   |
|                                     |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Other revenues                           | ** ** | **11,689**    |          | 11,080            |       | 10,911 | ** ** | **—** |   | — |   | — |   |
|                                     |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Total                                    | ** ** | **$**         | **1,588,921** |              | $          | 1,601,557 |   | $ | 1,515,729 | ** ** | **$** | **1,550,362** |   | $ | 1,572,852 |   | $ | 1,507,452 |   |
|                                     |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Electric customers at end of period      |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Residential                              | ** ** | **456,144**   |          | 456,770           |       | 456,989 | ** ** | **456,144** |   | 456,770 |   | 456,989 |   |
| Commercial                               | ** ** | **50,141**    |          | 50,190            |       | 49,875 | ** ** | **50,141** |   | 50,190 |   | 49,875 |   |
| Industrial                               | ** ** | **1,773**     |          | 1,797             |       | 1,818 | ** ** | **1,773** |   | 1,797 |   | 1,818 |   |
| Other                                    | ** ** | **6,577**     |          | 6,517             |       | 6,443 | ** ** | **6,577** |   | 6,517 |   | 6,443 |   |
|                                     |       |          |          |              |       |   |   |   |   |   |   |   |   |
| Total                                    | ** ** | **514,635**   |          | 515,274           |       | 515,125 | ** ** | **514,635** |   | 515,274 |   | 515,125 |   |

 

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*(a)**      ****DP&L****sellspower to DPLER (a subsidiary of **DPL**).  The revenues associated with these sales areclassified as wholesale sales on **DP&L’s**financial statements and retail sales for **DPL**.  The kWh volumes contain all volumesdistributed on the **DP&L** systemwhich include the retail sales by DPLER. The sales for resale volumes are omitted from **DP&L**to avoid duplicate reporting.*

 

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**ELECTRICOPERATIONS AND FUEL SUPPLY**

 
| ** **           | ** ** | **2009 Summer Generating Capacity** | ** ** |
|----------------------|------------|-------------------------------------|------------|
| **(Amounts in MWs)** | ** ** | **Coal Fired**                      | ** ** | **Peaking Units** | ** ** | **Total** | ** ** |
|                 |       |                                |       |   |   |   |   |
| **DPL**              |       | 2,827                               |       | 967 |   | 3,794 |   |
|                 |       |                                |       |   |   |   |   |
| **DP&L**         |       | 2,827                               |       | 422 |   | 3,249 |   |

 

**DPL’s**present summer generating capacity, including peaking units, is approximately3,794 MW.  Of this capacity,approximately 2,827 MW, or 75%, is derived from coal-fired steam generatingstations and the balance of approximately 967 MW, or 25%, consists ofcombustion turbine and diesel peaking units.

 

**DP&L’s**present summer generating capacity, including peaking units, is approximately3,249 MW.  Of this capacity,approximately 2,827 MW, or 87%, is derived from coal-fired steam generatingstations and the balance of approximately 422 MW, or 13%, consists ofcombustion turbine and diesel peaking units.

 

Our all-time net peak load was 3,270 MW,occurring August 8, 2007.

 

Approximately 87% of the existing steamgenerating capacity is provided by certain generating units owned as tenants incommon with Duke Energy-Ohio (or its subsidiaries The Cincinnati Gas &Electric Company [CG&E], or Union Heat, Light & Power) and AEP (orits subsidiary Columbus Southern Power [CSP]). As tenants in common, each company owns a specified share of each ofthese units, is entitled to its share of capacity and energy output, and has acapital and operating cost responsibility proportionate to its ownershipshare.  **DP&L’s**remaining steam generating capacity (approximately 365 MW) is derived from agenerating station owned solely by **DP&L**.  Additionally, **DP&L,** CG&E and CSP own, as tenants in common, 884circuit miles of 345,000-volt transmission lines.  **DP&L**has several interconnections with other companies for the purchase, sale andinterchange of electricity.

 

In2009, we generated 99.5% of our electric output from coal-fired units and 0.5%from oil and natural gas-fired units.

 

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Thefollowing table sets forth **DP&L’s**and DPLE’s generating stations and, where indicated, those stations which **DP&L** owns as tenants in common.

 
| ** **                                   | ** ** | ** **     | ** ** | ** **             | ** ** | ** **       | ** ** | **Approximate Summer** | ** ** |
|----------------------------------------------|------------|----------------|------------|------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                   | ** ** | ** **     | ** ** | ** **             | ** ** | ** **       | ** ** | **MW Rating**          | ** ** |
| **Station**                                  | ** ** | **Ownership*** | ** ** | **Operating  Company** | ** ** | **Location**     | ** ** | **DPL  Portion**       | ** ** | **Total** | ** ** |
| Coal Units                                   |       |           |       |                   |       |             |       |                   |       |   |   |
| Hutchings                                    |       | W              |       | DP&L               |       | Miamisburg, OH   |       | 365                    |       | 365 |   |
| Killen                                       |       | C              |       | DP&L               |       | Wrightsville, OH |       | 402                    |       | 600 |   |
| Stuart                                       |       | C              |       | DP&L               |       | Aberdeen, OH     |       | 808                    |       | 2,308 |   |
| Conesville-Unit 4                            |       | C              |       | CSP                    |       | Conesville, OH   |       | 126                    |       | 765 |   |
| Beckjord-Unit 6                              |       | C              |       | CG&E               |       | New Richmond, OH |       | 207                    |       | 414 |   |
| Miami Fort-Units 7 & 8              |       | C              |       | CG&E               |       | North Bend, OH   |       | 368                    |       | 1,020 |   |
| 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  |       | 94                     |       | 94 |   |
| 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 |   |
| Montpelier Units 1-4                         |       | W              |       | DPLE                   |       | Poneto, IN       |       | 238                    |       | 238 |   |
| Tait Units 4-7                               |       | W              |       | DPLE                   |       | Moraine, OH      |       | 307                    |       | 307 |   |
| Total approximate summer generating capacity |       |           |       |                   |       |             |       | 3,794                  |       | 8,352 |   |

 

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*W= Wholly-Owned

  C= Commonly-Owned

 

In addition to the above, **DP&L**also owns a 4.9% equity ownership interest in OVEC,an electric generating company.  OVEC hastwo plants in Cheshire, Ohio and Madison, Indiana with a combined generationcapacity of approximately 2,265 MW.  **DP&L’s** share of this generation capacity isapproximately 111 MW.

 

**DPL**hassubstantially all of the total expected coal volume needed to meet its retailand firm wholesale sales requirements for 2010 under contract.  The majority of the contracted coal ispurchased at fixed prices.  Somecontracts provide for periodic adjustments and some are priced based on marketindices.  Fuel costs are impacted bychanges in volume and price and are driven by a number of variables includingweather, the wholesale market price of power, certain provisions in coalcontracts related to government imposed costs, counterparty performance andcredit, scheduled outages and generation plant mix.  Our emission allowance consumption wasreduced in 2008 and 2009 due to the installation of FGD equipment (scrubbers)at our jointly-owned electric generating stations.  Due to the installation of this emissioncontrol equipment and barring any changes in the regulatory environment inwhich we operate, we expect to have emission allowance inventory in excess ofour needs, which we plan to sell during 2010 and in future periods.  We were a net seller of SO2 allowances and NOx allowances in 2009, and weexpect to be a net seller in 2010.

 

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Thegross average cost of fuel consumed per kWh was as follows:

 
| ** **   | ** ** | **Average Cost of Fuel**  | ** ** |
|--------------|------------|---------------------------|------------|
| ** **   | ** ** | **Consumed (¢/kWh)** | ** ** |
| ** **   | ** ** | **2009**                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|         |       |                      |       |   |   |   |   |
| **DPL**      | ** ** | **2.39**                  |       | 2.28 |   | 1.97 |   |
|         |       |                      |       |   |   |   |   |
| **DP&L** | ** ** | **2.36**                  |       | 2.22 |   | 1.91 |   |

 

**SEASONALITY**

 

Thepower generation and delivery business is seasonal and weather patterns have amaterial impact on operating performance. In the region we serve, demand for electricity is generally greater inthe summer months associated with cooling and in the winter months associatedwith heating as compared to other times of the year.  Unusually mild summers and winters could havean adverse effect on our results of operations, financial condition and cashflows.

 

**RATEREGULATION AND GOVERNMENT LEGISLATION**

 

**DP&L’s** sales to retail customers are subject to rateregulation by the PUCO.  Beginning January 1,2010, **DP&L** has a fuel rider in place forthe collection of our prudently incurred fuel, purchased power, emission andother related costs.  **DP&L’s** transmission rates and wholesaleelectric rates to municipal corporations, rural electric co-operatives andother distributors of electric energy are subject to regulation by the FERCunder the Federal Power Act.

 

Ohiolaw establishes the process for determining retail rates charged by publicutilities.  Regulation of retail ratesencompasses the timing of applications, the effective date of rate increases,the recoverable costs basis upon which the rates are based and other relatedmatters.  Ohio law also established theOffice of the OCC, which has the authority to represent residential consumersin state and federal judicial and administrative rate proceedings.

 

Ohiolegislation extends the jurisdiction of the PUCO to the records and accounts ofcertain public utility holding company systems, including **DPL**.  The legislation extends the PUCO’ssupervisory powers to a holding company system’s general condition andcapitalization, among other matters, to the extent that such matters relate tothe costs associated with the provision of public utility service.  Based on existing PUCO and FERCauthorization, regulatory assets and liabilities are recorded on the balancesheets.  See Note 3 of Notes toConsolidated Financial Statements.

 

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**COMPETITION AND REGULATION**

 

**Ohio Matters**

 

**Ohio Retail Rates**

 

Since January 2001, **DP&L’s** electric customers have beenpermitted to choose their retail electric generation supplier.  **DP&L** continues to have the exclusive right to providedelivery service in its state certified territory and the obligation to supplyretail generation service to customers that do not choose an alternativesupplier.  The PUCO maintains jurisdictionover **DP&L’s** delivery of electricity,standard service offer and other retail electric services.

 

On May 1,2008, substitute SB 221, an Ohio electric energy bill, was signed by theGovernor and went into effect July 31, 2008.  This law required that all Ohio distributionutilities file either an electric security plan or a market rate option thatwas to be in effect on January 1, 2009. Under the market rate option, a periodic competitive bid process willset the retail generation price after the utility demonstrates that it can meetcertain market criteria and bid requirements set out in the bill.  Also,under this option, utilities that still own generation in the state arerequired to phase in the market rate option over a period of not less than fiveyears.  An electric security plan mayallow for adjustments to the standard service offer for costs associated withenvironmental compliance; fuel and purchased power; construction of new orinvestment in specified generating facilities; and the provision of standby anddefault service, operating, maintenance, or other costs including taxes. As part of its electric security plan, a utility is permitted to file aninfrastructure improvement plan that will specify the initiatives the utility willtake to rebuild, upgrade, or replace its electric distribution system,including cost recovery mechanisms.  Both the market rate option andelectric security plan option involve a “substantially excessive earnings” testbased on the earnings of comparable companies with similar business andfinancial risks.  The PUCO issued threesets of rules related to implementation of the law.  These rules address topics such as theinformation that must be included in an electric security plan as well as amarket rate option, the significantly excessive earnings test requirements,corporate separation revisions, rules relating to the recovery oftransmission related costs, electric service and safety standards dealing withthe statewide line extension policy, and rules relating to advanced energyportfolio standards, renewable energy, demand reduction and energy efficiencystandards.

 

Incompliance with SB 221, **DP&L**filedits ESP at the PUCO on October 10, 2008. This plan contained three parts: 1) a standard offer plan; 2) a CCEMplan; and 3) an alternative energy plan. The standard offer plan stated that **DP&L**intendsto maintain its current rate plan through December 31, 2010, and addressedcompliance issues related to the PUCO rules.

 

SB 221and the implementation rules contain targets relating to advanced energyportfolio standards, renewable energy, demand reduction and energy efficiencystandards.  After several revisions,rulings on rehearing and reissuance that occurred throughout 2009, the rules relatingto renewable energy, energy efficiency, demand reduction and integratedresource plans were made effective on December 10, 2009.  The standards require that, by the year 2025,25% of the total number of kWh of electricity sold by the utility to retailelectric consumers must come from alternative energy resources, which include “advancedenergy resources” such as distributed generation, clean coal, advanced nuclear,energy efficiency and fuel cell technology; and “renewable energy resources”such as solar, hydro, wind, geothermal and biomass. At least half of the 25%must be generated from renewable energy resources, including 0.5% from solarenergy.  The renewable energy portfolio,energy efficiency and demand reduction standards began in 2009 with increasesin required percentages each year.  Theannual targets for energy efficiency are expected to save 22.3% by 2025 andpeak demand reductions are expected to reach 7.75% by 2018 compared to baselineenergy usage.  If any targets are notmet, compliance penalties will apply unless the PUCO makes certain findingsthat would excuse performance.  In December 2009,**DP&L** and DPLER made several filingsrelating to their renewable energy and energy efficiency complianceplans.  **DP&L** and DPLER were able toobtain Renewable Energy Certificates sufficient to meet their overall renewableenergy targets, but **DP&L** andDPLER together obtained only 36% of the separate requirement for 2009Ohio-based solar power.  The companiesasked for a waiver of any unmet 2009 Ohio solar requirements on grounds offorce majeure because there are insufficient solar renewable energy creditsavailable from Ohio resources.  In two separate filings, **DP&L** requested the PUCO’s consent that **DP&L** had met the requirements for energy efficiency andfor demand reduction based on **DP&L’s**interpretation of how those requirements should be applied.  These filings also requested that if the PUCOdisagreed with **DP&L’s** interpretation, thePUCO grant alternative relief and find that **DP&L**was unable to meet the targets due to reasons beyond its reasonable control,i.e. uncertainty throughout 2009 caused by delays in finalizing the rules andthe lack of timely PUCO action on several of **DP&L’s**special contracts relating to demand response efforts which remain pendingbefore the PUCO.  

 

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Inaddition, the rules that became effective December 10, 2009 requiredthat on January 1, 2010, **DP&L** filean extensive energy efficiency portfolio plan, outlining how **DP&L**plans to comply with the energy efficiency anddemand reduction benchmarks.  **DP&L** fileda separate request for a finding that it had already complied with thisrequirement in the form of **DP&L’s**portfolio plan that had been filed in 2008 as part of its electric securityplan, which had been approved by the PUCO and is being implemented.  We are unable to predict at this time how thePUCO will respond to these filings, but believe that the outcome will not bematerial to our financial condition. However, as the targets get increasingly larger over time, the costs ofcomplying with the SB 221 targets and the PUCO’s implementing rules couldhave a material impact on our financial condition.

 

On February 24,2009, **DP&L** filed the Stipulation with thePUCO which was signed by the Staff of the PUCO, the Office of the OCC andvarious intervening parties.  Thematerial terms agreed to under the Stipulation include the following:

 

·                  **DP&L’s**current rate plan will be extended through 2012.

·                  **DP&L**will be permitted to implement a fuel and purchased power recovery mechanismbeginning January 1, 2010 which will track and adjust fuel and purchasedpower costs on a quarterly basis.

·                  The rate stabilization surcharge remains a non-bypassable provider oflast resort charge at its current rate amount, but may be bypassable bycustomers served by a government aggregator beginning 2011. If a governmentaggregator elects to avoid this surcharge in 2011 and 2012, its customers canonly return to **DP&L** at a market-based rate.

·                  The last phase of the EIR increase will occur in 2010 as previouslyapproved by the PUCO and thereafter will remain at that level through 2012.

·                  **DP&L’s**base distribution and generation rates will be frozen through 2012.

·                  **DP&L**may seek recovery of certain cost increases such as storm damage expenses,regulatory or tax changes, costs associated with new climate change or carbonregulations, certain costs associated with the operation of the Hutchingsstation, costs associated with TCRR and Regional Transmission Organizationcosts not covered by the TCRR.

·                  The significantly excessive earnings test will not apply to **DP&L** until 2012.

·                  **DP&L**will be permitted to begin its energy efficiency and demand response programsimmediately with recovery scheduled to begin in 2009, with a two-yearreconciliation.  **DP&L’s**smart grid deployment initiative will be revised and resubmitted to the PUCOfor approval by September 2009 with the anticipation that the plans andrecovery will begin January 1, 2010 also with a two year reconciliation.

·                  **DP&L’s**proposed alternative energy plans will be approved and recovery of these costswill begin in 2009 with an annual reconciliation.

·                  Mercantile (large use) customers can obtain exemption from the energyefficiency rider if self-directed energy and demand programs generate reductionsequal to or greater than **DP&L’s**energy and demand reduction benchmarks.

 

On June 24, 2009,the PUCO issued an order granting approval of the Stipulation as filed andauthorized **DP&L** to implement ratesassociated with alternative energy and energy efficiency compliance costs,which **DP&L** implemented beginning on July 1,2009.

 

Consistent with theStipulation, **DP&L** filed its smart grid andadvanced metering infrastructure business cases with the PUCO on August 4,2009 seeking recovery of costs associated with a three-year plan to deploysmart meter; and a ten-year plan for distribution and substation automation,core telecommunications, supporting software and in-home technologies.  OnAugust 5, 2009, **DP&L**submitted an application for American Recovery and Reinvestment Act (ARRA)funding under the Integrated and/or Crosscutting Systems topic area for theSmart Grid Investment Grant Program, seeking $145.1 million of matchingfunds.  On October 27, 2009, we werenotified by the United States Department of Energy (DOE) that we will notreceive funding under the ARRA.  Atechnical conference was held at the PUCO in October 2009 for the smartgrid case, and a subsequent PUCO entry established a comment and reply commentperiod.  The PUCO Staff along with otherinterested parties provided comments and reply comments on **DP&L’s**plans.  A hearing is not yet scheduledfor this case.

 

The Stipulation providedfor the establishment of a fuel and purchased power recovery rider beginning January 1,2010.  **DP&L**filed its proposed fuel rider on October 30, 2009.  On December 16, 2009 the PUCO issued anorder stating the rate was consistent with the Stipulation provisions, that itdoes not appear to be unjust or unreasonable, and approved the rate to beimplemented on January 1, 2010. The fuel rider will fluctuate based onactual costs and recoveries and will be modified at the start of each seasonalquarter:  March 1, June 1,September 1, and December 1 each year. Consistent with the Stipulation, anannual review and audit is scheduled to take place in the first quarter of 2011for calendar year 2010.

 

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As a member of PJM, **DP&L** incurs costs and receives revenues from the RTOrelated to its transmission and generation assets, as well as its loadobligations for retail customers.  SB 221included a provision that allows Ohio electric utilities to seek and obtain areconcilable rider to recover RTO-related costs and credits.  In early 2009, the PUCO approved **DP&L’s** request to defer costs associated with itstransmission, capacity, ancillary service and other PJM-related chargesincurred as a member of PJM consistent with the provisions of SB 221.  **DP&L**subsequently filed to establish the TCRR that would incorporate all charges andcredits from the RTO as well as the amounts approved for deferral.  The TCRR was approved by the PUCO and on June 1,2009 **DP&L** began recovery of thesecosts.  In June 2009, an applicationfor rehearing was filed claiming the PUCO’s order allowing for recovery of RPMcosts through this rider was unlawful.  On September 9, the PUCO granted rehearing, and issued an entryordering **DP&L** to remove the RPM costs fromthe TCRR and refile its tariffs.  On September 23,2009, the Company filed two separate riders, a TCRR without RPM costs, and anRPM recovery rider, which were both subsequently approved per PUCO Finding andOrder issued on November 18, 2009, and implemented December 1,2009.  There was no change to the levelof recovery due to the rehearing process.

 

On September 9, 2009, the PUCO issued an entryestablishing a significantly excessive earnings test (SEET) proceeding.  A workshop was held at the PUCO offices on October 5,2009 to allow interested parties to present concerns and discuss issues relatedto the methodology for determining whether an electric utility hassignificantly excessive earnings pursuant to the provisions contained in SB221.  On November 18, 2009, the PUCOStaff issued its recommendations to the PUCO. **DP&L** filed its commentsand reply comments along with other interested parties.  Although **DP&L’s**Stipulation provides that the SEET does not apply to it until 2013based on 2012 earnings results, **DP&L**is actively participating in this proceeding.

 

On August 28, 2009, **DP&L** filed its application to establishreliability targets consistent with the most recent PUCO Electric Service andSafety Standards (ESSS).  The PUCO issued a procedural schedule and held atechnical conference on November 10, 2009.  Comments and replycomments were filed.  We expect this case will be set for hearing.  According to the ESSS rules, **DP&L** will be subject to financialpenalties if the established targets are not met for two consecutive years.

 

Whilethe overall financial impact of SB 221 will not be known for some time,implementation of the bill and compliance with its requirements could have amaterial impact on our financial condition.

 

**OhioCompetitive Considerations and Proceedings**

 

As of December 31,2009, six unaffiliated marketers were registered as CRES providers in **DP&L’s** service territory.  While there has been some customer switchingassociated with unaffiliated marketers, it represented less than 0.11% of salesin 2009.  DPLER, an affiliated company, is also a registered CRES providerand accounted for 99% of the total kWh supplied by CRES providers within **DP&L’s** service territory in 2009. During the first quarter of 2010, DPLER will begin providing CRES services tobusiness customers who are currently not in **DP&L’s**service territory.  At this time, we donot expect these incremental costs and revenues to have a material impact onour results of operations, financial position or cash flows.  In 2003-2004, several communities in **DP&L’s** service area passed ordinancesallowing the communities to become government aggregators for the purpose ofoffering alternative electric generation supplies to their citizens.  To date, none of these communities haveaggregated their generation load.

 

**Federal Matters**

 

Like other electricutilities and energy marketers, **DP&L**and DPLE may sell or purchase electric products on the wholesale market.  **DP&L**and DPLE compete with other generators, power marketers, privately andmunicipally-owned electric utilities and rural electric cooperatives whenselling electricity.  The ability of **DP&L** and DPLE to sell this electricitywill depend on how **DP&L’s** andDPLE’s price, terms and conditions compare to those of other suppliers.

 

As part of Ohio’selectric deregulation law, all of the state’s investor-owned utilities arerequired to join a RTO.  In October 2004,**DP&L** successfully integrated its1,000 miles of high-voltage transmission into the PJM RTO.  The role of the RTO is to administer a competitivewholesale market for electricity and ensure reliability of the transmissiongrid.  PJM ensures the reliability of thehigh-voltage electric power system serving 51 million people in all or parts ofDelaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, NorthCarolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and theDistrict of Columbia.  PJM coordinatesand directs the operation of the region’s transmission grid, administers theworld’s largest competitive wholesale electricity market and plans regionaltransmission expansion improvements to maintain grid reliability and relievecongestion.

 

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ThePJM RPM base residual auction for the 2012/13 period cleared at a per megawattprice of $16/day for our RTO area.  Prior to this auction, the permegawatt price for the 2011/2012 period was $110/day.  Future RPM auctionresults will be dependent not only on the overall supply and demand ofgeneration and load, but may also be impacted by congestion as well as PJM’sbusiness rules relating to bidding for Demand Response and EnergyEfficiency resources in the RPM auctions.  We cannot predict the outcomeof future auctions but if the current auction price is sustained, our futureresults of operations, financial condition and cash flows could be adverselyimpacted.

 

As a member of PJM, **DP&L**is also subject to charges and costs associated with PJM operations as approvedby the FERC.  FERC Orders issued in 2007 regarding the allocation of costsof large transmission facilities within PJM, could result in additional costsbeing allocated to **DP&L**ofapproximately $12 million or more annually by 2012.  **DP&L** filed a notice of appeal to theU.S. Court of Appeals, D.C. Circuit on March 18, 2008 challenging theallocation method.  The appeal was consolidated with other appeals takenby other interested parties of the same FERC Orders and the consolidated caseswere assigned to the 7th Circuit.  On August 6, 2009, the 7th Circuit ruled that theFERC had failed to provide a reasoned basis for the allocation method it hadapproved.  Rehearings were filed by otherinterested litigants and denied by the Court, which then remanded the matter tothe FERC for further proceedings.   On January 21,2010, the FERC issued a procedural order on remand establishing a paper hearingprocess under which PJM will make an informational filing in lateFebruary.  Subsequently PJM and other parties, including **DP&L**, will be able to file initial comments, testimony,and recommendations and reply comments.  Absent future changes to theprocedural schedule that may occur for a number of reasons including ifsettlement discussions are held, the paper hearing process should be completeand the case ready for FERC consideration in 2010.  FERC did not establisha deadline for its issuance of a substantive order.  **DP&L**cannot predict the timing or the likely outcome of the proceeding.  Until such time as FERC may act to approve achange in methodology, PJM will continue to apply the allocation methodologythat had been approved by FERC in 2007. Although we continue to maintain that these costs should be borne by thebeneficiaries of these projects and that **DP&L** is notone of these beneficiaries, any new credits or additional costs resulting fromthe ultimate outcome of this proceeding will be reflected in **DP&L’s** TCRR rider which is already in place to passthrough RTO-related costs and credits.

 

**DP&L** provides transmissionand wholesale electric service to twelve municipal customers in itsservice territory, which in turn distribute electricity principally withintheir incorporated limits.  **DP&L** also maintains an interconnection agreement withone municipality that has the capability to generate a portion of its ownenergy requirements.  Approximately onepercent of total electricity sales in 2009 represented sales to thesemunicipalities.

 

InJune 2009, the NERC, a FERC-certified electric reliability organizationresponsible for developing and enforcing mandatory reliability standards,commenced a routine audit of **DP&L’s**operations.  The audit, which was for theperiod June 18, 2007 to June 25, 2009, evaluated **DP&L’s**compliance with 42 requirements in 18 NERC-reliability standards.  **DP&L** iscurrently subject to a compliance audit at a minimum of once every three yearsas provided by the NERC Rules of Procedure. This audit was concluded in June 2009and its findings revealed that **DP&L** had somePossible Alleged Violations (PAVs) associated with five NERC ReliabilityStandards.  In response to the report, **DP&L** filed mitigation plans with NERC to address thePAVs.  These mitigation plans have beenaccepted and **DP&L** is currently awaiting aproposal for settlement from NERC.  Whilewe are currently unable to determine the extent of penalties, if any, that maybe imposed on **DP&L**, we do not believe suchpenalties will have a material impact on our results of operations.

 

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**ENVIRONMENTAL CONSIDERATIONS**

 

**DPL** and**DP&L’s** facilities and operations are subject to a wide range ofenvironmental regulations and laws by federal, state and localauthorities.  The environmental issues that may impact us include:

 

·                  The Federal CAA and state laws and regulations (including StateImplementation Plans) which require compliance, obtaining permits and reportingas to air emissions.

 

·                  Litigation with federal and certain state governments and certainspecial interest groups regarding whether modifications to or maintenance ofcertain coal-fired generating plants require additional permitting or pollutioncontrol technology, or whether emissions from coal-fired generating plantscause or contribute to global climate changes.

 

·                  Rules issued by the USEPA and Ohio EPA that require substantialreductions in SO2, particulates, mercury and NOxemissions.  **DPL** has installed emission controltechnology and is taking other measures to comply with required and anticipatedreductions.

 

·                  Rules issued by the USEPA and Ohio EPA that require reporting andfuture reductions of GHGs.

 

·                  Rules issued by the USEPA associated with the Federal Clean WaterAct (FCWA), which prohibits the discharge of pollutants into waters of theUnited States except pursuant to appropriate permits.

 

·                  Solid and hazardous waste laws and regulations, which govern themanagement and disposal of certain waste. The majority of solid waste createdfrom the combustion of coal and fossil fuels is fly ash and other coalcombustion by-products.  The EPA haspreviously determined that fly ash and other coal combustion by-products arenot hazardous waste subject to the Resource Conservation and Recovery Act(RCRA), but the EPA is reportedly reconsidering that determination.  A change in determination could significantlyincrease the costs of disposing of such by-products.

 

As well as imposingcontinuing compliance obligations, these laws and regulations authorize theimposition of substantial penalties for noncompliance, including fines,injunctive relief and other sanctions. In the normal course of business, we have investigatory and remedialactivities underway at these facilities to comply, or to determine compliance,with such regulations.  We record liabilities for probable estimated lossin accordance with the provisions of GAAP relating to the accounting forcontingencies.**  DPL,** through its wholly-ownedcaptive insurance subsidiary MVIC, has an actuarially calculated reserve of$1.2 million for environmental matters. We evaluate the potential liability related to probable losses quarterlyand may revise our estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on our results ofoperations, financial position or cash flows.

 

**EnvironmentalRegulation and Litigation Related to Air Quality**

 

Air Quality

 

In 1990, the federalgovernment amended the CAA to further regulate air pollution.  Under the law, the USEPA sets limits on howmuch of a pollutant can be in the air anywhere in the United States.  The CAA allows individual states to havestronger pollution controls, but states are not allowed to have weakerpollution controls than those set for the whole country.  The CAA has a material effect on ouroperations and such effects are detailed below with respect to certain programsunder the CAA.

 

On October 27, 2003,the USEPA published final rules regarding the equipment replacement provision(ERP) of the routine maintenance, repair and replacement (RMRR) exclusion ofthe CAA.  Activities at power plants that fall within the scope of theRMRR exclusion do not trigger new source review requirements, including theimposition of stricter emission limits. On December 24, 2003, the United States Court of Appeals for theD.C. Circuit stayed the effective date of the rule pending its decision onthe merits of the lawsuits filed by numerous states and environmentalorganizations challenging the final rules. On June 6, 2005, the USEPA issued its final response on thereconsideration of the ERP exclusion. The USEPA clarified its position, but did not change any aspect of the2003 final rules.  This decision wasappealed and the D.C. Circuit vacated the final rules on March 17,2006.  The scope of the RMRR exclusionremains uncertain due to this action by the D.C Circuit, as well as multiplelitigations not directly involving us where courts are defining the scope ofthe exception with respect to the specific facts and circumstances of theparticular power plants and activities before the courts.  While we believe that we have not engaged inany activities with respect to our existing power plants that would trigger thenew source review requirements, if new source review requirements were imposedon any of **DP&L’s** existing power plants, theresults could be materially adverse to us.

 

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The USEPA issued aproposed rule on October 20, 2005 concerning the test for measuringwhether modifications to electric generating units should trigger applicationof New Source Review (NSR) standards under the CAA.  A supplemental rule was also proposed onMay 8, 2007 to include additional options for determining if there is anemissions increase when an existing electric generating unit makes a physicalor operational change.  The rule waschallenged by environmental organizations and has not been finalized.  While we cannot at this time predict theoutcome of this rulemaking, any finalized rules could materially affectour operations.

 

On December 17,2003, the USEPA proposed the Interstate Air Quality Rule (IAQR) designedto reduce and permanently cap SO2 and NOx emissions from electricutilities.  The proposed IAQR focused onstates, including Ohio, whose power plant emissions are believed to besignificantly 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 the CAIR.  The final rules weresigned on March 10, 2005 and were published on May 12, 2005.  CAIR created an interstate trading programfor annual NOx emission allowances and made modifications to an existingtrading program for SO2. On August 24, 2005, the USEPA proposed additional revisions to theCAIR.  On July 11, 2008, the U.S.Court of Appeals for the District of Columbia Circuit issued a decision tovacate the USEPA’s CAIR and its associated Federal Implementation Plan andremanded to the USEPA with instructions to issue new regulations that conformedto the procedural and substantive requirements of the CAA.  The Court’s decision, in part, invalidatedthe new NOx annual emission allowance trading program and the modifications tothe SO2 emission trading program established by the March 10,2005 rules, and created uncertainty regarding future NOx and SO2 emissionreduction requirements and their timing. The USEPA and a group representing utilities filed a request on September 24,2008 for a rehearing before the entireCourt.  On December 23, 2008, the U.S. Court of Appeals issuedan order on reconsideration that permits CAIR to remain in effect until theUSEPA issues new regulations that would conform to the CAA requirements and theCourt’s July 11, 2008 decision.  In January 2010, the Courtordered the USEPA to file a response to request for a USEPA decision filed byparties in the original case who are now seeking a Court order to require theUSEPA to issue new regulations by March 1, 2010.  We are currentlyunable to predict the outcome of this request or the timing or impact of anynew regulations relating to CAIR.  CAIRhas and will continue to have a material effect on our operations.

 

In 2007, the OhioEPA revised their State Implementation Plan (SIP) to incorporate a CAIR programconsistent with the IAQR.  The Ohio EPAhad received partial approval from the USEPA and had been awaiting full programapproval from the USEPA when the U.S. Court of Appeals issued its July 11,2008 decision.  As a result of the December 23,2008 order, the Ohio EPA proposed revised rules on May 11, 2009,which were finalized on July 15, 2009. On September 25, 2009, theUSEPA issued a full SIP approval for the Ohio CAIR program.  We do not expect that full SIP approval ofthe Ohio CAIR program will have a significant impact on operations.

 

In the fourth quarter of2007, **DP&L** began a program for sellingexcess emission allowances, including annual NOxemissionallowances and SO2 emission allowances that were the subjectof CAIR trading programs.  In subsequentquarters, **DP&L** recognized gains from the saleof excess emission allowances to third parties. The court’s CAIR decision affected the trading market for excessallowances and impacted **DP&L’s**program for selling additional excess allowances in 2008.  Although in January 2009 we resumedselling excess allowances due to the revival of the trading market, thelong-term impact of the court’s decision and of the actions the USEPA or otherswill take in response to this decision,****is not fullyknown at this time and could have an adverse effect on us.

 

On January 30,2004, the USEPA published its proposal to restrict mercury and other air toxinsfrom coal-fired and oil-fired utility plants. The USEPA “de-listed” mercury as a hazardous air pollutant fromcoal-fired and oil-fired utility plants and, instead, proposed a cap-and-tradeapproach to regulate the total amount of mercury emissions allowed from suchsources.  The final Clean Air Mercury Rule (CAMR)was signed March 15, 2005 and was published on May 18, 2005.  On March 29, 2005, nine states sued theUSEPA, opposing the cap-and-trade regulatory approach taken by the USEPA.  In 2007, the Ohio EPA adopted rules implementingthe CAMR program.  On February 8,2008, the U.S. Court of Appeals for the District of Columbia Circuit struckdown the USEPA regulations, finding that the USEPA had not complied with statutoryrequirements applicable to “de-listing” a hazardous air pollutant and that acap-and-trade approach was not authorized by law for “listed” hazardous airpollutants.  A request for rehearingbefore the entire Court of Appeals was denied and a petition for review beforethe U.S. Supreme Court was filed on October 17, 2008.  On February 23, 2009, the U.S. SupremeCourt denied the petition.  The USEPA isexpected to move forward on setting Maximum Available Control Technology (MACT)standards for coal- and oil-fired electric generating units.  Upon publication in the federal registerfollowing finalization, affected exempt generating units (EGUs) will have threeyears to come into compliance with the new requirements.  At this time, **DP&L**is unable to determine the impact of the promulgation of new MACT standards onits financial position or results of operations; however, a MACT standard couldhave a material adverse effect on our operations, in particular, our unscrubbedunits.  We cannot at this time projectthe final costs we may incur to comply with any resulting mercury restrictionregulations.

 

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On January 5,2005, the USEPA published its final non-attainment designations for theNational Ambient Air Quality Standard (NAAQS) for Fine Particulate Matter 2.5(PM 2.5).  These designations included counties and partial counties inwhich **DP&L** operates or owns generatingfacilities.  On March 4, 2005, **DP&L** andother Ohio electric utilities and electric generators filed a petition forreview in the D.C. Circuit Court of Appeals, challenging the final rule creatingthese designations.  On November 30, 2005, the court ordered theUSEPA to decide on all petitions for reconsideration by January 20,2006.  On January 20, 2006, theUSEPA denied the petitions for reconsideration. On July 7, 2009, the D.C. Circuit Court of Appeals upheld the USEPAnon-attainment designations for the areas impacting **DP&L’s**generation plants, however, on October 8, 2009, the USEPA issued newdesignations based on 2008 monitoring data that showed all areas in attainmentto the standard with the exception of several counties in northeasternOhio.  The USEPA is expected to proposerevisions to the PM 2.5 standard in late 2010 as part of its routine five-year rule reviewcycle.  At this time, **DP&L** is unable to determine the impact the revisions tothe PM 2.5 standard will have on its financial position or results ofoperations.

 

On May 5, 2004, theUSEPA issued 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 inthe state should be subject to BART.  In the final rule, the USEPA madethe determination that CAIR achieves greater progress than BART and may be usedby states as a BART substitute.  Numerous units owned and operated by uswill be impacted by BART.  We cannot determine the extent of the impactuntil Ohio determines how BART will be implemented.

 

In response to a U.S.Supreme Court decision that the USEPA has the authority to regulate CO2 emissions frommotor vehicles, the USEPA made a finding that CO2 and certain other gases are pollutants underthe CAA.  The USEPA has not yet identified the specifics of how thesenewly designated pollutants will be regulated. In April 2009, the USEPA issued a proposed endangerment findingunder the CAA.  The proposed findingdetermined that CO2 and other GHGs from motor vehicles threatenthe health and welfare of future generations by contributing to climatechange.  If the proposed finding isfinalized, it could lead to the regulation of CO2 and other GHGs from sources other than motorvehicles, including coal-fired plants that we own and operate.  Recently, several bills have been introducedat the federal level to regulate GHG emissions. In June 2009, the U.S. House of Representatives passed H.R. 2454,the American Clean Energy and Security Act (ACES).  This proposed legislation targets a reductionin the emission of GHGs from large sources by 80% in 2050 through aneconomy-wide cap and trade program.  ACESalso includes energy efficiency and renewable energy initiatives.  Approximately 99% of the energy we produce isgenerated by coal.  **DP&L’s**share of CO2 emissions at generating stations we own andco-own is approximately 16 million tons annually.  Proposed GHG legislation finalized at afuture date could have a significant effect on **DP&L’**soperations and costs, which could adversely affect our net income, cash flowsand financial position.  However, due tothe uncertainty associated with such legislation, we are currently unable topredict the final outcome or the financial impact that this legislation willhave on us.  On September 22, 2009,the USEPA issued a final rule for mandatory reporting of GHGs from largesources that emit 25,000 metric tons per year or more of CO2,  includingelectric generating units.  The firstreport is due in March 2011 for 2010 emissions.  This reporting rule will guidedevelopment of policies and programs to reduce emissions.  **DP&L** doesnot anticipate that this reporting rule will result in any significantcost or other impact on current operations.

 

On July 15, 2009,the USEPA proposed revisions to its primary NAAQS for nitrogen dioxide.  This change could affect certain emissionsources in heavy traffic areas like the I-75 corridor between Cincinnati andDayton.  At this point, **DP&L** cannot determine the effect of this potentialchange, if any, on its operations.

 

The USEPA proposedrevisions to its primary NAAQS for SO2 on November 16, 2009.  This would replace the current 24-hourstandard and current annual standard. This regulation is expected to be finalized in 2010.  At this time, **DP&L**cannot determine the effect of this potential change, if any, on itsoperations.

 

On September 16,2009, the USEPA announced that it would reconsider the 2008 national groundlevel ozone standard.  A more stringentambient ozone standard may lead to stricter NOx emission standards in thefuture.  At this point, **DP&L** cannot determine the effect of this potential change,if any, on its operations.

 

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*AirQuality — Litigation Involving Co-Owned Plants*

 

In March 2000, asamended in June 2004, the U.S. Department of Justice filed a complaint inthe United States District Court, Southern District of Indiana, IndianapolisDivision against Cinergy Corp. (now part of Duke Energy) and two Cinergysubsidiaries for alleged violations of the CAA at various generation unitsoperated by PSI Energy, Inc. and CG&E, including generation unitsco-owned by  **DP&L** (Beckjord Unit 6 and Miami Fort Unit 7). A retrial has been held in which the second jury found for Duke Energy on someallegations, but for plaintiffs with respect to units at another one of DukeEnergy’s wholly-owned facilities.  In aseparate phase II remedies trial with respect to violations found in the firsttrial, Duke Energy was ordered to close down three of its wholly-owned generatingunits by September 2009, surrender some emission allowances and pay afine.  None of the violations found orremedies ordered relate to generating units owned in part by **DP&L**.

 

In2004, eight states and the City of New York filed a lawsuit in Federal DistrictCourt for the Southern District of New York against American Electric PowerCompany, Inc. (AEP), one of AEP’s subsidiaries, Cinergy Corp. (asubsidiary of Duke Energy Corporation (Duke Energy)) and four other electricpower companies.  A similar lawsuit wasfiled against these companies in the same court by Open Space Institute, Inc.,Open Space Conservancy, Inc. and The Audubon Society of NewHampshire.  The lawsuits allege that thecompanies’ emissions of CO2 contribute to global warming and constitute apublic or private nuisance.  The lawsuitsseek injunctive relief in the form of specific emission reductioncommitments.  In 2005, the FederalDistrict Court dismissed the lawsuits, holding that the lawsuits raisedpolitical questions that should not be decided by the courts.  The plaintiffs appealed.  Finding that the plaintiffs have standing tosue and can assert federal common law nuisance claims, the United States Courtof Appeals for the Second Circuit on September 21, 2009 vacated the dismissalof the Federal District Court and remanded the lawsuits back to the FederalDistrict Court for further proceedings. Although we are not named as a party to these lawsuits, **DP&L** is a co-owner of coal-fired plants with Duke Energyand AEP (or their subsidiaries) that could be affected by the outcome of theselawsuits.  The Second Circuit Court’sdecision could also encourage these or other plaintiffs to file similarlawsuits against other electric power companies, including us.  We are unable at this time to predict withcertainty the impact that these lawsuits might have on us.

 

On September 21,2004, the Sierra Club filed a lawsuit against **DP&L**andthe other owners of the Stuart generating station in the U.S. District Courtfor the Southern District of Ohio for alleged violations of the CAA and thestation’s operating permit.  On August 7,2008, a consent decree was filed in the U.S. District Court in full settlementof these CAA claims.  Under the terms of the consent decree, **DP&L** and the other owners of the Stuart generatingstation agreed to: (i) certain emission targets related to NOx, SO2 and particulatematter; (ii) make energy efficiency and renewable energy commitments thatare conditioned on receiving PUCO approval for the recovery of costs; (iii) forfeit5,500 SO2 allowances; and (iv) provide funding to athird party non-profit organization to establish a solar water heater rebateprogram.  **DP&L**and the other owners of the station also entered into an attorneys’ feeagreement to pay a portion of the Sierra Club’s attorney and expert witnessfees.  The parties to the lawsuit filed a joint motion on October 22,2008, seeking an order by the U.S. District Court approving the consent decreewith funding for the third party non-profit organization set at $300,000.  On October 23, 2008, the U.S. DistrictCourt approved the consent decree.  On October 21,2009, the Sierra Club filed with the U.S. District Court a motion forenforcement of the consent decree based on the Sierra Club’s interpretation ofthe consent decree that would require certain NOx emissions that **DP&L** has been excluding from its computations to beincluded for purposes of complying with the emission targets and reportingrequirements of the consent decree.  **DP&L**believes that it is properly computing and reporting NOx emissions under theconsent decree and has opposed the Sierra Club’s motion.  A decision on the motion is expected beforethe end of the first quarter 2010. Because Stuart Station’s NOx emissions are well below the 2009 and 2010limits in the consent decree under either method of calculation, an adversedecision would have no effect in 2010 on operations or costs.  An adverse decision could affect compliancecosts in future years when the NOx limits are further reduced under the consentdecree.

 

*AirQuality — Notices of Violation Involving Co-Owned Plants*

 

 On March 13, 2008, Duke Energy Ohio Inc., the operator of theZimmer generating station, received a NOV and a Finding of Violation from theUSEPA alleging violations of the CAA, the Ohio State Implementation Program(SIP) and permits for the Station in areas including SO2, opacity and increased heat input.  **DP&L** is aco-owner of the Zimmer generating station and could be affected by the eventualresolution of this matter.  Duke EnergyOhio Inc. is expected to act on behalf of itself and the co-owners with respectto this matter.  At this time, **DP&L** is unable to predict the outcome of this matter.

 

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In June 2000, theUSEPA issued a NOV to the **DP&L**-operatedStuart generating station (co-owned by **DP&L**,CG&E and CSP) for alleged violations of the CAA.  The NOV contained allegations consistent withNOVs and complaints that the USEPA had recently brought against numerous othercoal-fired utilities in the Midwest.  TheNOV indicated the USEPA may: (1) issue an order requiring compliance withthe requirements of the Ohio SIP; or (2) bring a civil action seekinginjunctive relief and civil penalties of up to $27,500 per day for eachviolation.  To date, neither action hasbeen taken.  At this time, **DP&L** cannot predict the outcome of this matter.

 

In November 1999,the USEPA filed civil complaints and NOVs against operators and owners ofcertain generation facilities for alleged violations of the CAA.  Generation units operated by CG&E(Beckjord Unit 6) and CSP (Conesville Unit 4) and co-owned by **DP&L** 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.  Although **DP&L** was not identified in the NOVs,civil complaints or state actions, the results of such proceedings couldmaterially affect **DP&L’s**co-owned plants.

 

 In December 2007, the Ohio EPA issued a NOV to the **DP&L**-operated Killen generating station (co-owned by **DP&L** and CG&E) for alleged violations of theCAA.  The NOVs alleged deficiencies inthe continuous monitoring of opacity.  Wesubmitted a compliance plan to the Ohio EPA on December 19, 2007.  To date, no further actions have been takenby the Ohio EPA.

 

*AirQuality — Other Issues Involving Co-Owned Plants*

 

In 2006, **DP&L** detected a malfunction with its emission monitoringsystem at the **DP&L**-operated Killengenerating station (co-owned by **DP&L** andCG&E) and ultimately determined its SO2 and NOx emissions data was underreported.  **DP&L**has petitioned the USEPA to accept an alternative methodology for calculatingactual emissions for 2005 and the first quarter 2006.  **DP&L**hassufficient allowances in its general account to cover the understatement and isworking with the USEPA to resolve the matter. Management does not believe the ultimate resolution of this matter willhave a material impact on results of operations, financial position or cashflows.

 

*AirQuality — Notices of Violation Involving Wholly-Owned Plants*

 

In2007, the Ohio EPA and the USEPA issued NOVs to **DP&L**for alleged violations of the CAA at the O.H. Hutchings Station.  The NOVs alleged deficiencies relate to stackopacity and particulate emissions. Discussions are under way with the USEPA, the U.S. Department of Justiceand Ohio EPA.  **DP&L**has provided data to those agencies regarding its maintenance expenses andoperating results.  On December 15,2008, **DP&L** received a request from theUSEPA for additional documentation with respect to those issues and other CAAissues including issues relating to capital expenses and any changes incapacity or output of the units at the O.H. Hutchings station.  During2009, **DP&L** has continued tosubmit various other operational and performance data to the USEPA in compliancewith its request.  **DP&L**iscurrently unable to determine the timing, costs, or method by which the issuesmay be resolved and continues to work with the USEPA on this issue.

 

On November 18,2009, the USEPA issued a NOV to **DP&L** foralleged New Source Review (NSR) violations of the CAA at the O.H. HutchingsStation relating to capital projects performed in 2001 involving Unit 3 andUnit 6.  **DP&L**does not believe that the two projects described in the NOV were modificationssubject to NSR.  **DP&L**is unable to determine the timing, costs or method by which these issues may beresolved and continues to work with the USEPA on this issue.

 

Water Quality

 

On July 9,2004, the USEPA issued final rules pursuant to the Clean Water Actgoverning existing facilities that have cooling water intake structures. The rules require an assessment of impingement or entrainment of organismsas a result of cooling water withdrawal. A number of parties appealed the rules to the Federal Court ofAppeals for the Second Circuit in New York and the Court issued an opinion on January 25,2007 remanding several aspects of the rule to the USEPA forreconsideration.  Several parties petitioned the U.S. Supreme Court forreview of the lower court decision.  On April 14,2008, the Supreme Court elected to review the lower court decision on the issueof whether the USEPA can compare costs with benefits in determining the besttechnology available for minimizing adverse environmental impact at coolingwater intake structures.  Briefs weresubmitted to the Court in the summer of 2008 and oral arguments were held in December 2008.  In April 2009, the U.S. Supreme Courtruled that the USEPA did have the authority to compare costs with benefits indetermining best technology available. The USEPA is developing proposed regulations which it hopes to issue forpublic comment by mid-2010.

 

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On May 4,2004, the Ohio EPA issued a final National Pollutant Discharge EliminationSystem permit (the Permit) for J.M. Stuart Station that continued our authorityto discharge water from the station into the Ohio River.  During the three-year term of the Permit, we conducted a thermal discharge studyto evaluate the technical feasibility and economic reasonableness of watercooling methods other than cooling towers. In December 2006, we submitted an application for the renewal ofthe Permit that was due to expire on June 30, 2007.  In July 2007 we received a draft permitproposing to continue our authority to discharge water from the station intothe Ohio River.  On February 5, 2008we received a letter from Ohio EPA indicating that they intended to impose acompliance schedule as part of the final Permit, that requires us to implementone of two diffuser options for the discharge of water from the station into theOhio River as identified in the thermal discharge study.  Subsequently, representatives from **DP&L** and the Ohio EPA have agreed to allow **DP&L** to restrict public access to the water dischargearea as an alternative to installing one of the diffuser options.  Ohio EPA issued a revised draft permit thatwas received on November 12, 2008. In December 2008, the USEPA requested that the Ohio EPA provideadditional information regarding the thermal discharge in the draftpermit.  In June 2009, **DP&L** provided information to the USEPA in response totheir request to the Ohio EPA.  Thetiming for issuance of a final permit is uncertain.

 

In September 2009,the USEPA announced that it will be revising technology-based regulationsgoverning water discharges from steam electric generating facilities such asJ.M. Stuart, Killen and O.H. Hutchings Stations.  The rulemaking will include the collection ofinformation via an industry-wide questionnaire as well as targeted watersampling efforts at selected facilities. Subsequent to the information collection effort, it is anticipated thatthe USEPA will release a proposed rule in 2011 with final regulationsissued in late 2012 or early 2013.  Atpresent, **DP&L** is unable to predict theimpact this rulemaking will have on its operations.

 

Land Use and Solid Waste Disposal

 

In September 2002, **DP&L** and other parties received a special notice that theUSEPA considers us to be a PRP for the clean-up of hazardous substances at theSouth Dayton Dump landfill site.  In August 2005,**DP&L** and other partiesreceived a general notice regarding the performance of a Remedial Investigationand Feasibility Study (RI/FS) under a Superfund Alternative Approach.  In October 2005, **DP&L** received a special notice letterinviting it to enter into negotiations with the USEPA to conduct theRI/FS.  No recent activity has occurredwith respect to that notice or PRP status. More recently, **DP&L** hasreceived requests by the USEPA and the existing PRP group to allow access to begiven to **DP&L’s** service center buildingsite, which is across a street from the landfill site.  The USEPA requested access to drillmonitoring and test wells to determine the extent of the landfill site’scontamination as well as to assess whether certain chemicals used at theservice center building site might have migrated through groundwater to thelandfill site.  Pursuant to anAdministrative Order issued by the USEPA requiring access to **DP&L’s** service center building site, **DP&L** has granted such access and drilling of soilborings and installation of monitoring wells occurred in the fall of 2009.  **DP&L**believesthe chemicals used at its service center building site were appropriatelydisposed of and have not contributed to the contamination at the South DaytonDump landfill site.  While **DP&L** is unable at this time to predict the outcome ofthis matter, if **DP&L** were required tocontribute to the clean-up of the site, it could have a material adverse effecton us.  **DP&L**is also unable at this time to predict whether the monitoring and test wellsmay lead to any actions relating to the service center building siteindependent of the South Dayton Dump clean-up.

 

In December 2003,**DP&L**and other parties received aspecial notice that the USEPA considers us to be a PRP for the clean-up of hazardoussubstances at the Tremont City landfill site. Information available to **DP&L**doesnot demonstrate that it contributed hazardous substances to the site.  While **DP&L** isunable at this time to predict the outcome of this matter, if **DP&L** were required to contribute to the clean-up of thesite, it could have a material adverse effect on us.

 

In November 2007,a PRP group contacted **DP&L**seekingour financial participation in a settlement that the group had reached with thefederal government with respect to the clean-up of an industrial site onceowned by Carolina Transformer, Inc. **DP&L**’s business records clearlyshow we did not conduct business with Carolina Transformer that would requireour participation in any clean-up of the site. **DP&L**has declined to participate inthe clean-up of this site.  While **DP&L** is unable at this time to predict the outcome ofthis matter, if **DP&L** were required tocontribute to the clean-up of the site, it could have a material adverse effecton us.

 

During2008, a major spill occurred at an ash pond owned by the Tennessee ValleyAuthority (TVA) as a result of a dike failure. The spill generated a significant amount of national news coverage, andsupport for tighter regulations for the storage and handling of coal combustionproducts.  **DP&L**has ash ponds at the Killen, O.H. Hutchings and J.M. Stuart stations which itoperates, and also at generating stations operated by others but in which **DP&L** has an ownership interest.  We frequently inspect our ash ponds and donot anticipate any similar failures.  Itis widely expected that the federal government will propose new regulationscovering ash generated

 

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fromthe combustion of coal including additional monitoring, testing, orconstruction standards with respect to ash ponds and ash landfills.  During March 2009, the USEPA, through aformal Information Collection Request, collected information on ash pondfacilities across the country, including those at Killen and J.M. Stuartstations.  Subsequently the USEPAcollected similar information for O.H. Hutchings Station.  In addition, during August and October 2009,representatives of the USEPA visited J.M. Stuart Station to collect informationon plant operations relative to the production and handling ofby-products.  The USEPA’s contractor hasissued a draft report on their October 2009 visit to J.M. StuartStation.  **DP&L**has provided comments on this document and additional related information tothe agency.  Due to the wide range ofpossible outcomes, **DP&L** isunable at this time to predict the timing or the financial impact of any futuregovernmental initiative that may occur.

 

Inaddition, as a result of the TVA ash pond spill, there has been increasingadvocacy to regulate coal combustion byproducts as hazardous waste under theResource Conservation Recovery Act, Subtitle C. On October 15, 2009, the USEPA provided a draft rule to the Officeof Management and Budget for interagency review.  The draft rule proposed to regulate coalash as a hazardous waste, with limited beneficial reuse.  **DP&L** isunable at this time to predict the financial impact of this regulation, but ifcoal combustion byproducts are regulated as hazardous waste, it is expected tohave a material adverse impact on operations.

 

**Legal andOther Matters**

 

In February 2007, **DP&L** filed a lawsuit against a coal supplier seekingdamages incurred due to the supplier’s failure to supply approximately 1.5million tons of coal to two jointly owned plants under a coal supply agreement,of which approximately 570 thousand tons was **DP&L’s**share.  **DP&L** obtained replacement coalto meet its needs.  The supplier hasdenied liability, and is currently in federal bankruptcy proceedings.  **DP&L** isunable to determine the ultimate resolution of this matter at this time. In accordance with GAAP, **DP&L** hasnot recorded any assets relating to this lawsuit.

 

On May 16, 2007, **DPL** filed a claim with Energy InsuranceMutual (EIM) to recoup legal expenses associated with our litigation againstcertain former executives.  Arbitration on that claim occurred on May 13,2009.  Thearbitration panel issued a ruling in Phase 1 of the arbitration on September 25,2009, finding that most of the claims involving the former executives werecovered.  The matter is pending.

 

As a member of PJM, **DP&L**is also subject to charges and costs associated with PJM operations as approvedby the FERC.  FERC Orders issued in 2007 regarding the allocation of costsof large transmission facilities within PJM, could result in additional costsbeing allocated to **DP&L**ofapproximately $12 million or more annually by 2012.  **DP&L** filed a notice of appeal to theU.S. Court of Appeals, D.C. Circuit on March 18, 2008 challenging theallocation method.  The appeal was consolidated with other appeals takenby other interested parties of the same FERC Orders and the consolidated caseswere assigned to the 7th Circuit.  On August 6, 2009, the 7th Circuit ruled that theFERC had failed to provide a reasoned basis for the allocation method it hadapproved.  Rehearings were filed by otherinterested litigants and denied by the Court, which then remanded the matter tothe FERC for further proceedings.  On January 21,2010, the FERC issued a procedural order on remand establishing a paper hearingprocess under which PJM will make an informational filing in lateFebruary.  Subsequently PJM and other parties, including **DP&L**, will be able to file initial comments, testimony,and recommendations and reply comments.  Absent future changes to theprocedural schedule that may occur for a number of reasons including ifsettlement discussions are held, the paper hearing process should be completeand the case ready for FERC consideration in 2010.  FERC did not establisha deadline for its issuance of a substantive order.  **DP&L**cannot predict the timing or the likely outcome of the proceeding.  Until such time as FERC may act to approve achange in methodology, PJM will continue to apply the allocation methodologythat had been approved by FERC in 2007. Although we continue to maintain that these costs should be borne by thebeneficiaries of these projects and that **DP&L** is notone of these beneficiaries, any new credits or additional costs resulting fromthe ultimate outcome of this proceeding will be reflected in **DP&L’s** TCRR rider which is already in place to passthrough RTO-related costs and credits.

 

In June 2009,the NERC, a FERC-certified electric reliability organization responsible fordeveloping and enforcing mandatory reliability standards, commenced a routineaudit of **DP&L’s** operations.  The audit, which was for the period June 18,2007 to June 25, 2009, evaluated **DP&L’s**compliance with 42 requirements in 18 NERC-reliability standards.  **DP&L** iscurrently subject to a compliance audit at a minimum of once every three yearsas provided by the NERC Rules of Procedure. This audit was concluded in June 2009and its findings revealed that **DP&L** hadsome Possible Alleged Violations (PAVs) associated with five NERC ReliabilityStandards.  In response to thereport, **DP&L** filed mitigation plans withNERC to address the PAVs.  Thesemitigation plans have been accepted and **DP&L** iscurrently awaiting a proposal for settlement from NERC.  While we are currently unable to determinethe extent of penalties, if any, that may be imposed on **DP&L**,we do not believe such penalties will have a material impact on our results ofoperations.

 

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***CapitalExpenditures for Environmental Matters***

 

Test operations of theFGD equipment on our jointly-owned Conesville Unit 4 were completed in November 2009.  The equipment is currently in service.

 

**DPL’s** construction additions were approximately$145 million, $228 million and $347 million in 2009, 2008 and 2007,respectively, and are expected to approximate $210 million in 2010.  Planned construction additions for 2010relate primarily to new investments in and upgrades to **DP&L’s** power plant equipment andtransmission and distribution system.

 

**DP&L’s** construction additions were $144 million, $225million and $344 million in 2009, 2008 and 2007, respectively, and are expectedto approximate $200 million in 2010. Planned construction additions for 2010 relate primarily to newinvestments in and upgrades to **DP&L’s**power plant equipment and transmission and distribution system.

 

Allenvironmental additions made during the past three years pertain to **DP&L** and approximate $21 million, $90million and $209 million in 2009, 2008 and 2007, respectively.

 

**Item 1A — Risk Factors**

 

This annual report andother documents that we file with the SEC and other regulatory agencies, aswell as other written or oral statements we may make from time to time, containinformation based on management’s beliefs and include forward-lookingstatements (within the meaning of the Private Securities Litigation Reform Actof 1995) that involve a number of known and unknown risks, uncertainties andassumptions. These forward-looking statements are not guarantees of futureperformance and there are a number of factors including, but not limited to,those listed below, which could cause actual outcomes and results to differmaterially from the results contemplated by such forward-looking statements. Wedo not undertake any obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, future eventsor otherwise. These forward-looking statements are generally identified byterms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,”“continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” andsimilar expressions.

 

Future operatingresults are subject to fluctuations based on a variety of factors, includingbut not limited to: unusual weather conditions; catastrophic weather-relateddamage; unscheduled generation outages; changes in wholesale power sales prices;unusual maintenance or repairs; changes in fuel and purchased power costs,emissions allowance costs, or availability constraints; environmentalcompliance; and electric transmission system constraints.

 

The following is alisting of specific risk factors that **DPL** and **DP&L** consider to be the most significant to yourdecision to invest in our securities.  Ifany of these events occur or are continuing, our business, results ofoperations, financial condition and cash flows could be materially affected.

 

**Regulation and Litigation**

 

Weare subject to extensive laws and regulation by federal, state and localauthorities, such as the PUCO, the USEPA, the Ohio EPA, the FERC, the SEC andthe Internal Revenue Service, among others. Regulations affect almost everyaspect of our business, including in the areas of the environment, health andsafety, cost recovery and rate making, securities, corporate governance, publicdisclosure and reporting and taxation. New laws and regulations, and newinterpretations of existing laws and regulations, are ongoing and we generallycannot predict the future course of changes in this regulatory environment orthe ultimate effect that this changing regulatory environment will have on ourbusiness.  Complying with this regulatoryenvironment requires us to expend a significant amount of funds andresources.  The failure to comply withthis regulatory environment could subject us to substantial financial costs andpenalties and changes, either forced or voluntary, in the way we operate ourbusiness.  Additional detail about theeffect of this regulatory environment on our operations is included in the riskfactors set forth below.  Inthe normal course of business, we are also subject to various lawsuits,actions, proceedings, claims and other matters asserted under this regulatoryenvironment, which require us to expend significant funds to address, theoutcomes of which are uncertain and the adverse resolutions of which could havea material adverse effect on our results of operations, financial condition andcash flows.

 

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**CostRecovery and Rates**

 

The costs we can recoverand the return on capital we are permitted to earn for certain aspects of ourbusiness are regulated and governed by the laws of Ohio and the rules, policiesand procedures of the PUCO.  On May 1,2008, SB 221, an Ohio electric energy bill, was signed by the Governor of Ohio andbecame effective July 31, 2008. This law, among other things, required all Ohio distribution utilitiesto file either an electric security plan or a market rate option that was to bein effect on January 1, 2009, and established a significantly excessiveearnings test for Ohio public utilities based on the earnings of othercompanies with similar business and financial risks.  The PUCO approved **DP&L’s**filed electric security plan on June 24, 2009.  **DP&L’s**electric security plan provides, among other things, that **DP&L’s**existing rate plan structure will continue through 2012; that **DP&L** may seek recovery for adjustments to its existingrate plan structure for costs associated with storm damage, regulatory and taxchanges, new climate change or carbon regulations, fuel and purchased power andcertain other costs; and that SB 221’s significantly excessive earnings testwill not apply to **DP&L** until2012.  **DP&L’s**electric security plan, and certain filings made by us in connection with thisplan, are further discussed under “Ohio Retail Rates” in Item 1 — COMPETITIONAND REGULATION.

 

While rate regulation ispremised on full recovery of prudently incurred costs and a reasonable rate ofreturn on invested capital, there can be no assurance that the PUCO will agreethat all of our costs have been prudently incurred or are recoverable or thatthe regulatory process in which rates are determined will always result inrates that will produce a full or timely recovery of our costs and permittedrates of return.  Certain of our costrecovery riders are also by-passable by some of our customers.  Accordingly, the rates **DP&L**is allowed to charge may or may not match its expenses at any given time.  Therefore, **DP&L**could be subject to prevailing market prices for electricity and would notnecessarily be able to charge rates that produce timely or full recovery of itsexpenses.  Changes in, orreinterpretations of, the laws, rules, policies and procedures that setelectric rates and permitted rates of return; changes in **DP&L’s** ability to recover expendituresfor environmental compliance, reliability initiatives, purchased power and fuel(which account for a substantial portion of our operating costs), capitalexpenditures and investments and other costs on a fully or timely basis throughrates; and changes to the frequency and timing of rate increases could have amaterial adverse effect on our results of operations, financial condition andcash flows.

 

**Advanced Energy and Energy Efficiency Requirements**

 

SB 221contains targets relating to advanced energy, renewable energy, peak demandreduction and energy efficiency standards. The standards require that, by the year 2025 and each thereafter, 25% ofthe total number of kWh of electricity sold by the utility to retail electric consumersmust come from alternative energy resources, which include “advanced energyresources” such as distributed generation, clean coal, advanced nuclear, energyefficiency and fuel cell technology; and “renewable energy resources” such assolar, hydro, wind, geothermal and biomass. At least half of the 25% must begenerated from renewable energy resources, including 0.5% from solar energy,and the remainder must be generated from advanced energy sources.  Annual renewable energy standards began in2009 with increases in required percentages each year through 2024. Theadvanced energy standard must be met by 2025 and each year thereafter.  Annual targets for energy efficiency began in2009 and require increasing energy reductions each year compared to a baselineenergy usage, up to 22.3% by 2025. Peak demand reduction targets began in 2009with increases in required percentages each year, up to 7.75% by 2018.  The advanced energy and renewable energystandards are expected to increase (and could increase materially) our powersupply costs.  Pursuant to **DP&L’s** approved electric security plan, **DP&L** is entitled to recover costs associated with itsalternative energy plans, as well as its energy efficiency and demand responseprograms, and **DP&L** began recovering thesecosts in 2009.  If in the future we areunable to timely or fully recover these costs, it could have a material adverseeffect on our results of operations, financial condition and cash flows.  In addition, if we were found not to be incompliance with these standards, monetary penalties could apply.  These penalties are not permitted to berecovered from customers and significant penalties could have a materialadverse effect on our results of operations, financial condition and cashflows.  The demand reduction and energyefficiency standards by design result in reduced energy and demand that couldadversely affect our results of operations, financial condition and cash flows.

 

**Availabilityand Cost of Fuel**

 

Wepurchase coal, natural gas and other fuel from a number of suppliers.  The coal market in particular has experiencedsignificant price volatility in the last several years.  We are now in a global market for coal inwhich our domestic price is increasingly affected by international supply disruptionsand demand balance.  Coal exports fromthe U.S. have increased significantly in recent years.  In addition, domestic issues likegovernment-imposed direct costs and permitting issues that affect mining costsand supply availability, the variable demand of retail customer load and thevariable performance of our generation fleet have an impact on our fuelprocurement operations.  Our approach isto hedge the fuel costs for our anticipated electric sales.  However, we may not be able to hedge the entireexposure of our operations from fuel price volatility.  As of the date of this report, we have hedgedour coal requirements with coal mine operators and financial institutions tomeet our committed burn through December 31, 2010.  Historically, some of our suppliers andbuyers of fuel have not performed on their contracts and have failed to deliveror accept fuel as specified under their contracts.  

 

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To the extent our suppliersand buyers do not meet their contractual commitments, we cannot secure adequatefuel or sell excess fuel in a timely or cost-effective manner or we are nothedged against price volatility, our results of operations, financial conditionand cash flows could be materially adversely affected.  In addition, **DP&L**is a co-owner of certain generation facilities where it is a non-operatingpartner.**  DP&L**does not procure or have control over the fuel for these facilities, but isresponsible for its proportionate share of the cost of fuel procured at thesefacilities.  Co-owner operated facilitiesdo not always have realized fuel costs that are equal to our co-owners’projections, and we are responsible for our proportionate share of any increasein actual fuel costs.  Pursuant to itselectric security plan, **DP&L**implemented a fuel and purchased power recovery mechanism beginning on January 1,2010, which will track and adjust fuel costs on a seasonal quarterlybasis.  If in the future we are unable totimely or fully recover our fuel costs, it could have a material adverse effecton our results of operations, financial condition and cash flows.

 

**Commodity Trading**

 

We trade coal, power andother commodities to hedge our positions in these commodities.  These trades are impacted by a range offactors, including variations in power demand, fluctuations in market prices,market prices for alternative commodities and optimization opportunities.  We have attempted to manage our commoditiestrading risk exposure by establishing and enforcing risk limits and riskmanagement policies.  Despite ourefforts, however, these risk limits and management policies may not work asplanned and fluctuating prices and other events could adversely affect ourresults of operations, financial condition and cash flows.  As part of our risk management, we use avariety of non-derivative and derivative instruments, such as swaps, futures andforwards, to manage our market risks.  Inthe absence of actively quoted market prices and pricing information fromexternal sources, the valuation of some of these derivative instrumentsinvolves management’s judgment or use of estimates.  As a result, changes in the underlyingassumptions or use of alternative valuation methods could affect the reportedfair value of some of these contracts. We could also recognize financial losses as a result of volatility inthe market values of these contracts or if a counterparty fails to perform,which could result in a material adverse effect on our results of operations,financial condition and cash flows.

 

**EnvironmentalCompliance**

 

Our operations andfacilities (both wholly-owned and co-owned with others) are subject to numerousand extensive federal, state and local environmental laws and regulationsrelating to air quality (such as reducing NOx, SO2, SO3 (sulfur trioxide) and mercury emissions andpotential future control of GHG emissions as discussed in more detail in thenext risk factor), water quality, wastewater discharge, solid waste (such asthe potential  future regulation of ashgenerated from coal-based generating stations), hazardous waste and health andsafety.  With respect to our largestgeneration station, the J.M. Stuart Station, we are also subject to continuingcompliance requirements related to NOx, SO2 and particulate matter emissions under **DP&L’s**consent decree with the Sierra Club. Compliance with these laws, regulations and other requirements requiresus to expend significant funds and resources. These expenditures have been significant in the past and we expect thatthey will increase in the future. Complying with these numerous requirementscould at some point become prohibitively expensive and result in our shuttingdown (temporarily or permanently) or altering the operation of ourfacilities.  Environmental laws andregulations also generally require us to obtain and comply with a wide varietyof environmental licenses, permits, inspections and other approvals.  If we are not able to timely obtain, maintainor comply with all licenses, permits, inspections and approvals required tooperate our business, then our operations could be prevented, delayed orsubject to additional costs.  Failure tocomply with environmental laws, regulations and other requirements may resultin the imposition of fines and penalties and the imposition of stricterenvironmental standards and controls and other injunctive measures affectingoperating assets.  In addition, anyalleged violation of these laws, regulations and other requirements may requireus to expend significant resources to defend against any such allegedviolations.  We own a non-controllinginterest in several generating stations operated by our co-owners.  As a non-controlling owner in thesegenerating stations, we are responsible for our pro rata share of expendituresfor complying with environmental laws, regulations and other requirements, buthave limited control over the compliance measures taken by our co-owners.  **DP&L** has anEIR in place as part of its existing rate plan structure, the last increase ofwhich occurs in 2010 and remains at that level through 2012.  In addition, **DP&L’s**electric security plan permits it to seek recovery for costs associated withnew climate change or carbon regulations. While we expect to recover certain environmental costs and expendituresfrom customers, if in the future we are unable to fully recover our costs in atimely manner it could have a material adverse effect on our results ofoperations, financial condition and cash flows. In addition, if we were found not to be in compliance with theseenvironmental laws, regulations or requirements, any penalties that would applywould likely not be recoverable from customers and could have a materialadverse effect on our results of operations, financial condition and cashflows.

 

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**Regulationof GHGs**

 

There is a growingconcern nationally and internationally among regulators, investors and othersconcerning global climate change and the contribution of emissions of GHG,including most significantly, CO2.  This concern has led to increased interest inlegislation and action at the federal and state levels, as well as litigation,relating to GHG emissions, including a recent declaration by the USEPA thatGHGs pose a danger to the public health that may allow the USEPA to directlyregulate greenhouse emissions.  Therehave been various GHG legislative proposals introduced in Congress (with onebill passed by the House of Representatives in 2009) and there is growingconsensus that some form of legislation of GHG emissions will be approved atthe federal level that could result in substantial additional costs in the formof taxes or emission allowances. Approximately 99% of the energy we produce is generated by coal.  If legislation or regulations are passed atthe federal or state levels imposing mandatory reductions of CO2 and other GHGson generation facilities, we could be required to make large additional capitalinvestments.  Legislation and regulationscould also impair the value of our generation stations or make some of thesestations uneconomical to maintain or operate and it could raise uncertaintyabout the future viability of fossil fuels, particularly coal, as an energysource for new and existing generation stations.  Although **DP&L** ispermitted under its current electric security plan to seek recovery of costsassociated with new climate change or carbon regulations, our inability tofully or timely recover such costs could have a material adverse effect on ourresults of operations, financial condition and cash flows.

 

**Sales ofExcess Emission Allowances**

 

**DP&L** has a program for selling excessemission allowances.  During 2009 and2008, **DP&L** sold excess emissionallowances to various counterparties realizing total net gains of $5.0 millionand $34.8 million, respectively.  Salesof excess emission allowances are impacted by a range of factors, such asgeneral economic conditions, fluctuations in market demand, availability ofexcess inventory available for sale and changes to the regulatory environment,including the status of the USEPA’s CAIR. These factors could cause the amount of excess emission allowances wesell to fluctuate, which could cause a material adverse effect on our resultsor operations, financial condition and cash flows for any particular period.

 

On July 11, 2008,the United States Court of Appeals for the District of Columbia Circuit issueda decision that vacated the CAIR and its associated Federal ImplementationPlan. This decision remanded these issues back to the USEPA.  The USEPA issued CAIR on March 10, 2005to regulate certain upwind states with respect to fine particulate matter andozone.  CAIR created interstate tradingprograms for annual NOx emission allowances and made modifications to anexisting trading program for SO2 that were to take effect in 2010.  The district court’s decision, in part,invalidated the new NOxannual emission allowance trading programand the modifications to the SO2 emission trading program and createduncertainty regarding future NOx and SO2 emission reduction requirements and theirtiming.  On December 23, 2008, thecourt reversed part of its decision that vacated CAIR.  Thus, CAIR currently remains in effect, butthe USEPA remains subject to the district court’s order to revise theprogram.  In January 2010, the Courtordered the USEPA to file a response to request for a USEPA decision filed byparties in the original case who are now seeking a Court order to require theUSEPA to issue new regulations by March 1, 2010.  We cannot at this time predict the timing orthe outcome of any new regulations relating to CAIR.

 

**DP&L**’sprogram for selling excess emission allowances includes sales of annual NOxemission allowances and SO2 emissionallowances that were the subject of CAIR trading programs.  Although we continue selling emissionallowances, the district court’s CAIR decision has affected the emissionallowance trading market and **DP&L’s**program for selling additional excess allowances.  The long-term impact of the district court’sdecision, and of the actions the USEPA or others will take in response to thisdecision, on **DPL** and **DP&L**is not fully known at this time, but could affect the amount of excess emissionallowances we sell and thus have an adverse effect on us.

 

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**Customer Switching**

 

Customerscan elect to take generation service from a CRES provider offering services tocustomers in **DP&L’s**service territory.  Although retail generation service has been acompetitive service since January 1, 2001, the competitive generationmarket has not developed to date in **DP&L’s**service territory to any significant degree. As of December 31, 2009, six unaffiliated CRES providers have beencertified by the PUCO to provide generation service to **DP&L**customers.  DPLER, a wholly-owned subsidiary of **DPL**,****is also a certified CRES provider andaccounted for 99% of the total kWh consumed by customers served by CRESproviders in **DP&L’s** serviceterritory in 2009.  Increased competitionby CRES providers in our service territory for retail generation service couldresult in the loss of existing customers and increased costs to retain orattract customers, which could have a material adverse effect on our results ofoperations, financial condition and cash flows. The following are a few of the factors that could result in increasedswitching by customers to CRES providers in the future:

 

·                  Lowwholesale price levels could lead to existing CRES providers becoming moreactive in our service territory, and new CRES providers entering our territory.

 

·                  Wecould also experience customer switching through “governmental aggregation,”where a municipality may contract with a CRES provider to provide generationservice to the customers located within the municipal boundaries.  Several communities in **DP&L’s** service territory passedordinances during 2003-2004 allowing them to become government aggregators.  To date, no aggregation program has beenimplemented.

 

·                  Increasedcustomer switching in other Ohio utility service territories could lead to newmarket entrants and more aggressive measures to secure customers by CRESproviders.

 

**Operationand Performance of Facilities**

 

The operation andperformance of our generation, transmission and distribution facilities andequipment is subject to various events and risks, such as the potentialbreakdown or failure of equipment, processes or facilities, fuel supply ortransportation disruptions, the loss of cost-effective disposal options forsolid waste generated by our facilities (such as gypsum), accidents, injuries,labor disputes or work stoppages by employees, operator error, acts ofterrorism or sabotage, construction delays or cost overruns, shortages of ordelays in obtaining equipment, material and labor, operational restrictionsresulting from environmental limitations and governmental interventions,performance below expected levels, weather-related and other naturaldisruptions, vandalism, events occurring on the systems of third parties thatinterconnect to and affect our system and the increased costs and enhancedrisks associated with our aging generation units.  Our results of operations, financialcondition and cash flows could be adversely affected due to the happening orcontinuation of these events.

 

Operation of our ownedand co-owned generating stations below expected capacity levels, or unplannedoutages at these stations, could cause reduced energy output and efficiencylevels and likely result in lost revenues and increased expenses that couldhave a material adverse effect on our results of operations, financialcondition and cash flows.  In particular,since over 50% of our base-load generation is derived from co-owned generationstations operated by our co-owners, poor operational performance by ourco-owners, misalignment of co-owners’ interests or lack of control over costs(such as fuel costs) incurred at these stations could have an adverse effect onus.  We have constructed and placed intoservice FGD facilities at most of our base-load generating stations.  If there is significant operational failureof the FGD equipment at the generating stations, we may not be able to meetemission requirements at some of our generating stations or, at other stations,it may require us to burn more expensive cleaner coal or utilize emissionallowances.  These events could result ina substantial increase in our operating costs. Depending on the degree, nature, extent, or willfulness of any failureto comply with environmental requirements, including those imposed by theConsent Decree, such non-compliance could result in the imposition of penaltiesor the shutting down of the affected generating stations, which could have amaterial adverse effect on our results of operations, financial condition andcash flows.

 

Asbestos and otherregulated substances are, and may continue to be, present at our facilitieswhere suitable alternative materials are not available.  Although we believe that any asbestos at ourfacilities is contained and suitable, we have been named as a defendant inpending asbestos litigation, which at this time is not material to us.  The continued presence of asbestos and otherregulated substances at these facilities could result in additional litigationbeing brought against us, which could have a material adverse effect on ourresults of operations, financial condition and cash flows.

 

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**Reliability Standards**

 

As an owner and operatorof a bulk power transmission system, **DP&L** issubject to mandatory reliability standards promulgated by the NERC and enforcedby the FERC.  The standards are based onthe functions that need to be performed to ensure the bulk power systemoperates reliably and is guided by reliability and market interfaceprinciples.  In addition, **DP&L** is subject to new Ohio reliability standards andtargets.  Compliance with reliabilitystandards subjects us to higher operating costs or increased capitalexpenditures.  While we expect to recovercosts and expenditures from customers through regulated rates, there can be noassurance that the PUCO will approve full recovery in a timely manner.  If we were found not to be in compliance withthe mandatory reliability standards, we could be subject to sanctions,including substantial monetary penalties, which likely would not be recoverablefrom customers through regulated rates and could have a material adverse effecton our results of operations, financial condition and cash flows.

 

**WeatherConditions**

 

Weather conditions significantly affect the demand for electricpower.  In our Ohio service territory,demand for electricity is generally greater in the summer months associatedwith cooling and in the winter months associated with heating as compared toother times of the year.  Unusually mildsummers and winters could therefore have an adverse effect on our results ofoperations, financial condition and cash flows. In addition, severe or unusual weather, such as hurricanes and ice orsnow storms, may cause outages and property damage that may require us to incuradditional costs that may not be insured or recoverable from customers.  While **DP&L** ispermitted to seek recovery of storm damage costs under its electric securityplan, if **DP&L** is unable to fully recoversuch costs in a timely manner, it could have a material adverse effect on ourresults of operations, financial condition and cash flows.

 

**Regional TransmissionOrganizational Risks**

 

On October 1, 2004,in compliance with Ohio law, **DP&L** turnedover control of its transmission functions and fully integrated into PJM. The price at which we can sell our generation capacity and energy is now determinedthrough supply and demand and the behavior of market participants.  Whilewe can continue to make bilateral transactions to sell our generation through awilling-buyer and willing-seller relationship, any transactions that are notpre-arranged are subject to market conditions at PJM.  To the extent wesell electricity into the power markets on a contractual basis, we are notguaranteed any rate of return on our capital investments through mandatedrates.  These sales are dependent uponprevailing market prices, which could fluctuate substantially over relativelyshort periods of time and adversely affect our results of operations, financialcondition and cash flows.** **The rules governing thevarious regional power markets also change from time to time which could affectour costs and revenues.  We incur fees and costs to participate in theRTO.  We may be limited with respect to the price at which power may besold from certain generating units and we may be required to expand our transmissionsystem according to decisions made by the RTO rather than our internal planningprocess.  While RTO transmission rates were initially designed to berevenue neutral, various proposals and proceedings currently taking place atFERC may cause transmission rates to change from time to time.  Inaddition, developing rules associated with the allocation and methodologyof assigning costs associated with improved transmission reliability, reducedtransmission congestion and firm transmission rights may have a financialimpact on us.  While the impact of the capacity market and other RTOdevelopments on us at any given time will depend on a variety of factors,including the market behavior of various participants, our results ofoperations, financial condition and cash flows could be materially adverselyaffected.  Future capacity auctionresults will be dependent not only on the overall supply and demand ofgeneration and load, but also by congestion and PJM’s business rules relatingto bidding for Demand Response and Energy Efficiency resources in theauctions.  The PJM RPM base residualauction for the 2012/2013 period cleared at a per megawatt price of $16/day forour RTO area.  Prior to this auction, theper megawatt price for the 2011/2012 period was $110/day.  We cannot predict the outcome of futureauctions, but if the current auction price is sustained or there is continuedvolatility in the auction market, our results of operations, financialcondition and cash flows could be materially adversely affected.

 

SB 221 includes a provision that allowselectric utilities to seek and obtain deferral and recovery of RTO relatedcharges.  If in the future, however, we are unable to defer or recover allof these cost in a timely manner, it could have a material adverse effect onour results of operations, financial condition and cash flows.

 

As members ofPJM, **DP&L** and DPLE are subject tocertain additional risks including those associated with the allocation amongPJM members of losses caused by unreimbursed defaults of other participants inPJM markets and those associated with complaint cases filed against PJM thatmay seek refunds of revenues previously earned by PJM members including **DP&L** and DPLE. These amounts could be significant and have a material adverse effect onour results of operations, financial condition and cash flows.

 

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**PJMInfrastructure Risks**

 

Annually, PJM performs a review of the capital additions required toprovide reliable electric transmission services throughout its territory.  PJM traditionally allocated the costs ofconstructing these facilities to those entities that benefited directly fromthe additions.  On April 19, 2007,the FERC issued an order that modified the traditional method of allocatingcosts associated with new high voltage planned transmission facilities.  FERC ordered that the cost of newhigh-voltage facilities be socialized across the PJM region.  The costs of the new facilities at lowervoltages will continue to be assigned to the load centers that benefit from thenew facilities.  With respect to thesocialization of new high voltage facilities, **DP&L**filed a notice of appeal to the U.S. Court of Appeals, D.C. Circuit on March 18,2008 challenging the allocation method.  The appeal was consolidated withother appeals taken by other petitioners of the same FERC Orders and theconsolidated cases were assigned to the 7th Circuit.  On August 6, 2009, the 7th Circuit ruled that the FERC had failed toprovide a reasoned basis for the allocation method for new high voltagefacilities that it had approved.  Subsequently, the 7th Circuit denied other petitioners’ rehearingrequests and remanded the case to the FERC for further proceedings.  Until such time as FERC may act to approve achange in methodology, PJM will continue to apply the allocation methodologythat had been approved by FERC in 2007. At this time, **DP&L**is unable to predict the outcome of this matter.  The overall impact of FERC’s allocationmethodology cannot be definitively assessed at this time because not all newplanned construction is likely to happen. The additional costs allocated to **DP&L** fornew large transmission approved projects were immaterial in 2009 and are notexpected to be material in 2010, but could rise to approximately $12 million ormore annually by 2012.  **DP&L** sought and obtained PUCO authority to defer andrecover costs associated with these new high-voltage transmission projectsthrough retail rates. However, if in the future we are unable to defer orrecover these costs, it could have a material adverse effect on our results ofoperations, financial condition and cash flows.

 

**Creditand Capital Markets**

 

From time to time we rely on access to thecredit and capital markets to fund certain of our operational and capitalcosts.  These capital and credit marketshave experienced extreme volatility and disruption and the ability ofcorporations to obtain funds through the issuance of debt or equity has beennegatively impacted.  Disruptions in thecredit and capital markets make it harder and more expensive to obtain fundingfor our business.  Access to funds underour existing financing arrangements is also dependent on the ability of ourcounterparties to meet their financing commitments.  Our inability to obtain financing onreasonable terms, or at all, with creditworthy counterparties could adverselyaffect our results of operations, financial condition and cash flows.  If our available funding is limited or we areforced to fund our operations at a higher cost, these conditions may require usto curtail our business activities and increase our cost of funding, both ofwhich could reduce our profitability.  **DP&L’s** variable rate debt bears interest based on aprevailing rate that is reset weekly based on a market index that can beaffected by market demand, supply, market interest rates and other marketconditions.  We also currently maintainboth cash on deposit and investments in cash equivalents that could beadversely affected by interest rate fluctuations.  In addition, select debt of **DPL** and **DP&L** iscurrently rated investment grade by various rating agencies.  If the rating agencies were to rate **DPL** and **DP&L** below investmentgrade, our borrowing costs would increase, we would likely be required to pay ahigher interest rate under certain existing and future financings and ourpotential pool of investors and funding sources would likely decrease.  Our credit ratings also govern the collateralprovisions of certain of our contracts, and a below investment grade creditrating by one of the rating agencies could require us to post cash collateralunder these contracts.  These eventswould likely reduce our liquidity and profitability and could have a materialadverse effect on our results of operations, financial condition and cashflows.

 

**Value and Funding ofBenefit Plan Assets**

 

The performance of thecapital markets affects the values of the assets that are held in trust tosatisfy future obligations under our pension and postretirement benefitplans.  These assets are subject tomarket fluctuations and will yield uncertain returns, which may fall below ourprojected return rates.  A decline in themarket value of the pension and postretirement benefit plan assets willincrease the funding requirements under our pension and postretirement benefitplans if the actual asset returns do not recover these declines in value in theforeseeable future.  Future pensionfunding requirements, and the timing of funding payments, may also be subjectto changes in legislation.  The PensionProtection Act, enacted in August 2006, requires underfunded pension plansto improve their funding ratios within prescribed intervals based on the levelof their underfunding.  As a result, ourrequired contributions to these plans may increase in the future.  In addition, our pension and postretirementbenefit plan liabilities are sensitive to changes in interest rates.  As interest rates decrease, the liabilitiesincrease, potentially increasing benefit expense and funding requirements.  Further, changes in demographics, includingincreased numbers of retirements or changes in life expectancy assumptions, mayalso increase the funding requirements of the obligations related to thepension and other postretirement benefit plans. Declines in market values and increased funding requirements could havea material adverse effect on our results of operations, financial condition andcash flows.

 

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**Relianceon Third Parties**

 

We enter intotransactions with and rely on many counterparties in connection with ourbusiness, including for the purchase and delivery of inventory, which includesfuel and equipment components (such as limestone for our FGD equipment), forour capital improvements and additions and to provide professional services,such as actuarial calculations, payroll processing and various consultingservices.  If any of these counterpartiesfails to perform its obligations to us or becomes unavailable, our businessplans may be materially disrupted, we may be forced to discontinue certainoperations if a cost-effective alternative is not readily available or we maybe forced to enter into alternative arrangements at then-current market pricesthat may exceed our contractual prices and cause delays.  These events could cause our results ofoperations, financial condition and cash flows to be materially adverselyaffected.

 

**OurStock Price May Fluctuate**

 

The market price of **DPL’s** common stock has fluctuated over a relatively widerange.  Over the past three years, themarket price of our common stock has fluctuated with a low of $19.16 and a highof $31.91.  Our common stock in recentyears has experienced significant price and volume variations that have oftenbeen unrelated to our operating performance. Over the previous year, the global markets have increasingly beencharacterized by substantially increased volatility in companies in a number ofindustries and in the broader markets. The market price of our common stock may continue to significantlyfluctuate in the future and may be affected adversely by factors such as actualor anticipated change in our operating results, acquisition activity, changesin financial estimates by securities analysts, general market conditions,rumors and other factors, which factors may increase price volatility and beexacerbated by continued disruption in the global markets at large.

 

**Economic Conditions and Markets**

 

Economic pressures, aswell as changing market conditions and other factors related to physical energyand financial 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 and our suppliers. The direction and relative strength of the global economy has beenincreasingly uncertain due to softness in the real estate and mortgage markets,volatility in fuel and other energy costs, difficulties in the financialservices sector and credit markets, increased unemployment and otherfactors.  Many of these factors havedisproportionately impacted our Ohio service territory.

 

Our results ofoperations, financial condition and cash flows may be negatively affected bysustained downturns or a sluggish economy. Sustained downturns, recession or a sluggish economy generally affectthe markets in which we operate and negatively influence our energyoperations.  A contracting, slow orsluggish economy could reduce the demand for energy in areas in which we aredoing business.  During economicdownturns, our commercial and industrial customers may see a decrease in demandfor their products, which in turn may lead to a decrease in the amount ofenergy they require.  In addition, ourcustomers’ ability to pay us could also be impaired, which could result in anincrease in receivables and write-offs of uncollectible accounts.  Our suppliers could also be affected by theeconomic downturn resulting in supply delays or unavailability.  Reduced demand for our electric services,failure by our customers to timely remit full payment owed to us and supply delaysor unavailability could have a material adverse effect on our results ofoperations, financial condition and cash flows.

 

**WarrantExercise**

 

**DPL’s** warrant holders can exercise theirwarrants to purchase shares of **DPL** commonstock at their discretion until March 12, 2012.  As of the date of this report, the number ofoutstanding warrants is 1.8 million.  Asa result, **DPL** could be required toissue up to 1.8 million common shares in exchange for the receipt of theexercise price of $21.00 per share or pursuant to a cashless exerciseprocess.  The exercise of warrants wouldincrease the number of common shares outstanding and increase our common sharedividend costs, thus affecting any existing guidance on EPS and adverselyaffecting our financial condition and cash flows.

 

**Internal Controls and InformationReporting**

 

Our internal controls,accounting policies and practices and internal information systems are designedto enable us to capture and process transactions and information in a timelyand accurate manner in compliance with GAAP in the United States of America,laws and regulations, taxation requirements and federal securities laws andregulations in order to, among other things, disclose and report financial andother information in connection with the recovery of our costs and with ourreporting requirements under federal securities, tax and other laws andregulations and to properly process payments. We have implemented corporate governance, internal control andaccounting policies and procedures in connection with the Sarbanes-Oxley Act of2002 (the “Act”).  Our internal controlsand policies have been and continue to be closely monitored by management andour Board of Directors to ensure continued compliance with Section 404 ofthe Act.  

 

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While we believe thesecontrols, policies, practices and systems are adequate to verify dataintegrity, unanticipated and unauthorized actions of employees, temporarylapses in internal controls due to shortfalls in oversight or resourceconstraints could lead to improprieties and undetected errors that could resultin the disallowance of cost recovery, noncompliant disclosure and reporting orincorrect payment processing.  Theconsequences of these events could have a material adverse effect on ourresults of operations, financial condition and cash flows.

 

**Accounting Standards**

 

Our Consolidated Financial Statements areprepared in accordance with accounting principles generally accepted in theUnited States of America.  The SEC, FASBor other authoritative bodies or governmental entities may issue newpronouncements or new interpretations of existing accounting standards that mayrequire us to change our accounting policies. These changes are beyond our control, can be difficult to predict andcould materially impact how we report our results of operations, financialcondition and cash flows.  We could berequired to apply a new or revised standard retroactively, which couldadversely affect our financial position. In addition, in preparing our Consolidated Financial Statements,management is required to make estimates and assumptions.  Actual results could differ significantlyfrom those estimates.

 

The SEC has issued a roadmap for thetransition by U.S. public companies to the use of International FinancialReporting Standards (IFRS) promulgated by the International AccountingStandards Board. Under the SEC’s proposed roadmap, we could be required toprepare financial statements in accordance with IFRS in 2014.  The SEC expects to make a determination in2011 regarding the mandatory adoption of IFRS. We are currently assessing the impact that this potential change wouldhave on our Consolidated Financial Statements and we will continue to monitorthe development of the potential implementation of IFRS.

 

**Qualifiedand Properly Motivated Workforce**

 

One of the challenges weface is to retain a skilled, efficient and cost-effective workforce whilerecruiting new talent to replace losses in knowledge and skills due toretirements.  This undertaking couldrequire us to make additional financial commitments and incur increased costs.  If we are unable to successfully attract andretain an appropriately qualified workforce, our results of operations,financial condition and cash flows could be materially adversely affected.  In addition, we have employee compensationplans that reward the performance of our employees.  While we seek to ensure that our compensationplans encourage acceptable levels for risk and high performance through paymix, performance metrics and timing, and although we have policies andprocedures in place to mitigate excessive risk-taking by employees, excessiverisk-taking by our employees to achieve performance targets could result inevents that could have a material adverse effect on our results of operations,financial condition and cash flows.

 

**CollectiveBargaining Agreements and Employee Relations**

 

Over half of ouremployees are represented by a collective bargaining agreement that is ineffect until October 31, 2011. While we believe that we maintain a satisfactory relationship with ouremployees, it is possible that labor disruptions affecting some or all of ouroperations could occur during the period of the bargaining agreement or at theexpiration of the collective bargaining agreement before a new agreement isnegotiated.  Work stoppages by, orpoor relations or ineffective negotiations with, our employees could have amaterial adverse effect on our results of operations, financial condition andcash flows.

 

**CyberSecurity and Terrorism**

 

Man-madeproblems such as computer viruses, terrorism, theft and sabotage, may disruptour operations and harm our operating results. We operate in a highly regulated industry that requires the continuedoperation of sophisticated information technology systems and networkinfrastructure.  Despite ourimplementation of security measures, all of our technology systems arevulnerable to disability, failures or unauthorized access due to hacking,viruses, acts of war or terrorism and other causes.  If our technology systems were to fail or bebreached and we were unable to recover in a timely way, we would be unable tofulfill critical business functions and sensitive confidential and other datacould be compromised, which could have a material adverse effect on our resultsof operations, financial condition and cash flows.  In addition, our generation plants, fuelstorage facilities, transmission and distribution facilities may be targets ofterrorist activities that could disrupt our ability to produce or distributesome portion of our energy products.  Anysuch disruption could result in a material decrease in revenues and significantadditional costs to repair and insure our assets, which could have a materialadverse effect on our results of operations, financial condition and cashflows.  The continued threat of terrorismand heightened security and military action in response to this threat, or anyfuture acts of terrorism, may cause further disruptions to the economies of theUnited States and other countries and create further uncertainties or otherwisematerially harm our results of operations, financial condition and cash flows.

 

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**DPL as Holding Company**

 

**DPL** is a holding company and itsinvestments in its subsidiaries are its primary assets.  Substantially all of **DPL’s**business is conducted by its **DP&L**subsidiary.  As such, **DPL’s** cash flow is dependent on the operating cash flows of **DP&L** and its ability to pay cash to **DPL**.  **DP&L’s**governing documents contain certain limitations on the ability to declare andpay dividends to **DPL** while preferred stock isoutstanding.  Certain of **DP&L’s** debt agreements also contain limits with respectto the ability of **DP&L** toloan or advance funds to **DPL.**  In addition, **DP&L**is regulated by the PUCO that possesses broad oversight powers to ensure thatthe needs of utility customers are being met. While we are not currently aware of any plans to do so, the PUCO couldattempt to impose restrictions on the ability of **DP&L**to pay cash to **DPL** pursuant to these broadpowers.  While we do not expect anyforegoing restrictions to significantly affect **DP&L’s**ability to pay funds to **DPL**in thefuture, a significant limitation on **DP&L’s**abilityto pay dividends or loan or advance funds to **DPL**would materially adversely affect **DPL’s** resultsof operations, financial condition and cash flows.

 

**Item1B – Unresolved Staff Comments**

 

None

 

**Item 2 – Properties**

 

Informationrelating to our properties is contained in Item 1 – ELECTRIC OPERATIONS ANDFUEL SUPPLY and Note 4 of Notes to Consolidated Financial Statements.

 

Substantially allproperty and plants of **DP&L**are subject to the lien of the mortgage securing **DP&L’s** 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 ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  We are also from time to time involved inother reviews, investigations and proceedings by governmental and regulatoryagencies regarding our business, certain of which may result in adversejudgments, settlements, fines, penalties, injunctions or other relief.  We believe the amounts provided in ourConsolidated Financial Statements, as prescribed by GAAP, for these matters areadequate in light of the probable and estimable contingencies.  However, there can be no assurances that theactual amounts required to satisfy alleged liabilities from various legal proceedings,claims and other matters (including those matters noted 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, 2009, cannot be reasonably determined.

 

The information about thelegal and other proceedings contained in Item 1 – COMPETITION AND REGULATIONunder the heading “Ohio Retail Rates” and in Item 8 – Note 19 of Notes toConsolidated Financial Statements of this report under the headings “Governmentaland Regulatory Inquiries”, “Air Quality – Litigation Involving Co-Owned Plants”,“Air Quality – Notices of Violation Involving Co-Owned Plants”, “Air Quality –Notices of Violation Involving Wholly-Owned Plants”, “Land Use and Solid WasteDisposal” and “Legal and Other Matters” is incorporated by reference into thisItem.

 

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

 

NONE

 

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**PART II**

** **

**Item 5 – Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

As of February 10,2010, there were 20,798 holders of record of **DPL**common equity, excluding individual participants in security positionlistings.  The following table presentsthe high and low per share sales prices for **DPL**common stock as reported by the New York Stock Exchange for eachquarter of 2009 and 2008:

 
| ** **     | ** ** | **2009** | ** ** | **2008**   | ** ** |
|----------------|------------|----------|------------|------------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**    | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  | ** ** | **$**    | **23.28**  | ** ** | **$**      | **19.27** |   | $ | 30.18 |   | $ | 24.58 |   |
| Second Quarter | ** ** | **$**    | **23.46**  | ** ** | **$**      | **21.18** |   | $ | 28.70 |   | $ | 26.10 |   |
| Third Quarter  | ** ** | **$**    | **26.53**  | ** ** | **$**      | **22.79** |   | $ | 26.76 |   | $ | 23.00 |   |
| Fourth Quarter | ** ** | **$**    | **28.68**  | ** ** | **$**      | **25.16** |   | $ | 24.59 |   | $ | 19.16 |   |

 

**DP&L’s** common stock is held solely by **DPL**and, as a result, is not listed fortrading on any stock exchange.

 

As long as **DP&L** preferred stock is outstanding, **DP&L’s** 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 exceedsthe net income of **DP&L**available for dividends on its Common Stock subsequent to December 31,1946, plus $1.2 million.  Thisdividend restriction has historically not impacted **DP&L’s**abilityto pay cash dividends and, as of December 31, 2009, **DP&L’s** retained earnings of $640.3million were all available for **DP&L**common stock dividends payable to **DPL.**

 

**DPL** paid regular quarterly cash dividends of$0.285 and $0.275 per share on our common stock during 2009 and 2008,respectively.  The annualized dividendrate was $1.14 per share in 2009 and $1.10 per share in 2008.

 

On December 9, 2009,**DPL’s**Board of Directors authorized aquarterly dividend rate increase of approximately 6%, increasing the quarterlydividend per **DPL** common share from $0.2850 to$0.3025, effective with the next dividend declaration.  If this dividend rate were maintained, theannualized dividend would increase from $1.14 per share to $1.21 per share.  Additional information concerning dividendspaid on **DPL** common stock is setforth under Selected Quarterly Information in Item 8 — Financial Statements andSupplementary Data.

 

Information regarding **DPL’s**equity compensation plans as of December 31, 2009is disclosed in Item 12 — Security Ownership of Certain Beneficial Ownersand Management and Related Stockholder Matters, which incorporates suchinformation by reference from **DPL’s** proxystatement for the 2010 Annual Meeting of Shareholders.

 

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The following tabledetails the repurchase by **DPL**of itscommon shares during 2009:

 

 
| ** **    | ** ** | ** **        | ** ** | ** **        | ** ** | **Number of**        | ** ** | **Approximate dollar**  | ** ** |
|---------------|------------|-------------------|------------|-------------------|------------|----------------------|------------|-------------------------|------------|
| ** **    | ** ** | ** **        | ** ** | ** **        | ** ** | **shares purchased** | ** ** | **value of shares**     | ** ** |
| ** **    | ** ** | **Number of**     | ** ** | **Average**       | ** ** | **as part of the**   | ** ** | **that could still be** | ** ** |
| ** **    | ** ** | **shares**        | ** ** | **price paid**    | ** ** | **Stock Repurchase** | ** ** | **purchased under**     | ** ** |
| **Month (1)** | ** ** | **purchased (2)** | ** ** | **per share (3)** | ** ** | **Program (4)**      | ** ** | **the program (4)**     | ** ** |
| ** **    | ** ** | ** **        | ** ** | ** **        |       |                 |       |                    |       |
| February      |       | 351               |       | $                 | 21.55      |                 | —     |                    | $          | — |   |
| November      |       | 2,387,991         |       | $                 | 26.96      |                 | 2,387,991  |                    | $          | 3,911,494 |   |
| December      |       | 3,557             |       | $                 | 27.55      |                 | 400        |                    | $          | 3,900,658 |   |
|          |       | 2,391,899         |       |              |       | 2,388,391            |       |                    |       |

 

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*(1) Basedon a calendar month.*

 

*(2) Comprises shares purchased as part of **DPL**’**s** current repurchase program and shares surrendered to **DPL** by employees to satisfy individual tax withholdingobligations upon vesting of previously issued shares of restricted commonstock.  Shares totaling 3,508 weresurrendered during 2009 to satisfy these individual tax withholdingobligations.*

 

*(3) Average price paid per share reflects the individual tradeprice of repurchases under **DPL’s** currentrepurchase program as well as the closing price of **DPL**common stock on the vesting dates of the restricted shares.*

 

*(4) On October 28, 2009, the **DPL**Board of Directors approved, and **DPL**publiclyannounced, a Stock Repurchase Program under which **DPL**mayuse proceeds from the exercise of warrants to repurchase warrants or **DPL**common stock from time to time in the open market,through private transactions or otherwise. Through December 31, 2009, the amount of such proceeds available tobe used under the Stock Repurchase Program approximated $68.3 million, of which$64.4 million was used during the quarter ended December 31, 2009 topurchase approximately 2.4 million shares at an average per share price of$26.96.  At December 31, 2009, theamount still available that could be used to repurchase stock under the StockRepurchase Program is approximately $3.9 million but could be higher ifadditional warrants are exercised for cash in the future.  The Stock Repurchase Program will run throughJune 30, 2012, which is approximately three months after the end of thewarrant exercise period.*

 

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The graph below matches **DPL’s** cumulative 5-year total shareholder return on commonstock with the cumulative total returns of the Dow Jones US Industrial Averageindex, the S&P Utilities index and the S&P Electric Utilities index.The graph tracks the performance of a $1,000 investment in our common stock andin each index (with the reinvestment of all dividends) from December 31,2004 to December 31, 2009.

 

 

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*$1000 invested on 12/31/04 in stock or index,including reinvestment of dividends.

Fiscal year ending December 31.

 

Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Copyright© 2010 Dow Jones & Co. All rightsreserved.

 
| ** **                          | ** ** | **12/04**  | ** ** | **12/05**  | ** ** | **12/06**  | ** ** | **12/07**  | ** ** | **12/08**  | ** ** | **12/09**  | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **DPL Inc.**                        |       | $          | 1,000.00   |       | $          | 1,074.53   |       | $          | 1,191.30   |       | $          | 1,317.68   |       | $ | 1,061.20 |   | $ | 1,345.50 |   |
| **Dow Jones US Industrial Average** |       | $          | 1,000.00   |       | $          | 1,017.22   |       | $          | 1,210.97   |       | $          | 1,318.56   |       | $ | 897.54 |   | $ | 1,101.13 |   |
| **S&P Electric Utilities**      |       | $          | 1,000.00   |       | $          | 1,176.57   |       | $          | 1,449.66   |       | $          | 1,784.80   |       | $ | 1,323.70 |   | $ | 1,368.40 |   |
| **S&P Utilities**               |       | $          | 1,000.00   |       | $          | 1,168.41   |       | $          | 1,413.66   |       | $          | 1,687.61   |       | $ | 1,198.53 |   | $ | 1,341.26 |   |

 

*The stockprice performance included in this graph is not necessarily indicative offuture stock price performance.*

 

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**Item 6 -Selected Financial Data**

 
| ** **                                                         | ** ** | **For  the years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions except per share  amounts or as indicated)** | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| **DPL**                                                            |       |                                       |       |   |   |   |   |   |   |   |   |
| ** **                                                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Basic  earnings (loss) per share of common stock:                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Continuing  operations (a)                                         |       | $                                          | 2.03       |   | $ | 2.22 |   | $ | 1.97 |   | $ | 1.12 |   | $ | 1.03 |   |
| Discontinued  operations (b)                                       |       | $                                          | —     |   | $ | — |   | $ | 0.09 |   | $ | 0.12 |   | $ | 0.44 |   |
| Cumulative  effect of accounting change (c)                        |       | $                                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | (0.03 | ) |
| Total  basic earnings per common share                             |       | $                                          | 2.03       |   | $ | 2.22 |   | $ | 2.06 |   | $ | 1.24 |   | $ | 1.44 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Diluted  earnings (loss) per share of common stock:                |       |                                       |       |   |   |   |   |   |   |   |   |
| Continuing  operations (a)                                         |       | $                                          | 2.01       |   | $ | 2.12 |   | $ | 1.80 |   | $ | 1.03 |   | $ | 0.97 |   |
| Discontinued  operations (b)                                       |       | $                                          | —     |   | $ | — |   | $ | 0.08 |   | $ | 0.12 |   | $ | 0.41 |   |
| Cumulative  effect of accounting change (c)                        |       | $                                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | (0.03 | ) |
| Total  dilutive earnings per common share                          |       | $                                          | 2.01       |   | $ | 2.12 |   | $ | 1.88 |   | $ | 1.15 |   | $ | 1.35 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Dividends  declared per share                                      |       | $                                          | 1.14       |   | $ | 1.10 |   | $ | 1.04 |   | $ | 1.00 |   | $ | 0.96 |   |
| Dividend  payout ratio                                             |       | 56.2                                       | %          | 49.5 | % | 50.5 | % | 80.7 | % | 66.7 | % |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Total  electric sales (millions of kWh)                            |       | 16,667                                     |       | 17,172 |   | 18,598 |   | 18,418 |   | 17,906 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Results  of operations:                                            |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                                           |       | $                                          | 1,588.9    |   | $ | 1,601.6 |   | $ | 1,515.7 |   | $ | 1,393.5 |   | $ | 1,284.9 |   |
| Earnings  from continuing operations, net of tax (a)               |       | $                                          | 229.1      |   | $ | 244.5 |   | $ | 211.8 |   | $ | 125.6 |   | $ | 124.7 |   |
| Earnings  from discontinued operations, net of tax                 |       | $                                          | —     |   | $ | — |   | $ | 10.0 |   | $ | 14.0 |   | $ | 52.9 |   |
| Cumulative  effect of accounting change, net of tax                |       | $                                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | (3.2 | ) |
| Net  income                                                        |       | $                                          | 229.1      |   | $ | 244.5 |   | $ | 221.8 |   | $ | 139.6 |   | $ | 174.4 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Financial  position items at December 31:                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Total  assets                                                      |       | $                                          | 3,641.7    |   | $ | 3,637.0 |   | $ | 3,566.6 |   | $ | 3,612.2 |   | $ | 3,791.7 |   |
| Long-term  debt (d)                                                |       | $                                          | 1,223.5    |   | $ | 1,376.1 |   | $ | 1,541.5 |   | $ | 1,551.8 |   | $ | 1,677.1 |   |
| Total  construction additions                                      |       | $                                          | 145.3      |   | $ | 227.8 |   | $ | 346.7 |   | $ | 351.6 |   | $ | 179.7 |   |
| Redeemable  preferred stock of subsidiary                          |       | $                                          | 22.9       |   | $ | 22.9 |   | $ | 22.9 |   | $ | 22.9 |   | $ | 22.9 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Senior  unsecured debt ratings at December 31:                |       |                                       |       |   |   |   |   |   |   |   |   |
| Fitch  Ratings                                                     |       | A-                                         |       | BBB+ |   | BBB+ |   | BBB |   | BBB- |   |
| Moody’s  Investors Service                                    |       | Baa1                                       |       | Baa2 |   | Baa2 |   | Baa3 |   | Ba1 |   |
| Standard &  Poor’s Corporation                       |       | BBB+                                       |       | BBB- |   | BBB- |   | BB |   | BB- |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Number  of shareholders - common stock                             |       | 20,888                                     |       | 21,628 |   | 22,771 |   | 24,434 |   | 26,601 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| **DP&L**                                                       |       |                                       |       |   |   |   |   |   |   |   |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Total  electric sales (millions of kWh)                            |       | 16,590                                     |       | 17,105 |   | 18,598 |   | 18,418 |   | 17,906 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Results  of operations:                                            |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                                           |       | $                                          | 1,550.4    |   | $ | 1,572.9 |   | $ | 1,507.4 |   | $ | 1,385.2 |   | $ | 1,276.9 |   |
| Earnings  on common stock (a)                                      |       | $                                          | 258.0      |   | $ | 284.9 |   | $ | 270.7 |   | $ | 241.6 |   | $ | 210.9 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Financial  position items at December 31:                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Total  assets                                                      |       | $                                          | 3,457.4    |   | $ | 3,397.7 |   | $ | 3,276.7 |   | $ | 3,090.3 |   | $ | 2,738.6 |   |
| Long-term  debt (d)                                                |       | $                                          | 783.7      |   | $ | 884.0 |   | $ | 874.6 |   | $ | 785.2 |   | $ | 685.9 |   |
| Redeemable  preferred stock of subsidiary                          |       | $                                          | 22.9       |   | $ | 22.9 |   | $ | 22.9 |   | $ | 22.9 |   | $ | 22.9 |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Senior  secured debt ratings at December 31:                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Fitch  Ratings                                                     |       | AA-                                        |       | A+ |   | A+ |   | A |   | A- |   |
| Moody’s  Investors Service                                    |       | Aa3                                        |       | A2 |   | A2 |   | A3 |   | Baa1 |   |
| Standard &  Poor’s Corporation                       |       | A                                          |       | A- |   | BBB+ |   | BBB |   | BBB- |   |
|                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Number  of shareholders - preferred stock                          |       | 242                                        |       | 256 |   | 281 |   | 290 |   | 329 |   |

 

----

*(a)*       *In the fourth quarter of 2006, **DPL** entered into agreements to sell two of its peakingfacilities resulting in a $44.2 million ($71 million pre-tax) impairmentcharge.  The sale was finalized in April 2007.  During 2006, **DPL**recorded a $37.3 million ($61.2 million pre-tax) charge for early redemption ofdebt.  **DP&L**recorded a $2.5 million ($4.1 million pre-tax) charge for early redemption ofdebt in 2006.  In May 2007, **DPL** settled the litigation with former executives resultingin a $19.7 million ($31 million pre-tax) gain. In April 2007, **DPL**alsorecouped legal costs associated with the litigation with the former executivesfrom one of its insurers resulting in a $9.2 million ($14.5 million pre-tax)gain.  In 2008, **DPL**sold coal and excess emission allowances to various counterparties, realizingnet gains of $58.2 million ($83.4 million pre-tax) and $24.3 million ($34.8million pre-tax), respectively.  Also, inJune 2008, **DPL** entered into a $42 million taxsettlement with ODT resulting in a recorded income tax benefit of $8.5 million.*

 

*(b)*       *On February 13, 2005, DPL’ssubsidiaries, MVE, Inc. (MVE) and MVIC, entered into an agreement to selltheir respective interest in forty-six private equity funds. MVE and MVICcompleted the sale of forty-three funds and a portion of another during 2005.The ownership interests to the remaining two funds and a portion of the thirdfund were transferred in 2006 and 2007, at which time DPL recognized previouslydeferred gains.  See Note 6 of the Notesto Consolidated Financial Statements.*

 

*(c)*        *In 2005, we recorded a cumulativeeffect of an accounting change related to an additional obligation in responseto the provisions of GAAP relating to the accounting for AROs.*

 

*(d)*       *Excludes current maturities oflong-term debt.*

 

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**Item 7 - Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

This report includes thecombined filing of **DPL Inc. (DPL)**and **The Dayton Power and Light Company****(DP&L).  DP&L**isthe principal subsidiary of **DPL**providingapproximately 98% of **DPL’s**totalconsolidated revenue and approximately 95% of **DPL’s**totalconsolidated asset base.  Throughout thisreport, the terms “we,” “us,” “our” and “ours” are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in the section.

 

Certainstatements contained in this discussion are “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report that relateto events or developments that are expected to occur in the future, includingmanagement’s expectations, strategic objectives, business prospects,anticipated economic performance and financial condition and other similarmatters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs, assumptionsand expectations of future economic performance, taking into account theinformation currently available to management. These statements are not statements of historical fact and are typicallyidentified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,”“expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will”and similar expressions.  Suchforward-looking statements are subject to risks and uncertainties, andinvestors are cautioned that outcomes and results may vary materially fromthose projected due to various factors beyond our control, including but notlimited to: abnormal or severe weather and catastrophic weather-related damage;unusual maintenance or repair requirements; changes in fuel costs and purchasedpower, coal, environmental emissions, natural gas and other commodity prices;volatility and changes in markets for electricity and other energy-relatedcommodities; performance of our suppliers; increased competition andderegulation in the electric utility industry; increased competition in theretail generation market; changes in interest rates; state, federal and foreignlegislative and regulatory initiatives that affect cost and investmentrecovery, emission levels, rate structures or tax laws; changes in federal orstate environmental laws and regulations to which **DPL**and its subsidiaries are subject; the development and operation of RTOs,including PJM to which **DPL’s** operatingsubsidiary (**DP&L**) has given control of itstransmission functions; changes in our purchasing processes, pricing, delays,contractor and supplier performance and availability; significant delaysassociated with large construction projects; growth in our service territoryand changes in demand and demographic patterns; changes in accounting rules andthe effect of accounting pronouncements issued periodically by accountingstandard-setting bodies; financial market conditions; the outcomes oflitigation and regulatory investigations, proceedings or inquiries; generaleconomic conditions; and the risks and other factors discussed in this reportand other **DPL** and **DP&L**filingswith the SEC.

 

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

 

The following discussionshould be read in conjunction with the accompanying Consolidated FinancialStatements and related footnotes included in Item 8 – Financial Statements andSupplementary Data.

 

**BUSINESS OVERVIEW**

 

**DPL** is a regional electric energy andutility company and through its principal subsidiary **DP&L,**is primarily engaged in the generation, transmission and distribution ofelectricity in West Central Ohio.  **DPL**and **DP&L** striveto achieve disciplined growth in energy margins while limiting volatility inboth cash flows and earnings and to achieve stable, long-term growth throughefficient operations and strong customer and regulatory relations.  More specifically, **DPL**and**DP&L’s**strategy is to match energy supply with load orcustomer demand, maximizing profits while effectively managing exposure tomovements in energy and fuel prices and utilizing the transmission anddistribution assets that transfer electricity at the most efficient cost whilemaintaining the highest level of customer service and reliability.

 

We operate and managegeneration assets and are exposed to a number of risks.  These risks include but are not limited toelectricity wholesale price risk, fuel supply and price risk and power plantperformance.  We attempt to manage theserisks through various means.  For instance,we operate a portfolio of wholly-owned and jointly-owned generation assets thatis diversified as to coal source, cost structure and operatingcharacteristics.  We are focused on theoperating efficiency of these power plants and maintaining their availability.

 

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We****operateand manage****transmission and distribution assetsin a rate-regulated environment.  Accordingly,this subjects us to regulatory risk in terms of the costs that we may recoverand the investment returns that we may collect in customer rates.  We are focused on delivering electricity andmaintaining high standards of customer service and reliability in acost-effective manner.

 

As we look forward, thereare a number of issues that we believe may have a significant impact on ourbusiness and operations described above. The following issues mentioned below are not meant to be exhaustive but toprovide insight to matters that have or are likely to have an effect on ourindustry and business:

 

**REGULATORY ENVIRONMENT**

 

·                  **Emissions – Climate ChangeLegislation**

 

There is a growingconcern nationally and internationally about global climate change and thecontribution of emissions of GHGs, including most significantly, CO2.  This concern has led to increasedinterest in legislation at the federal level, actions at the state level aswell as litigation relating to GHG emissions.  In 2007, a U.S.Supreme Court decision upheld that the USEPA has the authority to regulate CO2 emissions frommotor vehicles under the CAA.  In April 2009, the USEPA issued aproposed endangerment finding under the CAA, which was finalized and published December 15,2009.  The proposed finding determinedthat CO2 and other GHGs from motor vehicles threatenthe health and welfare of future generations by contributing to climatechange.  It is anticipated that thisruling will lead to the regulation of CO2 and other GHGs from electric generating unitsand other stationary sources of these emissions.  In June 2009, the U.S. House ofRepresentatives passed H.R. 2454, the American Clean Energy and Security Act(ACES).  This proposed legislationtargets a reduction in the emission of GHGs from large sources by 80% in 2050through an economy-wide cap and trade program. ACES also includes energy efficiency and renewable energyinitiatives.  Increased pressure for CO2 emissionsreduction is also coming from investor organizations and the internationalcommunity.  Environmental advocacy groupsare also focusing considerable attention on CO2 emissions from power generation facilities andtheir potential role in climate change.  Approximately99% of the energy we produce is generated by coal.  **DP&L’s**share of CO2 emissions at generating stations we own andco-own is approximately 16 million tons annually.  If legislation or regulations are passed atthe federal or state levels that impose mandatory reductions of CO2 and other GHGson generation facilities, the cost to**DPL**and**DP&L** of such reductionscould be material.

 

**·****                ****SB 221 Requirements**

 

SB221 and the implementation rules contain targets relating to advancedenergy portfolio standards, renewable energy, demand reduction and energyefficiency standards.  The standardsrequire that, by the year 2025, 25% of the total number of kWh of electricitysold by the utility to retail electric consumers must come from alternativeenergy resources, which include “advanced energy resources” such as distributedgeneration, clean coal, advanced nuclear, energy efficiency and fuel celltechnology; and “renewable energy resources” such as solar, hydro, wind,geothermal and biomass.  At least half ofthe 25% must be generated from renewable energy resources, including 0.5% fromsolar energy.  The renewable energyportfolio, energy efficiency and demand reduction standards began in 2009 withincreases in required percentages each year. The annual targets for energy efficiency and peak demand reductionsbegan in 2009 with annual increases. Energy efficiency programs are to save 22.3% by 2025 and peak demandreductions are expected to reach 7.75% by 2018 compared to a baseline energyusage.  If any targets are not met,compliance penalties will apply, unless the PUCO makes certain findings thatwould excuse performance.

 

SB221 also contains provisions for determining whether an electric utility hassignificantly excessive earnings.  On September 9,2009, the PUCO issued an entry establishing a significantly excessive earningstest (SEET) proceeding.  A workshop washeld at the Commission offices on October 5, 2009 to allow interestedparties to present concerns and discuss issues related to the methodology.  On November 18, 2009 the PUCO Staffissued its recommendations to the Commission. Staff recommendations provided that off-system or wholesale sales shouldbe included in the calculation, and that some threshold should be establishedbased on a group of comparable companies that would determine if the utilityhad significantly excessive earnings in a given year.  **DP&L**filed its comments and reply comments along with other interested parties.  Although **DP&L’s**Stipulation provides that the SEET does not apply to **DP&L** until 2013 based on 2012 earningsresults, **DP&L** is activelyparticipating in this proceeding.

 

·                  **CAIR decision by the U.S. Courtof Appeals for the District of Columbia Circuit**

 

On July 11, 2008,the United States Court of Appeals for the District of Columbia Circuit issueda decision that vacated the USEPA CAIR and its associated Federal ImplementationPlan. This decision remanded these issues back to the USEPA.  The USEPA issued CAIR on March 10, 2005to regulate certain upwind states with respect to fine particulate matter andozone.  CAIR created interstate tradingprograms for annual NOx emission allowances and made modifications to anexisting trading program for SO2 that were to take effect in 2010.  

 

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The court’s decision, inpart, invalidated the new NOx annual emission allowance trading program and themodifications to the SO2 emission trading program, and createduncertainty regarding future NOx and SO2 emission reduction requirements and their timing.  On December 23, 2008, the court reversedpart of its decision that vacated CAIR. Thus, CAIR currently remains in effect, but the USEPA remains subject tothe court’s order to revise the program. In January 2010, the Court ordered the USEPA to file a response toa Petition for Mandamus filed by parties in the original case who are nowseeking a Court order to require the USEPA to issue new regulations by March 1,2010.  We cannot at this time predict thetiming or the outcome of any new regulations in relation to CAIR.  CAIR has and will continue to have a materialeffect on our operations.

 

In the fourth quarter of2007, **DP&L** began a program for sellingexcess emission allowances, including annual NOx emission allowances and SO2 emission allowances that were the subject of CAIRtrading programs.  In subsequentquarters, **DP&L** recognized gains from the saleof excess emission allowances to third parties. The court’s CAIR decision has affected the trading market for excessallowances and impacted **DP&L’s** programfor selling additional excess allowances. The overall impact of the court’s decision, and of the actions the USEPAor others will take in response to this decision, on **DPL**and **DP&L** is not fully known at thistime and could have an adverse effect on us. In January 2009, we resumed selling excess emission allowances dueto the revival of the trading market.

 

**COMPETITIONAND PJM PRICING**

 

·                  **RPM Capacity Auction Price**

 

The PJM RPM base residualauction for the 2012/2013 period cleared at a per megawatt price of $16/day forour RTO area.  Prior to this auction, the per megawatt price for the2011/2012 period was $110/day.  FutureRPM auction results will be dependent not only on the overall supply and demandof generation and load, but may also be impacted by congestion as well as PJM’sbusiness rules relating to bidding for Demand Response and EnergyEfficiency resources in the RPM auctions. We cannot predict the outcome of future auctions but if the currentauction price is sustained, our future results of operations, financialcondition and cash flows could be adversely impacted.

 

·                  **Ohio Competitive Considerationsand Proceedings**

 

Overall power marketprices, as well as government aggregation initiatives, could lead to theentrance of competitors in our marketplace, affecting our results ofoperations, financial condition or cash flows. During the year ended December 31, 2009, two additionalunaffiliated marketers registered as CRES providers in **DP&L’s** service territory, bringing tosix the total number of unaffiliated CRES providers in **DP&L’s**service territory.  While there has beensome customer switching associated with unaffiliated marketers, it representedless than 0.11% of sales in 2009.  DPLER, an affiliated company, is also aregistered CRES provider and accounted for 99% of the total kWh supplied byCRES providers within **DP&L’s**service territory in 2009.  During thefirst quarter of 2010, DPLER will begin providing CRES services to businesscustomers in Ohio who are not in **DP&L’s**serviceterritory.  At this time, we do notexpect the incremental costs and revenues to have a material impact on ourresults of operations, financial position or cash flows.  We currently cannot determine the extent towhich customer switching to unaffiliated CRES providers will occur in thefuture and the impact this will have on our operations.  In 2003-2004, several communities in **DP&L’s** service area passed ordinancesallowing the communities to become government aggregators for the purpose ofoffering alternative electric generation supplies to their citizens.  To date, none of these communities haveaggregated their generation load.

 

**FUEL AND RELATED COSTS**

 

·                  **Fuel and Commodity Prices**

 

During 2009 and 2008, thecoal market experienced significant price volatility.  We are now in a global market for coal inwhich our domestic price is increasingly affected by international supplydisruptions and demand balance.  Coalexports from the U.S. have increased significantly in recent years.  In addition, domestic issues likegovernment-imposed direct costs and permitting issues are affecting miningcosts and supply availability.  Ourapproach is to hedge the fuel costs for our anticipated electric sales.  For the year ending December 31, 2010,we have hedged our coal requirements to meet our committed sales.  We may not be able to hedge the entireexposure of our operations from commodity price volatility.  To the extent our suppliers do not meet theircontractual commitments or we are not hedged against price volatility, ourresults of operations, financial position or cash flows could be materiallyaffected.  Beginning in January 2010,the Ohio retail jurisdictional share of fuel price changes will be reflected inthe operation of the fuel rider, subject to PUCO review.

 

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·                  **Sales of Coal and Excess EmissionAllowances**

 

During 2009, **DP&L** sold coal and excess emission allowances to variouscounterparties realizing total net gains of $56.3 million and $5.0 million,respectively.  These gains are recordedas a component of **DP&L’s** fuelcosts and reflected in operating income. Coal sales are impacted by a range of factors but can be largelyattributed to the following: variation in power demand, the market price ofpower compared to the cost to produce power, as well as optimizationopportunities in the coal market.  Salesof excess emission allowances are impacted, among other factors, by: generaleconomic conditions; fluctuations in market demand and pricing; availability ofexcess inventory available for sale; and changes to the regulatory environmentin which we operate.  The combined impactof these factors on our ability to sell coal and emission allowances in 2010and beyond is not fully known at this time and could materially impact theamount of gains that will be recognized in the future.  In addition, beginning in January 2010as part of the operation of the fuel rider, the Ohio retail jurisdictionalshare of the emission gains and a portion of the Ohio jurisdictional share ofthe coal gains will be used to reduce the overall rate charged to customers.

 

**FINANCIAL OVERVIEW**

 

The followingfinancial overview relates to **DPL**, whichincludes its principal subsidiary **DP&L**.  The results of operations for both **DPL** and **DP&L** areseparately discussed in more detail following this financial overview.

 

For the year ended December 31, 2009, Net income for **DPL** was $229.1 million, or $2.01 per share, compared to Netincome of $244.5 million, or $2.12 per share, for the same period in 2008.  All EPS amounts are on a diluted share basis. The decrease in net income compared to theprior year was primarily due to the following:

 

·                  adecrease in retail sales volume due to the impacts of the economic slowdown andmilder weather throughout the year,

 

·                  adecrease in wholesale power sales prices,

 

·                  adecrease in gains recognized from the sale of coal,

 

·                  adecrease in gains recognized from the sale of excess emission allowances,

 

·                  anincrease in the cost of fuel due to the increased volume of generation by ourpower plants and higher average fuel costs, particularly for coal, and

 

·                  an increase in pension and employeebenefit related costs.

 

Partially offsetting these items were:

 

·                  anincrease in retail rates primarily as a result of an increase in the EIR andthe implementation of the TCRR, RPM and Energy Efficiency riders,

 

·                  animprovement in generating plant performance which resulted in an increase inwholesale sales volume and a decrease in purchased power volumes,

 

·                  adecrease in power purchase prices and

 

·                  a netreduction in interest costs primarily as a result of certain outstanding debtredemptions.

 

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**RESULTS OF OPERATIONS – DPL Inc.**

 

**DPL’s**results ofoperations include the results of its subsidiaries, including the consolidatedresults of its principal subsidiary **DP&L**.  **DP&L**providesapproximately 98% of the total revenues of **DPL. **All material intercompany accountsand transactions have been eliminated in consolidation.  A separate specific discussion of the resultsof operations for **DP&L** ispresented elsewhere in this report.

 

**IncomeStatement Highlights – DPL**

** **
| ** **                                         | ** ** | **For  the years ended December 31,** | ** **  |
|----------------------------------------------------|------------|--------------------------------------------|-------------|
| **$ in millions**                             | ** ** | **2009**                                   | ** **  | **2008** | ** ** | **2007** | ** ** |
|                                               |       |                                       |        |   |   |   |   |
| **Revenues:**                                      |       |                                       |        |   |   |   |   |
| Retail                                             | ** ** | **$**                                      | **1,229.0** |   | $ | 1,223.3 |   | $ | 1,206.2 |   |
| Wholesale                                          | ** ** | **122.5**                                  |        | 149.9 |   | 180.3 |   |
| RTO  revenues                                      | ** ** | **89.4**                                   |        | 110.4 |   | 87.4 |   |
| RTO  capacity revenues                             | ** ** | **136.3**                                  |        | 106.9 |   | 30.9 |   |
| Other  revenues                                    | ** ** | **11.7**                                   |        | 11.1 |   | 10.9 |   |
| Total  revenues                                    | ** ** | **$**                                      | **1,588.9** |   | $ | 1,601.6 |   | $ | 1,515.7 |   |
|                                               |       |                                       |        |   |   |   |   |
| **Cost of revenues:**                              |       |                                       |        |   |   |   |   |
| Fuel  costs                                        | ** ** | **$**                                      | **391.7**   |   | $ | 361.2 |   | $ | 330.0 |   |
| Gains  from sale of coal                           | ** ** | **(56.3**                                  | **)**       | (83.4 | ) | (0.6 | ) |
| Gains  from sale of emission allowances            | ** ** | **(5.0**                                   | **)**       | (34.8 | ) | (1.2 | ) |
| Net  fuel                                          | ** ** | **330.4**                                  |        | 243.0 |   | 328.2 |   |
|                                               |       |                                       |        |   |   |   |   |
| Purchased  power                                   | ** ** | **46.9**                                   |        | 148.7 |   | 156.9 |   |
| RTO  charges                                       | ** ** | **105.0**                                  |        | 127.8 |   | 101.9 |   |
| RTO  capacity charges                              | ** ** | **131.8**                                  |        | 100.9 |   | 28.4 |   |
| Recovery  / (Deferral) of RTO related charges, net | ** ** | **(23.5**                                  | **)**       | — |   | — |   |
| Net  purchased power                               | ** ** | **260.2**                                  |        | 377.4 |   | 287.2 |   |
|                                               |       |                                       |        |   |   |   |   |
| Total  cost of revenues                            | ** ** | **$**                                      | **590.6**   |   | $ | 620.4 |   | $ | 615.4 |   |
|                                               |       |                                       |        |   |   |   |   |
| **Gross margins** (a)                              | ** ** | **$**                                      | **998.3**   |   | $ | 981.2 |   | $ | 900.3 |   |
|                                               |       |                                       |        |   |   |   |   |
| Gross  margin as a percentage of revenues          |       | **62.8**                                   | **%**       | 61.3 | % | 59.4 | % |
|                                               |       |                                       |        |   |   |   |   |
| **Operating income**                               | ** ** | **$**                                      | **428.2**   |   | $ | 435.5 |   | $ | 370.1 |   |
|                                               |       |                                       |        |   |   |   |   |
| **Basic earnings per share:**                      |       |                                       |        |   |   |   |   |
| Continuing  operations                             | ** ** | **$**                                      | **2.03**    |   | $ | 2.22 |   | $ | 1.97 |   |
| Discontinued  operations                           | ** ** | **—**                                 |        | — |   | 0.09 |   |
| Total  basic                                       | ** ** | **$**                                      | **2.03**    |   | $ | 2.22 |   | $ | 2.06 |   |
|                                               |       |                                       |        |   |   |   |   |
| **Diluted earnings per share:**                    |       |                                       |        |   |   |   |   |
| Continuing  operations                             | ** ** | **$**                                      | **2.01**    |   | $ | 2.12 |   | $ | 1.80 |   |
| Discontinued  operations                           | ** ** | **—**                                 |        | — |   | 0.08 |   |
| Total  diluted                                     | ** ** | **$**                                      | **2.01**    |   | $ | 2.12 |   | $ | 1.88 |   |

 

----

*(a)*              *Forpurposes of discussing operating results, we present and discuss gross margins.This format is useful to investors because it allows analysis and comparabilityof operating trends and includes the same information that is used bymanagement to make decisions regarding our financial performance.*

 

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**DPL – Revenues**

 

Retailcustomers, especially residential and commercial customers, consume moreelectricity on warmer and colder days. Therefore,**DPL’s** retailsales volume is impacted by the number of heating and cooling degree daysoccurring during a year.  Since**DPL**plans to utilize its internal generating capacity to supply its retailcustomers’ needs first, increases in retail demand may decrease the volume ofinternal generation available to be sold in the wholesale market and viceversa.

 

The wholesale marketcovers a multi-state area and settles on an hourly basis throughout theyear.  Factors impacting**DPL’s** wholesale sales volume each hour ofthe year include wholesale market prices;**DPL’s**retail demand; retail demand elsewhere throughout the entire wholesale marketarea;**DPL** and non-**DPL** plants’ availability to sell into thewholesale market and weather conditions across the multi-state region.**DPL’s** plan is to make wholesale sales whenmarket prices allow for the economic operation of its generation facilities notbeing utilized to meet its retail demand or when margin opportunities existbetween the wholesale sales and power purchase prices.

 

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

 
| **$ in millions**           | ** ** | **2009 vs. 2008** | ** ** | **2008  vs. 2007** | ** ** |
|----------------------------------|------------|-------------------|------------|--------------------|------------|
|                             |       |              |       |               |       |
| **Retail**                       |       |              |       |               |       |
| Rate                             | ** ** | **$**             | **119.6**  |               | $          | 45.1 |   |
| Volume                           | ** ** | **(113.5**        | **)**      | (23.7              | )          |
| Other                            | ** ** | **(0.4**          | **)**      | (4.3               | )          |
| **Total  retail change**         | ** ** | **$**             | **5.7**    |               | $          | 17.1 |   |
|                             |       |              |       |               |       |
| **Wholesale**                    |       |              |       |               |       |
| Rate                             | ** ** | **$**             | **(87.0**  | **)**              | $          | 29.8 |   |
| Volume                           | ** ** | **59.6**          |       | (60.2              | )          |
| **Total  wholesale change**      | ** ** | **$**             | **(27.4**  | **)**              | $          | (30.4 | ) |
|                             |       |              |       |               |       |
| **RTO  capacity and other**      |       |              |       |               |       |
| RTO capacity and other  revenues | ** ** | **$**             | **9.0**    |               | $          | 99.2 |   |
|                             |       |              |       |               |       |
| **Total  revenues change**       | ** ** | **$**             | **(12.7**  | **)**              | $          | 85.9 |   |

 

For the year ended December 31,2009, Revenues decreased $12.7 million, or 1%, to $1,588.9 million from$1,601.6 million in the prior year.  This decrease was primarily theresult of lower retail sales volume as well as decreased wholesale averageprices, partially offset by higher average retail rates, increased wholesalesales volume and an increase in RTO capacity and other revenues.  The revenue components for the year ended December 31,2009 are further discussed below:

 

·                  Retail revenues increased $5.7 millionresulting primarily from an 11% increase in average retail rates due largely tothe incremental effect of the recovery of costs under the third phase of theEIR combined with the implementation of the TCRR, RPM, Energy Efficiency andAlternative Energy riders, partially offset by a 9% decrease in sales volumedriven largely by the effects of the economic recession and milder weatherconditions.  The milder weatherconditions saw heating and cooling degree days decrease by 4% and 14% to 5,561days and 734 days, respectively.  As aresult, retail revenues had a favorable $119.6 million price variance and anunfavorable $113.5 million sales volume variance.

 

·                  Wholesale revenues decreased $27.4million primarily as a result of a 42% decrease in wholesale average pricespartially offset by a 40% increase in sales volume, resulting in an unfavorable$87.0 million wholesale price variance and a favorable $59.6 million salesvolume variance.

 

·                  RTO capacity and other revenues,consisting primarily of compensation for use of **DPL’s**transmission assets, regulation services, reactive supply and operatingreserves as well as capacity payments under the RPM construct, increased $9.0million compared to the same period in the prior year.  This increase was primarily the result ofadditional revenue of $29.4 million that was realized from the PJM capacityauction, partially offset by a decrease in PJM transmission and congestionrevenues of $21.0 million.  Beginning June 1,2009 when the TCRR and RPM rate riders became effective, the Ohio retailjurisdiction share of this change had no impact on net income.

 

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For the year ended December 31,2008, Revenues increased $85.9 million, or 6%, to $1,601.6 million from$1,515.7 million in the prior year.  This increase was primarily the resultof higher average rates for retail and wholesale sales as well as an increasein RTO capacity and other revenues, partially offset by lower retail andwholesale sales volumes.  The revenuecomponents for the year ended December 31, 2008 are further discussedbelow:

 

·                  Retail revenues increased $17.1 millionresulting primarily from a 4% increase in average retail rates due largely tothe second phase of the EIR, partially offset by a 2% decrease in sales volume. The decrease in retail sales volume was primarily a result of milderweather which caused cooling degree days to decrease by 26% to 853 days,combined with a 6% decrease in the volume of sales to industrialcustomers.  The lower sales volumes toindustrial customers were driven largely by the downturn in the economy whichseverely affected the automotive and other related industries in the regionresulting in plant closures and reduced production.  These decreases were partially offset by a 9%increase in heating degree days.

 

·                  Wholesale revenues decreased $30.4million primarily as a result of a 33% decrease in sales volume due largely tounplanned outages, partially offset by a 25% increase in wholesale averagerates, resulting in an unfavorable $60.2 million sales volume variance and afavorable $29.8 million wholesale price variance.

 

·                  RTO capacity and other revenues,consisting primarily of compensation for use of **DPL’s**transmission assets, regulation services, reactive supply and operatingreserves as well as capacity payments under the RPM construct, increased $99.2million compared to the prior year.  Thisincrease primarily resulted from additional income realized from the PJMcapacity auction and increased PJM transmission and congestion revenues.

 

## **DPL– Cost of Revenues**

 

For the year ended December 31,2009:

 

·                  Fuel costs, which include coal (net of gains onsales), gas, oil and emission allowances (net of gains on sales), increased$87.4 million, or 36%, compared to 2008, primarily due to the impact of lowergains realized from the sales of coal and excess emission allowances combinedwith a 7% increase in the usage of fuel due mainly to the improved performanceof our generating facilities.  In 2009, **DP&L** realized $56.3 million and $5.0 million in gainsfrom the sales of coal and excess emission allowances, respectively, comparedto $83.4 million and $34.8 million, respectively, during 2008.  Also contributing to the increase in fuelcosts was a 2% increase in the average cost of fuel consumed per kilowatt-hourlargely resulting from higher market prices of coal combined with outages atlower-cost units.

 

·                  Purchased power decreased $117.2 million compared to2008.  The net decrease in purchasedpower was due in part to lower volumes of purchased power and lower averagemarket rates of $72.3 million and $29.5 million, respectively.  The improved performance of our generatingfacilities, as mentioned in the preceding paragraph, resulted in increasedgeneration output and a reduced demand for higher-cost purchased power.  Also contributing to the decrease in purchasedpower were lower costs relating to other RTO charges as well as the netdeferral during 2009 of costs relating to **DP&L’s**transmission, capacity and other PJM-related charges which were incurred as amember of PJM.  This deferral isdiscussed in greater detail in Note 3 of Notes to Consolidated FinancialStatements.  These decreases werepartially offset by increased RTO capacity charges.  Wepurchase power to satisfy retail sales volume when generating facilities arenot available due to planned and unanticipated outages, or when market pricesare below the marginal costs associated with our generating facilities.

 

For the year ended December 31,2008:

 

·                  Fuel costs, which include coal (net of gains onsales), gas, oil, and emission allowances (net of gains on sales), decreased$85.2 million, or 26%, compared to 2007, primarily due to increases in netgains of $33.6 million from the sale of **DP&L’s**excess emission allowances and $82.8 million realized from the sale of **DP&L’s** coal combined with a decrease in the usage offuel due mainly to a 6% decrease in generation output largely attributable tounplanned outages.  These decreases werepartially offset by increased fuel prices. The successful installation of FGD equipment at Miami Fort, Killen andJ.M. Stuart stations has allowed us the ability to burn coal with a wide rangeof sulfur content and, accordingly, we purchase and sell coal as we seek toachieve optimum levels of production efficiency.  Gains or losses from sales of coal andemission allowances are recorded as components of fuel costs.

 

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·                  Purchased power costs increased $90.2million, or 31%, compared to 2007.  Theincrease in purchased power primarily results from a $15.3 million increaserelating to higher average market rates and a $98.4 million increase in RTOcapacity and other RTO charges, partially offset by a $23.5 million decreaserelating to lower volumes of purchased power. We purchase power to satisfyretail sales volume when generating facilities are not available due to plannedand unplanned outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

**DPL -Operation and Maintenance**

** **
| **$ in millions**                                      | ** ** | **2009  vs. 2008** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|
| Pension                                                     |       | $                  | 6.2        |   |
| Low-income payment  program *(1)*                           |       | 6.1                |       |
| Energy efficiency  programs *(1)*                           |       | 5.9                |       |
| Deferred compensation                                       |       | 4.1                |       |
| ESOP                                                        |       | 3.3                |       |
| Group insurance                                             |       | 3.2                |       |
| Deferred 2004/2005  storm costs and PJM administrative fees |       | (4.0               | )          |
| Generating facilities  operating and maintenance expenses   |       | (1.4               | )          |
| Other, net                                                  |       | 0.6                |       |
| **Total  operation and maintenance expense**                |       | $                  | 24.0       |   |

 

----

*(1) Thereis a corresponding increase in revenues associated with these programsresulting in no impact to net income.*

 

During the year ended December 31,2009, Operation and maintenance expense increased $24.0 million, or 8%,compared to 2008.  This variance wasprimarily the result of:

 

·                  higher pension costs due largely to adecline in the values of pension plan assets from 2008 and increased benefitcosts,

 

·                  increases in assistance for low-incomeretail customers which is funded by the USF revenue rate rider,

 

·                  expenses related to new energy efficiencyprograms put in place for our customers during 2009,

 

·                  increased deferred compensation costs,

 

·                  increases in employee benefit expensefunded by the ESOP and

 

·                  increased health insurance costs that were partiallyrelated to higher disability reserves.

 

These increases were partially offset by:

 

·                  lower amortization of regulatory assetsrelated to the 2004/2005 deferred storm costs and PJM administrative fees in2009 as these deferred costs were fully recovered through rates during 2008 andin the first quarter of 2009, respectively, and

 

·                  decreases in expenses for generatingfacilities largely due to unplanned outages in 2008 at lower-cost productionunits resulting in higher costs in that year. These decreases were partially offset by increased maintenance expensesassociated with unplanned outages at jointly-owned production units during2009.

 

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| **$ in millions**                       | ** ** | **2008  vs. 2007** | ** ** |
|----------------------------------------------|------------|--------------------|------------|
| Legal costs                                  |       | $                  | (17.6      | ) |
| Deferred compensation                        |       | (8.1               | )          |
| ESOP                                         |       | (7.1               | )          |
| Pension                                      |       | (2.4               | )          |
| Insurance settlement                         |       | 14.5               |       |
| Generating facilities  operating expenses    |       | 11.1               |       |
| Gain on sale of  corporate aircraft          |       | 6.0                |       |
| Turbine maintenance  costs                   |       | 4.1                |       |
| Boiler maintenance  costs                    |       | 1.0                |       |
| Other, net                                   |       | (2.6               | )          |
| **Total  operation and maintenance expense** |       | $                  | (1.1       | ) |

 

During the year ended December 31, 2008,Operation and maintenance expense decreased $1.1 million, or less than 1%, ascompared to 2007.  This variance wasprimarily due to:

 

·                  a decrease in legal costs due largely tothe litigation settlement with three of our former executives in May 2007,

 

·                  a decrease in deferred compensation costsassociated to a large degree with deferred compensation liabilities for thethree former executives,

 

·                  a decrease in employee compensation expenseassociated with the ESOP due mainly to the additional shares that were releasedfrom the ESOP in 2007 and

 

·                  lower pension costs primarily due to theplan funding made in November 2007.

 

These decreases were partially offset by:

 

·                  the 2007 insurance settlement whichreimbursed us for legal fees relating to the litigation with three formerexecutives,

 

·                  an increase in operating expenses largelydue to the operation of FGD and SCR equipment and related gypsum disposal,

 

·                  the gain on sale of the corporate aircraftrealized in 2007 and

 

·                  an increase in turbine maintenance costsincurred due to an unplanned outage at a jointly-owned production unit.

 

**DPL – Depreciation and Amortization**

 

During theyear ended December 31, 2009, Depreciation and amortization expenseincreased $7.8 million, or 6%, compared to 2008 primarily as a result of higherasset balances at the generating stations. These higher balances were due largely to the completion of the FGD projectsduring 2008.

 

During theyear ended December 31, 2008, Depreciation and amortization expenseincreased $2.9 million, or 2%, as compared to 2007.  This increase was primarily a result ofhigher plant balances due largely to the installation of the FGD equipment,partially offset by the impact of lower depreciation rates for generationproperty which were put into effect on August 1, 2007.

 

**DPL– General Taxes**

 

During theyear ended December 31, 2009, General taxes decreased $7.4 million, or 6%,compared to 2008 primarily due to lower property tax accruals in 2009 comparedto 2008 and lower kWh excise taxes resulting from lower retail sales volumes.

 

During theyear ended December 31, 2008, General taxes increased $13.7 million, or12%, as compared to 2007, primarily as a result of higher property taxes duemainly to capital improvements which have led to higher assessed propertyvalues, combined with increased tax rates.

 

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## **DPL**–Investment Income (Loss)

## ** **

During the year ended December 31,2009, Investment income (loss) decreased $4.2 million, or 117%, as compared to2008 primarily as a result of lower cash and short-term investment balancescombined with overall lower market yields on investments in 2009.  In addition, we also recorded a $1.4 millionexpense during 2009 relating to a loss incurred by DPL Capital Trust II, anonconsolidated wholly-owned subsidiary.

 

During the year ended December 31,2008, Investment income (loss) decreased $7.7 million, or 68%, as compared to2007.  This decrease was primarily theresult of:

 

·                  $3.2 million of gains realized in 2007from the sale of financial assets held in **DP&L’s**MasterTrust Plan for deferred compensation which were used for the settlement paymentto three former executives and

 

·                  lower cash and short-term investmentbalances combined with overall lower market yields on investments in 2008compared to 2007.

 

**DPL – NetGain on Settlement of Executive Litigation**

 

On May 21,2007, we settled litigation with three former executives.  In exchange for our payment of $25 million,the three former executives relinquished and dismissed all of their claims,including those related to deferred compensation, RSUs, MVE incentives, stockoptions and legal fees.  As a result ofthis settlement, during 2007, **DPL** realized anet pre-tax gain in continuing operations of approximately $31.0 million.  See Note 17 of Notes to ConsolidatedFinancial Statements.

 

**DPL****–****Interest Expense**

 

During the year ended December 31,2009, Interest expense decreased $7.7 million, or 8%, compared to 2008primarily due to:

 

·                  a $12.8 millionreduction in Interest expense due to the redemption of **DPL’s**$175 million 8.00%Senior Notes and the $100 million 6.25%Senior Notes in March 2009 and May 2008, respectively,

 

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

 

·                  $2.0 million of deferred interestcarrying costs on regulatory assets primarily associated with the 2008incremental storm costs and the riders for RPM and TCRR.  These regulatory assets are further discussedin Note 3 of Notes to Consolidated Financial Statements.

 

The above decreases werepartially offset by $6.4 million of lower capitalized interest in 2009 comparedto 2008, due largely to the completion of the FGD projects at our **DP&L** and partner-operated generating stations, as wellas a $3.7 million premium paid on the early redemption of a portion of **DPL’s** Note to DPL Capital Trust II which is due 2031.  In December 2009, **DPL**redeemed $52.4 million of this $195 million 8.125% note.  This redemption is further discussed in Note7 of Notes to Consolidated Financial Statements.

 

Duringthe year ended December 31, 2008, Interest expense increased $9.7 million,or 12%, as compared to 2007 primarily due to:

 

·                  $12.9 million of lowercapitalized interest due to the completion of the FGD projects at Miami Fort,Killen and J.M. Stuart stations,

 

·                  the write-off of unamortizeddebt issuance costs amounting to $1.6 million relating to pollution controlbonds following their repurchase from the bondholders in April 2008 and

 

·                  $0.9 million of additionalinterest expense associated with **DP&L’s** $90million variable rate pollution control bonds issued November 15, 2007 andrepurchased in April 2008.

 

Theseincreases were partially offset by a $7.0 million interest expense reductiondue to the redemption of the $225 million 8.25% Senior Notes in March 2007and the $100 million 6.25% Senior Notes in May 2008.

 

**DPL****–****Other Income (Deductions)**

 

During the year ended December 31,2009, there were no material fluctuations in the balances of Other income(deductions).

 

During the year ended December 31,2008, other deductions of $1.0 million changed from other income of $2.9million recorded in 2007.  The changefrom other income to other deductions primarily resulted from the recognitionin 2007 of a $2.1 million deferred credit related to a litigation settlement(which was not part of the executive litigation settlement).

 

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## **DPL**–Income Tax Expense

## ** **

For the year ended December 31,2009, Income tax expense increased $9.6 million, or 9%, compared to 2008, dueto estimate to actual adjustments of 2008 taxes related to the Internal RevenueCode Section 199 deduction, adjustments to deferred tax liabilities and a2008 settlement relating to the Ohio Franchise Tax.  These increases were partially offset by adecrease in pre-tax book earnings, estimate to actual adjustments of 2008 statetax liabilities, adjustments to our current tax receivables and the phase-outof the Ohio Franchise Tax.

 

During 2008, Income taxexpense decreased $19.6 million, or 16%, as compared to 2007, primarily due toa decrease in the effective tax rate reflecting the phase-out of the OhioFranchise Tax and the 2008 settlement of the Ohio Franchise Tax issue whichresulted in a recorded tax benefit of $8.5 million.

 

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

 

**Income Statement Highlights – DP&L**

** **
| ** **                                         | ** ** | **For  the years ended December 31,** | ** **  |
|----------------------------------------------------|------------|--------------------------------------------|-------------|
| **$ in millions**                             | ** ** | **2009**                                   | ** **  | **2008** | ** ** | **2007** | ** ** |
|                                               |       |                                       |        |   |   |   |   |
| **Revenues:**                                      |       |                                       |        |   |   |   |   |
| Retail                                             | ** ** | **$**                                      | **1,167.2** |   | $ | 1,075.3 |   | $ | 1,057.4 |   |
| Wholesale                                          | ** ** | **181.9**                                  |        | 293.5 |   | 331.7 |   |
| RTO revenues                                       | ** ** | **86.1**                                   |        | 108.3 |   | 87.4 |   |
| RTO capacity revenues                              | ** ** | **115.2**                                  |        | 95.8 |   | 30.9 |   |
| Total revenues                                     | ** ** | **$**                                      | **1,550.4** |   | $ | 1,572.9 |   | $ | 1,507.4 |   |
|                                               |       |                                       |        |   |   |   |   |
| **Cost  of revenues:**                             |       |                                       |        |   |   |   |   |
| Fuel costs                                         | ** ** | **$**                                      | **384.9**   |   | $ | 349.6 |   | $ | 317.2 |   |
| Gains from sale of coal                            | ** ** | **(56.3**                                  | **)**       | (83.4 | ) | (0.6 | ) |
| Gains from sale of  emission allowances            | ** ** | **(5.0**                                   | **)**       | (34.8 | ) | (1.2 | ) |
| Net fuel                                           | ** ** | **323.6**                                  |        | 231.4 |   | 315.4 |   |
|                                               |       |                                       |        |   |   |   |   |
| Purchased power                                    | ** ** | **46.9**                                   |        | 152.4 |   | 170.0 |   |
| RTO charges                                        | ** ** | **104.1**                                  |        | 126.6 |   | 101.9 |   |
| RTO capacity charges                               | ** ** | **131.7**                                  |        | 100.9 |   | 28.4 |   |
| Recovery / (Deferral)  of RTO related charges, net | ** ** | **(23.5**                                  | **)**       | — |   | — |   |
| Net purchased power                                | ** ** | **259.2**                                  |        | 379.9 |   | 300.3 |   |
|                                               |       |                                       |        |   |   |   |   |
| Total cost of revenues                             | ** ** | **$**                                      | **582.8**   |   | $ | 611.3 |   | $ | 615.7 |   |
|                                               |       |                                       |        |   |   |   |   |
| **Gross  margins** (a)                             | ** ** | **$**                                      | **967.6**   |   | $ | 961.6 |   | $ | 891.7 |   |
|                                               |       |                                       |        |   |   |   |   |
| Gross margin as a  percentage of revenues          |       | **62.4**                                   | **%**       | 61.1 | % | 59.2 | % |
|                                               |       |                                       |        |   |   |   |   |
| **Operating  income**                              | ** ** | **$**                                      | **421.9**   |   | $ | 436.6 |   | $ | 375.1 |   |

 

----

*(a)*       *Forpurposes of discussing operating results, we present and discuss gross margins.This format is useful to investors because it allows analysis and comparabilityof operating trends and includes the same information that is used bymanagement to make decisions regarding our financial performance.*

 

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**DP&L – Revenues**

 

Retail customers,especially residential and commercial customers, consume more electricity onwarmer and colder days.  Therefore,**DP&L’s** retail sales volume is impactedby the number of heating and cooling degree days occurring during a year. Since**DP&L** plans to utilizeits internal generating capacity to supply its retail customers’ needs first,increases in retail demand may decrease the volume of internal generationavailable to be sold in the wholesale market and vice versa.

 

Thewholesale market covers a multi-state area and settles on an hourly basisthroughout the year.  Factors impacting**DP&L’s** wholesale sales volume eachhour of the year include wholesale market prices;**DP&L’s** retail demand, retail demand elsewhere throughoutthe entire wholesale market area;**DP&L**and non-**DP&L** plants’availability to sell into the wholesale market and weather conditions acrossthe multi-state region.**  DP&L’s** plan is to makewholesale sales when market prices allow for the economic operation of itsgeneration facilities that are not being utilized to meet its retail demand orwhen margin opportunities exist between the wholesale sales and power purchaseprices.

 

Thefollowing table provides a summary of changes in Revenues from prior periods:

 
| **$ in millions**           | ** ** | **2009 vs. 2008** | ** ** | **2008  vs. 2007** | ** ** |
|----------------------------------|------------|-------------------|------------|--------------------|------------|
|                             |       |              |       |               |       |
| **Retail**                       |       |              |       |               |       |
| Rate                             | ** ** | **$**             | **191.7**  |               | $          | 43.0 |   |
| Volume                           | ** ** | **(99.7**         | **)**      | (20.8              | )          |
| Other                            | ** ** | **(0.1**          | **)**      | (4.3               | )          |
| **Total  retail change**         | ** ** | **$**             | **91.9**   |               | $          | 17.9 |   |
|                             |       |              |       |               |       |
| **Wholesale**                    |       |              |       |               |       |
| Rate                             | ** ** | **$**             | **(230.5** | **)**              | $          | 79.2 |   |
| Volume                           | ** ** | **118.9**         |       | (117.4             | )          |
| **Total  wholesale change**      | ** ** | **$**             | **(111.6** | **)**              | $          | (38.2 | ) |
|                             |       |              |       |               |       |
| **RTO  capacity and other**      |       |              |       |               |       |
| RTO capacity and other  revenues | ** ** | **$**             | **(2.8**   | **)**              | $          | 85.8 |   |
| ** **                       |       |              |       |               |       |
| **Total  revenues change**       | ** ** | **$**             | **(22.5**  | **)**              | $          | 65.5 |   |

 

For the year ended December 31,2009, Revenues decreased $22.5 million, or 1%, to $1,550.4 million from$1,572.9 million in the prior year.  This decrease was primarily theresult of lower wholesale average prices and lower retail sales volume,partially offset by higher average retail rates and increased wholesale salesvolume.  The revenue components for theyear ended December 31, 2009 are further discussed below:

 

·                  Retail revenues increased $91.9 millionresulting primarily from a 20% increase in average retail rates due largely tothe incremental effect of the third phase of the EIR and the implementation ofthe TCRR, RPM, Energy Efficiency and Alternative Energy rate riders, partiallyoffset by a 9% decrease in retail sales volume driven largely by the effects ofthe economic recession and milder weather conditions.  The milder weather conditions saw heating andcooling degree days decrease by 4% and 14% to 5,561 days and 734 days,respectively.  As a result, retailrevenues had a favorable $191.7 million price variance and an unfavorable $99.7million sales volume variance.

 

·                  Wholesale revenues decreased $111.6million primarily as a result of a 56% decrease in wholesale average prices,partially offset by a 41% increase in sales volume, resulting in an unfavorable$230.5 million wholesale price variance and a favorable $118.9 million salesvolume variance.

 

·                  RTO capacity and other revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, as well as capacity payments under the RPM construct, decreased $2.8million compared to the prior year.  Thisdecrease primarily resulted from $22.2 million of lower transmission andcongestion revenues, partially offset by additional revenue of $19.4 millionthat was realized from the PJM capacity auction.  Beginning June 1, 2009 when the TCRR andRPM rate deferral riders became effective, the Ohio retail jurisdiction shareof this change had no impact on Net income.

 

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For the year ended December 31,2008, Revenues increased $65.5 million, or 4%, to $1,572.9 million from$1,507.4 million in the same period of the prior year.  This increase wasprimarily the result of higher average rates for retail and wholesale sales, aswell as an increase in RTO capacity and other revenues, partially offset bylower retail and wholesale sales volumes. The revenue components for the year ended December 31, 2008 arefurther discussed below:

 

·                  Retail revenues increased $17.9 millionresulting primarily from a 4% increase in average retail rates due largely tothe second phase of the EIR, partially offset by a 2% decrease in salesvolume.  The decrease in retail salesvolume was primarily a result of milder weather which caused cooling degreedays to decrease by 26% to 853 days, combined with a 6% decrease in the volumeof sales to industrial customers.  Thelower sales volumes to industrial customers were driven largely by the downturnin the economy which has severely affected the automotive and other relatedindustries in the region resulting in plant closures and reducedproduction.  These decreases werepartially offset by a 9% increase in heating degree days.

 

·                  Wholesales revenues decreased $38.2million primarily as a result of a 35% decrease in sales volume due largely tounplanned outages, partially offset by a 37% increase in wholesale averagerates, resulting in an unfavorable $117.4 million sales volume variance and afavorable $79.2 million wholesale price variance.

 

·                  RTO capacity and other revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, as well as capacity payments under the RPM construct, increased $85.8million compared to the prior year.  Thisincrease primarily resulted from additional income realized from the PJMcapacity auction and increased PJM transmission and congestion revenues.

 

## **DP&L – Cost of Revenues**

## ** **

For the year ended December 31,2009:

 

·                  Fuel costs, which include coal (net ofgains on sales), gas, oil and emission allowances (net of gains on sales),increased $92.2 million, or 40%, compared to 2008, primarily due to the impactof lower gains realized from the sales of coal and excess emission allowancescombined with a 7% increase in the usage of fuel due mainly to the improvedperformance of our generating facilities. In 2009, **DP&L** realized $56.3 millionand $5.0 million in gains from the sales of coal and excess emissionallowances, respectively, compared to $83.4 million and $34.8 million,respectively, during 2008.  Alsocontributing to the increase in fuel costs was a 3% increase in the averagecost of fuel consumed per kilowatt-hour largely resulting from higher marketprices of coal combined with outages at lower-cost units.

 

·                  Purchased power decreased $120.7 millioncompared to 2008.  The net decrease inpurchased power was due in part to lower volumes of purchased power and loweraverage market rates of $74.8 million and $30.8 million, respectively.  The improved performance of our generatingfacilities, as mentioned in the preceding paragraph, resulted in increasedgeneration output and a reduced demand for higher-cost purchased power.  Also contributing to the decrease in purchasedpower were lower costs relating to other RTO charges as well as the netdeferral during 2009 of costs relating to **DP&L’s**transmission, capacity and other PJM-related charges which were incurred as amember of PJM.  This deferral isdiscussed in greater detail in Note 3 of Notes to Consolidated FinancialStatements.  These decreases werepartially offset by increased RTO capacity charges.  Wepurchase power to satisfy retail sales volume when generating facilities arenot available due to planned and unanticipated outages, or when market pricesare below the marginal costs associated with our generating facilities.

 

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For the year ended December 31,2008:

 

·                  Fuel costs, which include coal (net ofgains on sales), gas, oil and emission allowances (net of gains on sales),decreased $84.0 million, or 27%, compared to 2007, primarily due to increasesin net gains of $33.6 million from the sale of **DP&L’s**excess emission allowances and $82.8 million realized from the sale of **DP&L’s** coal combined with a decrease in the usage offuel due mainly to a 6% decrease in generation output largely attributable tounplanned outages.  These decreases werepartially offset by increased fuel prices. The successful installation of FGD equipment at Miami Fort, Killen andJ.M. Stuart stations has allowed us the ability to burn coal with a wide rangeof sulfur content and, accordingly, we purchase and sell coal as we seek toachieve optimum levels of production efficiency.  Gains or losses from sales of coal andemission allowances are recorded as components of fuel costs.

 

·                  Purchased power costs increased $79.6million, or 27%, compared to 2007.  Theincrease in purchased power primarily results from an $11.8 million increaserelating to higher average market rates and a $97.2 million increase in RTOcapacity and other RTO charges, partially offset by a $29.3 million decreaserelating to lower volumes of purchased power. We purchase power to satisfyretail sales volume when generating facilities are not available due to plannedand unplanned outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

**DP&L– Operation and Maintenance**

 
| **$ in millions**                                      | ** ** | **2009  vs. 2008** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|
| Pension                                                     |       | $                  | 6.1        |   |
| Low-income payment  program *(1)*                           |       | 6.1                |       |
| Energy efficiency  programs *(1)*                           |       | 5.9                |       |
| ESOP                                                        |       | 3.3                |       |
| Group insurance                                             |       | 3.2                |       |
| Deferred 2004/2005  storm costs and PJM administrative fees |       | (4.0               | )          |
| Generating facilities  operating and maintenance expenses   |       | (1.4               | )          |
| Other, net                                                  |       | 1.2                |       |
| **Total  operation and maintenance expense**                |       | $                  | 20.4       |   |

 

----

*(1)   There is a corresponding increase in Revenuesassociated with these programs resulting in no impact to Net income.*

 

Duringthe year ended December 31, 2009, Operation and maintenance expenseincreased $20.4 million, or 7%, compared to 2008.  This variance was primarily the result of:

 

·                  higher pension costs due largely to adecline in the values of pension plan assets from 2008 and increased benefitcosts,

 

·                  increases in assistance for low-incomeretail customers which is funded by the USF revenue rate rider,

 

·                  expenses related to new energy efficiencyprograms put in place for our customers during 2009,

 

·                  increases in employee benefit expensefunded by the ESOP and

 

·                  increased health insurance costs that werepartially related to higher disability reserves.

 

These increases are partially offset by:

 

·                  lower amortization of regulatory assetsrelated to the 2004/2005 deferred storm costs and PJM administrative fees in2009 as these deferred costs were fully recovered through rates during 2008 andin the first quarter of 2009, respectively, and

 

·                  decreases in expenses for generatingfacilities largely due to unplanned outages in 2008 at lower-cost productionunits resulting in higher costs in that year. These decreases were partially offset by increased maintenance expensesassociated with unplanned outages at jointly-owned production units during2009.

 

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| **$ in millions**                       | ** ** | **2008  vs. 2007** | ** ** |
|----------------------------------------------|------------|--------------------|------------|
| ESOP                                         |       | $                  | (7.0       | ) |
| Deferred compensation                        |       | (5.8               | )          |
| Legal costs                                  |       | (3.9               | )          |
| Pension                                      |       | (2.4               | )          |
| Generating facilities  operating expenses    |       | 11.1               |       |
| Turbine maintenance  costs                   |       | 4.1                |       |
| Boiler maintenance  costs                    |       | 1.0                |       |
| Other, net                                   |       | (5.9               | )          |
| **Total  operation and maintenance expense** |       | $                  | (8.8       | ) |

 

During the year ended December 31, 2008,Operation and maintenance expense decreased $8.8 million, or 3%, as compared to2007.  This variance was primarily dueto:

 

·                  a decrease in employee compensation expense associatedwith the ESOP due mainly to the additional shares that were released from theESOP in 2007,

 

·                  a decrease in deferred compensation costs associatedto a large degree with deferred compensation liabilities for three formerexecutives,

 

·                  a decrease in legal fees and

 

·                  lower pension costs primarily due to the plan fundingmade in November 2007.

 

These decreases werepartially offset by:

 

·                  an increase in operating expenses at our generatingfacilities largely due to the operation of the FGD and SCR equipment andrelated gypsum disposal,

 

·                  an increase in turbine maintenance costs incurred dueto an unplanned outage at a jointly-owned production unit and

 

·                  an increase in boiler maintenance expenses in 2008.

 

**DP&L– Depreciation and Amortization**

 

During the year ended December 31,2009, Depreciation and amortization expense increased $7.7 million, or 6%, ascompared to 2008 primarily as a result of higher asset balances at thegenerating stations.  These higherbalances were due largely to the completion of the FGD projects during 2008.

 

During theyear ended December 31, 2008, Depreciation and amortization expenseincreased $3.3 million, or 3%, as compared to 2007.  This increase was primarily a result ofhigher plant balances due largely to the installation of FGD equipment,partially offset by the impact of lower depreciation rates for generationproperty which were put into effect on August 1, 2007.

 

**DP&L– General Taxes**

 

During theyear ended December 31, 2009, General taxes decreased $7.4 million, or 6%,compared to 2008 primarily due to lower property tax accruals in 2009 comparedto 2008 and lower kWh excise taxes resulting from lower retail sales volumes.

 

During theyear ended December 31, 2008, General taxes increased $13.9 million, or13%, as compared to 2007, primarily as a result of higher property taxes duemainly to capital improvements which have led to higher assessed propertyvalues, combined with increased tax rates.

 

**DP&L – Investment Income**

 

During the year ended December 31,2009, Investment income (loss) decreased $4.2 million, or 60%, as compared to2008 primarily as a result of lower gains realized from the sale of **DPL**common stock from **DP&L’s**Master Trust Plan used for deferred compensation distributions as well as lowercash and short-term investment balances combined with overall lower marketyields on investments in 2009.

 

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During the year ended December 31,2008, Investment income (loss) decreased $16.7 million, or 70%, as compared to2007.  This decrease was primarily theresult of:

 

·                  $14.8 million of gains realized in 2007on the transfer of **DPL** commonstock to the **DP&L** Retirement Income PlanTrust (Pension) and

 

·                  $3.2 million of gains realized in 2007from the sale of financial assets held in **DP&L’s**Master Trust Plan for deferred compensation which were used for the settlementpayment to three former executives.

 

**DP&L – Net Gain on Settlementof Executive Litigation**

 

On May 21, 2007, wesettled litigation with three former executives.  In exchange for our payment of $25 million,the three former executives relinquished and dismissed all of their claims,including those related to deferred compensation, RSUs, MVE incentives, stockoptions and legal fees.  As a result ofthis settlement, in 2007, **DP&L**realizeda net pre-tax gain in continuing operations of approximately $35.3million.  See Note 17 of Notes toConsolidated Financial Statements.

 

**DP&L –****Interest Expense**

 

During the year ended December 31,2009, Interest expense increased $2.0 million, or 5%, as compared to 2008primarily as a result of $6.4 million of lower capitalized interest due largelyto the completion of the FGD projects at our own and partner-operatedgenerating stations.  This increase waspartially offset by:

 

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

 

·                  $2.0 million of deferred interest carrying costs onregulatory assets primarily associated with the 2008 incremental storm costsand the riders for RPM and TCRR.  TheseRegulatory assets are further discussed in Note 3 of Notes to ConsolidatedFinancial Statements.

 

During the year ended December 31,2008, Interest expense increased $14.2 million, or 64%, as compared to 2007primarily as a result of:

 

·                  $12.9 million of lower capitalized interest due to thecompletion of the FGD projects at Miami Fort, Killen, and J.M. Stuart stations,

 

·                  the write-off of unamortized debt issuance costsamounting to $1.6 million relating to **DP&L’s** $90million variable rate pollution control bonds following their repurchase fromthe bondholders in April 2008 and

 

·                  $0.9 million of additional Interest expense associatedwith **DP&L’s**$90 million variable ratepollution control bonds issued in November 2007 and repurchased in April 2008.

 

**DP&L –****Other Income (Deductions)**

 

During the year ended December 31,2009, there were no material fluctuations in the balances of Other income(deductions).

 

During the year ended December 31,2008, Other deductions of $1.1 million changed from Other income of $2.9million recorded in 2007.  The changefrom Other income to Other deductions primarily resulted from the recognitionin 2007 of a $2.1 million deferred credit related to a litigation settlement(which was not part of the executive litigation settlement).

 

## **DP&L–**IncomeTax Expense

## ** **

For the year ended December 31,2009, Income tax expense increased $4.3 million, or 4%, compared to 2008, dueto estimate to actual adjustments of 2008 income taxes related to the InternalRevenue Code Section 199 deduction, adjustments to deferred taxliabilities and a 2008 settlement relating to the Ohio Franchise Tax.  These increases were partially offset by adecrease in pre-tax book earnings, estimate to actual adjustments of 2008 statetax liabilities, adjustments to our current tax receivables and the phase-outof the Ohio Franchise Tax.

 

During 2008, Income taxexpense decreased $22.9 million, or 16%, as compared to 2007, primarily due toa decrease in the effective tax rate reflecting the phase-out of the OhioFranchise Tax and the 2008 settlement of the Ohio Franchise Tax issue whichresulted in a recorded tax benefit of $8.5 million.

 

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**FINANCIAL CONDITION, LIQUIDITY ANDCAPITAL REQUIREMENTS**

 

**DPL’s**financialcondition, liquidity and capital requirements include the consolidated resultsof its principal subsidiary **DP&L**.  All material intercompany accounts andtransactions have been eliminated in consolidation.  The following table provides a summary of thecash flows for **DPL** and **DP&L**:

 

**DPL**

 
| ** **                                        | ** ** | **For the years ended  December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| **$ in millions**                            | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                              | ** ** | ** **                                 |       |   |   |   |   |
| Net cash provided by  operating activities        | ** ** | **$**                                      | **526.1**  |   | $ | 363.2 |   | $ | 318.1 |   |
| Net cash used for  investing activities           | ** ** | **(166.1**                                 | **)**      | (248.5 | ) | (187.8 | ) |
| Net cash used for  financing activities           | ** ** | **(347.6**                                 | **)**      | (187.1 | ) | (257.6 | ) |
|                                              | ** ** | ** **                                 |       |   |   |   |   |
| Net change                                        | ** ** | **$**                                      | **12.4**   |   | $ | (72.4 | ) | $ | (127.3 | ) |
| Cash and cash  equivalents at beginning of period | ** ** | **62.5**                                   |       | 134.9 |   | 262.2 |   |
| Cash and cash  equivalents at end of period       | ** ** | **$**                                      | **74.9**   |   | $ | 62.5 |   | $ | 134.9 |   |

 

**DP&L**

 
| ** **                                        | ** ** | **For the years ended  December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| **$ in millions**                            | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                              | ** ** | ** **                                 |       |   |   |   |   |
| Net cash provided by  operating activities        | ** ** | **$**                                      | **515.1**  |   | $ | 394.6 |   | $ | 353.0 |   |
| Net cash used for  investing activities           | ** ** | **(167.4**                                 | **)**      | (242.0 | ) | (343.2 | ) |
| Net cash used for  financing activities           | ** ** | **(311.4**                                 | **)**      | (145.0 | ) | (42.7 | ) |
|                                              | ** ** | ** **                                 |       |   |   |   |   |
| Net change                                        | ** ** | **$**                                      | **36.3**   |   | $ | 7.6 |   | $ | (32.9 | ) |
| Cash and cash  equivalents at beginning of period | ** ** | **20.8**                                   |       | 13.2 |   | 46.1 |   |
| Cash and cash  equivalents at end of period       | ** ** | **$**                                      | **57.1**   |   | $ | 20.8 |   | $ | 13.2 |   |

 

The significant itemsthat have impacted the cash flows for **DPL** and **DP&L** are further discussed in greater detail below:

 

**Net CashProvided by Operating Activities**

 

The tariff-based revenuefrom our energy business continues to be the principal source of cash fromoperating activities while our primary uses of cash include payments for fuel, purchasedpower, operation and maintenance expenses, interest and taxes.  Management believes that the diversifiedretail customer mix of residential, commercial and industrial classes coupledwith rate relief approved by the PUCO provides us with a reasonably predictablegross cash flow from operations.

 

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**DPL – NetCash provided by Operating Activities**

 

**DPL’s** Net cash provided by operatingactivities for the years ended December 31, 2009, 2008 and 2007 can besummarized as follows:

 
| **$ in millions**                                  | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                                    |       |       |       |     |       |     |       |
| Earnings from  continuing operations                    | ** ** | **$**      | **229.1**  |     | $          | 244.5    |       | $ | 211.8 |   |
| Depreciation and  amortization                          | ** ** | **145.5**  |       | 137.7    |       | 134.8    |       |
| Deferred income taxes                                   | ** ** | **201.6**  |       | 43.1     |       | 3.1      |       |
| Income tax settlement                                   |       | —     |       | (42.0    | )          | —   |       |
| Regulatory expenditures  under TCRR/RPM and 2008 storms |       | **(15.7**  | **)**      | (13.1    | )          | —   |       |
| Net gain on settlement  of executive litigation         | ** ** | **—** |       | —   |       | (31.0    | )          |
| Other                                                   | ** ** | **(34.4**  | **)**      | (7.0     | )          | (0.6     | )          |
| Net cash provided by  operating activities              | ** ** | **$**      | **526.1**  |     | $          | 363.2    |       | $ | 318.1 |   |

 

For the year ended December 31,2009, Net cash provided by operating activities was primarily a result ofEarnings from continuing operations adjusted for noncash depreciation andamortization, combined with the following significant transactions:

 

·      the$201.6 million increase to Deferred income taxes primarily results from therecognition of certain tax benefits for 2008 and 2009 relating to a change inthe tax accounting method for deductions pertaining to repairs, depreciationand mixed service costs.  Primarily dueto the recognition of these benefits during 2009, **DPL**received a net cash refund of state and federal income taxes totaling $94.6million and, in addition, was able to offset $69.0 million of these benefitsagainst income tax liabilities accrued in 2009;

 

·      the$15.7 million of cash used to pay for transmission, capacity and otherPJM-related costs incurred during 2009, net of recoveries.  These costs were recorded as a Regulatoryasset in accordance with the provisions of GAAP relating to regulatory accounting(see Note 3 of Notes to Consolidated Financial Statements) and are expected tobe collected from customers during future years.

 

·      Otherrepresents items that had a current period cash flow impact and includeschanges in working capital and other future rights or obligations to receive orto pay cash.  These items are primarilyimpacted by, among other factors, the timing of when cash payments are made forfuel, purchased power, operating costs, interest and taxes, and when cash isreceived from our utility customers and from the sales of coal and excessemission allowances.

 

For the year ended December 31,2008,****Net cash provided by operatingactivities was primarily a result of Earnings from continuing operationsadjusted for noncash depreciation and amortization, combined with the followingsignificant transactions:

 

·      Deferredincome taxes increased by $43.1 million as a result of the acceleration of thededuction of newly installed FGD and SCR equipment for tax purposes, which hadthe effect of reducing current period income tax payments and increasing cashon hand,

 

·      the$42 million cash payment made in 2008 to the ODT following a tax settlementagreement and

 

·      the$13.1 million of cash used to restore damage of a non-capital nature caused bythe hurricane-force winds of September 2008 and other major 2008storms.  These costs were recorded as aRegulatory asset in accordance with the provisions of GAAP relating toregulatory accounting (see Note 3 of Notes to Consolidated Financial Statements)and are expected to be collected from customers during future years.

 

·      Otherrepresents items that had a current period cash flow impact and includeschanges in working capital and other future rights or obligations to receive orto pay cash, such as regulatory assets and liabilities.

 

For the year ended December 31,2007, Net cash provided by operating activities was primarily a result ofEarnings from continuing operations adjusted for noncash depreciation andamortization and the noncash impact of the net gain realized on settlement ofthe executive litigation.  Other representsitems that had a current period cash flow impact and includes changes inworking capital and other future rights or obligations to receive or to paycash, such as regulatory assets and liabilities.

 

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**DP&L –Net Cash provided by Operating Activities**

 

**DP&L’s** Net cash provided by operatingactivities for the years ended December 31, 2009, 2008 and 2007 can besummarized as follows:

 
| **$ in millions**                                 | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                                   |       |       |       |     |       |     |       |
| Net income                                             | ** ** | **$**      | **258.9**  |     | $          | 285.8    |       | $ | 271.6 |   |
| Depreciation and  amortization                         | ** ** | **135.5**  |       | 127.8    |       | 124.5    |       |
| Deferred income taxes                                  | ** ** | **200.1**  |       | 40.9     |       | (0.2     | )          |
| Income tax settlement                                  |       | —     |       | (42.0    | )          | —   |       |
| Regulatory expenditures  under TCRR/RPMand 2008 storms |       | **(15.7**  | **)**      | (13.1    | )          | —   |       |
| Net gain on settlement  of executive litigation        | ** ** | **—** |       | —   |       | (35.3    | )          |
| Other                                                  | ** ** | **(63.7**  | **)**      | (4.8     | )          | (7.6     | )          |
| Net cash provided by  operating activities             | ** ** | **$**      | **515.1**  |     | $          | 394.6    |       | $ | 353.0 |   |

 

For the years ended December 31,2009, 2008 and 2007, the significant components of **DP&L’s**Net cash provided by operating activities are similar to those discussed under **DPL’s** Net cash provided by operating activities above.

 

**DPL and DP&L – Net Cash usedfor Investing Activities**

 

**DPL andDP&L’s**Netcash used for investing activities for the years ended December 31, 2009,2008 and 2007 can be summarized as follows:

 
| **$ in millions**                                     | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                                       |       |       |       |     |       |     |       |
| **DP&L** environmental-related capital  expenditures   | ** ** | **$**      | **(21.2**  | **)**    | $          | (90.2    | )          | $ | (208.8 | ) |
| **DP&L** capital upgrades due to 2008 storms           | ** ** | **—** |       | (18.6    | )          | —   |       |
| **DP&L**other  plant-related asset acquisitions        | ** ** | **(146.2** | **)**      | (133.2   | )          | (134.4   | )          |
| **DP&L’s**net cash used  for investing activities | ** ** | **$**      | **(167.4** | **)**    | $          | (242.0   | )          | $ | (343.2 | ) |
|                                                       |       |       |       |     |       |     |       |
| Proceeds from sales of **DPL** assets                      | ** ** | **—** |       | —   |       | 158.4    |       |
| Other                                                      | ** ** | **1.3**    |       | (6.5     | )          | (3.0     | )          |
| **DPL’s** net cash used for investing activities      | ** ** | **$**      | **(166.1** | **)**    | $          | (248.5   | )          | $ | (187.8 | ) |

 

For all years, theenvironmental-related capital expenditures relate to cash outflows incurredduring the installation and upgrades of FGD and SCR equipment.  Other plant-related asset acquisitions relateto investments in other generation, transmission and distribution equipment.

 

For the year ended December 31,2009,**DP&L**continued to see reductionsin its environmental-related capital expenditures due to the completion of FGDand SCR projects.  The expenditures in2009 relate to the construction of FGD and SCR equipment at the Conesvillegeneration station which was substantially completed and placed into serviceduring the fourth quarter of 2009.  **DP&L** also continued to make upgrades and otherinvestments in other generation, transmission and distribution equipment.

 

For the year ended December 31,2008,**DP&L** saw reduced cash outflowsassociated with environmental-related expenditures compared to 2007 due toprojects relating to the installation of FGD and SCR equipment that had eitherbeen completed or were nearing completion. In addition, **DP&L** wasforced to replace a portion of its distribution lines and equipment followingthe damage caused by the hurricane-force winds of September 2008 and other2008 storms.

 

For the year ended December 31,2007,****the proceeds received from asset salesrelate to the sale of two DPLE peaker units and an aircraft previously owned bya **DPL** subsidiary.

 

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**DPL – Net Cash used for FinancingActivities**

 

**DPL’s** Net cash used for financing activitiesfor the years ended December 31, 2009, 2008 and 2007 can be summarized asfollows:

 
| **$ in  millions**                  | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                     |       |       |       |     |       |     |       |
| Retirement of long-term  debt            | ** ** | **$**      | **(227.4** | **)**    | $          | (100.0   | )          | $ | (225.0 | ) |
| Dividends paid on  common stock          | ** ** | **(128.8** | **)**      | (120.5   | )          | (111.7   | )          |
| Repurchase of DPL common  stock          | ** ** | **(64.4**  | **)**      | —   |       | —   |       |
| Repurchase of warrants                   | ** ** | **(25.2**  | **)**      | —   |       | —   |       |
| Proceeds from exercise  of warrants      | ** ** | **77.7**   |       | —   |       | —   |       |
| Cash withdrawn from  restricted funds    | ** ** | **14.5**   |       | 32.5     |       | 63.2     |       |
| Proceeds from exercise  of stock options | ** ** | **9.0**    |       | 2.2      |       | 14.6     |       |
| Other                                    | ** ** | **(3.0**   | **)**      | (1.3     | )          | 1.3      |       |
| Net cash used for  financing activities  | ** ** | **$**      | **(347.6** | **)**    | $          | (187.1   | )          | $ | (257.6 | ) |

 

For the year ended December 31,2009,**DPL** redeemed long-term debt totaling$227.4 million and paid common stock dividends of $128.8 million.  Under a stock repurchase program approved bythe Board of Directors in October 2009 (see Note 14 of Notes toConsolidated Financial Statements), **DPL** repurchasedapproximately 2.4 million **DPL** commonshares for $64.4 million.  In addition, **DPL** repurchased 8.6 million warrants for $25.2 million.  **DPL’s** cashinflows during the period include $77.7 million received from the cash exerciseof 3.7 million warrants and the withdrawal of the remaining balance ofrestricted funds of $14.5 million which was used primarily to fund theconstruction of FGD equipment at the Conesville generation station.  **DPL** alsoreceived $9.0 million from option holders who exercised stock options due, inpart, to the increase in our average stock price compared to 2008.

 

For the year ended December 31,2008, **DPL** paid common stock dividends of$120.5 million, retired $100 million of long-term debt and withdrew $32.5million from restricted funds held in trust to pay for environmental-relatedcapital expenditures.  In comparison to2007,****the lower cash withdrawals fromrestricted funds in 2008 were primarily due to the timing of costs incurredrelating to the installation of FGD and SCR equipment.  In addition, the****reducedcash proceeds in 2008 from the exercise of stock options were a direct resultof fewer options exercised.

 

For the year ended December 31,2007, **DPL** retired $225 million of long-termdebt, paid common stock dividends of $111.7 million, withdrew $63.2 millionfrom restricted funds to pay for environmental-related capital expenditures andreceived $14.6 million from the exercise of stock options.

 

**DP&L –Net Cash used for Financing Activities**

 

**DP&L’s** Net cash used for financing activitiesfor the years ended December 31, 2009, 2008 and 2007 can be summarized asfollows:

 
| **$ in millions**                     | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                       |       |       |       |     |       |     |       |
| Dividends paid on  common stock to parent  | ** ** | **$**      | **(325.0** | **)**    | $          | (155.0   | )          | $ | (125.0 | ) |
| Net loan (paid to) /  received from parent | ** ** | **—** |       | (20.0    | )          | 20.0     |       |
| Cash withdrawn from  restricted funds      | ** ** | **14.5**   |       | 32.5     |       | 63.2     |       |
| Other                                      | ** ** | **(0.9**   | **)**      | (2.5     | )          | (0.9     | )          |
| Net cash used for  financing activities    | ** ** | **$**      | **(311.4** | **)**    | $          | (145.0   | )          | $ | (42.7 | ) |

 

For the year ended December 31,2009,**DP&L** paid $325 million individends to **DPL**and withdrew the remainingbalance of $14.5 million from restricted funds to pay for the Conesville FGDand SCR projects.

 

For the year ended December 31,2008,**DP&L** paid $155 million individends to **DPL,** withdrew $32.5 million fromrestricted funds held in trust and repaid the net $20 million short-term loanfrom **DPL**.

 

For the year ended December 31,2007, **DP&L** paid $125 million in dividendsto **DPL,** withdrew $63.2 million fromrestricted funds held in trust and received a net $20 million short-term loanfrom **DPL**.

 

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**Liquidity**

 

We expect our existingsources of liquidity to remain sufficient to meet our anticipatedobligations.  Our business is capitalintensive, requiring significant resources to fund operating expenses,construction expenditures, scheduled debt maturities, and interest and dividendpayments.  For 2010 and in subsequentyears, we expect to satisfy these requirements with a combination of cash fromoperations and funds from the capital markets as our internal liquidity needsand market conditions warrant.  We alsoexpect that the borrowing capacity under credit facilities will continue to beavailable to manage working capital requirements during those periods.

 

We have access to $320million of short-term financing under two revolving credit facilities.  The first facility for $220 million expires November 2011and has three participating banks; the lead bank has a total commitment of 36%while the other two have commitments of 32% each.  The second facility is a 364-day $100 millionfacility that matures April 2010.  Atotal of six banks participate in this facility, with no bank having more than26% of the total commitment.  The twobank groups have no common members.  Weare currently evaluating the impact the maturity of the $100 million facilitywill have on our future liquidity and would expect to be able to renew orreplace this facility as needed.

 
| ** **             | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** | **Amounts**                | ** ** |
|------------------------|------------|------------|------------|--------------|------------|----------------|------------|----------------------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** | **available as of**        | ** ** |
| **$ in millions** | ** ** | **Type**   | ** ** | **Maturity** | ** ** | **Commitment** | ** ** | **December 31, 2009** | ** ** |
|                   |       |       |       |         |       |           |       |                       |       |
| **DP&L**           |       | Revolving  |       | 11/21/2011   |       | $              | 220.0      |                       | $          | 220.0 |   |
| ** **             |       |       |       |         |       |           |       |                       |       |
| **DP&L**           |       | Revolving  |       | 04/20/2010   |       | $              | 100.0      |                       | $          | 100.0 |   |
|                   |       |       |       |         |       | $              | 320.0      |                       | $          | 320.0 |   |

 

The$220 million revolver has a $50 million Letter of Credit (LOC) sublimit.  As of December 31,2009, there were no outstanding LOCs.

 

Cashand cash equivalents for **DPL** and **DP&L** amounted to $74.9 million and $57.1 million,respectively, at December 31,2009.

 

**CapitalRequirements**

 

**CONSTRUCTION ADDITIONS**

 
| ** **             | ** ** | **Actual** | ** ** | **Projected** | ** ** |
|------------------------|------------|------------|------------|---------------|------------|
| **$ in millions** | ** ** | **2009**   | ** ** | **2008**      | ** ** | **2007** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** |
|                   |       |       |       |          |       |   |   |   |   |   |   |   |   |
| **DPL**                | ** ** | **$**      | **145**    |          | $          | 228 |   | $ | 347 |   | $ | 210 |   | $ | 200 |   | $ | 180 |   |
|                   |       |       |       |          |       |   |   |   |   |   |   |   |   |
| **DP&L**           | ** ** | **$**      | **144**    |          | $          | 225 |   | $ | 344 |   | $ | 200 |   | $ | 190 |   | $ | 175 |   |

 

Capital projects aresubject to continuing review and are revised in light of changes in financialand economic conditions, load forecasts, legislative and regulatorydevelopments and changing environmental standards, among other factors.  **DPL**isprojecting to spend an estimated $590 million in capital projects for theperiod 2010 through 2012, mostly through its subsidiary **DP&L**.

 

Planned constructionadditions for 2010 relate primarily to new investments in and upgrades to **DP&L’s** power plant equipment andtransmission and distribution systems. In addition to our capital requirements above, on August 4, 2009, **DP&L** re-filed its smart grid and advanced meteringinfrastructure (AMI) business cases with the PUCO under which it would spendapproximately $270 million on capital projects during the period 2010 through2012.  Approval from the PUCO of thesecases is still pending.  The re-filing atthe PUCO is further discussed in Note 3 of Notes to Consolidated FinancialStatements.

 

Our ability to completecapital projects and the reliability of future service will be affected by ourfinancial condition, the availability of internal funds and the reasonable costof external funds.  We expect to financeour construction additions with a combination of cash on hand, short-termfinancing, long-term debt and cash flows from operations.

 

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**Credit Ratings**

 

The following tableoutlines the debt credit ratings and outlook of each company, along with theeffective dates of each rating and outlook for **DPL**and**DP&L**.

 
| ** **                             | ** ** | **DPL****(a)** | ** ** | **DP&L****(b)** | ** ** | **Outlook** | ** ** | **Effective**      |
|----------------------------------------|------------|----------------|------------|---------------------|------------|-------------|------------|--------------------|
|                                   |       |           |       |                |       |        |       |               |
| Fitch Ratings                          |       | A-             |       | AA-                 |       | Stable      |       | November 2009 |
| Moody’s Investors  Service        |       | Baa1           |       | Aa3                 |       | Stable      |       | August 2009   |
| Standard &  Poor’s Corp. |       | BBB+           |       | A                   |       | Stable      |       | April 2009    |

 

----

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

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

 

**Off-BalanceSheet Arrangements**

 

**DPL – Guarantees**

 

In the normal course ofbusiness, **DPL**enters into various agreements with itswholly-owned subsidiaries, DPLE and DPLER, providing financial or performanceassurance to third parties.  Theseagreements are entered into primarily to support or enhance thecreditworthiness otherwise attributed to DPLE and DPLER on a stand-alone basis, thereby facilitating the extension ofsufficient credit to accomplish DPLE’s and DPLER’s intended commercialpurposes.

 

At December 31,2009, **DPL** had $51 million ofguarantees to third parties for future financial or performance assurance undersuch agreements, on behalf of DPLE and DPLER. The guarantee arrangements entered into by**DPL**with these third parties cover all present and future obligations of DPLE andDPLER to such beneficiaries and are terminable at any time by **DPL** upon written notice to the beneficiaries.  The carrying amount of obligations for commercialtransactions covered by these guarantees and recorded in our ConsolidatedBalance Sheets was $0.6 million at December 31, 2009 and $1.6 millionat December 31, 2008.

 

In two separatetransactions in November and December 2006, **DPL**also agreed to be a guarantor of the obligations of DPLE regarding the sale in April 2007of the Darby Electric Peaking Station to American Electric Power and the saleof the Greenville Electric Peaking Station to Buckeye Electric Power, Inc.  In both cases, **DPL**agreed to guarantee the obligations of DPLE over a multiple-year period asfollows:

 
| **$ in millions** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Darby                  |       | $        | 23.0       |     | $          | 15.3     |       | $ | 7.7 |   |
|                   |       |     |       |     |       |     |       |
| Greenville             |       | $        | 11.1       |     | $          | 7.4      |       | $ | 3.7 |   |

 

In 2009, neither **DPL** nor **DP&L**incurred any losses related to the guarantees of DPLE’s obligations and webelieve it is remote that either **DPL**or **DP&L** would be required toperform or incur any losses in the future associated with any of the aboveguarantees of DPLE’s obligations.

 

**DP&L– Equity Ownership Interest**

 

**DP&L** owns a 4.9% equity ownership interest inOVEC, an electric generation company.  Asof December 31, 2009, **DP&L** could be responsible for therepayment of 4.9%, or $54.4 million, of a $1,110 million debt obligation thatmatures in 2026.  This would only happenif OVEC defaulted on its debt payments. As of December 31, 2009,we have no knowledge of such a default.

 

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**Contractual Obligations and Commercial Commitments**

 

We enter into various contractualobligations and other commercial commitments that may affect the liquidity ofour operations.  At December 31,2009, these include:

 
| ** **                                         | ** ** | ** ** | ** ** | **Payment Year** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------------|------------|
| **$ in millions**                             | ** ** | **Total**  | ** ** | **2010**         | ** ** | **2011-2012** | ** ** | **2013-2014** | ** ** | **Thereafter** | ** ** |
| **DPL**                                            |       |       |       |             |       |   |   |   |   |   |   |
|                                               |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                                     |       | $          | 1,324.4    |             | $          | 100.0 |   | $ | 297.4 |   | $ | 470.0 |   | $ | 457.0 |   |
| Interest payments                                  |       | 740.0      |       | 71.5             |       | 115.1 |   | 71.4 |   | 482.0 |   |
| Pension and  postretirement payments               |       | 253.8      |       | 23.8             |       | 48.9 |   | 51.1 |   | 130.0 |   |
| Capital leases                                     |       | 0.6        |       | 0.6              |       | — |   | — |   | — |   |
| Operating leases                                   |       | 0.5        |       | 0.3              |       | 0.2 |   | — |   | — |   |
| Coal contracts (a)                                 |       | 1,694.3    |       | 498.1            |       | 577.2 |   | 184.4 |   | 434.6 |   |
| Limestone contracts (a)                            |       | 48.4       |       | 5.5              |       | 11.4 |   | 12.0 |   | 19.5 |   |
| Purchase orders and  other contractual obligations |       | 162.6      |       | 56.9             |       | 84.9 |   | 14.6 |   | 6.2 |   |
| Total contractual  obligations                     |       | $          | 4,224.6    |             | $          | 756.7 |   | $ | 1,135.1 |   | $ | 803.5 |   | $ | 1,529.3 |   |
|                                               |       |       |       |             |       |   |   |   |   |   |   |
| **DP&L**                                       |       |       |       |             |       |   |   |   |   |   |   |
|                                               |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                                     |       | $          | 884.4      |             | $          | 100.0 |   | $ | — |   | $ | 470.0 |   | $ | 314.4 |   |
| Interest payments                                  |       | 454.8      |       | 39.4             |       | 78.3 |   | 48.2 |   | 288.9 |   |
| Pension and  postretirement payments               |       | 253.8      |       | 23.8             |       | 48.9 |   | 51.1 |   | 130.0 |   |
| Capital leases                                     |       | 0.6        |       | 0.6              |       | — |   | — |   | — |   |
| Operating leases                                   |       | 0.5        |       | 0.3              |       | 0.2 |   | — |   | — |   |
| Coal contracts (a)                                 |       | 1,694.3    |       | 498.1            |       | 577.2 |   | 184.4 |   | 434.6 |   |
| Limestone contracts (a)                            |       | 48.4       |       | 5.5              |       | 11.4 |   | 12.0 |   | 19.5 |   |
| Purchase orders and  other contractual obligations |       | 164.8      |       | 58.0             |       | 86.0 |   | 14.6 |   | 6.2 |   |
| Total contractual  obligations                     |       | $          | 3,501.6    |             | $          | 725.7 |   | $ | 802.0 |   | $ | 780.3 |   | $ | 1,193.6 |   |

 

----

(a)   Total at **DP&L**-operatedunits

 

Long-term debt:

 

**DPL’s** Long-term debt as of December 31,2009, consists of **DP&L’s** firstmortgage bonds and tax-exempt pollution control bonds and **DPL’s** unsecured senior notes.  These long-term debt amounts include currentmaturities but exclude unamortized debt discounts.

 

**DP&L’s** long-term debt as of December 31,2009 consists of its first mortgage bonds and tax-exempt pollution controlbonds.  These long-term debt amountsinclude current maturities but exclude unamortized debt discounts.

 

See Note 7 of Notes toConsolidated Financial Statements.

 

Interest payments:

 

Interest paymentsassociated with the long-term debt described above.  The interest payments relating tovariable-rate debt are projected using the interest rate prevailing at December 31,2009.

 

Pension andpostretirement payments:

 

As of December 31,2009, **DPL**, through its principal subsidiary **DP&L,** had estimated future benefitpayments as outlined in Note 9 of Notes to Consolidated FinancialStatements.  These estimated futurebenefit payments are projected through 2019.

 

Capital leases:

 

As of December 31,2009, **DPL**, through its principal subsidiary **DP&L,** had one immaterial capital leasethat expires in September 2010.

 

Operating leases:

 

As of December 31,2009, **DPL**, through its principal subsidiary **DP&L,** had several immaterial operatingleases with various terms and expiration dates.

 

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Coal contracts:

 

**DPL**, through its principal subsidiary **DP&L,** has entered into variouslong-term coal contracts to supply the coal requirements for the generatingplants it operates.  Some contract pricesare subject to periodic adjustment and have features that limit priceescalation in any given year.

 

Limestonecontracts:

 

**DPL**, through its principal subsidiary **DP&L,** has entered into variouslimestone contracts to supply limestone used in the operation of FGD equipmentat its generating facilities.

 

Purchase ordersand other contractual obligations:

 

As of December 31,2009, **DPL** and **DP&L** had various other contractualobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

Reserve foruncertain tax positions:

 

Due to the uncertaintyregarding the timing of future cash outflows associated with our unrecognizedtax benefits of $19.3 million, we are unable to make a reliable estimate of theperiods of cash settlement with the respective tax authorities and have notincluded such amounts in the contractual obligations table above.

 

**MARKET RISK**

 

Weare subject to certain market risks including, but not limited to, changes incommodity prices for electricity, coal, environmental emissions and gas andfluctuations in interest rates.  We usevarious market risk sensitive instruments, including derivative contracts,primarily to limit our exposure to fluctuations in commodity pricing.  Our Commodity Risk Management Committee(CRMC), comprising of members of senior management, is responsible forestablishing risk management policies and the monitoring and reporting of riskexposures relating to our **DP&L**-operatedgeneration units. The CRMC meets on a regular basis with the objective ofidentifying, assessing and quantifying material risk issues and developing strategiesto manage these risks.

 

**Commodity Pricing Risk**

 

Commodity pricing riskexposure includes the impacts of weather, market demand, increased competitionand other economic conditions.  To managethe volatility relating to these exposures at our **DP&L**-operatedgeneration units, we use a variety of non-derivative and derivative instrumentsincluding forward contracts and futures contracts.  These derivative instruments are usedprincipally for economic hedging purposes and none are held for trading purposes.  The majority of our commodity contracts arenot considered derivative instruments under GAAP and are therefore excludedfrom MTM accounting.  Derivatives thatfall within the scope of derivative accounting under GAAP must be recorded attheir fair value and marked to market unless they qualify for hedgeaccounting.  MTM gains and losses onderivative instruments that qualify for hedge accounting are deferred in AOCIuntil the forecasted transactions occurs. We adjust the derivative instruments that do not qualify for cash flowhedging to fair value on a monthly basis and where applicable, we recognize acorresponding Regulatory asset for above-market costs or a regulatory liabilityfor below-market costs in accordance with Regulatory accounting under GAAP.

 

During 2008 and 2009, thecoal market has experienced unprecedented price volatility.  The coal market has increasingly beeninfluenced by both international and domestic supply and consumption and, whilewe have all of the total expected coal volume needed to meet our retail andfirm wholesale sales requirements for 2010 under contract, sales requirementsmay change, particularly for retail load. To the extent we are not able to hedge against price volatility orrecover increases through our fuel rider that began in January 2010, ourresults of operations, financial position or cash flows could be materiallyaffected.

 

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The following tableprovides a reconciliation of the MTM positions of the commodity derivativecontracts included on our balance sheets at December 31, 2009:

 
| **$ in millions**                                         | ** ** | **2009** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|
|                                                           |       |     |       |
| **Fair  Value of Commodity Derivative Contracts:**             |       |     |       |
| Outstanding net asset /  (liability) at January 1, 2009   |       | $        | (6.6       | ) |
| Gains / (losses) on  settled contracts                         |       | (3.2     | )          |
| Changes in fair value  on contracts still held                 |       | 11.2     |       |
| Outstanding net asset /  (liability) at December 31, 2009 |       | $        | 1.4        |   |

 

The impact of the changein the fair values of the commodity derivative contracts between January 1,2009 and December 31, 2009 is detailed in the table below:

 
| ** **                                          | ** ** | **Year  ended**                   | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| **$ in millions**                         | ** ** | **December 31,   2009** | ** ** |
|                                                |       |                              |       |
| Effect on the  statements of results of operations: |       | $                                 | 1.8        |   |
|                                                |       |                              |       |
| Effect on the balance  sheets:                      |       |                              |       |
| Accumulated other  comprehensive income             |       | $                                 | 3.4        |   |
| Regulatory liability  (net)                         |       | 1.0                               |       |
| Partner payable                                     |       | 1.8                               |       |
| Total net change on  balance sheets                 |       | $                                 | 6.2        |   |
|                                                |       |                              |       |
| Total net change                                    |       | $                                 | 8.0        |   |

 

The net asset/liabilityof the MTM positions above are expected to mature within the next three years.

 

For purposes of potentialrisk analysis, we use a sensitivity analysis to quantify potential impacts ofmarket rate changes on the statements of results of operations.  The sensitivity analysis representshypothetical changes in market values that may or may not occur in the future.

 

Approximately16% of **DPL’s** and 19% of **DP&L’s** electric revenues for the year ended December 31, 2009 were from sales of excess energy andcapacity in the wholesale market.  Energyin excess of the needs of existing retail customers is sold in the wholesalemarket when we can identify opportunities with positive margins.

 

The table below providesthe effect on annual Net income as of December 31, 2009, of a hypotheticalincrease or decrease of 10% in theprice per megawatt hour of wholesale power, including the impact of acorresponding 10% change in the portion of purchased power used as part of thesale (note the share of the internal generation used to meet the wholesale salewould not be affected by the 10% change in wholesale prices):

 
| **$ in millions**                 | ** ** | **DPL**    | ** ** | **DP&L** | ** ** |
|----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **   | ** ** |
| Effect of 10% change in  price per mWh |       | $          | 7.9        |         | $          | 12.0 |   |
|                                        |            |            |            |              |            |  |  |

 

**DPL’s** fuel (including coal, gas, oil andemission allowances) and purchased power costs as a percentage of totaloperating costs in the years ended December 31, 2009 and 2008 were 33% and33%, respectively.  **DP&L’s** fuel (including coal, gas, oiland emission allowances) and purchased power costs as a percentage of totaloperating costs were 33% and 34% for the years ended December 31, 2009 and2008, respectively.  We havesubstantially all of the total expected coal volume needed to meet our retailand firm wholesale sales requirements for 2010 under contract.  The majority of our contracted coal ispurchased at fixed prices although some contracts provide for periodic pricingadjustments.  We do not expect topurchase SO2 allowances for 2010; however, the exactconsumption of SO2 allowances will depend on market pricesfor power, availability of our generation units and the actual sulfur contentof the coal burned.  We do not plan topurchase NOx allowances for 2010.  Fuelcosts are impacted by changes in volume and price and are driven by a number ofvariables including weather, reliability of coal deliveries, scheduled outagesand generation plant mix.

 

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Purchased power costsdepend, in part, upon the timing and extent of planned and unplanned outages ofour generating capacity.  We willpurchase power on a discretionary basis when wholesale market conditionsprovide opportunities to obtain power at a cost below our internal generationcosts.

 

Effective January 1,2010, **DP&L** is allowed to recover its Ohioretail jurisdictional share of fuel and purchased power costs, of approximately80%, as part of the fuel rider approved by the PUCO. The table below providesthe effect on annual net income as of December 31, 2009, of a hypotheticalincrease or decrease of 10% adjusted for the approximate 80% recovery in the prices of fuel and purchasedpower:

 
| **$ in millions**                            | ** ** | **DPL**    | ** ** | **DP&L** | ** ** |
|---------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** **   | ** ** |
| Effect of 10% change in  fuel and purchased power |       | $          | 6.3        |         | $          | 5.8 |   |
|                                                   |            |            |            |              |            |  |  |

 

**InterestRate Risk**

 

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

 

Thecarrying value of **DPL’s** debt was$1,324.1 million at December 31, 2009, consisting of **DP&L’s** first mortgage bonds, **DP&L’s** tax-exempt pollution controlbonds, **DP&L’s**revolving credit facilities, **DPL’s** unsecured notes and **DP&L’s** capital lease.  The fair value of this debt was $1,317.6million, based on current market prices or discounted cash flows using currentrates for similar issues with similar terms and remaining maturities.  The following table provides informationabout **DPL’s** debt obligations thatare sensitive to interest rate changes:

 

**PrincipalPayments and Interest Rate Detail by Contractual Maturity Date**

 

**DPL**

 
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **Carrying  value at** | ** ** | **Fair  value at**    | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** |
| **$ in millions** | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014**   | ** ** | **Thereafter** | ** ** | **2009  (a)**          | ** ** | **2009  (a)**         | ** ** |
| **Long-term  debt**    |       |       |       |       |       |       |       |       |       |       |       |           |       |                   |       |                  |       |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                   |       |                  |       |
| Variable-rate debt     |       | $          | 100.0      |       | $          | —     |       | $          | —     |       | $          | —         |       | $                      | —     |                  | $          | — |   | $ | 100.0 |   | $ | 100.0 |   |
| Average interest rate  |       | 0.3        | %          | N/A        |       | N/A        |       | N/A        |       | N/A        |       | N/A            |       | 0.3                    | %          |                  |       |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                   |       |                  |       |
| Fixed-rate debt        |       | $          | 0.6        |       | $          | 297.4      |       | $          | —     |       | $          | 470.0          |       | $                      | —     |                  | $          | 456.1 |   | $ | 1,224.1 |   | $ | 1,217.6 |   |
| Average interest rate  |       | 1.8        | %          | 6.9        | %          | N/A        |       | 5.1        | %          | N/A        |       | 5.8            | %          | 5.8                    | %          |                  |       |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                   |       |                  |       |
| Total                  |       |       |       |       |       |       |       |       |       |       |       |           |       | $                      | 1,324.1    |                  | $          | 1,317.6 |   |

 

----

*(a)  Fixed rate debt totals include unamortized debtdiscounts.*

 

Thecarrying value of **DP&L’s** debtwas $884.3 million at December 31, 2009, consisting of its first mortgagebonds, tax-exempt pollution control bonds, revolving credit facilities and acapital lease.  The fair value of thisdebt was $844.5 million, based on current market prices or discounted cashflows using current rates for similar issues with similar terms and remainingmaturities.  The following table providesinformation about **DP&L’s** debtobligations that are sensitive to interest rate changes:

 

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**PrincipalPayments and Interest Rate Detail by Contractual Maturity Date**

 

**DP&L**

 
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **Carrying  value at** | ** ** | **Fair  value at**    | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** |
| **$ in millions** | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014**   | ** ** | **Thereafter** | ** ** | **2009  (a)**          | ** ** | **2009  (a)**         | ** ** |
| **Long-term  debt**    |       |       |       |       |       |       |       |       |       |       |       |           |       |                   |       |                  |       |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                   |       |                  |       |
| Variable-rate debt     |       | $          | 100.0      |       | $          | —     |       | $          | —     |       | $          | —         |       | $                      | —     |                  | $          | — |   | $ | 100.0 |   | $ | 100.0 |   |
| Average interest rate  |       | 0.3        | %          | N/A        |       | N/A        |       | N/A        |       | N/A        |       | N/A            |       | 0.3                    | %          |                  |       |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                   |       |                  |       |
| Fixed-rate debt        |       | $          | 0.6        |       | $          | —     |       | $          | —     |       | $          | 470.0          |       | $                      | —     |                  | $          | 313.7 |   | $ | 784.3 |   | $ | 744.5 |   |
| Average interest rate  |       | 1.8        | %          | N/A        |       | N/A        |       | 5.1        | %          | N/A        |       | 4.8            | %          | 5.0                    | %          |                  |       |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                   |       |                  |       |
| Total                  |       |       |       |       |       |       |       |       |       |       |       |           |       | $                      | 884.3      |                  | $          | 844.5 |   |

 

----

*(a) Fixedrate debt totals include unamortized debt discounts.*

 

Debt maturities occurringin 2010 are discussed under FINANCIAL CONDITION, LIQUIDITY AND CAPITALREQUIREMENTS.

 

**Long-term Debt Interest Rate Risk SensitivityAnalysis**

 

Ourestimate of market risk exposure is presented for our fixed-rate andvariable-rate debt at December 31, 2009 and 2008 for which an immediateadverse market movement causes a potential material impact on our financialposition, results of operations, or the fair value of the debt.  We believe that the adverse market movementrepresents the hypothetical loss to future earnings and does not represent themaximum possible loss nor any expected actual loss, even under adverseconditions, because actual adverse fluctuations would likely differ.  As of December 31, 2009 and 2008, we didnot hold any market risk sensitive instruments which were entered into fortrading purposes.

 

**DPL**

 
| ** **             | ** ** | **Carrying  value at** | ** ** | **Fair  value at**    | ** ** | **One  Percent**   | ** ** | **Carrying  value at** | ** ** | **Fair  value at**    | ** ** | **One  Percent**   | ** ** |
|------------------------|------------|------------------------|------------|-----------------------|------------|--------------------|------------|------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **             | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** | **Interest  Rate** | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** | **Interest  Rate** | ** ** |
| **$ in millions** | ** ** | **2009**               | ** ** | **2009**              | ** ** | **Risk**           | ** ** | **2008**               | ** ** | **2008**              | ** ** | **Risk**           | ** ** |
| **Long-term  debt**    |       |                   |       |                  |       |               |       |                   |       |                  |       |               |       |
|                   |       |                   |       |                  |       |               |       |                   |       |                  |       |               |       |
| Variable-rate debt     |       | $                      | 100.0      |                  | $          | 100.0              |       | $                      | 1.0        |                  | $          | 100.0              |       | $ | 100.0 |   | $ | 1.0 |   |
|                   |       |                   |       |                  |       |               |       |                   |       |                  |       |               |       |
| Fixed-rate debt        |       | 1,224.1                |       | 1,217.6               |       | 12.2               |       | 1,451.8                |       | 1,370.5               |       | 13.7               |       |
|                   |       |                   |       |                  |       |               |       |                   |       |                  |       |               |       |
| Total                  |       | $                      | 1,324.1    |                  | $          | 1,317.6            |       | $                      | 13.2       |                  | $          | 1,551.8            |       | $ | 1,470.5 |   | $ | 14.7 |   |

 

**DP&L**

 
| ** **                  | ** ** | **Carrying value at** | ** ** | **Fair value at** | ** ** | **One Percent**   | ** ** | **Carrying value at** | ** ** | **Fair value at** | ** ** | **One Percent**   | ** ** |
|-----------------------------|------------|---------------------------------|------------|-----------------------------|------------|------------------------|------------|---------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **December 31,**           | ** ** | **December 31,**       | ** ** | **Interest Rate** | ** ** | **December 31,**           | ** ** | **December 31,**       | ** ** | **Interest Rate** | ** ** |
| **$ in millions** | ** ** | **2009**                        | ** ** | **2009**                    | ** ** | **Risk**               | ** ** | **2008**                        | ** ** | **2008**                    | ** ** | **Risk**               | ** ** |
| **Long-term  debt**         |       |                            |       |                        |       |                   |       |                            |       |                        |       |                   |       |
|                        |       |                            |       |                        |       |                   |       |                            |       |                        |       |                   |       |
| Variable-rate debt          |       | $                               | 100.0      |                        | $          | 100.0                  |       | $                               | 1.0        |                        | $          | 100.0                  |       | $ | 100.0 |   | $ | 1.0 |   |
|                        |       |                            |       |                        |       |                   |       |                            |       |                        |       |                   |       |
| Fixed-rate debt             |       | 784.3                           |       | 744.5                       |       | 7.5                    |       | 784.7                           |       | 715.7                       |       | 7.2                    |       |
|                        |       |                            |       |                        |       |                   |       |                            |       |                        |       |                   |       |
| Total                       |       | $                               | 884.3      |                        | $          | 844.5                  |       | $                               | 8.5        |                        | $          | 884.7                  |       | $ | 815.7 |   | $ | 8.2 |   |

 

**DPL’s** debt is comprised of both fixed-ratedebt and variable-rate debt.  In regardto fixed rate debt, the interest rate risk with respect to **DPL’s**long-term debt, excluding capital lease obligations, primarily relates to thepotential impact a decrease of one percentage point in interest rates has onthe fair value of **DPL**$1,224.1million of fixed-rate debt and not on **DPL’s** financialposition or results of operations.  Onthe variable-rate debt, the interest rate risk with respect to **DPL’s** long-term debt represents the potential impact anincrease of one percentage point in the interest rate has on **DPL’s** results of operations related to **DP&L’s**$100 million variable-rate long-term debt outstanding as of December 31,2009.

 

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**DP&L**’s interest rate risk with respect to **DP&L’s** long-term debt primarily relates to the potentialimpact a decrease in interest rates of one percentage point has on the fairvalue of **DP&L**’s $784.3 million of fixed-ratedebt and not on **DP&L**’s financial position or **DP&L**’s results of operations.  On the variable-rate debt, the interest raterisk with respect to **DP&L**’slong-term debt represents the potential impact an increase of one percentagepoint in the interest rate has on **DP&L**’sresults of operations related to **DP&L**’s $100million variable-rate long-term debt outstanding as of December 31, 2009.

 

**EquityPrice Risk**

 

As of December 31,2009, approximately 35.0% of the defined benefit pension plan assets werecomprised of investments in equity securities and 65.0% related to investmentsin fixed income securities, cash and cash equivalents, and alternativeinvestments.  The equity securities arecarried at their market value of approximately $85.1 million at December 31,2009.  A hypothetical 10% decrease inprices quoted by stock exchanges would result in an $8.5 million reduction infair value as of December 31, 2009 and approximately a $0.5 millionincrease to the 2010 pension expense.

 

**CreditRisk**

 

Credit risk is the riskof an obligor’s failure to meet the terms of any investment contract, loanagreement or otherwise perform as agreed. Credit risk arises from allactivities in which success depends on issuer, borrower or counterpartyperformance, whether reflected on or off the balance sheet.  We limit our credit risk by assessing thecreditworthiness of potential counterparties before entering into transactionswith them and continue to evaluate their creditworthiness after transactionshave been originated.  We use the three leading corporate creditrating agencies and other current market-based qualitative and quantitativedata to assess the financial strength of counterparties on an ongoing basis.  We may require various forms of credit assurance from counterparties in orderto mitigate credit risk.

 

**CRITICALACCOUNTING ESTIMATES**

 

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

 

Different estimates couldhave a material effect on our financial results.  Judgments and uncertainties affecting theapplication of these policies and estimates may result in materially differentamounts being reported under different conditions or circumstances.  Historically, however, recorded estimateshave not differed materially from actual results.  Significant items subject to such judgmentsinclude: the carrying value of property, plant and equipment; unbilledrevenues; the valuation of derivative instruments; the valuation of insuranceand claims liabilities; the valuation of allowances for receivables and deferredincome taxes; regulatory assets and liabilities; reserves recorded for incometax exposures; litigation; contingencies; the valuation of AROs; and assets andliabilities related to employee benefits.

 

**Impairmentsand Assets Held for Sale:**  In accordance with theprovisions of GAAP relating to the accounting for impairments, long-livedassets to be held and used are reviewed for impairment whenever events orcircumstances indicate that the carrying amount may not be recoverable.  When required, impairment losses on assets tobe held and used are recognized based on the fair value of the asset.  We determine the fair value of these assetsbased upon estimates of future cash flows, market value of similar assets, if availableor independent appraisals, if required. In analyzing the fair value and recoverability using future cash flows,we make projections based on a number of assumptions and estimates of growthrates, future economic conditions, assignment of discount rates and estimatesof terminal values.  An impairment lossis recognized if the carrying amount of the long-lived asset is not recoverablefrom its undiscounted cash flows.  Themeasurement of impairment loss is the difference between the carrying amountand fair value of the asset.  Long-livedassets to be disposed of or held for sale are reported at the lower of carryingamount or fair value less cost to sell. We determine the fair value of these assets in the same manner asdescribed for assets held and used.

 

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**RevenueRecognition (including Unbilled Revenue)****:** We consider revenue realized, or realizable, and earned when persuasiveevidence of an arrangement exists, the products or services have been providedto the customer, the sales price is fixed or determinable, and collection isreasonably assured.  The determination ofthe energy sales to customers is based on the reading of their meters, whichoccurs on a systematic basis throughout the month.  We recognize revenues using an accrual methodfor retail and other energy sales that have not yet been billed, but whereelectricity has been consumed.  This is termed “unbilled revenues” and isa widely recognized and accepted practice for utilities.  At the end of each month, unbilled revenuesare determined by the estimation of unbilled energy provided to customers sincethe date of the last meter reading, projected line losses, the assignment ofunbilled energy provided to customer classes and the average rate per customerclass.  Given our estimation method 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.

 

**IncomeTaxes:**  Judgment and the use of estimates arerequired in developing the provision for income taxes and reporting oftax-related assets and liabilities.  Theinterpretation of tax laws involves uncertainty, since taxing authorities mayinterpret them differently. Ultimate resolution of income tax matters mayresult in favorable or unfavorable impacts to Net income and cash flows andadjustments to tax-related assets and liabilities could be material.  We have adopted the provisions of GAAPrelating to the accounting for uncertainty in income taxes.  Taking into consideration the uncertainty andjudgment involved in the determination and filing of income taxes, these GAAPprovisions establish standards for recognition and measurement in financialstatements of positions taken, or expected to be taken, by an entity on itsincome tax returns.  Positions taken byan entity on its income tax returns that are recognized in the financialstatements must satisfy a more-likely-than-not recognition threshold, assumingthat the position will be examined by taxing authorities with full knowledge ofall relevant information.

 

Deferred income taxassets and liabilities represent future effects on income taxes for temporarydifferences between the bases of assets and liabilities for financial reportingand tax purposes.  We evaluate quarterlythe probability of realizing deferred tax assets by reviewing a forecast offuture taxable income and the availability of tax planning strategies that canbe implemented, if necessary, to realize deferred tax assets.  Failure to achieve forecasted taxable incomeor successfully implement tax planning strategies may affect the realization ofdeferred tax assets.

 

**Regulatory Assets and Liabilities:**** **Application of the provisions of GAAPrelating to regulatory accounting requires us to reflect the effect of rateregulation in our Consolidated Financial Statements.  For regulated businesses subject to federalor state cost-of-service rate regulation, regulatory practices that assigncosts to accounting periods may differ from accounting methods generallyapplied by nonregulated companies.  Whenit is probable that regulators will permit the recovery of current coststhrough future rates charged to customers, we defer these costs as Regulatoryassets that otherwise would be expensed by nonregulated companies.  Likewise, we recognize Regulatory liabilitieswhen it is probable that regulators will require customer refunds throughfuture rates and when revenue is collected from customers for expenses that arenot yet incurred.  Regulatory assets areamortized into expense and Regulatory liabilities are amortized into incomeover the recovery period authorized by the regulator.

 

We evaluate whether ornot recovery of our Regulatory assets through future rates is probable and makevarious assumptions in our analyses.  Theexpectations of future recovery are generally based on orders issued byregulatory commissions or historical experience, as well as discussions withapplicable regulatory authorities.  Ifrecovery of a regulatory asset is determined to be less than probable, it willbe written off in the period the assessment is made.  We currently believe the recovery of ourRegulatory assets is probable.  See Note3 of Notes to Consolidated Financial Statements.

 

**AROs: **In accordance with the provisions of GAAP relating tothe accounting for AROs, legal obligations associated with the retirement oflong-lived assets are required to be recognized at their fair value at the timethose 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.  These GAAP provisions alsorequire that components of previously recorded depreciation related to the costof removal of assets upon retirement, whether legal AROs or not, must beremoved from a company’s accumulated depreciation reserve.  We make assumptions, estimates and judgmentsthat affect the reported amounts of assets, liabilities and expenses as theyrelate to AROs.  These assumptions andestimates are based on historical experience and assumptions that we believe tobe reasonable at the time.

 

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**Insurance and Claims Costs**: In addition to insurance obtained from third-party providers, MVIC, awholly-owned captive subsidiary of **DPL**, provides insurance coverage solelyto us, our subsidiaries and, in some cases, our partners in commonly-ownedfacilities we operate, for workers’ compensation, general liability, propertydamage, and directors’ and officers’ liability. Insurance and Claims Costs on the Consolidated Balance Sheets of **DPL** include insurance reserves of approximately $16.2million and $17.6 million for 2009 and 2008, respectively.  Furthermore, **DP&L**is responsible for claim costs below certain coverage thresholds of MVIC forthe insurance coverage noted above.  Inaddition, **DP&L** has medical, life anddisability reserves for claims costs below certain coverage thresholds ofthird-party providers.  **DPL**and**DP&L**recordthese additional insurance and claims costs of approximately $11.3 million and$9.8 million for 2009 and 2008, respectively, within Other current liabilitiesand Other deferred credits on the balance sheets.  The MVIC reserves at **DPL**and the workers’ compensation, medical, life and disability reserves at **DP&L** are actuarially determined based on a reasonableestimation of insured events occurring. There is uncertainty associated with the loss estimates and actualresults may differ from the estimates. Modification of these loss estimates based on experience and changedcircumstances is reflected in the period in which the estimate is re-evaluated.

 

**Pension and Postretirement Benefits: **Weaccount for and disclose pension and postretirement benefits in accordance withthe provisions of GAAP relating to the accounting for pension and other postretirementplans.  These GAAP provisions require theuse of assumptions, such as the discount rate and long-term rate of return onassets, in determining the obligations, annual cost, and funding requirementsof the plans.

 

For2010, we are maintaining our long-term rate of return assumptions of 8.50% forpension and 6.00% for other postemployment benefit plan assets representing ourlong-term assumptions based on our current portfolio mix.  We havedecreased our assumed discount rate to 5.75% for pension and 5.35% forpostretirement benefits expense to reflect current duration-based yield curvediscount rates.  A one percent change in the rate of return assumption forpension would result in an increase or decrease to the 2010 pension expense ofapproximately $2.5 million.  A onepercent change in the discount rate for pension would result in an increase ordecrease to the 2010 pension expense of approximately $2.0 million.  We donot anticipate any special adjustments to expense in 2010.

 

In future periods,differences in the actual return on pension and other post-employment benefitplan assets and assumed return, or changes in the discount rate, will affectthe timing of contributions to the plans, if any.  We provide postretirement health carebenefits to employees who retired prior to 1987.  A one percentage point change in the assumedhealth care cost trend rate would affect postretirement benefit costs byapproximately $0.1 million.

 

**Contingent and Other Obligations: **Duringthe conduct of our business, we are subject to a number of federal and state laws and regulations, aswell as other factors and conditions that potentially subject us toenvironmental, litigation, insurance and other risks.  We periodically evaluate our exposure to suchrisks and record reserves for those matters where a loss is considered probableand reasonably estimable in accordance with GAAP.  In recording such reserves, we may makeassumptions, estimates and judgments that affect the reported amounts ofassets, liabilities and expenses as they relate to contingent and otherobligations.  These assumptions andestimates are based on historical experience and assumptions and may be subjectto change.  We, however, believe suchestimates and assumptions are reasonable.

 

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## **LEGALAND OTHER MATTERS**

## ** **

Adiscussion of LEGAL AND OTHER MATTERS is described in Note 19 of Notes toConsolidated Financial Statements and in Item 3 — LEGAL PROCEEDINGS.  A discussion of environmental matters andcompetition and regulation matters affecting both **DPL**and **DP&L** is described in Item 1 —ENVIRONMENTAL CONSIDERATIONS and Item 1 — COMPETITION AND REGULATION.  Such discussions are incorporated byreference in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations and made a part hereof.

 

**Recently Issued Accounting Pronouncements**

 

Adiscussion of recently issued accounting pronouncements is described in Note 1of Notes to Consolidated Financial Statements and such discussion isincorporated by reference in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and made a part hereof.

 

**Item 7A — Quantitative and Qualitative Disclosures aboutMarket Risk**

 

The information requiredby this item of Form 10-K is set forth in the MARKET RISK section underItem 7 — Management’s Discussion and Analysis of Financial Condition andResults of Operations.

 

**Item8 — Financial Statements and Supplementary Data**

 

This report includes thecombined filing of **DPL** and **DP&L.  DP&L**isthe principal subsidiary of **DPL**providingapproximately 98% of **DPL’s**totalconsolidated revenue and approximately 95% of **DPL’s**totalconsolidated asset base.  Throughout thisreport, the terms “we,” “us,” “our” and “ours” are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in the section.

 

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**DPL INC.**

**CONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                                                 | ** ** | **For the years ended December 31,** | ** **  |
|------------------------------------------------------------|------------|-------------------------------------------|-------------|
| **$ in millions except per share  amounts**           | ** ** | **2009**                                  | ** **  | **2008** | ** ** | **2007** | ** ** |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| **Revenues**                                               | ** ** | **$**                                     | **1,588.9** |   | $ | 1,601.6 |   | $ | 1,515.7 |   |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| **Cost of revenues:**                                      | ** ** | ** **                                |        |   |   |   |   |
| Fuel                                                       | ** ** | **330.4**                                 |        | 243.0 |   | 328.2 |   |
| Purchased  power                                           | ** ** | **260.2**                                 |        | 377.4 |   | 287.2 |   |
| Total  cost of revenues                                    | ** ** | **590.6**                                 |        | 620.4 |   | 615.4 |   |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| **Gross margin**                                           | ** ** | **998.3**                                 |        | 981.2 |   | 900.3 |   |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| **Operating expenses:**                                    | ** ** | ** **                                |        |   |   |   |   |
| Operation  and maintenance                                 | ** ** | **306.5**                                 |        | 282.5 |   | 283.6 |   |
| Depreciation  and amortization                             | ** ** | **145.5**                                 |        | 137.7 |   | 134.8 |   |
| General  taxes                                             | ** ** | **118.1**                                 |        | 125.5 |   | 111.8 |   |
| Total  operating expenses                                  | ** ** | **570.1**                                 |        | 545.7 |   | 530.2 |   |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| **Operating income**                                       | ** ** | **428.2**                                 |        | 435.5 |   | 370.1 |   |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| **Other income / (expense), net**                          | ** ** | ** **                                |        |   |   |   |   |
| Investment  income (loss)                                  | ** ** | **(0.6**                                  | **)**       | 3.6 |   | 11.3 |   |
| Net  gain on settlement of executive litigation            | ** ** | **—**                                |        | — |   | 31.0 |   |
| Interest  expense                                          | ** ** | **(83.0**                                 | **)**       | (90.7 | ) | (81.0 | ) |
| Other  income (deductions)                                 | ** ** | **(3.0**                                  | **)**       | (1.0 | ) | 2.9 |   |
| Total  other income / (expense), net                       | ** ** | **(86.6**                                 | **)**       | (88.1 | ) | (35.8 | ) |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| **Earnings from continuing operations before income tax**  | ** ** | **341.6**                                 |        | 347.4 |   | 334.3 |   |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| Income  tax expense                                        | ** ** | **112.5**                                 |        | 102.9 |   | 122.5 |   |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| **Earnings from continuing operations**                    | ** ** | **229.1**                                 |        | 244.5 |   | 211.8 |   |
| ** **                                                 | ** ** | ** **                                |        |   |   |   |   |
| **Earnings from discontinued operations, net of tax**      | ** ** | **—**                                |        | — |   | 10.0 |   |
| ** **                                                 | ** ** | ** **                                |        |   |   |   |   |
| **Net income**                                             | ** ** | **$**                                     | **229.1**   |   | $ | 244.5 |   | $ | 221.8 |   |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| **Average number of common shares outstanding (millions)** | ** ** | ** **                                |        |   |   |   |   |
| Basic                                                      | ** ** | **112.9**                                 |        | 110.2 |   | 107.9 |   |
| Diluted                                                    | ** ** | **114.2**                                 |        | 115.4 |   | 117.8 |   |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| **Earnings per share of common stock**                     | ** ** | ** **                                |        |   |   |   |   |
| Basic:                                                     | ** ** | ** **                                |        |   |   |   |   |
| Earnings  from continuing operations                       | ** ** | **$**                                     | **2.03**    |   | $ | 2.22 |   | $ | 1.97 |   |
| Earnings  from discontinued operations, net of tax         | ** ** | **—**                                |        | — |   | 0.09 |   |
| Total  Basic                                               | ** ** | **$**                                     | **2.03**    |   | $ | 2.22 |   | $ | 2.06 |   |
|                                                       | ** ** | ** **                                |        |   |   |   |   |
| Diluted:                                                   | ** ** | ** **                                |        |   |   |   |   |
| Earnings  from continuing operations                       | ** ** | **$**                                     | **2.01**    |   | $ | 2.12 |   | $ | 1.80 |   |
| Earnings  from discontinued operations, net of tax         | ** ** | **—**                                |        | — |   | 0.08 |   |
| Total  Diluted                                             | ** ** | **$**                                     | **2.01**    |   | $ | 2.12 |   | $ | 1.88 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**DPL INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **$ in millions**                                                             | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                                      |       |   |   |   |   |
| Net income                                                                         | ** ** | **$**                                     | **229.1**  |   | $ | 244.5 |   | $ | 221.8 |   |
| Less: Earnings from  discontinued operations, net of tax                           | ** ** | **—**                                |       | — |   | (10.0 | ) |
| Earnings from  continuing operations                                               | ** ** | **229.1**                                 |       | 244.5 |   | 211.8 |   |
|                                                                               |       |                                      |       |   |   |   |   |
| Adjustments to  reconcile Net income to Net cash provided by operating activities: |       |                                      |       |   |   |   |   |
| Depreciation and  amortization                                                     | ** ** | **145.5**                                 |       | 137.7 |   | 134.8 |   |
| Deferred income taxes                                                              | ** ** | **201.6**                                 |       | 43.1 |   | 3.1 |   |
| Net gain on settlement  of executive litigation                                    | ** ** | **—**                                |       | — |   | (31.0 | ) |
| Net gain on sale of  property                                                      | ** ** | **—**                                |       | — |   | (6.0 | ) |
| Changes in certain  assets and liabilities:                                        |       |                                      |       |   |   |   |   |
| Accounts receivable                                                                | ** ** | **39.3**                                  |       | (18.7 | ) | (18.9 | ) |
| Inventories                                                                        | ** ** | **(20.6**                                 | **)**      | (0.2 | ) | (19.6 | ) |
| Taxes applicable to  subsequent years                                              | ** ** | **(1.5**                                  | **)**      | (10.0 | ) | (0.1 | ) |
| Deferred regulatory  costs, net                                                    | ** ** | **(24.6**                                 | **)**      | (12.9 | ) | 9.4 |   |
| Accounts payable                                                                   | ** ** | **(65.0**                                 | **)**      | 27.0 |   | (0.5 | ) |
| Accrued taxes payable                                                              | ** ** | **(2.4**                                  | **)**      | (46.1 | ) | 19.9 |   |
| Accrued interest  payable                                                          | ** ** | **(1.5**                                  | **)**      | (0.8 | ) | (9.4 | ) |
| Pension, retiree and  other benefits                                               | ** ** | **15.2**                                  |       | 31.2 |   | 26.7 |   |
| Unamortized investment  tax credit                                                 | ** ** | **(2.8**                                  | **)**      | (2.8 | ) | (2.8 | ) |
| Insurance and claims  costs                                                        | ** ** | **(1.4**                                  | **)**      | (2.4 | ) | (1.9 | ) |
| Other                                                                              | ** ** | **15.2**                                  |       | (26.4 | ) | 2.6 |   |
| **Net  cash provided by operating activities**                                     | ** ** | **526.1**                                 |       | 363.2 |   | 318.1 |   |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash  flows from investing activities:**                                         |       |                                      |       |   |   |   |   |
| Capital expenditures                                                               | ** ** | **(172.3**                                | **)**      | (243.6 | ) | (346.2 | ) |
| Net proceeds from sale  of property - peakers                                      | ** ** | **—**                                |       | — |   | 151.0 |   |
| Proceeds from sale of  property - aircraft                                         | ** ** | **—**                                |       | — |   | 7.4 |   |
| Proceeds from sale of  property - other                                            | ** ** | **1.2**                                   |       | — |   | — |   |
| Purchases of short-term  investments and securities                                | ** ** | **—**                                |       | (4.9 | ) | — |   |
| Sales of short-term  investments and securities                                    | ** ** | **5.0**                                   |       | — |   | — |   |
| **Net  cash used for investing activities**                                        | ** ** | **(166.1**                                | **)**      | (248.5 | ) | (187.8 | ) |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash  flows from financing activities:**                                         |       |                                      |       |   |   |   |   |
| Dividends paid on  common stock                                                    | ** ** | **(128.8**                                | **)**      | (120.5 | ) | (111.7 | ) |
| Repurchase of DPL  common stock                                                    | ** ** | **(64.4**                                 | **)**      | — |   | — |   |
| Repurchase of warrants                                                             | ** ** | **(25.2**                                 | **)**      | — |   | — |   |
| Proceeds from exercise  of warrants                                                | ** ** | **77.7**                                  |       | — |   | — |   |
| Retirement of long-term  debt                                                      | ** ** | **(175.0**                                | **)**      | (100.0 | ) | (225.0 | ) |
| Early redemption of  Capital Trust II notes                                        | ** ** | **(52.4**                                 | **)**      | — |   | — |   |
| Premium paid for early  redemption of debt                                         | ** ** | **(3.7**                                  | **)**      | — |   | — |   |
| Issuance of pollution  control bonds, net                                          | ** ** | **—**                                |       | 98.4 |   | 90.0 |   |
| Retirement of pollution  control bonds                                             | ** ** | **—**                                |       | (90.0 | ) | — |   |
| Pollution control bond  proceeds held in trust                                     | ** ** | **—**                                |       | (10.0 | ) | (90.0 | ) |
| Withdrawal of restricted  funds held in trust, net                                 | ** ** | **14.5**                                  |       | 32.5 |   | 63.2 |   |
| Withdrawals from  revolving credit facilities                                      | ** ** | **260.0**                                 |       | 115.0 |   | 95.0 |   |
| Repayment of borrowings  from revolving credit facilities                          | ** ** | **(260.0**                                | **)**      | (115.0 | ) | (95.0 | ) |
| Exercise of stock  options                                                         | ** ** | **9.0**                                   |       | 2.2 |   | 14.6 |   |
| Tax impact related to  exercise of stock options                                   | ** ** | **0.7**                                   |       | 0.3 |   | 1.3 |   |
| **Net  cash used for financing activities**                                        | ** ** | **(347.6**                                | **)**      | (187.1 | ) | (257.6 | ) |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash  and cash equivalents:**                                                    |       |                                      |       |   |   |   |   |
| Net change                                                                         | ** ** | **12.4**                                  |       | (72.4 | ) | (127.3 | ) |
| Balance at beginning of  period                                                    | ** ** | **62.5**                                  |       | 134.9 |   | 262.2 |   |
| **Cash  and cash equivalents at end of period**                                    | ** ** | **$**                                     | **74.9**   |   | $ | 62.5 |   | $ | 134.9 |   |
|                                                                               |       |                                      |       |   |   |   |   |
| **Supplemental  cash flow information:**                                           |       |                                      |       |   |   |   |   |
| Interest paid, net of  amounts capitalized                                         | ** ** | **$**                                     | **84.3**   |   | $ | 86.8 |   | $ | 87.8 |   |
| Income taxes (refunded)  / paid, net                                               | ** ** | **$**                                     | **(94.6**  | **)** | $ | 127.3 |   | $ | 115.6 |   |
| Non-cash financing and  investing activities:                                      |       |                                      |       |   |   |   |   |
| Accruals for capital  expenditures                                                 | ** ** | **$**                                     | **20.8**   |   | $ | 34.1 |   | $ | 45.6 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

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**DPL INC.**

**CONSOLIDATEDBALANCE SHEETS**

** **
| ** **                                       | ** ** | **At December 31,** | ** **  |
|--------------------------------------------------|------------|--------------------------|-------------|
| **$ in millions**                           | ** ** | **2009**                 | ** **  | **2008** | ** ** |
|                                             |       |                     |        |   |   |
| **ASSETS**                                       |       |                     |        |   |   |
|                                             |       |                     |        |   |   |
| **Current assets:**                              |       |                     |        |   |   |
| Cash  and cash equivalents                       | ** ** | **$**                    | **74.9**    |   | $ | 62.5 |   |
| Restricted  funds held in trust                  | ** ** | **—**               |        | 14.5 |   |
| Accounts  receivable, net (Note 2)               | ** ** | **212.8**                |        | 259.9 |   |
| Inventories  (Note 2)                            | ** ** | **125.7**                |        | 105.1 |   |
| Taxes  applicable to subsequent years            | ** ** | **59.5**                 |        | 58.0 |   |
| Other  prepayments and current assets            | ** ** | **24.1**                 |        | 26.7 |   |
| Total  current assets                            | ** ** | **497.0**                |        | 526.7 |   |
|                                             |       |                     |        |   |   |
| **Property, plant and equipment:**               |       |                     |        |   |   |
| Property,  plant and equipment                   | ** ** | **5,269.2**              |        | 5,073.4 |   |
| Less:  Accumulated depreciation and amortization | ** ** | **(2,466.0**             | **)**       | (2,350.6 | ) |
|                                             | ** ** | **2,803.2**              |        | 2,722.8 |   |
|                                             |       |                     |        |   |   |
| Construction  work in process                    | ** ** | **89.0**                 |        | 153.6 |   |
| Total  net property, plant and equipment         | ** ** | **2,892.2**              |        | 2,876.4 |   |
|                                             |       |                     |        |   |   |
| **Other noncurrent assets:**                     |       |                     |        |   |   |
| Regulatory  assets (Note 3)                      | ** ** | **214.2**                |        | 195.6 |   |
| Other  deferred assets                           | ** ** | **38.3**                 |        | 38.3 |   |
| Total  other noncurrent assets                   | ** ** | **252.5**                |        | 233.9 |   |
|                                             |       |                     |        |   |   |
| **Total Assets**                                 | ** ** | **$**                    | **3,641.7** |   | $ | 3,637.0 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**DPL INC.**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                          | ** ** | ** **             |       |                   |       | **At December 31,** | ** **  |
|-----------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|-------------|
| **$ in millions**                              | ** ** | ** **             |       |                   |       | **2009**                 | ** **  | **2008** | ** ** |
|                                                | ** ** | ** **             |       |                   |       |                     |        |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**       | ** ** | ** **             |       |                   |       |                     |        |   |   |
|                                                | ** ** | ** **             |       |                   |       |                     |        |   |   |
| **Current liabilities:**                            | ** ** | ** **             |       |                   |       |                     |        |   |   |
| Current  portion - long-term debt                   | ** ** | ** **             |       |                   |       | **$**                    | **100.6**   |   | $ | 175.7 |   |
| Accounts  payable                                   | ** ** | ** **             |       |                   |       | **77.2**                 |        | 178.3 |   |
| Accrued  taxes                                      | ** ** | ** **             |       |                   |       | **70.2**                 |        | 72.9 |   |
| Accrued  interest                                   | ** ** | ** **             |       |                   |       | **23.5**                 |        | 25.0 |   |
| Customer  security deposits                         | ** ** | ** **             |       |                   |       | **19.4**                 |        | 19.8 |   |
| Other  current liabilities                          | ** ** | ** **             |       |                   |       | **24.0**                 |        | 14.7 |   |
| Total  current liabilities                          | ** ** | ** **             |       |                   |       | **314.9**                |        | 486.4 |   |
|                                                | ** ** | ** **             |       |                   |       |                     |        |   |   |
| **Noncurrent liabilities:**                         | ** ** | ** **             |       |                   |       |                     |        |   |   |
| Long-term  debt                                     | ** ** | ** **             |       |                   |       | **1,223.5**              |        | 1,376.1 |   |
| Deferred  taxes                                     | ** ** | ** **             |       |                   |       | **569.1**                |        | 374.1 |   |
| Regulatory  liabilities (Note 3)                    | ** ** | ** **             |       |                   |       | **125.4**                |        | 121.9 |   |
| Pension,  retiree and other benefits                | ** ** | ** **             |       |                   |       | **111.7**                |        | 94.7 |   |
| Unamortized  investment tax credit                  | ** ** | ** **             |       |                   |       | **35.2**                 |        | 38.0 |   |
| Insurance  and claims costs                         | ** ** | ** **             |       |                   |       | **16.2**                 |        | 17.6 |   |
| Other  deferred credits                             | ** ** | ** **             |       |                   |       | **122.9**                |        | 108.2 |   |
| Total  noncurrent liabilities                       | ** ** | ** **             |       |                   |       | **2,204.0**              |        | 2,130.6 |   |
|                                                | ** ** | ** **             |       |                   |       |                     |        |   |   |
| **Redeemable preferred stock of subsidiary**        | ** ** | ** **             |       |                   |       | **22.9**                 |        | 22.9 |   |
|                                                | ** ** | ** **             |       |                   |       | ** **               |        |   |   |
| Commitments  and contingencies (Note 19)            | ** ** | ** **             |       |                   |       | ** **               |        |   |   |
|                                                | ** ** | ** **             |       |                   |       | ** **               |        |   |   |
| **Common shareholders’ equity:**               | ** ** | ** **             |       |                   |       | ** **               |        |   |   |
| Common  stock, at par value of $0.01 per share:     | ** ** | ** **             |       |                   |       | ** **               |        |   |   |
| ** **                                          | ** ** | **December 2009** | ** ** | **December 2008** | ** ** | ** **               | ** **  | ** ** | ** ** |
| Shares  authorized                                  |       | 250,000,000            |       | 250,000,000            |       |                     |        |   |   |
| Shares  issued                                      |       | 163,724,211            |       | 163,724,211            |       |                     |        |   |   |
| Shares  outstanding                                 |       | 118,966,767            |       | 115,961,880            | ** ** | **1.2**                  |        | 1.2 |   |
| Warrants                                            | ** ** | ** **             |       |                   |       | **2.9**                  |        | 31.0 |   |
| Common  stock held by employee plans                | ** ** | ** **             |       |                   |       | **(19.3**                | **)**       | (27.6 | ) |
| Accumulated  other comprehensive loss               | ** ** | ** **             |       |                   |       | **(29.0**                | **)**       | (23.1 | ) |
| Retained  earnings                                  | ** ** | ** **             |       |                   |       | **1,144.1**              |        | 1,015.6 |   |
| Total  common shareholders’ equity             | ** ** | ** **             |       |                   |       | **1,099.9**              |        | 997.1 |   |
|                                                |       |                   |       |                   |       |                     |        |   |   |
| **Total Liabilities and Shareholders’ Equity** | ** ** | ** **             |       |                   |       | **$**                    | **3,641.7** |   | $ | 3,637.0 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**DPL INC.**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

 
| ** **                                                                              | ** ** | ** **           | ** ** | ** ** | ** ** | ** **   | ** ** | **Common**   | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------|------------|------------|------------|--------------|------------|--------------|------------|---------------------|------------|--------------|------------|------------|------------|
| ** **                                                                              | ** ** | ** **           | ** ** | ** ** | ** ** | ** **   | ** ** | **Stock**    | ** ** | **Accumulated**     | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Common Stock (a)** | ** ** | ** ** | ** ** | **Held by**  | ** ** | **Other**    | ** ** | ** **          | ** ** | ** **   | ** ** |
| ** **                                                                              | ** ** | **Outstanding**      | ** ** | ** ** | ** ** | ** **   | ** ** | **Employee** | ** ** | **Comprehensive**   | ** ** | **Retained** | ** ** | ** ** | ** ** |
| **in millions (except Outstanding Shares)**                                             | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Warrants** | ** ** | **Plans**    | ** ** | **Income / (Loss)** | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                                                    |       |                 |       |       |       |         |       |         |       |                |       |         |       |       |       |
| Beginning balance                                                                       |       | 113,018,972          |       | $          | 1.1        |         | $          | 50.0         |       | $                   | (69.0      | )            | $          | 4.8        |       | $ | 736.5 |   | $ | 723.4 |   |
|                                                                                    |       |                 |       |       |       |         |       |         |       |                |       |         |       |       |       |
| **2007:**                                                                               |       |                 |       |       |       |         |       |         |       |                |       |         |       |       |       |
| Net income                                                                              |       |                 |       |       |       |         |       |         |       |                |       | 221.8        |       |       |       |
| Change in unrealized  gains (losses) on financial instruments, net of tax               |       |                 |       |       |       |         |       |         |       | (0.9                | )          |         |       |       |       |
| Change in deferred gains  (losses) on cash flow hedges, net of tax                      |       |                 |       |       |       |         |       |         |       | (5.5                | )          |         |       |       |       |
| Change in unrealized  gains (losses) on pension and postretirement benefits, net of tax |       |                 |       |       |       |         |       |         |       | 2.2                 |       |         |       |       |       |
| Total comprehensive  income                                                             |       |                 |       |       |       |         |       |         |       |                |       |         |       | 217.6      |       |
| Common stock dividends  (a)                                                             |       |                 |       |       |       |         |       |         |       |                |       | (111.7       | )          | (111.7     | )          |
| Treasury stock reissued                                                                 |       | 539,472              |       |       |       |         |       |         |       |                |       | 16.0         |       | 16.0       |       |
| Tax effects to equity                                                                   |       |                 |       |       |       |         |       |         |       |                |       | 1.3          |       | 1.3        |       |
| Employee / Director  stock plans                                                        |       |                 |       |       |       |         |       | 29.2         |       |                |       | 6.5          |       | 35.7       |       |
| Other                                                                                   |       |                 |       |       |       |         |       | 0.1          |       |                |       | 0.1          |       | 0.2        |       |
| Ending balance                                                                          |       | 113,558,444          |       | $          | 1.1        |         | $          | 50.0         |       | $                   | (39.7      | )            | $          | 0.6        |       | $ | 870.5 |   | $ | 882.5 |   |
|                                                                                    |       |                 |       |       |       |         |       |         |       |                |       |         |       |       |       |
| **2008:**                                                                               |       |                 |       |       |       |         |       |         |       |                |       |         |       |       |       |
| Net income                                                                              |       |                 |       |       |       |         |       |         |       |                |       | 244.5        |       |       |       |
| Change in unrealized  gains (losses) on financial instruments, net of tax               |       |                 |       |       |       |         |       |         |       | (0.5                | )          |         |       |       |       |
| Change in deferred gains  (losses) on cash flow hedges, net of tax                      |       |                 |       |       |       |         |       |         |       | (1.7                | )          |         |       |       |       |
| Change in unrealized  gains (losses) on pension and postretirement benefits, net of tax |       |                 |       |       |       |         |       |         |       | (21.5               | )          |         |       |       |       |
| Total comprehensive  income                                                             |       |                 |       |       |       |         |       |         |       |                |       |         |       | 220.8      |       |
| Common stock dividends  (a)                                                             |       |                 |       |       |       |         |       |         |       |                |       | (120.5       | )          | (120.5     | )          |
| Treasury stock reissued                                                                 |       | 2,403,436            |       | 0.1        |       | (19.0        | )          |         |       |                |       | 21.2         |       | 2.3        |       |
| Tax effects to equity                                                                   |       |                 |       |       |       |         |       |         |       |                |       | 0.3          |       | 0.3        |       |
| Employee / Director  stock plans                                                        |       |                 |       |       |       |         |       | 12.1         |       |                |       | (0.3         | )          | 11.8       |       |
| Other                                                                                   |       |                 |       |       |       |         |       |         |       |                |       | (0.1         | )          | (0.1       | )          |
| Ending balance                                                                          |       | 115,961,880          |       | $          | 1.2        |         | $          | 31.0         |       | $                   | (27.6      | )            | $          | (23.1      | )          | $ | 1,015.6 |   | $ | 997.1 |   |
|                                                                                    |       |                 |       |       |       |         |       |         |       |                |       |         |       |       |       |
| **2009:**                                                                               |       |                 |       |       |       |         |       |         |       |                |       |         |       |       |       |
| Net income                                                                              |       |                 |       |       |       |         |       |         |       |                |       | 229.1        |       |       |       |
| Change in unrealized  gains (losses) on financial instruments, net of tax               |       |                 |       |       |       |         |       |         |       | 0.5                 |       |         |       |       |       |
| Change in deferred gains  (losses) on cash flow hedges, net of tax                      |       |                 |       |       |       |         |       |         |       | (3.7                | )          |         |       |       |       |
| Change in unrealized  gains (losses) on pension and postretirement benefits, net of tax |       |                 |       |       |       |         |       |         |       | (2.7                | )          |         |       |       |       |
| Total comprehensive  income                                                             |       |                 |       |       |       |         |       |         |       |                |       |         |       | 223.2      |       |
| Common stock dividends  (a)                                                             |       |                 |       |       |       |         |       |         |       |                |       | (128.8       | )          | (128.8     | )          |
| Repurchase of warrants                                                                  |       |                 |       |       |       | (13.6        | )          |         |       |                |       | (11.6        | )          | (25.2      | )          |
| Exercise of warrants                                                                    |       | 4,973,629            |       |       |       | (14.5        | )          |         |       |                |       | 92.2         |       | 77.7       |       |
| Treasury stock purchased                                                                |       | (2,388,391           | )          |       |       |         |       |         |       |                |       | (64.4        | )          | (64.4      | )          |
| Treasury stock reissued                                                                 |       | 419,649              |       |       |       |         |       |         |       |                |       | 10.1         |       | 10.1       |       |
| Tax effects to equity                                                                   |       |                 |       |       |       |         |       |         |       |                |       | 0.8          |       | 0.8        |       |
| Employee / Director  stock plans                                                        |       |                 |       |       |       |         |       | 8.3          |       |                |       | 0.5          |       | 8.8        |       |
| Other                                                                                   |       |                 |       |       |       |         |       |         |       |                |       | 0.6          |       | 0.6        |       |
| Ending balance                                                                          |       | 118,966,767          |       | $          | 1.2        |         | $          | 2.9          |       | $                   | (19.3      | )            | $          | (29.0      | )          | $ | 1,144.1 |   | $ | 1,099.9 |   |

 

----

*(a)   Commonstock dividends per share were $1.04 in 2007, $1.10 in 2008 and $1.14 in 2009.*

 

See Notes to ConsolidatedFinancial Statements.

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**STATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                                      | ** ** | **For the years ended December 31,** | ** **  |
|-------------------------------------------------|------------|-------------------------------------------|-------------|
| **$ in millions**                          | ** ** | **2009**                                  | ** **  | **2008** | ** ** | **2007** | ** ** |
|                                            | ** ** | ** **                                |        |   |   |   |   |
| **Revenues**                                    | ** ** | **$**                                     | **1,550.4** |   | $ | 1,572.9 |   | $ | 1,507.4 |   |
|                                            | ** ** | ** **                                |        |   |   |   |   |
| **Cost of revenues:**                           | ** ** | ** **                                |        |   |   |   |   |
| Fuel                                            | ** ** | **323.6**                                 |        | 231.4 |   | 315.4 |   |
| Purchased  power                                | ** ** | **259.2**                                 |        | 379.9 |   | 300.3 |   |
| Total  cost of revenues                         | ** ** | **582.8**                                 |        | 611.3 |   | 615.7 |   |
|                                            | ** ** | ** **                                |        |   |   |   |   |
| **Gross margin**                                | ** ** | **967.6**                                 |        | 961.6 |   | 891.7 |   |
|                                            | ** ** | ** **                                |        |   |   |   |   |
| **Operating expenses:**                         | ** ** | ** **                                |        |   |   |   |   |
| Operation  and maintenance                      | ** ** | **293.4**                                 |        | 273.0 |   | 281.8 |   |
| Depreciation  and amortization                  | ** ** | **135.5**                                 |        | 127.8 |   | 124.5 |   |
| General  taxes                                  | ** ** | **116.8**                                 |        | 124.2 |   | 110.3 |   |
| Total  operating expenses                       | ** ** | **545.7**                                 |        | 525.0 |   | 516.6 |   |
|                                            | ** ** | ** **                                |        |   |   |   |   |
| **Operating income**                            | ** ** | **421.9**                                 |        | 436.6 |   | 375.1 |   |
|                                            | ** ** | ** **                                |        |   |   |   |   |
| **Other income / (expense), net:**              | ** ** | ** **                                |        |   |   |   |   |
| Investment  income                              | ** ** | **2.8**                                   |        | 7.0 |   | 23.7 |   |
| Net  gain on settlement of executive litigation | ** ** | **—**                                |        | — |   | 35.3 |   |
| Interest  expense                               | ** ** | **(38.5**                                 | **)**       | (36.5 | ) | (22.3 | ) |
| Other  income (deductions)                      | ** ** | **(2.8**                                  | **)**       | (1.1 | ) | 2.9 |   |
| Total  other income / (expense), net            | ** ** | **(38.5**                                 | **)**       | (30.6 | ) | 39.6 |   |
|                                            |       |                                      |        |   |   |   |   |
| **Earnings before income tax**                  | ** ** | **383.4**                                 |        | 406.0 |   | 414.7 |   |
|                                            | ** ** | ** **                                |        |   |   |   |   |
| Income  tax expense                             | ** ** | **124.5**                                 |        | 120.2 |   | 143.1 |   |
| ** **                                      | ** ** | ** **                                |        |   |   |   |   |
| **Net income**                                  | ** ** | **258.9**                                 |        | 285.8 |   | 271.6 |   |
|                                            | ** ** | ** **                                |        |   |   |   |   |
| Dividends  on preferred stock                   | ** ** | **0.9**                                   |        | 0.9 |   | 0.9 |   |
|                                            | ** ** | ** **                                |        |   |   |   |   |
| **Earnings on common stock**                    | ** ** | **$**                                     | **258.0**   |   | $ | 284.9 |   | $ | 270.7 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **$ in millions**                                                             | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Cash flows from operating activities:**                                          |       |                                      |       |   |   |   |   |
| Net  income                                                                        | ** ** | **$**                                     | **258.9**  |   | $ | 285.8 |   | $ | 271.6 |   |
| Adjustments  to reconcile Net income to Net cash provided by operating activities: |       |                                      |       |   |   |   |   |
| Depreciation  and amortization                                                     | ** ** | **135.5**                                 |       | 127.8 |   | 124.5 |   |
| Deferred  income taxes                                                             | ** ** | **200.1**                                 |       | 40.9 |   | (0.2 | ) |
| Gain  on transfer of assets to pension plan                                        | ** ** | **—**                                |       | — |   | (14.8 | ) |
| Net  gain on settlement of executive litigation                                    | ** ** | **—**                                |       | — |   | (35.3 | ) |
| Changes  in certain assets and liabilities:                                        |       |                                      |       |   |   |   |   |
| Accounts  receivable                                                               | ** ** | **25.7**                                  |       | (3.5 | ) | (19.0 | ) |
| Inventories                                                                        | ** ** | **(20.5**                                 | **)**      | (0.2 | ) | (20.6 | ) |
| Taxes  applicable to subsequent years                                              | ** ** | **(1.3**                                  | **)**      | (9.9 | ) | (0.1 | ) |
| Deferred  regulatory costs, net                                                    | ** ** | **(24.6**                                 | **)**      | (12.9 | ) | 9.4 |   |
| Accounts  payable                                                                  | ** ** | **(65.9**                                 | **)**      | 26.9 |   | 1.9 |   |
| Accrued  taxes payable                                                             | ** ** | **(0.9**                                  | **)**      | (50.0 | ) | 18.4 |   |
| Accrued  interest payable                                                          | ** ** | **0.2**                                   |       | — |   | 0.3 |   |
| Pension,  retiree and other benefits                                               | ** ** | **15.2**                                  |       | 31.3 |   | 26.6 |   |
| Unamortized  investment tax credit                                                 | ** ** | **(2.8**                                  | **)**      | (2.8 | ) | (2.8 | ) |
| Other                                                                              | ** ** | **(4.5**                                  | **)**      | (38.8 | ) | (6.9 | ) |
| **Net cash provided by operating activities**                                      | ** ** | **515.1**                                 |       | 394.6 |   | 353.0 |   |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash flows from investing activities:**                                          |       |                                      |       |   |   |   |   |
| Capital  expenditures                                                              | ** ** | **(167.4**                                | **)**      | (242.0 | ) | (343.2 | ) |
| **Net cash used for investing activities**                                         | ** ** | **(167.4**                                | **)**      | (242.0 | ) | (343.2 | ) |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash flows from financing activities:**                                          |       |                                      |       |   |   |   |   |
| Dividends  paid on common stock to parent                                          | ** ** | **(325.0**                                | **)**      | (155.0 | ) | (125.0 | ) |
| Dividends  paid on preferred stock                                                 | ** ** | **(0.9**                                  | **)**      | (0.9 | ) | (0.9 | ) |
| Issuance  of pollution control bonds, net                                          | ** ** | **—**                                |       | 98.4 |   | 90.0 |   |
| Retirement  of pollution control bonds                                             | ** ** | **—**                                |       | (90.0 | ) | — |   |
| Pollution  control bond proceeds held in trust                                     | ** ** | **—**                                |       | (10.0 | ) | (90.0 | ) |
| Withdrawal  of restricted funds held in trust, net                                 | ** ** | **14.5**                                  |       | 32.5 |   | 63.2 |   |
| Withdrawals  from revolving credit facilities                                      | ** ** | **260.0**                                 |       | 115.0 |   | — |   |
| Repayment  of borrowings from revolving credit facilities                          | ** ** | **(260.0**                                | **)**      | (115.0 | ) | — |   |
| Payment  of short-term debt held by parent                                         | ** ** | **—**                                |       | (20.0 | ) | (85.0 | ) |
| Issuance  of short-term debt to parent                                             | ** ** | **—**                                |       | — |   | 105.0 |   |
| **Net cash used for financing activities**                                         | ** ** | **(311.4**                                | **)**      | (145.0 | ) | (42.7 | ) |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash and cash equivalents:**                                                     |       |                                      |       |   |   |   |   |
| Net  change                                                                        | ** ** | **36.3**                                  |       | 7.6 |   | (32.9 | ) |
| Balance  at beginning of period                                                    | ** ** | **20.8**                                  |       | 13.2 |   | 46.1 |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                                     | **57.1**   |   | $ | 20.8 |   | $ | 13.2 |   |
|                                                                               |       |                                      |       |   |   |   |   |
| **Supplemental cash flow information:**                                            |       |                                      |       |   |   |   |   |
| Interest  paid, net of amounts capitalized                                         | ** ** | **$**                                     | **39.5**   |   | $ | 33.4 |   | $ | 18.5 |   |
| Income  taxes (refunded) / paid, net                                               | ** ** | **$**                                     | **(94.7**  | **)** | $ | 127.0 |   | $ | 114.7 |   |
| Non-cash  financing and investing activities:                                      |       |                                      |       |   |   |   |   |
| Accruals  for capital expenditures                                                 | ** ** | **$**                                     | **20.8**   |   | $ | 34.1 |   | $ | 45.6 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**BALANCESHEETS**

 
| ** **                                       | ** ** | **At December 31,** | ** **  |
|--------------------------------------------------|------------|--------------------------|-------------|
| **$ in millions**                           | ** ** | **2009**                 | ** **  | **2008** | ** ** |
|                                             |       |                     |        |   |   |
| **ASSETS**                                       |       |                     |        |   |   |
|                                             |       |                     |        |   |   |
| **Current assets:**                              |       |                     |        |   |   |
| Cash  and cash equivalents                       | ** ** | **$**                    | **57.1**    |   | $ | 20.8 |   |
| Restricted  funds held in trust                  | ** ** | **—**               |        | 14.5 |   |
| Accounts  receivable, net (Note 2)               | ** ** | **192.0**                |        | 225.4 |   |
| Inventories  (Note 2)                            | ** ** | **124.3**                |        | 103.8 |   |
| Taxes  applicable to subsequent years            | ** ** | **59.2**                 |        | 57.9 |   |
| Other  prepayments and current assets            | ** ** | **26.0**                 |        | 23.9 |   |
|                                             | ** ** | ** **               |        |   |   |
| Total  current assets                            | ** ** | **458.6**                |        | 446.3 |   |
|                                             |       |                     |        |   |   |
| **Property, plant and equipment:**               |       |                     |        |   |   |
| Property,  plant and equipment                   | ** ** | **5,011.0**              |        | 4,817.9 |   |
| Less:  Accumulated depreciation and amortization | ** ** | **(2,370.7**             | **)**       | (2,265.5 | ) |
|                                             | ** ** | **2,640.3**              |        | 2,552.4 |   |
|                                             |       |                     |        |   |   |
| Construction  work in process                    | ** ** | **87.9**                 |        | 153.0 |   |
| Total  net property, plant and equipment         | ** ** | **2,728.2**              |        | 2,705.4 |   |
|                                             |       |                     |        |   |   |
| **Other noncurrent assets:**                     |       |                     |        |   |   |
| Regulatory  assets (Note 3)                      | ** ** | **214.2**                |        | 195.6 |   |
| Other  assets                                    | ** ** | **56.4**                 |        | 50.4 |   |
|                                             | ** ** | ** **               |        |   |   |
| Total  other noncurrent assets                   | ** ** | **270.6**                |        | 246.0 |   |
|                                             |       |                     |        |   |   |
| **Total Assets**                                 | ** ** | **$**                    | **3,457.4** |   | $ | 3,397.7 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**BALANCESHEETS**

 
| ** **                                          | ** ** | **At December 31,** | ** **  |
|-----------------------------------------------------|------------|--------------------------|-------------|
| **$ in millions**                              | ** ** | **2009**                 | ** **  | **2008** | ** ** |
|                                                |       |                     |        |   |   |
| **LIABILITIES AND SHAREHOLDER’S EQUITY**       |       |                     |        |   |   |
|                                                |       |                     |        |   |   |
| **Current liabilities:**                            |       |                     |        |   |   |
| Current  portion - long-term debt                   | ** ** | **$**                    | **100.6**   |   | $ | 0.7 |   |
| Accounts  payable                                   | ** ** | **75.1**                 |        | 176.6 |   |
| Accrued  taxes                                      | ** ** | **68.6**                 |        | 70.5 |   |
| Accrued  interest                                   | ** ** | **13.1**                 |        | 12.9 |   |
| Customers  security deposits                        | ** ** | **19.4**                 |        | 19.8 |   |
| Other  current liabilities                          | ** ** | **23.2**                 |        | 14.2 |   |
| Total  current liabilities                          | ** ** | **300.0**                |        | 294.7 |   |
|                                                |       |                     |        |   |   |
| **Noncurrent liabilities:**                         |       |                     |        |   |   |
| Long-term  debt                                     | ** ** | **783.7**                |        | 884.0 |   |
| Deferred  taxes                                     | ** ** | **553.0**                |        | 358.3 |   |
| Regulatory  liabilities (Note 3)                    | ** ** | **125.4**                |        | 121.9 |   |
| Pension,  retiree and other benefits                | ** ** | **111.7**                |        | 94.7 |   |
| Unamortized  investment tax credit                  | ** ** | **35.2**                 |        | 38.0 |   |
| Other  deferred credits                             | ** ** | **122.9**                |        | 108.3 |   |
| Total  noncurrent liabilities                       | ** ** | **1,731.9**              |        | 1,605.2 |   |
|                                                |       |                     |        |   |   |
| **Redeemable preferred stock**                      | ** ** | **22.9**                 |        | 22.9 |   |
|                                                |       |                     |        |   |   |
| Commitments  and contingencies (Note 19)            |       |                     |        |   |   |
|                                                |       |                     |        |   |   |
| **Common shareholder’s equity:**               |       |                     |        |   |   |
| Common  stock, at par value of $0.01 per share      | ** ** | **0.4**                  |        | 0.4 |   |
| Other  paid-in capital                              | ** ** | **781.6**                |        | 783.1 |   |
| Accumulated  other comprehensive loss               | ** ** | **(19.7**                | **)**       | (16.1 | ) |
| Retained  earnings                                  | ** ** | **640.3**                |        | 707.5 |   |
| Total  common shareholder’s equity             | ** ** | **1,402.6**              |        | 1,474.9 |   |
|                                                |       |                     |        |   |   |
| **Total Liabilities and Shareholder’s Equity** | ** ** | **$**                    | **3,457.4** |   | $ | 3,397.7 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**THEDAYTON POWER AND LIGHT COMPANY**

**STATEMENTSOF SHAREHOLDER’S EQUITY**

 
| ** **                                                                              | ** ** | ** **           | ** ** | ** ** | ** ** | ** **  | ** ** | **Accumulated**     | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------|------------|------------|------------|-------------|------------|---------------------|------------|--------------|------------|------------|------------|
| ** **                                                                              | ** ** | **Common Stock (a)** | ** ** | **Other**  | ** ** | **Other**   | ** ** | ** **          | ** ** | ** **   | ** ** |
| ** **                                                                              | ** ** | **Outstanding**      | ** ** | ** ** | ** ** | **Paid-in** | ** ** | **Comprehensive**   | ** ** | **Retained** | ** ** | ** ** | ** ** |
| **in millions (except Outstanding Shares)**                                             | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Income / (Loss)** | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                                                    |       |                 |       |       |       |        |       |                |       |         |       |       |       |
| Beginning balance                                                                       |       | 41,172,173           |       | $          | 0.4        |        | $          | 783.7               |       | $            | 28.1       |       | $          | 432.0 |   | $ | 1,244.2 |   |
|                                                                                    |       |                 |       |       |       |        |       |                |       |         |       |       |       |
| **2007:**                                                                               |       |                 |       |       |       |        |       |                |       |         |       |       |       |
| Net income                                                                              |       |                 |       |       |       |        |       |                |       | 271.6        |       |       |       |
| Change in unrealized  gains (losses) on financial instruments, net of tax               |       |                 |       |       |       |        |       | (7.7                | )          |         |       |       |       |
| Change in deferred  gains (losses) on cash flow hedges, net of tax                      |       |                 |       |       |       |        |       | (5.5                | )          |         |       |       |       |
| Change in unrealized  gains (losses) on pension and postretirement benefits, net of tax |       |                 |       |       |       |        |       | 2.2                 |       |         |       |       |       |
| Total comprehensive  income                                                             |       |                 |       |       |       |        |       |                |       |         |       | 260.6      |       |
| Common stock dividends                                                                  |       |                 |       |       |       |        |       |                |       | (125.0       | )          | (125.0     | )          |
| Preferred stock  dividends                                                              |       |                 |       |       |       |        |       |                |       | (0.9         | )          | (0.9       | )          |
| Tax effects to equity                                                                   |       |                 |       |       |       | 1.3         |       |                |       |         |       | 1.3        |       |
| Employee / Director  stock plans                                                        |       |                 |       |       |       | (0.3        | )          |                |       |         |       | (0.3       | )          |
| Other                                                                                   |       |                 |       |       |       | 0.1         |       | —              |       | (0.1         | )          | —     |       |
| Ending balance                                                                          |       | 41,172,173           |       | $          | 0.4        |        | $          | 784.8               |       | $            | 17.1       |       | $          | 577.6 |   | $ | 1,379.9 |   |
|                                                                                    |       |                 |       |       |       |        |       |                |       |         |       |       |       |
| **2008:**                                                                               |       |                 |       |       |       |        |       |                |       |         |       |       |       |
| Net income                                                                              |       |                 |       |       |       |        |       |                |       | 285.8        |       |       |       |
| Change in unrealized  gains (losses) on financial instruments, net of tax               |       |                 |       |       |       |        |       | (9.8                | )          |         |       |       |       |
| Change in deferred  gains (losses) on cash flow hedges, net of tax                      |       |                 |       |       |       |        |       | (1.7                | )          |         |       |       |       |
| Change in unrealized  gains (losses) on pension and postretirement benefits, net of tax |       |                 |       |       |       |        |       | (21.7               | )          |         |       |       |       |
| Total comprehensive  income                                                             |       |                 |       |       |       |        |       |                |       |         |       | 252.6      |       |
| Common stock dividends                                                                  |       |                 |       |       |       |        |       |                |       | (155.0       | )          | (155.0     | )          |
| Preferred stock  dividends                                                              |       |                 |       |       |       |        |       |                |       | (0.9         | )          | (0.9       | )          |
| Tax effects to equity                                                                   |       |                 |       |       |       | 0.3         |       |                |       |         |       | 0.3        |       |
| Employee / Director  stock plans                                                        |       |                 |       |       |       | (2.0        | )          |                |       |         |       | (2.0       | )          |
| Ending balance                                                                          |       | 41,172,173           |       | $          | 0.4        |        | $          | 783.1               |       | $            | (16.1      | )          | $          | 707.5 |   | $ | 1,474.9 |   |
|                                                                                    |       |                 |       |       |       |        |       |                |       |         |       |       |       |
| **2009:**                                                                               |       |                 |       |       |       |        |       |                |       |         |       |       |       |
| Net income                                                                              |       |                 |       |       |       |        |       |                |       | 258.9        |       |       |       |
| Change in unrealized  gains (losses) on financial instruments, net of tax               |       |                 |       |       |       |        |       | 2.7                 |       |         |       |       |       |
| Change in deferred  gains (losses) on cash flow hedges, net of tax                      |       |                 |       |       |       |        |       | (3.7                | )          |         |       |       |       |
| Change in unrealized  gains (losses) on pension and postretirement benefits, net of tax |       |                 |       |       |       |        |       | (2.7                | )          |         |       |       |       |
| Total comprehensive  income                                                             |       |                 |       |       |       |        |       |                |       |         |       | 255.2      |       |
| Common stock dividends                                                                  |       |                 |       |       |       |        |       |                |       | (325.0       | )          | (325.0     | )          |
| Preferred stock dividends                                                               |       |                 |       |       |       |        |       |                |       | (0.9         | )          | (0.9       | )          |
| Tax effects to equity                                                                   |       |                 |       |       |       | 0.8         |       |                |       |         |       | 0.8        |       |
| Employee / Director  stock plans                                                        |       |                 |       |       |       | (2.5        | )          |                |       |         |       | (2.5       | )          |
| Other                                                                                   |       |                 |       |       |       | 0.2         |       | 0.1                 |       | (0.2         | )          | 0.1        |       |
| Ending balance                                                                          |       | 41,172,173           |       | $          | 0.4        |        | $          | 781.6               |       | $            | (19.7      | )          | $          | 640.3 |   | $ | 1,402.6 |   |

 

----

*(a)  50,000,000 shares authorized.*

 

See Notes to ConsolidatedFinancial Statements.

 

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**Notes toConsolidated Financial Statements**

 

This report includes thecombined filing of **DPL** and **DP&L.  DP&L**isthe principal subsidiary of **DPL**providingapproximately 98% of **DPL’s**totalconsolidated revenue and approximately 95% of **DPL’s**totalconsolidated asset base.  Throughout thisreport, the terms “we,” “us,” “our” and “ours” are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in the section.

 

Some of the Notespresented in this report are only applicable to **DPL** or **DP&L**as indicated.  The other Notes apply toboth registrants and the financial information presented is segregated byregistrant.

 

*1.     Overview and Summary of SignificantAccounting Policies*

 

**Description of Business**

 

**DPL**is a diversifiedregional energy company organized in 1985 under the laws of Ohio.  **DPL’s**principal subsidiary is **DP&L**.  **DP&L**is a public utility incorporated in 1911 under the laws of Ohio.  **DP&L**is engaged in generation, transmission, distribution and the sale ofelectricity to residential, commercial, industrial and governmental customersin a 6,000 square mile area of West Central Ohio.  Electricity for **DP&L’s** 24 county service area is primarily generated ateight coal-fired power plants and is distributed to more than 500,000 retailcustomers.  Principal industries servedinclude automotive, food processing, paper, plastic manufacturing and defense.

 

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

 

**DPL’s** other significant subsidiaries includeDPLE, which engages in the operation of peaking generating facilities; DPLER,which is a CRES provider selling retail electric energy and other energyservices; and MVIC, our captive insurance company that provides insuranceservices to us and our subsidiaries.  Allof **DPL’s** subsidiaries are wholly-owned.

 

**DPL**also has a wholly-owned business trust,DPL Capital Trust II, formed for the purpose of issuing trust capitalsecurities to investors.

 

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

 

**DP&L’s** electric transmission and distributionbusinesses are subject to rate regulation by federal and state regulators whileits generation business is not subject to such regulation.  Accordingly, **DP&L**applies the accounting standards for regulated operations to its electrictransmission and distribution businesses and records regulatory assets whenincurred costs are expected to be recovered in future customer rates, andregulatory liabilities when current cost recoveries in customer rates relate toexpected future costs.

 

**Financial Statement Presentation**

 

We prepare Consolidated Financial Statementsfor **DPL**. **DPL’s** Consolidated Financial Statementsinclude the accounts of **DPL** andits wholly-owned subsidiaries.  DPLCapital Trust II is not consolidated, consistent with the provisions of GAAPrelating to variable interest entities.

 

**DP&L** has an undivided ownership interest inseven electric generating facilities and numerous transmission facilities.  These undivided interests in jointly ownedfacilities are accounted for on a pro rata basis in **DP&L’s**Financial Statements.

 

All material intercompanyaccounts and transactions are eliminated in consolidation.

 

We have evaluated allsubsequent events through February 11, 2010 which is the date thesefinancial statements were filed with the SEC.

 

Thepreparation of financial statements in conformity with GAAP requires us to makeestimates and judgments that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities, and therevenue and expenses of the periods reported. Actual results could differ from those estimates.  Significant items subject to such estimatesand judgments include: the carrying value of property, plant and equipment;unbilled revenues; the valuation of derivative instruments; the valuation ofinsurance and claims liabilities; the valuation of allowances for receivablesand deferred income taxes; regulatory assets and liabilities; reserves recordedfor income tax exposures; litigation; contingencies; the valuation of AROs; andassets and liabilities related to employee benefits.

 

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**Revisions**

 

During the preparation ofour annual report on Form 10-K for the year ended December 31, 2009,we identified certain immaterial items that had not been correctly presented inour prior period balance sheets. Accordingly, we have made the following adjustments to our prior periodbalance sheets to conform to the current period presentation. These adjustmentsdid not have any impact on our gross margin, operating income, net income,earnings per share or cash flows as previously reported.

 

Property Taxes

 

Certain accrued taxesrepresenting property tax liabilities had been previously classified as acurrent liability and should have been classified as a noncurrentliability.  As a result of thisreclassification, accrued taxes decreased at **DPL**by $57.5 million from $130.4 million to $72.9 million and also by the same$57.5 million at **DP&L** from $128.0 million to$70.5 million as of December 31, 2008. This same reclassification also increased other deferred credits at **DPL** by $57.5 million from $50.7 million to $108.2 millionand at **DP&L** by $57.5 million from $50.8million to $108.3 million as of December 31, 2008.

 

Deferred Taxes

 

Certain deferred taxesthat related to amounts recorded in accumulated other comprehensiveincome/(loss) for pension-related costs had been previously classified withindeferred taxes and should have been classified within accumulated other comprehensiveincome/(loss).  In addition, certaindeferred taxes that related to amounts recoverable from customers in futurerates had also been incorrectly presented. As a result of these two deferred tax items, deferred taxes decreased at**DPL** by $59.6 million from $433.7million to $374.1 million and at **DP&L** by$59.5 million from $417.8 million to $358.3 million as of December 31,2008.  These same reclassifications alsodecreased accumulated other comprehensive loss at **DPL**by $21.5 million from $44.6 million to $23.1 million and at **DP&L** by $21.4 million from $37.5 million to $16.1million and decreased regulatory assets at both **DPL**and **DP&L** by $38.1 million from $233.7million to $195.6 million as of December 31, 2008.  These reclassifications also resulted in anincrease in accumulated other comprehensive income at **DPL**by $9.8 million from a loss of $9.2 million to income of $0.6 million and at **DP&L** by $10.6 million from $6.5 million to $17.1 millionas of December 31, 2007 and an increase in accumulated other comprehensiveincome at **DPL** by $11.3 million from a loss of$6.5 million to income of $4.8 million and at **DP&L**by $13.0 million from $15.1 million to $28.1 million as of December 31,2006.

 

## **RevenueRecognition**

## ** **

Revenues are recognizedfrom retail and wholesale electricity sales and electricity transmission anddistribution delivery services.  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 collection isreasonably assured.  The determination ofenergy sales to customers is based on the reading of their meters and thisoccurs on a systematic basis throughout the month.  We recognize the revenues on our statementsof results of operations using an accrual method for retail and other energysales that have not yet been billed, but where electricity has beenconsumed.  This is termed “unbilled revenues” and is a widely recognizedand accepted practice for utilities.  Atthe end of each month, unbilled revenues are determined by the estimation ofunbilled energy provided to customers since the date of the last meter reading,projected line losses, the assignment of unbilled energy provided to customerclasses and the average rate per customer class.

 

All of the power producedat the generation plants is sold to an RTO and we in turn purchase it back fromthe RTO to supply our customers.  Thesepower sales and purchases are reported on a net hourly basis as revenues orpurchased power on our statements of results of operations.  We record expenses when purchased electricityis received and when expenses are incurred, with the exception of theineffective portion of certain power purchase contracts that are derivativesand qualify for hedge accounting, as well as certain derivative contracts thatdo not qualify for hedge accounting, causing gains or losses to be recordedprior to the receipt of electricity.

 

**Allowance for Uncollectible Accounts**

 

We establish provisionsfor uncollectible accounts by using both historical average loss percentages toproject future losses and by establishing specific provisions for known creditissues.

 

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**Property, Plant and Equipment**

 

We record ourownership share of our undivided interest in jointly-held plants as an asset inproperty, plant and equipment.  Property,plant and equipment are stated at cost. For regulated transmission and distribution property, cost includesdirect labor and material, allocable overhead expenses and an allowance forfunds used during construction (AFUDC). AFUDC represents the cost of borrowed funds and equity used to financeregulated construction projects. Capitalization of AFUDC ceases at either project completion or at thedate specified by regulators.  AFUDCcapitalized in 2009, 2008 and 2007 was not material.

 

For unregulatedgeneration property, cost includes direct labor and material, allocableoverhead expenses and interest capitalized during construction using theprovisions of GAAP relating to the accounting for capitalized interest.  Capitalized interest was $2.4 million in2009, $8.9 million in 2008 and $21.8 million in 2007.

 

For substantially alldepreciable property, when a unit of property is retired, the original cost ofthat property less any salvage value is charged to Accumulated depreciation andamortization.

 

Property is evaluated forimpairment when events or changes in circumstances indicate that its carryingamount may not be recoverable.

 

## **Repairsand Maintenance**

## ** **

Costs associated withmaintenance activities, primarily power plant outages, are recognized at thetime the work is performed.  These costs,which include labor, materials and supplies, and outside services required tomaintain equipment and facilities, are capitalized or expensed based onFERC-defined units of property.

 

## **Depreciation**

## ** **

Depreciation expense iscalculated using the straight-line method, which allocates the cost of propertyover its estimated useful life.  For **DPL’s** generation, transmission, anddistribution assets, straight-line depreciation is applied on an average annualcomposite basis using group rates that approximated 2.7% in 2009, 2.7% in 2008and 2.9% in 2007.  In July 2007, **DPL** completed a depreciation rate study for non-regulatedgeneration property based on its property, plant and equipment balances during2007.  The results of the depreciationstudy concluded that **DPL’s**depreciation rates should be reduced due to projected asset lives beyondpreviously estimated useful lives.  **DPL** adjusted the depreciation rates for its non-regulatedgeneration property, effective August 1, 2007.  For the period from August 1, 2007 to December 31,2007, the reduction in depreciation expense increased income from continuingoperations by approximately $9.5 million, increased net income by approximately$6.0 million, and increased basic EPS by approximately $0.06 per share.

 

The following is asummary of **DPL’s** Property, plantand equipment with corresponding composite depreciation rates at December 31,2009 and 2008:

 

**DPL**

 
| ** **                                      | ** ** | ** **  | ** **  | **Composite** | ** ** | ** ** | ** ** | **Composite** | ** ** |
|-------------------------------------------------|------------|-------------|-------------|---------------|------------|------------|------------|---------------|------------|
| **$ in  millions**                         | ** ** | **2009**    | ** **  | **Rate**      | ** ** | **2008**   | ** ** | **Rate**      | ** ** |
| Regulated:                                      | ** ** | ** **  |        |          |       |       |       |          |       |
| Transmission                                    | ** ** | **$**       | **355.3**   | ** **    | **2.4**    | **%**      | $          | 350.2         |       | 2.4 | % |
| Distribution                                    | ** ** | **1,206.7** | ** **  | **3.7**       | **%**      | 1,146.1    |       | 3.7           | %          |
| General                                         | ** ** | **76.8**    | ** **  | **3.1**       | **%**      | 66.7       |       | 7.2           | %          |
| Non-depreciable                                 | ** ** | **57.8**    | ** **  | **N/A**       |       | 56.9       |       | N/A           |       |
| Total regulated                                 | ** ** | **$**       | **1,696.6** | ** **    | ** ** |       | $          | 1,619.9       |       |   |   |
|                                            | ** ** | ** **  |        |          |       |       |       |          |       |
| Unregulated:                                    | ** ** | ** **  |        |          |       |       |       |          |       |
| Production / Generation                         | ** ** | **$**       | **3,519.2** | ** **    | **2.5**    | **%**      | $          | 3,403.0       |       | 2.4 | % |
| Other                                           | ** ** | **35.0**    | ** **  | **3.7**       | **%**      | 31.8       |       | 3.5           | %          |
| Non-depreciable                                 | ** ** | **18.4**    | ** **  | **N/A**       |       | 18.7       |       | N/A           |       |
| Total unregulated                               | ** ** | **$**       | **3,572.6** | ** **    | ** ** |       | $          | 3,453.5       |       |   |   |
|                                            | ** ** | ** **  |        |          |       |       |       |          |       |
| Total property, plant  and equipment in service | ** ** | **$**       | **5,269.2** | ** **    | **2.7**    | **%**      | $          | 5,073.4       |       | 2.7 | % |

 

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For **DP&L’s** generation, transmission, anddistribution assets, straight-line depreciation is applied on an average annualcomposite basis using group rates that approximated 2.7% in 2009, 2.6% in 2008and 2.8% in 2007.

 

The following is asummary of **DP&L’s** Property,plant and equipment with corresponding composite depreciation rates at December 31,2009 and 2008:

 

**DP&L**

 
| ** **                                      | ** ** | ** **  | ** **  | **Composite** | ** ** | ** ** | ** ** | **Composite** | ** ** |
|-------------------------------------------------|------------|-------------|-------------|---------------|------------|------------|------------|---------------|------------|
| **$ in  millions**                         | ** ** | **2009**    | ** **  | **Rate**      | ** ** | **2008**   | ** ** | **Rate**      | ** ** |
| Regulated:                                      | ** ** | ** **  |        |          |       |       |       |          |       |
| Transmission                                    | ** ** | **$**       | **355.3**   | ** **    | **2.4**    | **%**      | $          | 350.2         |       | 2.4 | % |
| Distribution                                    | ** ** | **1,206.7** | ** **  | **3.7**       | **%**      | 1,146.2    |       | 3.7           | %          |
| General                                         | ** ** | **76.8**    | ** **  | **3.1**       | **%**      | 66.7       |       | 7.2           | %          |
| Non-depreciable                                 | ** ** | **57.8**    | ** **  | **N/A**       |       | 56.9       |       | N/A           |       |
| Total regulated                                 | ** ** | **$**       | **1,696.6** | ** **    | ** ** |       | $          | 1,620.0       |       |   |   |
|                                            | ** ** | ** **  |        |          |       |       |       |          |       |
| Unregulated:                                    | ** ** | ** **  |        |          |       |       |       |          |       |
| Production                                      | ** ** | **$**       | **3,299.1** | ** **    | **2.4**    | **%**      | $          | 3,182.6       |       | 2.3 | % |
| Non-depreciable                                 | ** ** | **15.3**    | ** **  | **N/A**       |       | 15.3       |       | N/A           |       |
| Total unregulated                               | ** ** | **$**       | **3,314.4** | ** **    | ** ** |       | $          | 3,197.9       |       |   |   |
|                                            | ** ** | ** **  |        |          |       |       |       |          |       |
| Total property, plant  and equipment in service | ** ** | **$**       | **5,011.0** | ** **    | **2.7**    | **%**      | $          | 4,817.9       |       | 2.6 | % |

 

## **AROs**

## ** **

We recognize AROs inaccordance with GAAP.  GAAP requireslegal obligations associated with the retirement of long-lived assets to berecognized at their fair value at the time those obligations are incurred.  Upon initial recognition of a legalliability, costs are capitalized as part of the related long-lived asset anddepreciated over the useful life of the related asset.  Our legal obligations associated with theretirement of our long-lived assets consisted primarily of river intake anddischarge structures, coal unloading facilities, loading docks, ice breakersand ash disposal facilities.  Ourgeneration AROs are recorded within other deferred credits on the balancesheets.

 

Estimating the amount andtiming of future expenditures of this type requires significant judgment.  Management routinely updates these estimatesas additional information becomes available.

 

**Changes in the Liability forGeneration AROs**

 
| **$ in millions**         | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Balance at  January 1     | ** ** | **$**    | **13.2**   |     | $          | 12.5 |   |
| Accretion expense              | ** ** | **0.8**  |       | 0.7      |       |
| Additions                      | ** ** | **2.1**  |       | —   |       |
| Settlements                    | ** ** | **(0.5** | **)**      | (1.0     | )          |
| Estimated cash flow  revisions | ** ** | **0.6**  |       | 1.0      |       |
| Balance at  December 31   | ** ** | **$**    | **16.2**   |     | $          | 13.2 |   |

 

**AssetRemoval Costs**

 

We continue to recordcost of removal for our regulated transmission and distribution assets throughour depreciation rates and recover those amounts in rates charged to ourcustomers.  There are no known legal AROsassociated with these assets.  We haverecorded $99.1 million and $96.0 million in estimated costs of removal at December 31,2009 and 2008, respectively, as regulatory liabilities for our transmission anddistribution property.  These amountsrepresent the excess of the cumulative removal costs recorded throughdepreciation rates versus the cumulative removal costs actually incurred.  See Note 3 of Notes to Consolidated FinancialStatements.

 

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**Changes in the Liability forTransmission and Distribution Asset Removal Costs**

 
| **$ in millions**       | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Balance at  January 1   | ** ** | **$**    | **96.0**   |     | $          | 91.5 |   |
| Additions                    | ** ** | **6.5**  |       | 8.3      |       |
| Settlements                  | ** ** | **(3.4** | **)**      | (3.8     | )          |
| Balance at  December 31 | ** ** | **$**    | **99.1**   |     | $          | 96.0 |   |

 

**RegulatoryAccounting**

 

In accordance with GAAP,regulatory assets and liabilities are recorded in the balance sheets for ourregulated transmission and distribution businesses.  Regulatory assets are the deferral of costsexpected to be recovered in future customer rates and Regulatory liabilitiesrepresent current recovery of expected future costs.

 

We evaluate ourRegulatory assets each period and believe recovery of these assets isprobable.  We have received or requesteda return on certain regulatory assets for which we are currently recovering orseeking recovery through rates.  Werecord a return after it has been authorized in an order by a regulator.  If we were required to terminate applicationof these GAAP provisions for all of our regulated operations, we would have towrite off the amounts of all regulatory assets and liabilities to thestatements of results of operations at that time.  See Note 3 of Notes to Consolidated FinancialStatements.

 

**Inventories**

 

Inventories are carriedat average cost and include coal, limestone, oil and gas used for electricgeneration, and materials and supplies used for utility operations.

 

We account for ouremission allowances as inventory and record emission allowance inventory atweighted average 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 month.  Net gains or losses on the sale of excessemission allowances, representing the difference between the sales proceeds andthe weighted average cost of emission allowances, are recorded as a componentof our fuel costs and are reflected in Operating income when realized.  During the periods ended December 31,2009, 2008 and 2007, we recognized gains from the sale of emission allowancesin the amounts of $5.0 million, $34.8 million and $1.2 million,respectively.  Beginning in January 2010,most of the gains on emission allowances will be used to reduce the overallfuel rider charged to the Ohio retail jurisdiction.

 

At December 31,2009, we had substantially placed into service FGD equipment at most of our **DP&L**and partner-operated facilities.

 

**Income Taxes**

 

GAAP requires an assetand liability approach for financial accounting and reporting of income taxeswith tax effects of differences, based on currently enacted income tax rates,between the financial reporting and tax basis of accounting reported asdeferred tax assets or liabilities in the balance sheets.  Deferred tax assets are recognized fordeductible temporary differences. Valuation allowances are provided against deferred tax assets unless itis more likely than not that the asset will be realized.

 

Investment tax credits,which have been used to reduce federal income taxes payable, have been deferredfor financial 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 income taxeswill be recoverable or refundable through future revenues.

 

**DPL** files a consolidated U.S. federal incometax return in conjunction with its subsidiaries.  The consolidated tax liability is allocatedto each subsidiary based on the separate return method which is specified inour tax allocation agreement and which provides a consistent, systematic andrational approach.  See Note 8 of Notesto Consolidated Financial Statements.

 

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**Accounting for Taxes Collectedfrom Customers and Remitted to Governmental Authorities**

 

**DP&L** collects certain excise taxes levied bystate or local governments from its customers. **DP&L’s**excise taxes are accounted for on a gross basis and recorded as revenues andgeneral taxes in the accompanying Statements of Results of Operations asfollows:

 
| ** **                | ** ** | **For the years ended** | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **December 31,**   | ** ** |
| **$ in millions**    | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| State/Local excise  taxes | ** ** | **$**                   | **49.5**   |   | $ | 52.3 |   | $ | 53.2 |   |
|                           |            |                         |            |  |  |  |  |  |  |  |

 

**Stock-Based Compensation**

 

We measure the cost ofemployee services received and paid with equity instruments based on thefair-value of such equity on the grant date. This cost is recognized in results of operations over the period thatemployees are required to provide service. Liability awards are initially recorded based on the fair-value ofequity instruments and are to be re-measured for the change in stock price ateach subsequent reporting date until the liability is ultimately settled.  The fair-value for employee share options andother similar instruments at the grant date are estimated using option-pricingmodels and any excess tax benefits are recognized as an addition to paid-incapital.  The reduction in income taxespayable from the excess tax benefits is presented in the statements of cashflows within Cash flows from financing activities.  See Note 12 of Notes to ConsolidatedFinancial Statements.

 

**Cash and Cash Equivalents**

 

## **Cash and cash equivalents are stated at cost, whichapproximates fair value.  All highlyliquid short-term investments with original maturities of three months or lessare considered cash equivalents.**

## ** **

**FinancialInstruments**

 

We classify ourinvestments in debt and equity financial instruments of publicly tradedentities into different categories: held-to-maturity and available-for-sale.  Available-for-sale securities are carried atfair value and unrealized gains and losses on those securities, net of deferredincome taxes, are presented as a separate component of shareholders’equity.  Other-than-temporary declines invalue are recognized currently in earnings. Financial instruments classified as held-to-maturity are carried atamortized cost.  The cost basis forpublic equity security and fixed maturity investments is average cost andamortized cost, respectively.

 

### ***Financial Derivatives***

### * *

Allderivatives are recognized as either assets or liabilities in the balancesheets and are measured at fair value. Changes in the fair value are recorded in earnings unless they aredesignated as a cash flow hedge of a forecasted transaction or qualify for thenormal purchases and sales exception.

 

We use forward contractsand options to reduce our exposure to changes in energy and commodity pricesand as a hedge against the risk of changes in cash flows associated withexpected electricity purchases.  Thesepurchases are required to meet full load requirements during times of peakdemand or during planned and unplanned generation facility outages.  We also hold forward sales contracts thathedge against the risk of changes in cash flows associated with power salesduring periods of projected generation facility availability.  We use cash flow hedge accounting when thehedge is deemed to be effective and MTM accounting when the hedge is noteffective.  See Note 11 of Notes toConsolidated Financial Statements.

 

### ***Insurance and Claims Costs***

### * *

In addition to insuranceobtained from third-party providers, MVIC, a wholly-owned captive subsidiary of**DPL**, provides insurance coverageto us, our subsidiaries and, in some cases, our partners in commonly ownedfacilities we operate, for workers’ compensation, general liability, propertydamage, and directors’ and officers’ liability. Insurance and claims costs on the Consolidated Balance Sheets of **DPL** include insurance reserves of approximately $16.2 millionand $17.6 million for 2009 and 2008, respectively.  Furthermore, **DP&L**is responsible for claim costs below certain coverage thresholds of MVIC forthe insurance coverage noted above.  Inaddition, **DP&L** has medical, life, anddisability reserves for claims costs below certain coverage thresholds ofthird-party providers.  **DPL**and**DP&L**recordthese additional insurance and claims costs of approximately $11.3 million and$9.8 million for 2009 and 2008, respectively, within Other current liabilitiesand Other deferred credits on the balance sheets.  The MVIC reserves at **DPL**and the workers’ compensation, medical, life, and disability reserves at **DP&L** are actuarially determined based on a reasonableestimation of insured events occurring. There is uncertainty associated with these loss estimates and actualresults may differ from the estimates.  Modificationof these loss estimates based on experience and changed circumstances isreflected in the period in which the estimate is re-evaluated.

 

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**DPLCapital Trust II**

 

**DPL** has a wholly-owned business trust, DPLCapital Trust II (the Trust), formed for the purpose of issuing trust capitalsecurities to third-party investors. Effective 2003, **DPL**deconsolidated the Trust upon adoption of the accounting standards related tovariable interest entities and currently treats the Trust as a nonconsolidatedsubsidiary.  The Trust, which holdsmandatorily redeemable trust capital securities, is reported as two componentson **DPL’s** consolidated balance sheet.  The investment in the Trust, which amounts to$3.8 million and $5.5 million at December 31, 2009 and 2008, respectively,is included in Other deferred assets within Other noncurrent assets.  **DPL** also has anote payable to the Trust amounting to $142.6 million and $195.0 million at December 31,2009 and 2008, respectively, that was established upon the Trust’sdeconsolidation in 2003.  See Note 7 ofNotes to Consolidated Financial Statements.

 

In addition to theobligations under the note payable mentioned above, **DPL**also agreed to a security obligation which represents a full and unconditionalguarantee of payments to the capital security holders of the Trust.

 

**Pension and Postretirement Benefits**

 

We recognize thefunded status of our benefit plan; recognize as a component of othercomprehensive income (OCI), net of tax, the gains or losses and prior servicecosts or credits that arise during the period but are not recognized ascomponents of net periodic benefit cost; measure defined benefit plan assetsand obligations as of the date of our fiscal year-end; and disclose in Notes toConsolidated Financial Statements additional information about certain effectson net periodic benefit costs for the next fiscal year that arise from delayedrecognition of the gains or losses, prior service costs or credits, andtransition assets or obligations.  See Note 9 of Notes to Consolidated FinancialStatements.

 

**Related Party Transactions**

 

Inthe normal course of business, **DP&L** entersinto transactions with other subsidiaries of **DPL**.  All material intercompany accounts andtransactions are eliminated in **DPL’s**Consolidated Financial Statements. The following table provides a summary ofthese transactions:

 
| **$ in millions**                                   | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |     |       |
| **DP&L** Revenues:                                   |       |     |       |     |       |     |       |
| Sales to DPLER (a)                                       | ** ** | **$**    | **64.8**   |     | $          | 150.6    |       | $ | 151.5 |   |
|                                                     |       |     |       |     |       |     |       |
| **DP&L** Operation & Maintenance  Expenses: |       |     |       |     |       |     |       |
| Insurance services  provided by MVIC (b)                 | ** ** | **$**    | **(3.4**   | **)**    | $          | (3.5     | )          | $ | (4.9 | ) |

 

----

*(a)**      ****DP&L****sells power to DPLER to satisfythe electric requirements of its retail customers.  The revenues associated with sales to DPLERare recorded as wholesale sales in **DP&L’s**Financial Statements.*

*(b)**      **MVIC, a wholly-owned captiveinsurance subsidiary of **DPL,** providesinsurance coverage to **DP&L** andother **DPL**subsidiaries for workers’compensation, general liability, property damages and directors’ and officers’liability.  These amounts representinsurance premiums paid by **DP&L** toMVIC.*

 

**RecentlyAdopted Accounting Standards**

 

**FASBCodification**

 

We adopted FASC 105, “GenerallyAccepted Accounting Principles” (formerly SFAS No. 168, “The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles —a replacement of FASB Statement No. 162”),on September 30, 2009.  Theobjective of this Statement is to replace Statement No. 162 and toestablish the FASC as the source of authoritative accounting principlesrecognized by the FASB to be applied by nongovernmental entities in thepreparation of financial statements in conformity with GAAP.  Rules and interpretive releases of theSEC under authority of federal securities laws are also sources ofauthoritative GAAP for SEC registrants. This update did not have a material impact on our overall results ofoperations, financial position or cash flows.

 

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**Disclosures about DerivativeInstruments and Hedging Activities**

 

We adopted an update toFASC 815, “Derivatives and Hedging” (formerly SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities — an amendment to FASBStatement No. 133”), on January 1, 2009.  This update requires an entity to provideenhanced disclosures about: (a) how and why an entity uses derivativeinstruments; (b) how derivative instruments and related hedged items areaccounted for under FASC 815 and its related interpretations; and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance and cash flows. This update did not have a material impact on our overall results ofoperations, financial position or cash flows. See Note 11 of Notes to Consolidated Financial Statements.

 

**ParticipatingSecurities and EPS**

 

Weadopted an update to FASC 260, “Earnings per Share” (formerly Staff PositionEITF 03-6-1, “Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities”) on January 1, 2009.  This update clarifies that unvestedshare-based awards that contain non-forfeitable rights to dividends or dividendequivalents (whether paid or unpaid) are participating securities and must beincluded in the computation of EPS pursuant to the two-class method.  This update did not have a material impact onour overall results of operations, financial position or cash flows.

 

**Meaningof “Indexed to a Company’s Own Stock”**

 

Weadopted an update to FASC 815, “Derivatives and Hedging” (formerly EITF Issue No. 07-5,“Determining Whether an Instrument (or Embedded Feature) is Indexed to anEntity’s Own Stock”), on January 1, 2009. This update gives guidance on when a financial instrument is consideredto be indexed to a company’s own stock to meet the criteria for FASC815-10-15-74(a) (formerly paragraph 11(a) of FASB Statement No. 133,“Accounting for Derivative Financial Instruments.”)  This update did not have a material impact onour overall results of operations, financial position or cash flows.

 

**InterimDisclosures about Fair Value of Financial Instruments**

 

Weadopted an update of FASC 825, “Financial Instruments” (formerly Staff PositionSFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of FinancialInstruments”), on June 30, 2009. This update requires disclosure about the fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements.  Thisupdate did not have a material impact on our overall results of operations,financial position or cash flows.  SeeNote 10 of Notes to Consolidated Financial Statements.

 

**SubsequentEvents**

 

We adopted FASC 855, “SubsequentEvents” (formerly SFAS 165), on June 30, 2009.  FASC 855 incorporates the guidance in theAmerican Institute of Certified Public Accountants’ Auditing Standard 560 —Subsequent Events, into the accounting guidance.  This new standard does not change currentaccounting practices.  FASC 855 did not have a material impact onour overall results of operations, financial position or cash flows.

 

**Disclosuresabout Pensions and Other Postretirement Benefits**

 

Weadopted an update to FASC 715, “Compensation — Retirement Plans” (formerlyStaff Position SFAS 132(R)-1, “Employers’ Disclosures about PostretirementBenefit Plan Assets”), on December 31, 2009.  This update requires disclosures aboutbenefit plan assets similar to the disclosure required in FASC 820, “Fair ValueMeasurements and Disclosures.”  It alsorequires discussions on investment allocation decisions, major categories ofplan assets and significant concentrations of risk in plan assets for theperiod.  This update did not have amaterial impact on our overall results of operations, financial position orcash flows.  See Note 9 of Notes toConsolidated Financial Statements.

 

**RedeemableEquity Instruments**

 

Weadopted ASU 2009-04, “Accounting for Redeemable Equity Instruments, anamendment to Section 480-10-S99,” (ASU 2009-04) on October 1,2009.  ASU 2009-04 clarifies that SECAccounting Series Release 268 pertains to preferred stocks and otherredeemable securities including common stock, derivative instruments,non-controlling interest, securities held by an ESOP and share-based paymentarrangements with employees.  This updatedid not have a material impact on our overall results of operations, financialposition or cash flows.

 

**MeasuringLiabilities at Fair Value**

 

Weadopted ASU 2009-05, “Measuring Liabilities at Fair Value,” (ASU 2009-05) on October 1,2009.  ASU 2009-05 provides additionalguidance clarifying the measurement of liabilities at fair value.  This update did not have a material impact onour overall results of operations, financial position or cash flows.

 

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**Investments in Certain Entitiesthat Calculate Net Asset Value per Share**

 

We adopted ASU 2009-12, “FairValue Measurements and Disclosures,” (ASU 2009-12) on December 31,2009.  ASU 2009-12 updates FASC 820-10, “FairValue Measurements and Disclosures — Overall” and allows, as a practicalexpedient, a reporting entity to measure the fair value of an investment thatis within the scope of these amendments on the basis of the net asset value pershare of the investment if the net asset value of the investment is calculatedin a manner consistent with the measurement principles of FASC 946, “FinancialServices — Investment Companies.”  This update did not have a material impacton our overall results of operations, financial position or cash flows.

 

**RecentlyIssued Accounting Standards**

 

**VariableInterest Entities**

 

In June 2009, theFASB issued ASU 2009-02 “Omnibus Update” (formerly SFAS No. 167, arevision to FASB Interpretation No. 46(R), “**Consolidation of Variable Interest Entities,”)****(ASU 2009-02) that is effective for**annual reportingperiods beginning after November 15, 2009. We expect to adopt this ASU in the first quarter of 2010.  This standard updates FASC 810, “Consolidation.”  ASU 2009-02 changes how a company determineswhen an entity that is insufficiently capitalized or is not controlled throughvoting (or similar rights) should be consolidated.  The determination of whether a company isrequired to consolidate an entity is based on, among other things, an entity’spurpose and design and a company’s ability to direct the activities of theentity that most significantly impact the entity’s economic performance.  We do not expect these new rules to havea material impact on our overall results of operations, financial position orcash flows.

 

**FairValue Disclosures**

 

InJanuary 2010, the FASB issued ASU 2010-06 “Fair Value Measurements andDisclosures” (ASU 2010-06) effective for annual reporting periods beginningafter December 15, 2009.  We expectto adopt this ASU on January 1, 2010. This standard updates FASC 820, “Fair Value Measurements.”  ASU 2010-06 requires additional disclosuresabout fair value measurements including transfers in and out of Levels 1 and 2and a higher level of disaggregation for the different types of financialinstruments.  For the reconciliation ofLevel 3 fair value measurements, information about purchases, sales, issuancesand settlements should be presented separately. We do not expect these new rules to have a material impact on ouroverall results of operations, financial position or cash flows.

 

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*2.  Supplemental Financial Information*

* *

**DPL Inc.**

* *
| ** **                                         | ** ** | **At**                | ** ** | **At**                | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                             | ** ** | **2009**              | ** ** | **2008**              | ** ** |
|                                               |       |                  |       |                  |       |
| **Accounts  receivable, net:**                     |       |                  |       |                  |       |
| Unbilled revenue                                   | ** ** | **$**                 | **74.9**   |                  | $          | 82.5 |   |
| Customer receivables                               | ** ** | **99.4**              |       | 107.5                 |       |
| Amounts due from  partners in jointly-owned plants | ** ** | **12.6**              |       | 28.0                  |       |
| Coal sales                                         | ** ** | **10.6**              |       | 25.6                  |       |
| Other                                              | ** ** | **16.4**              |       | 17.4                  |       |
| Provision for  uncollectible accounts              | ** ** | **(1.1**              | **)**      | (1.1                  | )          |
| **Total  accounts receivable, net**                | ** ** | **$**                 | **212.8**  |                  | $          | 259.9 |   |
|                                               |       |                  |       |                  |       |
| **Inventories,  at average cost:**                 |       |                  |       |                  |       |
| Fuel, limestone and  emission allowances           | ** ** | **$**                 | **85.8**   |                  | $          | 68.7 |   |
| Plant materials and  supplies                      | ** ** | **38.5**              |       | 36.3                  |       |
| Other                                              | ** ** | **1.4**               |       | 0.1                   |       |
| **Total  inventories, at average cost**            | ** ** | **$**                 | **125.7**  |                  | $          | 105.1 |   |

 

**DP&L**

 
| ** **                                         | ** ** | **At**                | ** ** | **At**                | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                             | ** ** | **2009**              | ** ** | **2008**              | ** ** |
|                                               |       |                  |       |                  |       |
| **Accounts  receivable, net:**                     |       |                  |       |                  |       |
| Unbilled revenue                                   | ** ** | **$**                 | **71.0**   |                  | $          | 74.7 |   |
| Customer receivables                               | ** ** | **94.4**              |       | 96.7                  |       |
| Amounts due from  partners in jointly-owned plants | ** ** | **12.6**              |       | 28.0                  |       |
| Coal sales                                         | ** ** | **10.6**              |       | 25.6                  |       |
| Other                                              | ** ** | **4.5**               |       | 1.5                   |       |
| Provision for uncollectible  accounts              | ** ** | **(1.1**              | **)**      | (1.1                  | )          |
| **Total  accounts receivable, net**                | ** ** | **$**                 | **192.0**  |                  | $          | 225.4 |   |
|                                               |       |                  |       |                  |       |
| **Inventories,  at average cost:**                 |       |                  |       |                  |       |
| Fuel, limestone and  emission allowances           | ** ** | **$**                 | **85.8**   |                  | $          | 68.7 |   |
| Plant materials and  supplies                      | ** ** | **37.1**              |       | 35.0                  |       |
| Other                                              | ** ** | **1.4**               |       | 0.1                   |       |
| **Total  inventories, at average cost**            | ** ** | **$**                 | **124.3**  |                  | $          | 103.8 |   |

 

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*3.  Regulatory Matters*

 

In accordance with GAAP,regulatory assets and liabilities are recorded in the balance sheets for ourregulated electric transmission and distribution businesses.  Regulatory assets are the deferral of costsexpected to be recovered in future customer rates and regulatory liabilitiesrepresent current recovery of expected future costs or gains probable ofrecovery in future rates.

 

We evaluate ourregulatory assets each period and believe recovery of these assets isprobable.  We have received or requesteda return on certain regulatory assets for which we are currently recovering orseeking recovery through rates.  Werecord a return after it has been authorized in an order by a regulator.

 

Regulatory assets andliabilities on the balance sheets include:

 
| ** **                                                  | ** ** | ** **       | ** ** | ** **       | ** ** | **At**                | ** ** | **At**                | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **Type of**      | ** ** | **Amortization** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                                      | ** ** | **Recovery (a)** | ** ** | **Through**      | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| **Regulatory  Assets:**                                     | ** ** | ** **       | ** ** |             |       |                  |       |                  |       |
| Deferred recoverable  income taxes                          |       | C/B              |       | Ongoing          | ** ** | **$**                 | **36.8**   |                  | $          | 43.1 |   |
| Pension benefits                                            |       | C                |       | Ongoing          | ** ** | **85.2**              |       | 83.3                  |       |
| Unamortized loss on  reacquired debt                        |       | C                |       | Ongoing          | ** ** | **15.6**              |       | 17.2                  |       |
| Electric Choice systems  costs                              |       | F                |       | 2011             | ** ** | **4.0**               |       | 7.1                   |       |
| Regional transmission  organization costs                   |       | D                |       | 2014             | ** ** | **7.0**               |       | 8.5                   |       |
| TCRR, transmission,  ancillary and other PJM-related costs  |       | F                |       | 2011             | ** ** | **5.5**               |       | —                |       |
| RPM capacity costs                                          |       | F                |       | 2011             | ** ** | **20.0**              |       | —                |       |
| Deferred storm costs -  2008                                |       | D                |       |             | ** ** | **16.0**              |       | 13.1                  |       |
| Power plant emission  fees                                  |       | C                |       | Ongoing          | ** ** | **6.3**               |       | 6.3                   |       |
| CCEM smart grid and  advanced metering infrastructure costs |       | D                |       |             | ** ** | **6.5**               |       | 6.4                   |       |
| CCEM energy efficiency  program costs                       |       | F                |       | Ongoing          | ** ** | **3.6**               |       | 1.9                   |       |
| Other costs                                                 |       |             |       |             | ** ** | **7.7**               |       | 8.7                   |       |
| **Total  regulatory assets**                                | ** ** | ** **       | ** ** | ** **       | ** ** | **$**                 | **214.2**  |                  | $          | 195.6 |   |
|                                                        |       |             |       |             |       |                  |       |                  |       |
| **Regulatory  Liabilities:**                                | ** ** | ** **       | ** ** |             |       |                  |       |                  |       |
| Estimated costs of  removal - regulated property            |       |             |       |             | ** ** | **$**                 | **99.1**   |                  | $          | 96.0 |   |
| SECA net revenue  subject to refund                         |       |             |       |             | ** ** | **20.1**              |       | 20.1                  |       |
| Postretirement benefits                                     |       |             |       |             | ** ** | **5.1**               |       | 5.8                   |       |
| Other costs                                                 |       |             |       |             | ** ** | **1.1**               |       | —                |       |
| **Total  regulatory liabilities**                           | ** ** | ** **       | ** ** | ** **       | ** ** | **$**                 | **125.4**  |                  | $          | 121.9 |   |

 

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

*C – Recovery of incurred costsonly.*

*B – Balance has an offsettingliability resulting in no impact on rate base.*

*D – Recovery not yet determined,but is probable of occurring in future rate proceedings.*

 

**Regulatory Assets**

** **

Deferred recoverableincome taxesrepresent deferred income tax assets recognized from the normalization offlow-through items as the result of amounts previously provided tocustomers.  This is the cumulativeflow-through benefit given to regulated customers that will be collected fromthem in future years.  Since currentlyexisting temporary differences between the financial statements and the relatedtax basis of assets will reverse in subsequent periods, these deferredrecoverable income taxes are amortized.

 

Pension benefits represent the qualifying FASC 715, “Compensation— Retirement Benefits” costs of our regulated operations that for ratemakingpurposes are deferred for future recovery. We recognize an asset for a plan’s overfunded status or a liability fora plan’s underfunded status, and recognize, as a component of other comprehensiveincome (OCI), the changes in the funded status of the plan that arise duringthe year that are not recognized as a component of net periodic benefit cost.  This regulatory asset represents theregulated portion that would otherwise be charged as a loss to OCI.

 

Unamortized loss onreacquired debtrepresents losses on long-term debt reacquired or redeemed in priorperiods.  These costs are being amortizedover the life of the original issues in accordance with FERC rules.

 

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Electric Choice systemscosts represent costsincurred to modify the customer billing system for unbundled customer rates andelectric choice utility bills relative to other generation suppliers andinformation reports provided to the state administrator of the low-incomepayment program.  In March 2006, thePUCO issued an order that approved our tariff as filed.  We began collecting this rider immediatelyand expect to recover all costs over five years.

 

Regional transmissionorganization costsrepresent costs incurred to join a RTO. The recovery of these costs will be requested in a future FERC ratecase.  In accordance with FERCprecedence, we are amortizing these costs over a 10-year period beginning in2004 when we joined the PJM RTO.

 

TCRR, transmission,ancillary and other PJM-related costs represent the costs related to transmission,ancillary service and other PJM-related charges that have been incurred as amember of PJM.  We review retail ratesand are able to make true-up adjustments on an annual basis.

 

On February 19,2009, the PUCO approved **DP&L’s**request to defer transmission, capacity, ancillary and other costs incurredsince July 31, 2008 consistent with the provisions of SB 221.  In May 2009, the PUCO granted **DP&L** authority to recover these costs through retailrates beginning June 1, 2009. Subsequently, an application for rehearing was filed claiming the PUCO’sorder allowing for recovery of RPM capacity costs through a TCRR wasunlawful.  The PUCO issued an ordergranting rehearing and, on September 9, 2009, issued an order directing **DP&L** to remove the deferred and current RPM capacitycosts from the TCRR rider but also indicating that these RPM capacity costs maybe recoverable under a separate rider.  **DP&L** made a compliance filing on September 23,2009, where it removed such costs from the TCRR rider and proposed a new RTORPM rider for the recovery of such costs. The PUCO approved the two separate riders in November 2009.  The sum of the rate collected through thecurrent TCRR rider and the new RTO RPM rider equals the rate collected throughthe original TCRR rider.  Accordingly,during the period ended December 31, 2009, **DP&L**deferred total net RTO costs in the amount of $23.5 million.  In addition, **DP&L**also deferred $1.1 million relating to Regional Transmission Expansion Plan(RTEP) costs and $0.9 million relating to interest and operation andmaintenance expenses.  Of the totaldeferred costs amounting to $25.5 million, $9.8 million relates to the period August 1,2008 through December 31, 2008, and $15.7 million relates to the yearended December 31, 2009.  Thedeferral of these costs resulted in a favorable impact to our results ofoperations.

 

RPM capacity costs represent the PJM-related costs from thecalculations of the PJM Reliability Pricing Model that allocates capacity amongthe users of the PJM System.  Asdiscussed above, **DP&L** is recovering these coststhrough a PUCO-approved RTO RPM rider. The sum of the rate collected through the current TCRR rider and the newRTO RPM rider equals the rate collected through the original TCRR rider.  We review this rate and are able to maketrue-up adjustments to it on an annual basis.

 

Deferred storm costs -2008 relate tocosts incurred to repair the damage caused by hurricane force winds in September 2008,as well as other major 2008 storms.  On January 14,2009, the PUCO granted **DP&L** theauthority to defer these costs with a return until such time that **DP&L** seeks recovery in a future rate proceeding.

 

Power plant emission fees represent costs paid to the State ofOhio since 2002 for environmental monitoring. An application is pending before the PUCO to amend an approved raterider that had been in effect to collect fees that were paid and deferred inyears prior to 2002.  The deferred costsincurred prior to 2002 have been fully recovered.  As the previously approved rate ridercontinues to be in effect, we believe these costs are probable of future raterecovery.

 

CCEM smart grid andadvanced metering infrastructure costs represent costs incurred as a result of studying anddeveloping distribution system upgrades and implementation of advanced meteringinfrastructure.  Consistent with theStipulation, **DP&L** re-filed its smart gridand advanced metering infrastructure business cases with the PUCO on August 4,2009 seeking recovery of costs associated with a 10-year plan to deploy smartmeters, distribution and substation automation, core telecommunications,supporting software and in-home technologies.  On August 5, 2009, **DP&L** submitted an application for American Recovery andReinvestment Act (ARRA) funding under the Integrated and/or CrosscuttingSystems topic area for the Smart Grid Investment Grant Program.  On October 27, 2009, we were notified bythe United States Department of Energy (DOE) that we will not receive fundingunder the ARRA.  A technical conferencein this case was held at the PUCO in October 2009 for the smart grid case,and a subsequent PUCO entry established a comment and reply commentperiod.  A hearing is not yet scheduledfor this case.  Based on past PUCO precedentand the Ohio legislature’s intent behind SB221, we believe these costs areprobable of future recovery in rates.

 

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CCEM energy efficiencyprogram costsrepresent costs incurred to develop and implement various new customer programsaddressing energy efficiency.  A portionof these costs is being recovered over three years as part of the Stipulationbeginning July 1, 2009; the remaining costs are subject to a two-yeartrue-up process for any over/under recovery of costs.

 

Other costs primarily include consumer educationadvertising costs regarding electric deregulation, settlement system costs,other PJM and rate case costs, and alternative energy costs that are or will berecovered over various periods.

 

**Regulatory Liabilities**

** **

Estimated costs ofremoval — regulated property reflect an estimate of amounts collected in customerrates that are expected to be incurred to remove existing transmission anddistribution property from service upon retirement.

 

SECA net revenue subject to refund represents our deferral of amountscollected in customer rates during 2005 and 2006.  SECA revenue and expenses represent FERC-orderedtransitional payments for the use of transmission lines within PJM.  A hearing was held in early 2006 to determineif these transitional payments are subject to refund, however, no ruling hasbeen issued.  We began receiving andpaying these transitional payments in May 2005.

 

Postretirement benefits represent the qualifying FASC 715, “Compensation —Retirement Benefits” gains related to our regulated operations that, forratemaking purposes, are probable of being reflected in future rates.  We recognize an asset for a plan’s overfundedstatus or a liability for a plan’s underfunded status, and recognize, as acomponent of OCI, the changes in the funded status of the plan that ariseduring the year that are not recognized as a component of net periodic benefitcost.  This regulatory liabilityrepresents the regulated portion that would otherwise be reflected as a gain toOCI.

 

Other costs primarily include derivative activity related to fuelcosts that will be settled over various periods.

 

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*4.  Ownershipof Coal-fired Facilities*

 

**DP&L** and other Ohio utilities have undividedownership interests in seven coal-fired electric generating facilities andnumerous transmission facilities. Certain expenses, primarily fuel costs for the generating units, areallocated to the owners based on their energy usage.  The remaining expenses, investments in fuelinventory, plant materials and operating supplies, and capital additions areallocated to the owners in accordance with their respective ownershipinterests.  As of December 31, 2009,we had $42 million ofconstruction work in process at such facilities.  **DP&L’s**share of the operating cost of such facilities is included within thecorresponding line in the Statements of Results of Operations and **DP&L’s** share of the investment in thefacilities is included in the Balance Sheets.

 

**DP&L’s** undivided ownership interest in suchfacilities as well as our wholly-owned coal fired Hutchings plant at December 31,2009, is as follows.

 
| ** **                             | ** ** | ** **            | ** ** | ** **     | ** ** | **DP&L****Investment** | ** ** |
|----------------------------------------|------------|-----------------------|------------|----------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **            | ** ** | ** **     | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **SCR  and FGD** | ** ** |
| ** **                             | ** ** | ** **            | ** ** | ** **     | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Equipment** | ** ** |
| ** **                             | ** ** | **DP&L****Share** | ** ** | ** **     | ** ** | ** **                 | ** ** | **Construction** | ** ** | **Installed** | ** ** |
| ** **                             | ** ** | ** **            | ** ** | **Production** | ** ** | **Gross  Plant**           | ** ** | **Accumulated** | ** ** | **Work  in** | ** ** | **and  In** | ** ** |
| ** **                             | ** ** | **Ownership**         | ** ** | **Capacity**   | ** ** | **In  Service**            | ** ** | **Depreciation** | ** ** | **Process** | ** ** | **Service** | ** ** |
| ** **                             | ** ** | **(%)**               | ** ** | **(MW)**       | ** ** | **($ in  millions)**  | ** ** | **($ in  millions)** | ** ** | **($ in  millions)** | ** ** | **(Yes/No)** | ** ** |
| Production Units:                      |       |                  |       |           |       |                       |       |   |   |   |   |   |   |
| Beckjord Unit 6                        |       | 50.0                  |       | 210            |       | $                          | 78         |   | $ | 56 |   | $ | — |   | No |   |
| Conesville Unit 4                      |       | 16.5                  |       | 129            |       | 124                        |       | 29 |   | 3 |   | Yes |   |
| East Bend Station                      |       | 31.0                  |       | 186            |       | 200                        |       | 129 |   | — |   | Yes |   |
| Killen Station                         |       | 67.0                  |       | 402            |       | 605                        |       | 276 |   | 2 |   | Yes |   |
| Miami Fort Units 7 and  8              |       | 36.0                  |       | 368            |       | 345                        |       | 123 |   | 9 |   | Yes |   |
| Stuart Station                         |       | 35.0                  |       | 820            |       | 683                        |       | 248 |   | 21 |   | Yes |   |
| Zimmer Station                         |       | 28.1                  |       | 365            |       | 1,056                      |       | 597 |   | 7 |   | Yes |   |
| Transmission (at  varying percentages) |       |                  |       |           |       | 91                         |       | 54 |   | — |   |   |   |
| Total                                  |       |                  |       | 2,480          |       | $                          | 3,182      |   | $ | 1,512 |   | $ | 42 |   |   |   |
|                                   |       |                  |       |           |       |                       |       |   |   |   |   |   |   |
| Wholly-owned production  unit:         |       |                  |       |           |       |                       |       |   |   |   |   |   |   |
| Hutchings Station                      |       | 100.0                 |       | 388            |       | $                          | 122        |   | $ | 108 |   | $ | 1 |   | No |   |

 

**DP&L’s** share of operating costs associated withthe jointly-owned generating facilities are included within the correspondingline in the statements of results of operations.

 

*5.  Assets Sales*

 

**PeakerSales**

 

During 2006, inconnection with DPLE’s (a wholly-owned subsidiary of **DPL**)decision to sell the Greenville Station and Darby Station electric peakinggeneration facilities, **DPL** concludedthat the related assets were impaired.  Greenville Station consisted offour natural gas peaking units with a net book value of approximately $66million. Darby Station consisted of six natural gas peaking units with a netbook value of approximately $156 million. During the fourth quarter of 2006, **DPL** recorded a$71.0 million impairment charge to write-down the assets to their fairvalue.  The Greenville Station and DarbyStation assets were sold by DPLE in April 2007 for $49.2 million and$102.0 million, respectively, in two separate transactions.

 

**Aircraft Sale**

 

OnJune 7, 2007, Miami Valley CTC, Inc. (an indirect, wholly-ownedsubsidiary of **DPL**), sold itscorporate aircraft and associated inventory and parts for $7.4 million.  The net book value of the assets sold wasapproximately $1.0 million, and severance and other costs of approximately $0.4million were accrued.  Miami Valley CTC, Inc.recorded a net gain on the sale of approximately $6.0 million during the secondquarter ending June 30, 2007, which was included in **DPL’s**Operation and maintenance expense.

 

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*6. Discontinued Operations*

 

On February 13,2005, **DPL’s** subsidiaries, MVE, Inc.(MVE) and MVIC, entered into an agreement to sell their respective interests inforty-six private equity funds to AlpInvest/Lexington 2005, LLC, a jointventure of AlpInvest Partners and Lexington Partners, Inc.  During 2005, MVE and MVIC completed the saleof their interests in forty-three funds and a portion of another of thoseprivate equity funds.  During 2005, MVEentered into alternative closing arrangements with AlpInvest/Lexington 2005,LLC for funds where legal title to said funds could not be transferred until alater time.  Pursuant to thesearrangements, MVE transferred the economic aspects of the remaining privateequity funds, consisting of two funds and a portion of one fund, toAlpInvest/Lexington 2005, LLC without a change in ownership of theinterests.  The ownership interest inthese funds was transferred in 2006 and 2007, at which time **DPL** recognized previously deferred gains.  **DPL** recognized$18.9 million ($12.1 million after tax) of these previously deferred gains in2006 and the remaining balance of these gains in the amount of $7.9 million,net of associated expenses ($4.9 million after tax), were recognized in2007.  This transaction was recorded indiscontinued operations for each period presented.

 

As a result of the May 21,2007 settlement of the litigation with three former executives (see Note 17 ofNotes to Consolidated Financial Statements), the three former executivesrelinquished all of their rights to certain deferred compensation, restrictedstock units, MVE incentives, stock options and reimbursement of legalfees.  The reversal of accruals relatedto the performance of the financial asset portfolio was recorded indiscontinued operations.  Additionally, aportion of the $25 million settlement expense was allocated to discontinuedoperations.  These transactions resultedin a net gain of $8.1 million, net of associated expenses ($5.1 million aftertax), on the settlement of litigation being recorded in discontinued operationsin 2007.

 

There were nodiscontinued operations recorded in 2009 or 2008.

 

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*7.  Debt Obligations*

 

**Long-termDebt**

 
| ** **                                                                                    | ** ** | **At**                | ** **  | **At**                | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                                                                    | ** ** | **December 31,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                                        | ** ** | **2009**              | ** **  | **2008**              | ** ** |
| **DP&L -**                                                                                |       |                  |        |                  |       |
| First mortgage bonds  maturing 2013 - 5.125%                                                  | ** ** | **$**                 | **470.0**   |                  | $          | 470.0 |   |
| Pollution control  series maturing 2028 - 4.70%                                               | ** ** | **35.3**              |        | 35.3                  |       |
| Pollution control  series maturing 2034 - 4.80%                                               | ** ** | **179.1**             |        | 179.1                 |       |
| Pollution control  series maturing 2036 - 4.80%                                               | ** ** | **100.0**             |        | 100.0                 |       |
| Pollution control  series maturing 2040 - variable rates: 0.24% - 0.85% and 0.80% - 1.25% (a) |       | **—**            |        | 100.0                 |       |
| ** **                                                                                    |       | **784.4**             |        | 884.4                 |       |
|                                                                                          |       |                  |        |                  |       |
| Obligation for capital  lease                                                                 | ** ** | **—**            |        | 0.6                   |       |
| Unamortized debt  discount                                                                    | ** ** | **(0.7**              | **)**       | (1.0                  | )          |
| Total long-term debt - **DP&L**                                                           | ** ** | **$**                 | **783.7**   |                  | $          | 884.0 |   |
|                                                                                          |       |                  |        |                  |       |
| **DPL Inc. -**                                                                                |       |                  |        |                  |       |
| Senior notes 6.875%  series due 2011                                                          | ** ** | **297.4**             |        | 297.4                 |       |
| Note to DPL Capital  Trust II 8.125% due 2031                                                 | ** ** | **142.6**             |        | 195.0                 |       |
| Unamortized debt  discount                                                                    | ** ** | **(0.2**              | **)**       | (0.3                  | )          |
| Total long-term debt - **DPL**                                                                | ** ** | **$**                 | **1,223.5** |                  | $          | 1,376.1 |   |

 

**Current portion - Long-term Debt**

 
| ** **                                                                                              | ** ** | **At**                | ** ** | **At**                | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                                                                                  | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| **DP&L**                                                                                            |       |                  |       |                  |       |
| Pollution control  series maturing 2040 - variable rates: 0.24% - 0.85% and 0.80% - 1.25%  (a) (b) |       | **$**                 | **100.0**  |                  | $          | — |   |
| Obligation for capital  lease                                                                           | ** ** | **0.6**               |       | 0.7                   |       |
| Total current portion -  long-term debt - **DP&L**                                                  | ** ** | **$**                 | **100.6**  |                  | $          | 0.7 |   |
|                                                                                                    |       |                  |       |                  |       |
| **DPL  Inc.**                                                                                           |       |                  |       |                  |       |
| Senior notes 8.00%  series due 2009                                                                     | ** ** | **—**            |       | 175.0                 |       |
| Total current portion -  long-term debt - **DPL**                                                       | ** ** | **$**                 | **100.6**  |                  | $          | 175.7 |   |

 

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| *(a)*    | *Range of  interest rates for the year ended December 31, 2009 and the one month  ended December 31, 2008, respectively.* |
|----------|-------------------------------------------------------------------------------------------------------------------------------------|
| * * | *These  pollution control bonds were issued on December 4, 2008.*                                                              |
| *(b)*    | *Shown as current since bondholders could call bonds. See  further discussion below.*                                               |

 

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At December 31,2009, maturities of long-term debt, including capital lease obligations, aresummarized as follows:

 
| **$ in millions** | ** ** | **DPL** | ** ** | **DP&L** | ** ** |
|------------------------|------------|---------|------------|--------------|------------|
| 2010                   |       | $       | 100.6      |         | $          | 100.6 |   |
| 2011                   |       | 297.4   |       | —       |       |
| 2012                   |       | —  |       | —       |       |
| 2013                   |       | 470.0   |       | 470.0        |       |
| 2014                   |       | —  |       | —       |       |
| Thereafter             |       | 457.0   |       | 314.4        |       |
|                   |       | $       | 1,325.0    |         | $          | 885.0 |   |

 

**Debt and Debt Covenants**

 

On December 21,2009, **DPL** purchased $52.4 million principalamount of DPL Capital Trust II 8.125% capital securities in a privatelynegotiated transaction.  As part of thistransaction, **DPL** paid a $3.7 million, or 7%,premium which was recognized as an expense in the fourth quarter of 2009 andrecorded within interest expense on the Consolidated Statements of Results ofOperations.

 

On April 21, 2009, **DP&L** entered into a $100 million unsecured revolvingcredit agreement with a syndicated bank group. The agreement is for a 364-day term expiring on April 20,2010.  The facility contains onefinancial covenant: **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  As of December 31, 2009, this covenantis met with a ratio of 0.40 to 1.00.  Asof December 31, 2009, there were no borrowings outstanding under thisfacility.  Fees associated with thiscredit facility were approximately $0.7 million in 2009.

 

On March 31, 2009, **DPL**paid $175 million of the 8.00% Senior notes when the notes became due.

 

On December 4, 2008,the OAQDA issued $100 million of collateralized, variable rate Revenue RefundingBonds Series A and B due November 1, 2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due is backed by a standbyletter of credit (LOC) issued by a syndicated bank group.  This LOC facility, which was for an initialtwo-year period expiring in December 2010, is irrevocable, has nosubjective acceleration clauses and also contains a provision that alloutstanding amounts drawn on the facility are due upon the LOC’s expirationdate.  Since this LOC facility willexpire in December 2010, at which point the bondholders could call thebonds, we have reflected these outstanding bonds as a current liability.  Management will continue to monitor andevaluate market conditions over the next several months and make adetermination to either seek a renewal of this standby letter of credit or toexplore alternative financing arrangements. **DP&L** used $10 million of theproceeds from this bond issuance to finance its portion of the costs foracquiring, constructing and installing certain solid waste disposal and airquality facilities at the Conesville generation station.  The remaining $90 million was used to redeemthe 2007 Series A Bonds as discussed in the next paragraph.

 

On November 15,2007, the OAQDA issued $90 million of collateralized, variable rate OAQDARevenue Bonds, 2007 Series A due November 1, 2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due was insured by aninsurance policy issued by Financial Guaranty Insurance Company (FGIC).  During the first quarter of 2008, all threecredit rating agencies downgraded FGIC. These downgrades, as well as the downgrades of our major bond insurers,resulted in auction rate security bonds carrying substantially higher interestrates in succeeding auctions and incurring failed auctions.  On April 4, 2008, **DP&L**converted the 2007 Series A Bonds from Auction Rate Securities to VariableRate Demand Notes.  At that time, **DP&L** repurchased these notes out of the market andplaced them with the Trustee to be held until the capital marketscorrected.  These notes were redeemed in December 2008.

 

OnNovember 21, 2006, **DP&L**entered into a $220 million unsecured revolving credit agreement.  This agreement has a five-year term thatexpires on November 21, 2011 and provides**DP&L**with the ability to increase the size of the facility by an additional $50million at any time.  The facilitycontains one financial covenant:  **DP&L’s** total debt to total capitalization ratio is notto exceed 0.65 to 1.00.  As of December 31,2009, this covenant is met with a ratio of 0.40 to 1.00.  **DP&L**had nooutstanding borrowings under this credit facility at December 31,2009.  Fees associated with this creditfacility were approximately $0.9 million in 2009 compared to $0.3 million in2008.  Changes in credit ratings,however, may affect fees and the applicable interest.  This revolving credit agreement contains a$50 million letter of credit sublimit. As of December 31, 2009, **DP&L** had nooutstanding letters of credit against the facility.  **DP&L** hascertain contractual agreements for the sale and purchase of power, fuel andrelated energy services that contain credit rating related clauses allowing thecounter parties to seek additional surety under certain conditions.

 

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Duringthe first quarter of 2006, the Ohio Department of Development (ODOD) awarded **DP&L** the ability to issue, through 2008, up to $200million of qualified tax-exempt financing from the ODOD’s 2005 volume capcarryforward.  The PUCO approved **DP&L’s** application for this additional financing on July 26,2006.  The entire $200 million financingwas used to partially fund the FGD capital projects.

 

Substantially allproperty, plant and equipment of **DP&L** aresubject to the lien of the mortgage securing **DP&L’s**First and Refunding Mortgage, dated as of October 1, 1935, with the Bankof New York as Trustee.

 

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*8.  Income Taxes*

 

For the years ended December 31,2009, 2008 and 2007, **DPL’s**components of income tax expense were as follows:

 

**DPL**

 
| ** **                                        | ** ** | **For the years ended** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **December 31,**   | ** ** |
| **$ in millions**                            | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Computation  of Tax Expense**                   |       |                    |       |   |   |   |   |
| Federal income tax (a)                            | ** ** | **$**                   | **119.9**  |   | $ | 121.9 |   | $ | 117.3 |   |
|                                              |       |                    |       |   |   |   |   |
| Increases (decreases) in  tax resulting from:     |       |                    |       |   |   |   |   |
| State income taxes, net  of federal effect (b)    | ** ** | **0.9**                 |       | 4.1 |   | 11.6 |   |
| Depreciation                                      | ** ** | **(2.0**                | **)**      | (4.3 | ) | (4.8 | ) |
| Investment tax credit  amortized                  | ** ** | **(2.8**                | **)**      | (2.8 | ) | (2.8 | ) |
| Section 199 -  domestic production deduction | ** ** | **(4.6**                | **)**      | (4.2 | ) | (2.0 | ) |
| Accrual (settlement)  for open tax years (c)      | ** ** | **(1.4**                | **)**      | (7.2 | ) | 2.7 |   |
| Other, net (d)                                    | ** ** | **2.5**                 |       | (4.6 | ) | 0.5 |   |
| Total tax expense (e)                             | ** ** | **$**                   | **112.5**  |   | $ | 102.9 |   | $ | 122.5 |   |
|                                              |       |                    |       |   |   |   |   |
| **Components  of Tax Expense**                    |       |                    |       |   |   |   |   |
| Federal - Current                                 | ** ** | **$**                   | **(84.4**  | **)** | $ | 60.9 |   | $ | 94.2 |   |
| State and Local - Current                         | ** ** | **(1.8**                | **)**      | 1.8 |   | 6.6 |   |
| Total Current                                     | ** ** | **$**                   | **(86.2**  | **)** | $ | 62.7 |   | $ | 100.8 |   |
|                                              |       |                    |       |   |   |   |   |
| Federal - Deferred                                | ** ** | **$**                   | **196.0**  |   | $ | 37.9 |   | $ | 16.7 |   |
| State and Local -  Deferred                       | ** ** | **2.7**                 |       | 2.3 |   | 5.0 |   |
| Total Deferred                                    | ** ** | **$**                   | **198.7**  |   | $ | 40.2 |   | $ | 21.7 |   |
|                                              |       |                    |       |   |   |   |   |
| Total tax expense                                 | ** ** | **$**                   | **112.5**  |   | $ | 102.9 |   | $ | 122.5 |   |

 

**Componentsof Deferred Tax Assets and Liabilities**

 
| ** **                                 | ** ** | **At December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|
| **$ in millions**                     | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| **Net Noncurrent Assets /  (Liabilities)** | ** ** | ** **               | ** ** | ** ** | ** ** |
| Depreciation / property  basis             | ** ** | **$**                    | **(583.5** | **)** | $ | (391.9 | ) |
| Income taxes  recoverable                  | ** ** | **(12.9**                | **)**      | (15.1 | ) |
| Regulatory assets                          | ** ** | **(16.5**                | **)**      | (7.7 | ) |
| Investment tax credit                      | ** ** | **12.3**                 |       | 13.3 |   |
| Investment loss                            | ** ** | **0.1**                  |       | 0.1 |   |
| Compensation and  employee benefits        | ** ** | **35.8**                 |       | 34.2 |   |
| Insurance                                  | ** ** | **0.8**                  |       | 0.8 |   |
| Other (f)                                  | ** ** | **(5.2**                 | **)**      | (7.8 | ) |
| Net noncurrent  (liabilities)              | ** ** | **$**                    | **(569.1** | **)** | $ | (374.1 | ) |
|                                       |       |                     |       |   |   |
| **Net  Current Assets**(g)                 |       |                     |       |   |   |
| Other                                      | ** ** | **$**                    | **3.7**    |   | $ | 2.2 |   |
| Net current assets                         | ** ** | **$**                    | **3.7**    |   | $ | 2.2 |   |

 

----

| *(a)* | *The statutory tax rate of 35% was applied to pre-tax  earnings from continuing operations before preferred dividends.*                                                                                                                                                                                                                                                                                                                                                        |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(b)* | *We have recorded a benefit of $0.2 million and an expense  of $0.2 million and $0.5 million in 2009, 2008 and 2007, respectively, for  state tax credits available related to the consumption of coal mined in Ohio.  In addition, an expense of less than $0.1 million in 2009, a benefit of $0.5  million in 2008 and an expense of $0.9 million in 2007 were recorded as a  result of the phase-out of the Ohio Franchise Tax.*                                            |
| *(c)* | *We have recorded benefits of $2.9 million and $40.7  million and an expense of $2.7 million in 2009, 2008 and 2007, respectively,  of tax provisions for tax deduction or income positions taken in prior tax  returns that we believe were properly treated on such tax returns but for  which it is possible that these positions may be contested. The 2008 amount  relates to the ODT settlement discussed below.*                                                        |
| *(d)* | *Includes an expense of $2.0 million, benefit of $3.8  million and expense of $5.0 million in 2009, 2008 and 2007, respectively, of  income tax related to adjustments from prior years.*                                                                                                                                                                                                                                                                                      |
| *(e)* | *Excludes $6.0 million in 2007 of income taxes reported as  discontinued operations.*                                                                                                                                                                                                                                                                                                                                                                                          |
| *(f)* | *The Other noncurrent liabilities caption includes deferred  tax assets of $12.0 million in 2009 and $10.7 million in 2008 related to  state and local tax net operating loss carryforwards, net of related  valuation allowances of $12.0 million in 2009 and $10.7 million in 2008. As  of December 31, 2009 and 2008, all deferred tax assets related to net  operating losses were valued at zero. These net operating loss carryforwards  expire from 2017 to 2024.* |
| *(g)* | *Amounts are included within Other prepayments and current  assets on the Consolidated Balance Sheets of **DPL**.*                                                                                                                                                                                                                                                                                                                                                             |

 

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**DPL** has recorded $0.7 million, $0.3 millionand $1.3 million in 2009, 2008 and 2007, respectively, for tax benefits relatedto stock-based compensation that were credited to Retained earnings.  We have recorded $1.7 million, $11.5 millionand $0.9 million in 2009, 2008 and 2007, respectively, for tax benefits relatedto pensions, postretirement benefits, cash flow hedges and financialinstruments that were credited to Accumulated other comprehensive loss.

 

For the years ended December 31,2009, 2008 and 2007, **DP&L’s**components of income tax were as follows:

 

**DP&L**

 
| ** **                                        | ** ** | **For the years ended** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **December 31,**   | ** ** |
| **$ in millions**                            | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Computation  of Tax Expense**                   |       |                    |       |   |   |   |   |
| Federal income tax (a)                            | ** ** | **$**                   | **134.2**  |   | $ | 142.1 |   | $ | 145.1 |   |
|                                              |       |                    |       |   |   |   |   |
| Increases (decreases)  in tax resulting from:     |       |                    |       |   |   |   |   |
| State income taxes, net  of federal effect (b)    | ** ** | **0.4**                 |       | 2.6 |   | 9.6 |   |
| Depreciation                                      | ** ** | **(2.0**                | **)**      | (4.3 | ) | (4.7 | ) |
| Investment tax credit  amortized                  | ** ** | **(2.8**                | **)**      | (2.8 | ) | (2.8 | ) |
| Non-deductible  compensation                      | ** ** | **—**              |       | — |   | — |   |
| Section 199 -  domestic production deduction | ** ** | **(4.6**                | **)**      | (4.2 | ) | (2.0 | ) |
| Accrual (settlement)  for open tax years (c)      | ** ** | **(1.4**                | **)**      | (7.2 | ) | 2.7 |   |
| Other, net (d)                                    | ** ** | **0.7**                 |       | (6.0 | ) | (4.8 | ) |
| Total tax expense                                 | ** ** | **$**                   | **124.5**  |   | $ | 120.2 |   | $ | 143.1 |   |
|                                              |       |                    |       |   |   |   |   |
| **Components  of Tax Expense**                    |       |                    |       |   |   |   |   |
| Federal - Current                                 | ** ** | **$**                   | **(70.3**  | **)** | $ | 81.2 |   | $ | 117.1 |   |
| State and Local - Current                         | ** ** | **(2.5**                | **)**      | 0.9 |   | 7.6 |   |
| Total Current                                     | ** ** | **$**                   | **(72.8**  | **)** | $ | 82.1 |   | $ | 124.7 |   |
|                                              |       |                    |       |   |   |   |   |
| Federal - Deferred                                | ** ** | **$**                   | **194.4**  |   | $ | 36.4 |   | $ | 16.3 |   |
| State and Local -  Deferred                       | ** ** | **2.9**                 |       | 1.7 |   | 2.1 |   |
| Total Deferred                                    | ** ** | **$**                   | **197.3**  |   | $ | 38.1 |   | $ | 18.4 |   |
|                                              |       |                    |       |   |   |   |   |
| Total tax expense                                 | ** ** | **$**                   | **124.5**  |   | $ | 120.2 |   | $ | 143.1 |   |

 

**Components of Deferred Tax Assets andLiabilities**

 
| ** **                               | ** ** | **At December 31,** | ** ** |
|------------------------------------------|------------|--------------------------|------------|
| **$ in millions**                   | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| **Net  Noncurrent Assets (Liabilities)** |       |                     |       |   |   |
| Depreciation/property  basis             | ** ** | **$**                    | **(563.7** | **)** | $ | (373.8 | ) |
| Income taxes  recoverable                | ** ** | **(12.9**                | **)**      | (15.1 | ) |
| Regulatory assets                        | ** ** | **(16.5**                | **)**      | (13.3 | ) |
| Investment tax credit                    | ** ** | **12.3**                 |       | 13.3 |   |
| Compensation and  employee benefits      | ** ** | **35.8**                 |       | 34.1 |   |
| Other                                    | ** ** | **(8.0**                 | **)**      | (3.5 | ) |
| Net noncurrent  (liabilities)            | ** ** | **$**                    | **(553.0** | **)** | $ | (358.3 | ) |
|                                     |       |                     |       |   |   |
| **Net  Current Assets**(e)               |       |                     |       |   |   |
| Other                                    | ** ** | **$**                    | **3.7**    |   | $ | 2.3 |   |
| Net current assets                       | ** ** | **$**                    | **3.7**    |   | $ | 2.3 |   |

 

----

| *(a)* | *The statutory tax rate of 35% was applied to pre-tax  earnings before preferred dividends.*                                                                                                                                                                                                                                                                                                                                      |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(b)* | *We have recorded a benefit of $0.2 million and expenses of  $0.2 million and $0.5 million in 2009, 2008 and 2007, respectively, for state  tax credits available related to the consumption of coal mined in Ohio. In  addition, an expense of less than $0.1 million in 2009, a benefit of $0.5  million in 2008 and an expense of $0.9 million in 2007 were recorded as a  result of the phase-out of the Ohio Franchise Tax.* |
| *(c)* | *We have recorded benefits of $2.9 million and $40.7  million and expense of $2.7 million in 2009, 2008 and 2007, respectively, of  tax provisions for tax deduction or income positions taken in prior tax  returns that we believe were properly treated on such tax returns but for  which it is possible that these positions may be contested. The 2008 amount  relates to the ODT settlement discussed below.*              |
| *(d)* | *Includes and expense of $0.8 million, benefit of $3.5  million and expense of $5.0 million in 2009, 2008 and 2007, respectively, of  income tax related to adjustments from prior years.*                                                                                                                                                                                                                                        |
| *(e)* | *Amounts are included within Other prepayments and current  assets on the Balance Sheets of **DP&L**.*                                                                                                                                                                                                                                                                                                                        |

 

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**DP&L** has recorded $0.7 million, $0.3 millionand $1.3 million in 2009, 2008 and 2007, respectively, for tax benefits relatedto stock-based compensation that were credited to Other paid-in capital.  We have recorded $0.5 million, $16.5 millionand $4.6 million in 2009, 2008 and 2007, respectively, for tax benefits relatedto pensions, postretirement benefits, cash flow hedges and financialinstruments that were credited to Accumulated other comprehensive loss.

 

**Accounting for Uncertainty inIncome Taxes**

 

We apply the provisionsof GAAP relating to the accounting for uncertainty in income taxes.  A reconciliation of the beginning and endingamount of unrecognized tax benefits for **DPL** and **DP&L** is as follows:

 
| **$ in millions**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Balance as of beginning  of year            |       | $        | 1.9        |     | $          | 56.3 |   |
| Tax positions taken  during prior periods   |       | —   |       | —   |       |
| Tax positions taken  during current period  |       | 20.6     |       | 1.9      |       |
| Settlement with taxing  authorities         |       | (3.2     | )          | (56.3    | )          |
| Lapse of applicable  statute of limitations |       | —   |       | —   |       |
| Balance as of end of  year                  |       | $        | 19.3       |     | $          | 1.9 |   |

 

Of the December 31,2009 balance of unrecognized tax benefits, $21.6 million is due to uncertaintyin the timing of deductibility offset by $2.3 million of unrecognized taxliabilities that would affect the effective tax rate.

 

We recognize interest andpenalties related to unrecognized tax benefits in income taxes.  The amount of interest and penalties accruedwas a benefit of $0.1 million as of December 31, 2009 and an expense ofless than $0.1 million as of December 31, 2008.  The amount of interest and penalties recordedin the statements of results of operations for 2009 and 2008 was a benefit of$0.1 million and $9.0 million, respectively, and an expense of $4.1 million for2007.

 

Following is asummary of the tax years open to examination by major tax jurisdiction:

 

U.S. Federal – 2007 and forward

State and Local – 2005 and forward

 

None of the unrecognizedtax benefits are expected to significantly increase or decrease within the nexttwelve months.

 

On February 13,2006, we received correspondence from the ODT notifying us that the ODT hadcompleted their examination and review of our Ohio Corporation Franchise TaxReturns for tax years 2002 through 2004 and that the final proposed auditadjustments resulted in a balance due of $90.8 million before interest andpenalties.  On June 27, 2008, weentered into a $42.0 million settlement agreement with the ODT resolving alloutstanding audit issues and appeals, including uncertain tax positions for taxyears 1998 through 2006.  The $42 millionpayment was made to the ODT in July 2008. Due to this settlement agreement, the balance of our unrecognized statetax liabilities recorded at December 31, 2007, in the amount of $56.3million, was reversed resulting in a recorded income tax benefit of $8.5million, net of federal tax impact, in 2008.

 

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*9.  Pension and Postretirement Benefits*

 

**DP&L** sponsors a defined benefit plan forsubstantially all employees.  Forcollective bargaining employees, the defined benefits are based on a specificdollar amount per year of service.  Forall other employees, the defined benefit plan is based primarily oncompensation and years of service.  Wefund pension plan benefits as accrued in accordance with the minimum fundingrequirements of the Employee Retirement Income Security Act of 1974(ERISA).  In addition, we have aSupplemental Executive Retirement Plan (SERP) for certain active and retiredkey executives.  Benefits under this SERPhave been frozen and no additional benefits can be earned.  We****also haveunfunded liabilities related to retirement benefits for certain active,terminated and retired key executives.

 

On February 23,2006, **DPL**’s Board of Directors approved a newcompensation and benefits program that includes The DPL Inc. SupplementalExecutive Defined Contribution Retirement Plan (SEDCRP) which replaces our SERPthat was terminated as to new participants in 2000.  The Compensation Committee of the Board ofDirectors designates the eligible employees. Pursuant to the SEDCRP, we provide a supplemental retirement benefit toparticipants by crediting an account established for each participant inaccordance with the Plan requirements. We designate as hypothetical investment funds under the SEDCRP one ormore of the investment funds provided under The Dayton Power and Light CompanyEmployee Savings Plan.  Each participantmay change his or her hypothetical investment fund selection at specifiedtimes.  If a participant does not elect ahypothetical investment fund(s), then we select the hypothetical investmentfund(s) for such participant.

 

A participant shallbecome 100% vested in all amounts credited to his or her account upon thecompletion of five vesting years, as defined in The Dayton Power and LightCompany Retirement Income Plan, or upon a change of control or the participant’sdeath or disability.  If a participant’semployment is terminated, other than by death or disability, prior to suchparticipant becoming 100% vested in his or her account, the account shall beforfeited as of the date of termination.

 

Qualified employees whoretired prior to 1987 and their dependents are eligible for health care andlife insurance benefits, while qualified employees who retired after 1987 areeligible for life insurance benefits only. We have funded a portion of the union-eligible health benefits using aVoluntary Employee Beneficiary Association Trust.

 

Regulatory assets andliabilities are recorded for the portion of the under- or over-fundedobligations related to the transmission and distribution areas of our electricbusiness and for the changes in the funded status of the plan that arise duringthe year that are not recognized as a component of net periodic benefitcost.  These regulatory assets andliabilities represent the regulated portion that would otherwise be charged orcredited to AOCI.  We have historicallyrecorded these costs on the accrual basis and this is how these costs have beenhistorically recovered.  This factor, combinedwith the historical precedents from the PUCO and FERC, make these costsprobable of future rate recovery.

 

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The following tables setforth our pension and postretirement benefit plans’ obligations and assetsrecorded on the balance sheets as of December 31, 2009 and 2008.  The amounts presented in the following tablesfor pension include both the defined benefit pension plan and the SupplementalExecutive Retirement Plan in the aggregate, and use a measurement date of December 31,2009 and 2008.  The amounts presented forpostretirement include both health and life insurance benefits and use ameasurement date of December 31, 2009 and 2008.

 
| ** **                                                                                                                | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                                                                                                    | ** ** | **2009**    | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Change  in Benefit Obligation During Year**                                                                             |       |        |       |               |       |   |   |   |   |
| Benefit obligation at  January 1                                                                                     | ** ** | **$**       | **294.6**  |               | $          | 285.0 | ** ** | **$** | **25.2** |   | $ | 26.4 |   |
| Service cost                                                                                                              | ** ** | **3.6**     |       | 3.3                | ** ** | **—** |   | — |   |
| Interest cost                                                                                                             | ** ** | **18.1**    |       | 16.7               | ** ** | **1.5** |   | 1.4 |   |
| Plan amendments                                                                                                           | ** ** | **7.2**     |       | 6.9                | ** ** | **1.1** |   | — |   |
| Actuarial (gain) / loss                                                                                                   | ** ** | **20.3**    |       | 2.0                | ** ** | **0.3** |   | (0.1 | ) |
| Benefits paid                                                                                                             | ** ** | **(19.9**   | **)**      | (19.3              | )          | **(1.9** | **)** | (2.5 | ) |
| Benefit obligation at  December 31                                                                                   | ** ** | **$**       | **323.9**  |               | $          | 294.6 | ** ** | **$** | **26.2** |   | $ | 25.2 |   |
|                                                                                                                      |       |        |       |               |       |   |   |   |   |
| **Change  in Plan Assets During Year**                                                                                    |       |        |       |               |       |   |   |   |   |
| Fair value of plan  assets at January 1                                                                              | ** ** | **$**       | **225.4**  |               | $          | 291.0 | ** ** | **$** | **6.2** |   | $ | 6.5 |   |
| Actual return / (loss)  on plan assets                                                                                    | ** ** | **37.5**    |       | (46.7              | )          | **0.4** |   | 0.2 |   |
| Contributions to plan  assets                                                                                             | ** ** | **0.4**     |       | 0.4                | ** ** | **0.3** |   | 2.1 |   |
| Benefits paid                                                                                                             | ** ** | **(19.9**   | **)**      | (19.3              | )          | **(2.3** | **)** | (2.7 | ) |
| Medicare reimbursements                                                                                                   | ** ** | **—**  |       | —             | ** ** | **0.4** |   | 0.1 |   |
| Fair value of plan  assets at December 31                                                                            | ** ** | **$**       | **243.4**  |               | $          | 225.4 | ** ** | **$** | **5.0** |   | $ | 6.2 |   |
|                                                                                                                      |       |        |       |               |       |   |   |   |   |
| **Funded  Status of Plan**                                                                                                | ** ** | **$**       | **(80.5**  | **)**              | $          | (69.2 | ) | **$** | **(21.2** | **)** | $ | (19.0 | ) |
|                                                                                                                      |       |        |       |               |       |   |   |   |   |
| **Amounts  Recognized in the Balance Sheets at December 31**                                                         |       |        |       |               |       |   |   |   |   |
| Current liabilities                                                                                                       | ** ** | **$**       | **(0.4**   | **)**              | $          | (0.4 | ) | **$** | **(0.4** | **)** | $ | (0.4 | ) |
| Noncurrent liabilities                                                                                                    | ** ** | **(80.1**   | **)**      | (68.8              | )          | **(20.8** | **)** | (18.6 | ) |
| Net asset / (liability)  at December 31                                                                              | ** ** | **$**       | **(80.5**  | **)**              | $          | (69.2 | ) | **$** | **(21.2** | **)** | $ | (19.0 | ) |
|                                                                                                                      |       |        |       |               |       |   |   |   |   |
| **Amounts  Recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory  Liabilities, pre-tax** |       |        |       |               |       |   |   |   |   |
| *Components:*                                                                                                             |       |        |       |               |       |   |   |   |   |
| Prior service cost /  (credit)                                                                                            | ** ** | **$**       | **20.4**   |               | $          | 16.7 | ** ** | **$** | **1.1** |   | $ | — |   |
| Net actuarial loss /  (gain)                                                                                              | ** ** | **130.9**   |       | 129.9              | ** ** | **(6.9** | **)** | (7.8 | ) |
| Accumulated other  comprehensive income, regulatory assets and regulatory liabilities, pre-tax                            |       | **$**       | **151.3**  |               | $          | 146.6 |   | **$** | **(5.8** | **)** | $ | (7.8 | ) |
|                                                                                                                      |       |        |       |               |       |   |   |   |   |
| *Recorded  as:*                                                                                                           |       |        |       |               |       |   |   |   |   |
| Regulatory asset                                                                                                          | ** ** | **$**       | **84.6**   |               | $          | 83.3 | ** ** | **$** | **0.6** |   | $ | — |   |
| Regulatory liability                                                                                                      | ** ** | **—**  |       | —             | ** ** | **(5.1** | **)** | (5.8 | ) |
| Accumulated other  comprehensive income                                                                                   | ** ** | **66.7**    |       | 63.3               | ** ** | **(1.3** | **)** | (2.0 | ) |
| Accumulated other  comprehensive income, regulatory**assets and regulatory liabilities,  pre-tax                          |       | **$**       | **151.3**  |               | $          | 146.6 |   | **$** | **(5.8** | **)** | $ | (7.8 | ) |

 

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The accumulated benefitobligation for our defined benefit pension plans was $314.0 million and $283.3million at December 31, 2009 and 2008, respectively.

 

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

 

 
| **Net  Periodic Benefit Cost / (Income)**                | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|----------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                                   | ** ** | **2009**    | ** ** | **2008**           | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                                             | ** ** | **$**       | **3.6**    |               | $          | 3.2 |   | $ | 3.2 | ** ** | **$** | **—** |   | $ | — |   | $ | — |   |
| Interest cost                                            | ** ** | **18.1**    |       | 16.7               |       | 16.2 | ** ** | **1.5** |   | 1.4 |   | 1.5 |   |
| Expected return on  assets (a)                           | ** ** | **(22.5**   | **)**      | (24.1              | )          | (22.0 | ) | **(0.4** | **)** | (0.4 | ) | (0.5 | ) |
| Amortization of  unrecognized:                           |       |        |       |               |       |   |   |   |   |   |   |   |   |
| Actuarial (gain) / loss                                  | ** ** | **4.4**     |       | 2.6                |       | 3.4 | ** ** | **(0.7** | **)** | (0.9 | ) | (0.9 | ) |
| Prior service cost                                       | ** ** | **3.4**     |       | 2.4                |       | 2.4 | ** ** | **0.1** |   | — |   | — |   |
| Transition obligation                                    | ** ** | **—**  |       | —             |       | — | ** ** | **—** |   | — |   | 0.2 |   |
| Net periodic benefit  cost / (income) before adjustments | ** ** | **$**       | **7.0**    |               | $          | 0.8 |   | $ | 3.2 | ** ** | **$** | **0.5** |   | $ | 0.1 |   | $ | 0.3 |   |

 

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(a)          For purposes ofcalculating the expected return on pension plan assets, under GAAP, themarket-related value of assets (MRVA) is used.  GAAP requires that thedifference between actual plan asset returns and estimated plan asset returnsbe admitted into the MRVA equally over a period not to exceed five years. We use a methodology under which we admit the difference between actual andestimated asset returns in the MRVA equally over a three year period.  TheMRVA used in the 2009 calculation of expected return on pension plan assets wasapproximately $275 million.

 

**Other Changes in Plan Assets andBenefit Obligation Recognized in Accumulated Other Comprehensive Income,Regulatory Assets and Regulatory Liabilities**

 
| ** **                                                                                                                               | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                                                                                                                   | ** ** | **2009**    | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net actuarial (gain) /  loss                                                                                                             | ** ** | **$**       | **5.3**    |               | $          | 72.8 | ** ** | **$** | **0.3** |   | $ | 0.2 |   |
| Prior service cost /  (credit)                                                                                                           | ** ** | **7.2**     |       | 6.9                | ** ** | **1.1** |   | — |   |
| Reversal of  amortization item:                                                                                                          |       |        |       |               |       |   |   |   |   |
| Net actuarial (gain) /  loss                                                                                                             | ** ** | **(4.4**    | **)**      | (2.6               | )          | **0.7** |   | 0.9 |   |
| Prior service cost /  (credit)                                                                                                           | ** ** | **(3.4**    | **)**      | (2.4               | )          | **(0.1** | **)** | — |   |
| Transition (asset) /  obligation                                                                                                         | ** ** | **—**  |       | —             | ** ** | **—** |   | — |   |
|                                                                                                                                     |       |        |       |               |       |   |   |   |   |
| Total recognized in  Accumulated other comprehensive income, Regulatory assets and Regulatory  liabilities                               |       | **$**       | **4.7**    |               | $          | 74.7 |   | **$** | **2.0** |   | $ | 1.1 |   |
|                                                                                                                                     |       |        |       |               |       |   |   |   |   |
| Total recognized in net  periodic benefit cost and Accumulated other comprehensive income, Regulatory  assets and Regulatory liabilities |       | **$**       | **11.7**   |               | $          | 75.5 |   | **$** | **2.5** |   | $ | 1.2 |   |

 

Estimated amounts thatwill be amortized from Accumulated other comprehensive income, Regulatory assetsand Regulatory liabilities into net periodic benefit costs during 2010 are:

 
| **$ in millions**           | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|----------------------------------|------------|-------------|------------|--------------------|------------|
| Net actuarial (gain) /  loss     | ** ** | **$**       | **7.4**    | ** **         | **$**      | **(0.5** | **)** |
| Prior service cost /  (credit)   | ** ** | **3.6**     | ** ** | **0.1**            | ** ** |
| Transition (asset) /  obligation | ** ** | **—**  | ** ** | **—**         | ** ** |
|                                  |            |             |            |                    |            |  |  |

 

On November 26,2007, **DP&L**contributed $27.4 million in **DPL** common stock from its Master Trust assets to theRetirement Income Plan.

 

Our expected return onplan asset assumptions, used to determine benefit obligations, are based onhistorical long-term rates of return on investments, which use the widelyaccepted capital market principle that assets with higher volatility generate agreater return over the long run. Current market factors, such as inflation and interest rates, as well asasset diversification and portfolio rebalancing, are evaluated when long-termcapital market assumptions are determined. Peer data and historical returns are reviewed to verify reasonablenessand appropriateness.

 

Our overall expectedlong-term rate of return on assets is approximately 8.50% for pension planassets and approximately 6.00% for retiree benefit plan assets.  This expected return is based primarily onhistorical returns and portfolio investment allocation.  There can be no assurance of our ability togenerate those rates of return in the future.

 

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Our overall discount ratewas evaluated in relation to the December 31, 2009 Hewitt Top QuartileYield Curve which represents a portfolio of top-quartile AA-rated bonds used tosettle pension obligations and the Citigroup Pension Discount Curve.  Peer data and historical returns were alsoreviewed to verify the reasonableness and appropriateness of our discount rateused in the calculation of benefit obligations and expense.

 

The weighted averageassumptions used to determine benefit obligations for the years ended December 31,2009 and 2008 were:

 
| ** **                          | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------------|------------|-------------|------------|--------------------|------------|
| **Benefit Obligation  Assumptions** | ** ** | **2009**    | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Discount rate for  obligations      | ** ** | **5.75**    | **%**      | 6.25               | %          | **5.35** | **%** | 6.25 | % |
| Rate of compensation  increases     | ** ** | **4.44**    | **%**      | 5.44               | %          | **N/A** |   | N/A |   |

 

The weighted-averageassumptions used to determine net periodic benefit cost (income) for the yearsended December 31, 2009, 2008 and 2007 were:

 
| **Net Periodic Benefit**                | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------------|------------|-------------|------------|--------------------|------------|
| **Cost / (Income) Assumptions**         | ** ** | **2009**    | ** ** | **2008**           | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Discount rate                           | ** ** | **6.25**    | **%**      | 6.00               | %          | 5.75 | % | **6.25** | **%** | 6.00 | % | 5.75 | % |
| Expected rate of return  on plan assets | ** ** | **8.50**    | **%**      | 8.50               | %          | 8.50 | % | **6.00** | **%** | 6.00 | % | 6.75 | % |
| Rate of compensation  increases         | ** ** | **5.44**    | **%**      | 5.44               | %          | 5.44 | % | **N/A** |   | N/A |   | N/A |   |

 

The assumed health carecost trend rates at December 31, 2009 and 2008 are as follows:

 
| ** **                            | ** ** | **Expense** | ** ** | **Benefit  Obligations** | ** ** |
|---------------------------------------|------------|-------------|------------|--------------------------|------------|
| **Health Care  Cost Assumptions**     | ** ** | **2009**    | ** ** | **2008**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Pre - age 65                          | ** ** | ** **  |       |                     | ** ** | ** ** |   |   |   |
| Current health care  cost trend rate  | ** ** | **9.50**    | **%**      | 10.00                    | %          | **9.50** | **%** | 9.50 | % |
| Year trend reaches  ultimate          | ** ** | **2014**    |       | 2013                     | ** ** | **2015** |   | 2014 |   |
|                                  | ** ** | ** **  |       |                     | ** ** | ** ** |   |   |   |
| Post - age 65                         | ** ** | ** **  |       |                     | ** ** | ** ** |   |   |   |
| Current health care  cost trend rate  | ** ** | **9.00**    | **%**      | 10.00                    | %          | **9.00** | **%** | 9.00 | % |
| Year trend reaches  ultimate          | ** ** | **2013**    |       | 2013                     | ** ** | **2014** |   | 2013 |   |
|                                  | ** ** | ** **  |       |                     | ** ** | ** ** |   |   |   |
| Ultimate health care  cost trend rate | ** ** | **5.00**    | **%**      | 5.00                     | %          | **5.00** | **%** | 5.00 | % |

 

The assumed health carecost trend rates have an effect on the amounts reported for the health careplans.  A one-percentage point change inassumed health care cost trend rates would have the following effects on thenet periodic postretirement benefit cost and the accumulated postretirementbenefit obligation:

 
| **Effect of  Change in Health Care Cost Trend Rate** | ** ** | **One-percent** | ** ** | **One-percent** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| **$ in millions**                               | ** ** | **increase**    | ** ** | **decrease**    | ** ** |
|                                                 |       |            |       |            |       |
| Service cost plus  interest cost                     |       | $               | 0.1        |            | $          | (0.1 | ) |
| Benefit obligation                                   |       | $               | 1.2        |            | $          | (1.1 | ) |

 

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

 
| **Estimated Future Benefit Payments** | ** ** | ** **  | ** ** | ** **         | ** ** |
|---------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|                                  | ** ** | ** **  |       |               |       |
| 2010                                  |       | $           | 21.2       |               | $          | 2.6 |   |
| 2011                                  |       | $           | 21.6       |               | $          | 2.5 |   |
| 2012                                  |       | $           | 22.4       |               | $          | 2.4 |   |
| 2013                                  |       | $           | 23.1       |               | $          | 2.3 |   |
| 2014                                  |       | $           | 23.6       |               | $          | 2.1 |   |
| 2015 - 2019                           |       | $           | 121.6      |               | $          | 8.4 |   |

 

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We expect to contribute$10.4 million to our pension plans and $2.6 million to our other postretirementbenefit plans in 2010.

 

The Pension ProtectionAct (the Act) of 2006 contained new requirements for our single employerdefined benefit pension plan.  Inaddition to establishing a 100% funding target for plan years beginning after December 31,2008, the Act also limits some benefits if the funded status of pension plansdrops below certain thresholds.  Amongother restrictions under the Act, if the funded status of a plan falls below apredetermined ratio which is 80% in 2010, lump-sum payments to new retirees arelimited to 50% of amounts that otherwise would have been paid and new benefitimprovements may not go into effect.  Forthe 2009 plan year, the funded status of our defined benefit pension plan ascalculated under the requirements of the Act was 101.7% and is estimated to be91.7% until the 2010 status is certified in September 2010 for the 2010plan year.  The Worker, Retiree, andEmployer Recovery Act of 2008 (WRERA), which was signed into law on December 23,2008, grants plan sponsors certain relief from funding requirements and benefitrestrictions of the Act.

 

**Plan Assets**

 

Plan assets are investedusing a total return investment approach whereby a mix of equity securities,debt securities and other investments are used to preserve asset values,diversify risk and achieve our target 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 allocation are measured and monitoredon an ongoing basis.

 

Plan assets are managedin a balanced portfolio comprised of two major components:  an equity portion and a fixed incomeportion.  The expected role of Planequity investments is to maximize the long-term real growth of Plan assets,while the role of fixed income investments is to generate current income,provide for more stable periodic returns and provide some protection against aprolonged decline in the market value of Plan equity investments.

 

Long-term strategic assetallocation guidelines are determined by management and take into account thePlan’s long-term objectives as well as its short-term constraints.  The target allocations for plan assets are30-80% for equity securities, 30-65% for fixed income securities, 0-10% forcash and 0-25% for alternative investments. Equity securities include U.S. and international equity, while fixedincome securities include long-duration and high-yield bond funds and emergingmarket debt funds.  Other types of investmentsinclude investments in hedge funds and private equity funds that follow severaldifferent strategies.

 

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The fair values of our pension plan assets at December 31, 2009by asset category are as follows:

 

**FairValue Measurements for Pension Plan Assets at December 31, 2009**

 
| **Asset  Category****$ in millions** | ** ** | **Market Value at  12/31/09** | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets** | ** ** | **Significant  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | ** **                    | ** ** | **(Level  1)**                                              | ** ** | **(Level  2)**                      | ** ** | **(Level  3)**                        | ** ** |
| **Equity  Securities (a)**                |       |                          |       |                                                        |       |                                |       |                                  |       |
| Small/Mid Cap Equity                      |       | $                             | 4.5        |                                                        | $          | —                              |       | $                                     | 4.5        |   | $ | — |   |
| Large Cap Equity                          |       | 35.9                          |       | —                                                      |       | 35.9                                |       | —                                |       |
| DPL Inc. Common Stock                     |       | 25.5                          |       | 25.5                                                        |       | —                              |       | —                                |       |
| International Equity                      |       | 19.2                          |       | —                                                      |       | 19.2                                |       | —                                |       |
| **Total  Equity Securities**              |       | $                             | 85.1       |                                                        | $          | 25.5                                |       | $                                     | 59.6       |   | $ | — |   |
|                                      |       |                          |       |                                                        |       |                                |       |                                  |       |
| **Debt  Securities (b)**                  |       |                          |       |                                                        |       |                                |       |                                  |       |
| Emerging Markets Debt                     |       | $                             | 12.9       |                                                        | $          | —                              |       | $                                     | 12.9       |   | $ | — |   |
| High Yield Bond                           |       | 13.8                          |       | —                                                      |       | 13.8                                |       | —                                |       |
| Long Duration Fund                        |       | 77.4                          |       | —                                                      |       | 77.4                                |       | —                                |       |
| **Total  Debt Securities**                |       | $                             | 104.1      |                                                        | $          | —                              |       | $                                     | 104.1      |   | $ | — |   |
|                                      |       |                          |       |                                                        |       |                                |       |                                  |       |
| **Cash  and Cash Equivalents (c)**        |       |                          |       |                                                        |       |                                |       |                                  |       |
| Cash                                      |       | $                             | 0.5        |                                                        | $          | 0.5                                 |       | $                                     | —     |   | $ | — |   |
|                                      |       |                          |       |                                                        |       |                                |       |                                  |       |
| **Other  Investments (d)**                |       |                          |       |                                                        |       |                                |       |                                  |       |
| Limited Partnership  Interest             |       | $                             | 3.1        |                                                        | $          | —                              |       | $                                     | —     |   | $ | 3.1 |   |
| Common Collective Fund                    |       | 50.6                          |       | —                                                      |       | —                              |       | 50.6                                  |       |
| **Total  Other Investments**              |       | $                             | 53.7       |                                                        | $          | —                              |       | $                                     | —     |   | $ | 53.7 |   |
|                                      |       |                          |       |                                                        |       |                                |       |                                  |       |
| **Total  Pension Plan Assets**            | ** ** | **$**                         | **243.4**  | ** **                                                  | **$**      | **26.0**                            | ** ** | **$**                                 | **163.7**  | ** ** | **$** | **53.7** | ** ** |

 

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(a)          This category includesinvestments in equity securities of large, small and medium sized companies andequity securities of foreign companies including those in developing countries.The funds are valued using the net asset value method in which an average ofthe market prices for the underlying investments is used to value the fundexcept for the **DPL** common stock which is valuedusing the closing price on the New York Stock Exchange.

 

(b)         This category includesinvestments in investment-grade fixed-income instruments, U.S.dollar-denominated debt securities of emerging market issuers and high yieldfixed-income securities that are rated below investment grade. The funds arevalued using the net asset value method in which an average of the marketprices for the underlying investments is used to value the fund.

 

(c)          This category comprises cashheld to pay beneficiaries.  The fairvalue of cash equals its book value.

 

(d)         This category represents aprivate equity fund that specializes in management buyouts and a hedge fund offunds made up of 30+ different hedge fund managers diversified over eightdifferent hedge strategies.  The fairvalue of the private equity fund is determined by the General Partner based onthe performance of the individual companies. The fair value of the hedge fund is valued using the net asset value methodin which an average of the market prices for the underlying investments is usedto value the fund.

 

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The change in the fairvalue for the pension assets valued using significant unobservable inputs(Level 3) was due to the following:

 

**FairValue Measurements of Pension Assets Using Significant Unobservable Inputs**

**(Level3)**

 
| **$ in millions**                               | ** ** | **Limited  Partnership  Interest** | ** ** | **Common  Collective  Fund** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|------------------------------|------------|
| Beginning balance at  December 31, 2008         |       | $                                  | 3.1        |                         | $          | 33.1 |   |
| Actual return on plan  assets:                       |       |                               |       |                         |       |
| Relating to assets  still held at the reporting date |       | 0.1                                |       | 1.3                          |       |
| Relating to assets sold  during the period           |       | —                             |       | —                       |       |
| Purchases, sales, and  settlements                   |       | (0.1                               | )          | 16.2                         |       |
| Transfers in and / or  out of Level 3                |       | —                             |       | —                       |       |
| Ending balance at  December 31, 2009            |       | $                                  | 3.1        |                         | $          | 50.6 |   |

 

The fair values of our otherpostretirement benefit plan assets at December 31, 2009 by asset categoryare as follows:

 

**FairValue Measurements for Postretirement Plan Assets at December 31, 2009**

 
| **Asset  Category****$ in millions** | ** ** | **Market  Value at  12/31/09** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | ** **                     | ** ** | **(Level 1)**                                              | ** ** | **(Level 2)**                       | ** ** | **(Level 3)**                         | ** ** |
|                                      |       |                           |       |                                                       |       |                                |       |                                  |       |
| JP Morgan Core Bond  Fund (a)             |       | $                              | 5.0        |                                                       | $          | —                              |       | $                                     | 5.0        |   | $ | — |   |
|                                           |            |                                |            |                                                            |            |                                     |            |                                       |            |  |  |  |  |

 

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(a)          This category includesinvestments in U.S. government obligations and mortgage-backed and asset-backedsecurities.  The funds are valued usingthe net asset value method in which an average of the market prices for theunderlying investments is used to value the fund.

 

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*10.  Fair Value Measurements*

 

The fair values of our financial instruments are based on publishedsources for pricing when possible.  Werely on modelled valuations only when no other method exists.  The fair value of our financial instrumentsrepresents estimates of possible value that may not be realized in thefuture.  The table below presents thefair value and cost of our non-derivative instruments at December 31, 2009and 2008.

 
| ** **             | ** ** | **At December 31,** | ** ** |
|------------------------|------------|--------------------------|------------|
| ** **             | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| **$ in millions** | ** ** | **Cost**                 | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| **DPL**                |       |                     |       |   |   |   |   |   |   |
| **Assets**             |       |                     |       |   |   |   |   |   |   |
| Master Trust Assets    |       | $                        | 12.3       |   | $ | 12.6 |   | $ | 13.6 |   | $ | 13.1 |   |
|                   |       |                     |       |   |   |   |   |   |   |
| **Liabilities**        |       |                     |       |   |   |   |   |   |   |
| Debt                   |       | $                        | 1,324.1    |   | $ | 1,317.6 |   | $ | 1,551.8 |   | $ | 1,470.5 |   |
|                   |       |                     |       |   |   |   |   |   |   |
| **DP&L**           |       |                     |       |   |   |   |   |   |   |
| **Assets**             |       |                     |       |   |   |   |   |   |   |
| Master Trust Assets    |       | $                        | 26.4       |   | $ | 40.9 |   | $ | 29.8 |   | $ | 40.2 |   |
|                   |       |                     |       |   |   |   |   |   |   |
| **Liabilities**        |       |                     |       |   |   |   |   |   |   |
| Debt                   |       | $                        | 884.3      |   | $ | 844.5 |   | $ | 884.7 |   | $ | 815.7 |   |

 

***Debt***

 

Debtis fair valued based on current public market prices for disclosure purposesonly.  Unrealized gains or losses are notrecognized in the financial statements as debt is presented at amortized costin the financial statements.  The debtamounts include the current portion payable in the next twelve months and havematurities that range from 2010 to 2040.

 

***Master TrustAssets***

 

**DP&L** established aMaster Trust to hold assets for the benefit of employees participating inemployee benefit plans and these assets are not used for general operatingpurposes.  These assets are primarilycomprised of open-ended mutual funds and **DPL** commonstock.  The **DPL**common stock held by the **DP&L** MasterTrust is eliminated in consolidation and is not reflected in **DPL’s** Consolidated Balance Sheets.  The **DPL** common stockis valued using current public market prices, while the open-ended mutual fundsare valued using the net asset value per unit. These investments are accounted for as available-for-sale securities andare recorded at fair value.  Anyunrealized gains or losses are recognized in AOCI until the securities aresold.

 

**DPL**had $0.3million ($0.2 million after tax) in unrealized gains and no unrealized losseson the Master Trust assets in AOCI at December 31, 2009 and no unrealizedgains and $0.5 million ($0.3 million after tax) in unrealized losses in AOCI atDecember 31, 2008.

 

**DP&L** has $14.5million ($9.5 million after tax) in unrealized gains and no unrealized losseson the Master Trust assets in AOCI at December 31, 2009 and $10.9 million($7.0 million after tax) in unrealized gains and $0.5 million ($0.3 millionafter tax) in unrealized losses in AOCI at December 31, 2008.

 

Nounrealized gains or losses are expected to be transferred to earnings in 2010.

 

**Transferof Master Trust Assets to Pension**

 

On October 26, 2007,the Board of Directors approved a resolution permitting the transfer of 925,000shares of **DPL**common stock from the **DP&L** Master Trust to The Dayton Power and Light CompanyRetirement Income Plan Trust (Pension). This transaction was completed on November 26, 2007, contributingshares of **DPL**common stock with a fair value of$27.4 million to the pension plan.

 

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** **

**Net AssetValue (NAV) per Unit**

 

The followingtable discloses the fair value and redemption frequency for those assets whosefair value is estimated using the NAV per unit as of December 31,2009.  These assets are part of theMaster Trust and exclude **DPL**commonstock which is valued using quoted market prices and not the NAV.  Fair values estimated using the net assetvalue per unit are considered Level 2 inputs within the fair value hierarchy,unless they cannot be redeemed at the NAV on the reporting date.  Investments that have restrictions on theredemption of the investments are Level 3 inputs.  As of December 31, 2009, **DPL** did not have any investments for sale at a pricedifferent than the NAV.

 

**Fair Value Estimated using Net Asset Value per Unit**

 
| **Investment**                | ** ** | ** **     | ** ** | **Unfunded**    | ** ** | **Redemption** | ** ** | **Redemption**    | ** ** |
|-------------------------------|------------|----------------|------------|-----------------|------------|----------------|------------|-------------------|------------|
| **$ in millions**        | ** ** | **Fair Value** | ** ** | **Commitments** | ** ** | **Frequency**  | ** ** | **Notice Period** | ** ** |
| Money  Market Mutual Fund (a) |       | $              | 4.1        |            | $          | —         |       | Immediate         |       | None |   |
|                          |       |           |       |            |       |           |       |              |       |
| Equity  Securities (b)        |       | 2.8            |       | —          |       | Immediate      |       | None              |       |
|                          |       |           |       |            |       |           |       |              |       |
| Debt  Securities (c)          |       | 5.5            |       | —          |       | Immediate      |       | None              |       |
|                          |       |           |       |            |       |           |       |              |       |
| Multi-Strategy  Fund (d)      |       | 0.2            |       | —          |       | Immediate      |       | None              |       |
|                          |       |           |       |            |       |           |       |              |       |
| Total                         |       | $              | 12.6       |            | $          | —         |       |              |       |   |   |

 

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*(a)*       *Thiscategory includes investments in high-quality, short-term securities.  Investments in this category can be redeemedimmediately at the current net asset value per unit.*

 

*(b)*       *Thiscategory includes investments in hedge funds representing an S&P 500 indexand the Morgan Stanley Capital International (MCSI) U.S. Small Cap 1750Index.  Investments in this category canbe redeemed immediately at the current net asset value per unit.*

 

*(c)*        *Thiscategory includes investments in U.S. Treasury obligations and U.S. investmentgrade bonds.  Investments in thiscategory can be redeemed immediately at the current net asset value per unit.*

* *

*(d)*       *Thiscategory includes investments in stocks, bonds and short-term investments in amix of actively managed funds. Investments in this category can be redeemed immediately at the currentnet asset value per unit.*

 

**Fair Value Hierarchy**

 

Fair value is defined asthe exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date.  The fair valuehierarchy requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value.  These inputs are then categorized as Level 1(quoted prices in active markets for identical assets or liabilities); Level 2(observable inputs such as quoted prices for similar assets or liabilities orquoted prices in markets that are not active); or Level 3 (unobservableinputs).

 

Valuations of assets andliabilities reflect the value of the instrument including the values associatedwith counterparty risk.  We include ourown credit risk and our counterparty’s credit risk in our calculation of fairvalue using the Global Corporate Cumulative Average Default Rates.

 

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The fair value ofassets and liabilities measured on a recurring basis and the respectivecategory within the fair value hierarchy for **DPL**was determined as follows:

 

**DPL**

 
| ** **             | ** ** | **Assets and Liabilities Measured at Fair Value on a  Recurring Basis** | ** ** |
|------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **             | ** ** | ** **                                                              | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | ** ** | ** ** | **Fair  Value on  Consolidated** | ** ** |
| **$ in millions** | ** ** | **Fair  Value at  December 31,  2009***                            | ** ** | **Based  on Quoted  Prices in Active  Market** | ** ** | **Other  Observable  Inputs** | ** ** | **Unobservable  Inputs** | ** ** | **Collateral  and  Counterparty  Netting** | ** ** | **Balance  Sheet at  December 31,  2009** | ** ** |
| **Assets**             |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Master Trust Assets    |       | $                                                                       | 12.6       |   | $ | — |   | $ | 12.6 |   | $ | — |   | $ | — |   | $ | 12.6 |   |
| Derivative Assets      |       | 6.3                                                                     |       | — |   | 6.3 |   | — |   | (1.4 | ) | 4.9 |   |
| Total                  |       | $                                                                       | 18.9       |   | $ | — |   | $ | 18.9 |   | $ | — |   | $ | (1.4 | ) | $ | 17.5 |   |
|                   |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**        |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Derivative Liabilities |       | $                                                                       | 4.7        |   | $ | 1.2 |   | $ | 3.5 |   | $ | — |   | $ | (1.2 | ) | $ | 3.5 |   |
| Total                  |       | $                                                                       | 4.7        |   | $ | 1.2 |   | $ | 3.5 |   | $ | — |   | $ | (1.2 | ) | $ | 3.5 |   |

 

----

*Includes credit valuationadjustments for counterparty risk. 

 

The fair value ofassets and liabilities measured on a recurring basis and the respectivecategory within the fair value hierarchy for **DP&L**was determined as follows:

 

**DP&L**

 
| ** **              | ** ** | **Assets and Liabilities Measured at Fair Value on a  Recurring Basis** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **              | ** ** | ** **                                                              | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | ** ** | ** ** | **Fair  Value on** | ** ** |
| **$ in millions**  | ** ** | **Fair  Value at  December 31,  2009***                            | ** ** | **Based  on Quoted  Prices in Active  Market** | ** ** | **Other  Observable  Inputs** | ** ** | **Unobservable  Inputs** | ** ** | **Collateral  and  Counterparty  Netting** | ** ** | **Balance  Sheet at  December 31,  2009** | ** ** |
| **Assets**              |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Master Trust Assets (a) |       | $                                                                       | 40.9       |   | $ | 28.3 |   | $ | 12.6 |   | $ | — |   | $ | — |   | $ | 40.9 |   |
| Derivative Assets       |       | 6.3                                                                     |       | — |   | 6.3 |   | — |   | (1.4 | ) | 4.9 |   |
| Total                   |       | $                                                                       | 47.2       |   | $ | 28.3 |   | $ | 18.9 |   | $ | — |   | $ | (1.4 | ) | $ | 45.8 |   |
|                    |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**         |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Derivative Liabilities  |       | $                                                                       | 4.7        |   | $ | 1.2 |   | $ | 3.5 |   | $ | — |   | $ | (1.2 | ) | $ | 3.5 |   |
| Total                   |       | $                                                                       | 4.7        |   | $ | 1.2 |   | $ | 3.5 |   | $ | — |   | $ | (1.2 | ) | $ | 3.5 |   |

 

----

*Includes credit valuation adjustments for counterparty risk. 

 

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

 

Level 1 inputs are usedfor **DPL** common stock held by the MasterTrust and for derivative contracts such as heating oil futures.  The fair value is determined by reference toquoted market prices and other relevant information generated by markettransactions.  Level 2 inputs are used tovalue derivatives such as financial transmission rights where the quoted pricesare from a relatively inactive market; forward power contracts and forwardNYMEX-quality coal contracts which are traded on the OTC market but which arevalued using prices on the NYMEX for similar contracts on the OTC market; andopen-ended mutual funds that are in the Master Trust valued using the end ofday NAV.

 

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**Non-recurring fair valuemeasurements**

 

The fair value of an AROis estimated by discounting expected cash outflows to their present value atthe initial recording of the liability. Cash outflows are based on the approximate future disposal cost asdetermined by market information, historical information or other managementestimates.  These inputs to the fairvalue of the AROs would be considered Level 3 inputs under the fair valuehierarchy.  We added a new ARO for alandfill and additional layers to our existing landfill and asbestos AROs inthe amount of $2.7 million during 2009.

 

**DPL** had $45.3 million and $15.0 million inmoney market funds classified as cash and cash equivalents in its ConsolidatedBalance Sheets at December 31, 2009 and 2008, respectively.  The money market funds have quoted pricesthat are generally equivalent to par.

 

*11.  Derivative Instruments and Hedging Activities*

 

In the normalcourse of business, **DPL** and **DP&L** enter into various financial instruments, includingderivative financial instruments.  We usederivatives principally to manage the risk of changes in market prices forcommodities.  The derivatives that we useto economically hedge these risks are governed by our risk management policiesfor forward and futures contracts. Our net positions are continually assessedwithin our structured hedging programs to determine whether new or offsettingtransactions are required.  The objectiveof the hedging program is generally to mitigate financial risks while ensuringthat we have adequate resources to meet our requirements.  We monitor and value derivative positionsmonthly as part of our risk management processes.  We use published sources for pricing whenpossible to mark positions to market. All of our derivative instruments are used for risk management purposesand are designated as a cash flow hedge or marked to market each reportingperiod.

 

At December 31,2009, **DP&L** had the following outstandingderivative instruments:

** **
| ** **                     | ** ** | **Accounting**  | ** ** | ** ** | ** ** | **Purchases**       | ** ** | **Sales**           | ** ** | **Net  Purchase/  (Sale)** | ** ** |
|--------------------------------|------------|-----------------|------------|------------|------------|---------------------|------------|---------------------|------------|----------------------------|------------|
| **Commodity**                  | ** ** | **Treatment**   | ** ** | **Unit**   | ** ** | **(in  thousands)** | ** ** | **(in  thousands)** | ** ** | **(in  thousands)**        | ** ** |
| FTRs                           |       | Mark to Market  |       | MWH        |       | 9.3                 |       | —              |       | 9.3                        |       |
| Heating Oil Futures            |       | Mark to Market  |       | Gallons    |       | 3,822.0             |       | —              |       | 3,822.0                    |       |
| Forward Power Contracts        |       | Cash Flow Hedge |       | MWH        |       | 84.6                |       | (1,769.2            | )          | (1,684.6                   | )          |
| NYMEX-quality Coal  Contracts* |       | Mark to Market  |       | Tons       |       | 3,844.0             |       | (1,286.5            | )          | 2,557.5                    |       |

 

----

*Includes our partner’s share for the jointly-ownedplants that **DP&L**operates.

 

***CashFlow Hedges***

 

As part of our riskmanagement processes, we identify the relationships between hedging instrumentsand hedged items, as well as the risk management objective and strategy forundertaking various hedge transactions. The MTM value of cash flow hedges asdetermined by current public market prices will continue to fluctuate withchanges in market prices up to contract expiration.  The effective portion of the hedgingtransaction is recognized in AOCI and transferred to earnings when the hedgedforecasted transaction takes place or when the hedged forecasted transaction isprobable of not occurring.  Theineffective portion of the cash flow hedge is recognized in earnings in thecurrent period.  All risk components weretaken into account to determine the hedge effectiveness of the cash flowhedges.

 

We currently use cashflow hedging with forward power contracts and in 2003 we entered into aninterest rate swap which was settled that same year.  Approximately $2.1 million ($1.4 million net oftax) of accumulated losses in AOCI related to the above mentioned power hedgesare expected to be reclassified to earnings over the next twelve months.  The balance of the remaining deferred gainfrom the interest rate swap in AOCI is being amortized into earnings over thelife of the related bonds.  Approximately$2.5 million ($1.6 million net of tax) of accumulated gains in AOCI related tothe above referenced interest rate hedge are expected to be reclassified toearnings over the next twelve months.  As of December 31,2009, the maximum length of time that we are hedging our exposure tovariability in future cash flows related to forecasted transactions is 23months and 106 months for the forward power positions and the interest ratehedge, respectively.

 

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The following tableprovides information concerning gains or losses recognized in AOCI for the cashflow hedges:

 
| ** **                                                                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **2009**              | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| ** **                                                                | ** ** | ** **            | ** ** | **Interest**          | ** ** | **Power  and**        | ** ** | **Interest** | ** ** | **Power  and** | ** ** | **Interest** | ** ** |
| **$ in millions (net of tax)**                                       | ** ** | **Power**             | ** ** | **Rate  Hedge**       | ** ** | **Capacity**          | ** ** | **Rate  Hedge** | ** ** | **Capacity** | ** ** | **Rate  Hedge** | ** ** |
|                                                                      |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Beginning accumulated  derivative gain / (loss) in AOCI                   |       | $                     | (0.2       | )                     | $          | 17.2                  |       | $ | (1.0 | ) | $ | 19.7 |   | $ | 2.1 |   | $ | 22.1 |   |
|                                                                      |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Net gains / (losses)  associated with current period hedging transactions |       | 2.2                   |       | —                |       | 4.8                   |       | — |   | (0.4 | ) | — |   |
|                                                                      |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Net gains reclassified  to earnings                                       |       | (3.4                  | )          | (2.5                  | )          | (4.0                  | )          | (2.5 | ) | (2.7 | ) | (2.4 | ) |
|                                                                      |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Ending accumulated  derivative gain / (loss) in AOCI                      |       | $                     | (1.4       | )                     | $          | 14.7                  |       | $ | (0.2 | ) | $ | 17.2 |   | $ | (1.0 | ) | $ | 19.7 |   |

 

Thefollowing table shows the amount and income statement classification of thegains and losses incurred during the period on **DP&L’s**derivatives designated as hedging instruments for the year ended December 31,2009.

 

**For theyear ended December 31, 2009**

 
| **$ in millions (net of tax)**                                                                                                             | ** ** | **Amount of Gains   Recognized in AOCI   on Derivative   (Effective Portion)** | ** ** | **Location of Gain or   (Loss) Reclassified   from AOCI into   Income (Effective   Portion)** | ** **       | **Amount of Gain or   (Loss) Reclassified   from AOCI into   Income (Effective   Portion)** | ** ** | **Location of Gains   Recognized in   Income on   Derivative   (Ineffective Portion)** | ** ** | **Amount of Gain or   (Loss) Recognized in   Income on Derivative   (Ineffective Portion)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------------|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| **Derivatives  Designated as Hedging Instruments**                                                                                              | ** ** | ** **                                                                     | ** ** | ** **                                                                                    | ** **       | ** **                                                                                  | ** ** | ** **                                                                             |       |                                                                                        |       |
| ** **                                                                                                                                      | ** ** | ** **                                                                     | ** ** | ** **                                                                                    | ** **       | ** **                                                                                  | ** ** | ** **                                                                             |       |                                                                                        |       |
| Interest Rate Hedge                                                                                                                             |       | $                                                                              | —     |                                                                                          | Interest expense |                                                                                        | $          | 2.5                                                                                    |       | Interest expense                                                                            |       | $ | — |   |
| Forward Power Contracts                                                                                                                         |       | 2.2                                                                            |       | Revenues                                                                                      |             | 3.4                                                                                         |       | Revenues                                                                               |       | —                                                                                      |       |
|                                                                                                                                            |       |                                                                           |       |                                                                                          |             |                                                                                        |       |                                                                                   |       |                                                                                        |       |
| **(Decrease)  / Increase on the Statements of Results of Operations of DP&L for  Derivative Instruments Designated as Hedging Instruments** |       | $                                                                              | 2.2        |                                                                                          |             |                                                                                        | $          | 5.9                                                                                    |       |                                                                                        |       | $ | — |   |

 

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The following table showsthe fair value and balance sheet classification of **DP&L’s**derivative instruments designated as hedging instruments.

 

FairValues of Derivative Instruments Designated as Hedging Instruments

AtDecember 31, 2009

 
| **$ in millions**                           | ** ** | **Fair Value** | ** ** | **Netting*** | ** ** | **Balance Sheet Location** | ** ** | **Fair Value  on Balance  Sheet**     | ** ** |
|--------------------------------------------------|------------|----------------|------------|--------------|------------|----------------------------|------------|---------------------------------------|------------|
| **Short-Term Derivative Positions**              |       |           |       |         |       |                       |       |                                  |       |
| Forward  Power Contracts in an Asset position    |       | $              | 0.7        |         | $          | (0.7                       | )          | Other prepayments and current  assets |       | $ | — |   |
|                                             |       |           |       |         |       |                       |       |                                  |       |
| Forward  Power Contracts in a Liability position |       | (2.8           | )          | 0.7          |       | Other current liabilities  |       | (2.1                                  | )          |
|                                             |       |           |       |         |       |                       |       |                                  |       |
| **Total Cash Flow Hedges**                       |       | $              | (2.1       | )            | $          | —                     | ** ** | ** **                            |       | $ | (2.1 | ) |

 

----

*Includes counterpartynetting.

 

***Markto Market***

 

Certain derivative contractsare entered into on a regular basis as part of our risk management program butdo not qualify for hedge accounting or the normal purchase and sales exceptionsunder FASC 815.  Accordingly, suchcontracts are recorded at fair value with changes in the fair value charged orcredited to the statements of results of operations in the period in which thechange occurred.  This is commonlyreferred to as “MTM” accounting. Contracts we enter into as part of our risk management program may besettled financially, by physical delivery or net settled with thecounterparty.  We currently MTM FinancialTransmission Rights (FTRs), heating oil futures and forward NYMEX-quality coalcontracts.

 

**DP&L** enters into coal contracts from time totime to supply its generating plants.  Weperform a quarterly evaluation of the different coal markets to determine ifthese coal contracts are considered derivative instruments under FASC 815.  **DP&L** hasconcluded that NYMEX and NYMEX look-a-like coal contracts are considered derivativeinstruments because they have been determined to be readily convertible to cashunder FASC 815.

 

Certain qualifyingderivative instruments have been designated as normal purchases or normal salescontracts, as provided in FASC 815. Derivative contracts that have been designated as normal purchases ornormal sales under FASC 815 are not subject to MTM accounting treatment and arerecognized in the statements of results of operations on an accrual basis.

 

***RegulatoryAssets and Liabilities***

 

UnderFASC 980, “Regulated Operations,” if a cost is probable of recovery in futurerates, it should be deferred as a regulatory asset.  If a gain is probable of being returned tocustomers, it should be deferred as a regulatory liability.  Portions of the derivative contracts that aremarked to market each reporting period and are related to the retail portion of**DP&L’s** load requirements areincluded as part of the fuel factor approved by the PUCO beginning January 1,2010.  Therefore, the Ohio jurisdictionalretail portion of the heating oil futures and the NYMEX-quality coal contractsare deferred as a regulatory asset or liability until the contractssettle.  If these unrealized gains andlosses are no longer deemed to be probable of recovery through our rates, theywill be reclassified into earnings in the period such determination is made.

 

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The following table shows the amount and statement ofresults of operations or balance sheet classification of the gains and losseson **DP&L’s** derivatives not designatedas hedging instruments for the period ended December 31, 2009.

 

**For theyear ended December 31, 2009**

 
| **$ in millions**                           | ** ** | **NYMEX    Coal*** | ** ** | **Heating    Oil** | ** ** | **FTRs** | ** ** | **Power** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|--------------------|------------|----------|------------|-----------|------------|-----------|------------|
| Change in unrealized  gain / (loss)              |       | $                  | 4.1        |               | $          | 5.1      |       | $         | 0.8        |      | $          | (0.2 | ) | $ | 9.8 |   |
| Realized gain / (loss)                           |       | 1.1                |       | (3.1               | )          | (0.4     | )          | —    |       | (2.4      | )          |
| Total                                            |       | $                  | 5.2        |               | $          | 2.0      |       | $         | 0.4        |      | $          | (0.2 | ) | $ | 7.4 |   |
| **Recorded  on Balance Sheet:**                  |       |               |       |               |       |     |       |      |       |      |       |
| Partner’s share of gain  / (loss)           |       | $                  | 1.8        |               | $          | —   |       | $         | —     |      | $          | — |   | $ | 1.8 |   |
| Regulatory (asset) /  liability                  |       | 1.5                |       | (0.5               | )          | —   |       | —    |       | 1.0       |       |
|                                             |       |               |       |               |       |     |       |      |       |      |       |
| **Recorded  in Income Statement: gain / (loss)** |       |               |       |               |       |     |       |      |       |      |       |
| Purchased power                                  |       | $                  | —     |               | $          | —   |       | $         | 0.4        |      | $          | (0.2 | ) | $ | 0.2 |   |
| Fuel                                             |       | 1.9                |       | 2.3                |       | —   |       | —    |       | 4.2       |       |
| O&M                                          |       | —             |       | 0.2                |       | —   |       | —    |       | 0.2       |       |
| Total                                            |       | $                  | 5.2        |               | $          | 2.0      |       | $         | 0.4        |      | $          | (0.2 | ) | $ | 7.4 |   |

 

----

*Includes gains and losses on financially settledderivative contracts and cost to market adjustments on physically settledderivative contracts.

 

The following table showsthe fair value and Balance Sheet classification of **DP&L’s**derivative instruments not designated as hedging instruments.

 

Fair Values of Derivative Instruments Not Designatedas Hedging Instruments

At December 31, 2009

 
| ** **                                           | ** ** | ** **      | ** ** | ** **   | ** ** | ** **                            | ** ** | **Fair  Value on**                    | ** ** |
|------------------------------------------------------|------------|-----------------|------------|--------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| **$ in millions**                               | ** ** | **Fair  Value** | ** ** | **Netting*** | ** ** | **Balance  Sheet Location**           | ** ** | **Balance  Sheet**                    | ** ** |
| **Short-term Derivative Positions**                  |       |            |       |         |       |                                  |       |                                  |       |
| FTRs  in an Asset position                           |       | $               | 0.8        |         | $          | —                                |       | Other prepayments and  current assets |       | $ | 0.8 |   |
| Heating  Oil Futures in a Liability position         |       | (1.2            | )          | 1.2          |       | Other current liabllities             |       | —                                |       |
| NYMEX-Quality  Coal Forwards in an Asset position    |       | 2.6             |       | (0.2         | )          | Other prepayments and  current assets |       | 2.4                                   |       |
| NYMEX-Quality  Coal Forwards in a Liability position |       | (1.2            | )          | —       |       | Other current liabilities             |       | (1.2                                  | )          |
| Forward  Power Contracts in a Liability position     |       | (0.2            | )          | —       |       | Other current liabilities             |       | (0.2                                  | )          |
| **Total short-term derivative MTM positions**        |       | $               | 0.8        |         | $          | 1.0                                   |       |                                  |       | $ | 1.8 |   |
|                                                 |       |            |       |         |       |                                  |       |                                  |       |
| **Long-term Derivative Positions**                   |       |            |       |         |       |                                  |       |                                  |       |
| NYMEX-Quality  Coal Forwards in an Asset position    |       | $               | 2.9        |         | $          | (1.2                                  | )          | Other assets                          |       | $ | 1.7 |   |
| **Total long-term derivative MTM positions**         |       | $               | 2.9        |         | $          | (1.2                                  | )          |                                  |       | $ | 1.7 |   |
|                                                 |       |            |       |         |       |                                  |       |                                  |       |
| **Total MTM Position**                               |       | $               | 3.7        |         | $          | (0.2                                  | )          |                                  |       | $ | 3.5 |   |

 

----

*Includes counterparty andcollateral netting.

 

Certain of our OTC commodity derivative contracts areunder master netting agreements that contain provisions that require our debtto maintain an investment grade credit rating from credit rating agencies.  If our debt were to fall below investmentgrade, we would be in violation of these provisions, and the counterparties tothe derivative instruments could request immediate payment or demand immediateand ongoing full overnight collateralization of the MTM loss.  The aggregate fair value of all derivativeinstruments that are in a MTM loss position at December 31, 2009, is $4.7million.  This amount is offset by $1.2million in a broker margin account which offsets our loss positions on theNYMEX Clearport traded heating oil and coal contracts.  If our debt were to fall below investmentgrade, we would have to post collateral for the remaining $3.5 million.

 

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*12.  Stock-Based Compensation*

 

In April 2006, **DPL’s** shareholders approved The DPL Inc. Equity andPerformance Incentive Plan (the EPIP) which became immediately effective andwill remain in effect for a term of ten years, unless terminated sooner inaccordance with its terms.  TheCompensation Committee of the Board of Directors will designate the employeesand directors eligible to participate in the EPIP and the times and types ofawards to be granted.  Under the EPIP,the Compensation Committee may grant equity-based compensation in theform of stock options, stock appreciation rights, restricted stock,restricted stock units, performance shares and units, and other stock-basedawards.  Awards may be subject tothe achievement of certain management objectives.  In addition, the EPIP provides, uponrecommendation of the Chief Executive Officer and Chairman of the Board, for agrant of a special equity award to recognize outstanding performance.  A total of 4,500,000 shares of **DPL** common stock were reserved for issuance under the EPIP.

 

The following tablesummarizes share-based compensation expense recorded at **DPL**and **DP&L**:

 
| ** **                                                              | ** ** | **For the years ended** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                              | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                  | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Stock options                                                           | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Restricted stock units                                                  | ** ** | **—**              |       | (0.1 | ) | — |   |
| Performance shares                                                      | ** ** | **1.8**                 |       | 0.9 |   | 1.5 |   |
| Restricted shares                                                       | ** ** | **0.7**                 |       | 0.3 |   | 0.3 |   |
| Non-employee directors’  RSUs                                      | ** ** | **0.5**                 |       | 0.5 |   | 0.3 |   |
| Management performance  shares                                          | ** ** | **0.7**                 |       | 0.3 |   | — |   |
| Share-based  compensation included in Operation and maintenance expense |       | **3.7**                 |       | 1.9 |   | 2.1 |   |
| Income tax expense /  (benefit)                                         | ** ** | **(1.3**                | **)**      | (0.7 | ) | (0.7 | ) |
| Total share-based  compensation, net of tax                             | ** ** | **$**                   | **2.4**    |   | $ | 1.2 |   | $ | 1.4 |   |

 

Share-based awards issuedin **DPL’s**common stock will be distributedfrom treasury stock.  **DPL** has sufficient treasury stock to satisfy all outstandingshare-based awards.

 

**DeterminingFair Value**

 

*Valuationand Amortization Method —*We estimate the fair value of stock options and RSUsusing a Black-Scholes-Merton model; performance shares are valued using a MonteCarlo simulation; restricted shares are valued at the closing market price onthe day of grant and the Directors’ RSUs are valued at the closing market priceon the day prior to the grant date.  Weamortize the fair value of all awards on a straight-line basis over therequisite service periods, which are generally the vesting periods.

 

*ExpectedVolatility —*Our expected volatility assumptions are based on the historicalvolatility of **DPL** common stock.  The volatility range captures the high andlow volatility values for each award granted based on its specific terms.

 

*ExpectedLife —*Theexpected life assumption represents the estimated period of time from grantuntil exercise and reflects historical employee exercise patterns.

 

*Risk-FreeInterest Rate —*The risk-free interest rate for the expected term ofthe award is based on the corresponding yield curve in effect at the time ofthe valuation for U.S. Treasury bonds having the same term as the expected lifeof the award, i.e., a five year bond rate is used for valuing an award with afive year expected life.

 

*ExpectedDividend Yield —*The expected dividend yield is based on **DPL’s** current dividend rate, adjusted as necessary tocapture anticipated dividend changes and the 12 month average **DPL** common stock price.

 

*ExpectedForfeitures —*The forfeiture rate used to calculate compensation expense is based on **DPL’s** historical experience, adjusted as necessary toreflect special circumstances.

 

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**StockOptions**

 

In 2000, **DPL’s** Board of Directors adopted and **DPL’s** shareholders approved The DPL Inc.Stock Option Plan.  On April 26,2006, **DPL’s** shareholders approved The DPLInc. 2006 Equity and Performance Incentive Plan (EPIP).  With the approval of the EPIP, no new awardswill be granted under The DPL Inc. Stock Option Plan, but shares relating toawards that are forfeited or terminated under The DPL Inc. Stock Option Planmay be granted under the EPIP.  As of December 31,2009, there were no unvested stock options.

 

Summarized stock optionactivity was as follows:

 
| ** **                                 | ** ** | **For the years ended** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **December 31,**   | ** ** |
| ** **                                 | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Options:                                   |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year          | ** ** | **836,500**             |       | 946,500 |   | 5,091,500 |   |
| Granted                                    | ** ** | **—**              |       | — |   | — |   |
| Exercised                                  | ** ** | **(419,000**            | **)**      | (110,000 | ) | (525,000 | ) |
| Forfeited (a)                              | ** ** | **—**              |       | — |   | (3,620,000 | ) |
| Outstanding at year-end                    | ** ** | **417,500**             |       | 836,500 |   | 946,500 |   |
| Exercisable at year-end                    | ** ** | **417,500**             |       | 836,500 |   | 946,500 |   |
|                                       |       |                    |       |   |   |   |   |
| Weighted average option  prices per share: |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year          | ** ** | **$**                   | **24.64**  |   | $ | 24.09 |   | $ | 21.95 |   |
| Granted                                    | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Exercised                                  | ** ** | **$**                   | **21.53**  |   | $ | 18.56 |   | $ | 26.79 |   |
| Forfeited                                  | ** ** | **$**                   | **—** |   | $ | — |   | $ | 20.38 |   |
| Outstanding at year-end                    | ** ** | **$**                   | **27.16**  |   | $ | 24.64 |   | $ | 24.09 |   |
| Exercisable at year-end                    | ** ** | **$**                   | **27.16**  |   | $ | 24.64 |   | $ | 24.09 |   |

 

----

*(a)  As a result of the settlement of the formerexecutive litigation on May 21, 2007, 3.6 million outstanding optionsshown above were forfeited in the second quarter of 2007 and anotherapproximately one million disputed options not shown above were also forfeited.*

 

Thefollowing table reflects information about stock options outstanding at December 31,2009:

 
| ** **             | ** ** | ** **      | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------|------------|-----------------|------------|-------------------------|------------|-------------------------|------------|
| ** **             | ** ** | ** **      | ** ** | **Weighted-**           | ** ** | **Weighted-**           | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **             | ** ** | ** **      | ** ** | **Average**             | ** ** | **Average**             | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range  of Exercise** | ** ** | ** **      | ** ** | **Contractual**         | ** ** | **Exercise**            | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| **Prices**             | ** ** | **Outstanding** | ** ** | **Life  (in Years)**    | ** ** | **Price**               | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|                   |       |            |       |                    |       |                    |       |   |   |   |   |
| $14.95 - $21.00        |       | 141,000         |       | 0.7                     |       | $                       | 20.97      |   | 141,000 |   | $ | 20.97 |   |
| $21.01 - $29.63        |       | 276,500         |       | 1.0                     |       | $                       | 29.42      |   | 276,500 |   | $ | 29.42 |   |

 

Thefollowing table reflects information about stock option activity during theperiod:

 
| ** **                                                                   | ** ** | **For the years ended** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                       | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted-average grant  date fair value of options granted during the period | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Intrinsic value of  options exercised during the period                      | ** ** | **$**                   | **2.2**    |   | $ | 1.0 |   | $ | 2.3 |   |
| Proceeds from stock  options exercised during the period                     | ** ** | **$**                   | **9.0**    |   | $ | 2.2 |   | $ | 14.6 |   |
| Excess tax benefit from  proceeds of stock options exercised                 | ** ** | **$**                   | **0.7**    |   | $ | 0.3 |   | $ | 1.3 |   |
| Fair value of shares  that vested during the period                          | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Unrecognized  compensation expense                                           | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Weighted average period  to recognize compensation expense (in years)        | ** ** | **—**              |       | — |   | — |   |

 

No options were grantedduring 2007, 2008 or 2009.

 

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**RestrictedStock Units (RSUs)**

 

RSUs were granted tocertain key employees prior to 2001.  Asa result of the settlement of the former executive litigation, all disputedRSUs (1.3 million) were forfeited by three former executives (see Note 17 ofNotes to Consolidated Financial Statements). There were 3,311 RSUs outstanding as of December 31, 2009, none ofwhich has vested.  The non-vested RSUswill be paid in cash upon vesting in 2010. Non-vested RSUs are valued quarterly at fair value using theBlack-Scholes-Merton model to determine the amount of compensation expense tobe recognized.  Non-vested RSUs do notearn dividends.

 
| ** **                            | ** ** | ** **    | ** ** | **Weighted-Avg.** | ** ** |
|---------------------------------------|------------|---------------|------------|-------------------|------------|
| ** **                            | ** ** | **Number of** | ** ** | **Grant Date**    | ** ** |
| **$ in millions**                | ** ** | **RSUs**      | ** ** | **Fair Value**    | ** ** |
| Non-vested at  January 1, 2009   |       | 10,120        |       | $                 | 0.2        |   |
| Granted in 2009                       |       | —        |       | —            |       |
| Vested in 2009                        |       | (6,809        | )          | (0.1              | )          |
| Forfeited in 2009                     |       | —        |       | —            |       |
| Non-vested at  December 31, 2009 |       | 3,311         |       | $                 | 0.1        |   |

 

SummarizedRSU activity was as follows:

 
| ** **                        | ** ** | **For the years ended** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **December 31,**   | ** ** |
| ** **                        | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| RSUs:                             |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year | ** ** | **10,120**              |       | 22,976 |   | 1,334,339 |   |
| Granted                           | ** ** | **—**              |       | — |   | — |   |
| Dividends                         | ** ** | **—**              |       | — |   | 11,656 |   |
| Exercised                         | ** ** | **(6,809**              | **)**      | (11,253 | ) | (20,097 | ) |
| Forfeited                         | ** ** | **—**              |       | (1,603 | ) | (1,302,922 | ) |
| Outstanding at period  end        | ** ** | **3,311**               |       | 10,120 |   | 22,976 |   |
| Exercisable at period  end        | ** ** | **—**              |       | — |   | — |   |

 

Compensation expense isrecognized each quarter based on the change in the market price of **DPL** common stock.

 

As of December 31,2009, 2008 and 2007, liabilities recorded for outstanding RSUs were $0.1million, $0.2 million and $0.6 million, respectively, which are included inOther deferred credits on the balance sheets.

 

The following table showsthe assumptions used in the Black-Scholes-Merton model to calculate the fairvalue of the non-vested RSUs during the respective periods:

 
| ** **                           | ** ** | **For the years ended** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **December 31,**                  | ** ** |
| ** **                           | ** ** | **2009**                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected volatility                  | ** ** | **17.9%**                              |       | 24.8% - 28.1% |   | 6.1% - 15.3% |   |
| Weighted-average expected volatility | ** ** | **17.9%**                              |       | 26.0% |   | 13.0% |   |
| Expected life (years)                | ** ** | **0.6**                                |       | 1.0 - 2.0 |   | 1.0 - 3.0 |   |
| Expected dividends                   | ** ** | **5.1%**                               |       | 4.5% |   | 3.8% |   |
| Weighted-average expected dividends  | ** ** | **5.1%**                               |       | 4.5% |   | 3.8% |   |
| Risk-free interest rate              | ** ** | **0.2%**                               |       | 0.2% - 0.4% |   | 3.0% - 3.3% |   |

 

**PerformanceShares**

 

Underthe EPIP, the Board adopted a Long-Term Incentive Plan (LTIP) under which **DPL** will grant a targeted number of performance shares ofcommon stock to executives.  Grants underthe LTIP will be awarded based on a Total Shareholder Return Relative to Peersperformance.  No performance shares willbe earned in a performance period if the three-year Total Shareholder ReturnRelative to Peers is below the threshold of the 40th percentile. Further, the LTIP awards will be capped at 200% of the target number ofperformance shares, if the Total Shareholder Return Relative to Peers is at orabove the threshold of the 90th percentile. The Total Shareholder Return Relative to Peers is considered a marketcondition under FASC 718.  There is athree year requisite service period for each portion of the performance shares.

 

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The schedule of non-vested performance shareactivity for the year ended December 31, 2009 follows:

 
| ** **                            | ** ** | **Number of**   | ** ** | **Weighted-Avg.** | ** ** |
|---------------------------------------|------------|-----------------|------------|-------------------|------------|
| ** **                            | ** ** | **Performance** | ** ** | **Grant Date**    | ** ** |
| **$ in millions**                | ** ** | **Shares**      | ** ** | **Fair Value**    | ** ** |
| Non-vested at  January 1, 2009   |       | 119,855         |       | $                 | 3.3        |   |
| Granted in 2009                       |       | 124,588         |       | 2.8               |       |
| Vested in 2009                        |       | (47,355         | )          | (1.6              | )          |
| Forfeited in  2009                    |       | (6,739          | )          | (0.2              | )          |
| Non-vested at  December 31, 2009 |       | 190,349         |       | $                 | 4.3        |   |

 
| ** **                        | ** ** | **For the years ended** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **December 31,**   | ** ** |
| ** **                        | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Performance  shares:              |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year | ** ** | **156,300**             |       | 142,108 |   | 154,768 |   |
| Granted                           | ** ** | **124,588**             |       | 93,298 |   | 78,559 |   |
| Exercised                         | ** ** | **—**              |       | — |   | (22,462 | ) |
| Expired                           | ** ** | **(36,445**             | **)**      | (37,426 | ) | (21,583 | ) |
| Forfeited                         | ** ** | **(6,739**              | **)**      | (41,680 | ) | (47,174 | ) |
| Outstanding at  period end        | ** ** | **237,704**             |       | 156,300 |   | 142,108 |   |
| Exercisable at  period end        | ** ** | **47,355**              |       | 36,445 |   | 37,426 |   |

 

The following tablereflects information about performance share activity during the period:

 
| ** **                                                                              | ** ** | **For the years ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                              | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                                  | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted-average  grant date fair value of performance shares granted during the period | ** ** | **$**                   | **2.8**    |   | $ | 2.2 |   | $ | 2.6 |   |
| Intrinsic value  of performance shares exercised during the period                      | ** ** | **$**                   | **—** |   | $ | — |   | $ | 0.6 |   |
| Proceeds from  performance shares exercised during the period                           | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Excess tax  benefit from proceeds of performance shares exercised                       | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Fair value of  performance shares that vested during the period                         | ** ** | **$**                   | **1.6**    |   | $ | 0.8 |   | $ | 0.8 |   |
| Unrecognized  compensation expense                                                      | ** ** | **$**                   | **2.1**    |   | $ | 1.6 |   | $ | 1.9 |   |
| Weighted average  period to recognize compensation expense (in years)                   | ** ** | **1.7**                 |       | 1.6 |   | 1.7 |   |

 

Thefollowing table shows the assumptions used in the Monte Carlo Simulation tocalculate the fair value of the performance shares granted during the period:

 
| ** **                            | ** ** | **For the years ended** | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **December 31,**   | ** ** |
| ** **                            | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected  volatility                  | ** ** | **22.8%  - 23.3%**      |       | 15.0% - 15.7% |   | 15.8% - 17.3% |   |
| Weighted-average  expected volatility | ** ** | **22.8%**               |       | 15.1% |   | 16.6% |   |
| Expected life  (years)                | ** ** | **3.0**                 |       | 3.0 |   | 3.0 |   |
| Expected dividends                    | ** ** | **5.4%  - 5.6%**        |       | 3.5% - 4.1% |   | 3.3% - 3.9% |   |
| Weighted-average  expected dividends  | ** ** | **5.6%**                |       | 4.1% |   | 3.4% |   |
| Risk-free  interest rate              | ** ** | **0.3%  - 1.5%**        |       | 2.2% - 3.2% |   | 4.5% - 4.9% |   |

 

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**Restricted Shares**

 

Under the EPIP, the Board granted shares of **DPL** Restricted Shares to various executives.  The Restricted Shares are registered in theexecutive’s name, carry full voting privileges, receive dividends as declaredand paid on all **DPL** common stock and vest after aspecified service period.

 

In July 2008,the Board of Directors granted compensation awards to a select group ofmanagement employees.  The managementrestricted stock awards have a three-year requisite service period, carry fullvoting privileges and receive dividends as declared and paid on all **DPL** common stock.

 

On September 17,2009, the **DPL** Board of Directors approved atwo-part equity compensation award under **DPL’s**2006****Equity and Performance Incentive Plan for certain of **DPL’s** executive officers. The first part is a restricted share grant and the second part is amatching restricted share grant.  A totalof 90,036 restricted shares were granted on September 17, 2009 as part ofthe restricted share grant.  Theserestricted shares generally vest after five years if the participant remainscontinuously employed with **DPL** or asubsidiary and if the year over year average basic EPS has increased by atleast 1% per year from 2009 - 2013. Under the matching restricted share grant, participants will have athree-year period from the date of plan implementation during which they maypurchase **DPL** common stock equal in value to upto two times their base salary.  **DPL** will match the shares purchased with another grant ofrestricted stock (matching restricted share grant).  The percentage match by **DPL**is detailed in the table below.  Thematching restricted share grant will generally vest over a three year period ifthe participant continues to hold the originally purchased shares and remainscontinuously employed with **DPL**or asubsidiary**.** The restricted shares are registeredin the executive’s name, carry full voting privileges and receive dividends asdeclared and paid on all **DPL** commonstock.

 

The matching criteria are:

 
| **Value (Cost Basis) of** | ** ** | ** **             |
|---------------------------|------------|------------------------|
| **Shares Purchased as a** | ** ** | **Company % Match of** |
| **% of 2009 Base Salary** | ** ** | **Shares Purchased**   |
| <25%                   |       | 25%                    |
| 25% to <50%            |       | 50%                    |
| 50% to <100%           |       | 75%                    |
| 100% to 200%              |       | 125%                   |

 

The matching percentage will be applied on acumulative basis and adjusted at the end of each quarter.

 

Restricted stock can only be awarded in **DPL** common stock.

 
| ** **                            | ** ** | **Number of**  | ** ** | **Weighted-Avg.** | ** ** |
|---------------------------------------|------------|----------------|------------|-------------------|------------|
| ** **                            | ** ** | **Restricted** | ** ** | **Grant Date**    | ** ** |
| **$ in millions**                | ** ** | **Shares**     | ** ** | **Fair Value**    | ** ** |
| Non-vested at  January 1, 2009   |       | 69,147         |       | $                 | 1.9        |   |
| Granted in 2009                       |       | 159,050        |       | 4.2               |       |
| Vested in 2009                        |       | (10,000        | )          | (0.3              | )          |
| Forfeited in  2009                    |       | —         |       | —            |       |
| Non-vested at  December 31, 2009 |       | 218,197        |       | $                 | 5.8        |   |

 
| ** **                        | ** ** | **For the years ended** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **December 31,**   | ** ** |
| ** **                        | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Restricted  shares:               |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year | ** ** | **69,147**              |       | 42,200 |   | 19,000 |   |
| Granted                           | ** ** | **159,050**             |       | 39,347 |   | 23,200 |   |
| Exercised                         | ** ** | **(10,000**             | **)**      | (1,000 | ) | — |   |
| Forfeited                         | ** ** | **—**              |       | (11,400 | ) | — |   |
| Outstanding at  period end        | ** ** | **218,197**             |       | 69,147 |   | 42,200 |   |
| Exercisable at  period end        | ** ** | **—**              |       | — |   | — |   |

 

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The following table reflects information aboutrestricted share activity during the period:

 
| ** **                                                                             | ** ** | **For the years ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                             | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                                 | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted-average  grant date fair value of restricted shares granted during the period | ** ** | **$**                   | **4.2**    |   | $ | 1.1 |   | $ | 0.7 |   |
| Intrinsic value  of restricted shares exercised during the period                      | ** ** | **$**                   | **0.3**    |   | $ | — |   | $ | — |   |
| Proceeds from  restricted shares exercised during the period                           | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Excess tax  benefit from proceeds of restricted shares exercised                       | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Fair value of  restricted shares that vested during the period                         | ** ** | **$**                   | **0.3**    |   | $ | — |   | $ | — |   |
| Unrecognized  compensation expense                                                     | ** ** | **$**                   | **4.3**    |   | $ | 1.3 |   | $ | 0.9 |   |
| Weighted average  period to recognize compensation expense (in years)                  | ** ** | **3.4**                 |       | 2.7 |   | 2.8 |   |

 

**Non-Employee Director Restricted Stock Units**

 

Under the EPIP, as part of their annualcompensation for service to **DPL** and **DP&L**, each non-employee Director receives a retainer inRSUs on the date of the annual meeting of shareholders.  The RSUs will become non-forfeitable on April 15of the following year.  All of the RSUsbecome non-forfeitable in the event of death, disability, or change in control;but if the Director resigns or retires prior to the April 15 vesting date,the vested shares will be distributed on a pro rata basis.  The RSUs accrue quarterly dividends in theform of additional RSUs.  Upon vesting,the RSUs will become exercisable and will be distributed in **DPL** common stock, unless the Director chooses to deferreceipt of the shares until a later date. The RSUs are valued at the closing stock price on the day prior to thegrant and the compensation expense is recognized evenly over the vestingperiod.

 
| ** **                            | ** ** | **Number  of**          | ** ** | **Weighted-Avg.** | ** ** | ** ** |       |   |
|---------------------------------------|------------|-------------------------|------------|-------------------|------------|------------|------------|--------|
| ** **                            | ** ** | **Director**            | ** ** | **Grant  Date**   | ** ** | ** ** |       |   |
| **$ in millions**                | ** ** | **RSUs**                | ** ** | **Fair  Value**   | ** ** | ** ** |       |   |
| Non-vested at  January 1, 2009   |       | 15,546                  |       | $                 | 0.4        |       |       |   |   |
| Granted in 2009                       |       | 20,016                  |       | 0.5               |       |       |       |   |
| Dividends  accrued in 2009            |       | 1,737                   |       | —            |       |       |       |   |
| Exercised and  issued in 2009         |       | (2,066                  | )          | (0.1              | )          |       |       |   |
| Exercised and  deferred in 2009       |       | (14,521                 | )          | (0.4              | )          |       |       |   |
| Forfeited in  2009                    |       | —                  |       | —            |       |       |       |   |
| Non-vested at  December 31, 2009 |       | 20,712                  |       | $                 | 0.4        |       |       |   |   |
|                                  |       |                    |       |              |       |       |       |   |
| ** **                            | ** ** | **For the years ended** | ** ** |
| ** **                            | ** ** | **December 31,**   | ** ** |
| ** **                            | ** ** | **2009**                | ** ** | **2008**          | ** ** | **2007**   | ** ** |
| Restricted stock  units:              |       |                    |       |              |       |       |       |
| Outstanding at  beginning of year     | ** ** | **15,546**              |       | 13,573            |       | —     |       |
| Granted                               | ** ** | **20,016**              |       | 17,022            |       | 14,920     |       |
| Dividends  accrued                    | ** ** | **1,737**               |       | 931               |       | 348        |       |
| Exercised and  issued                 | ** ** | **(2,066**              | **)**      | (7,910            | )          | (142       | )          |
| Exercised and  deferred               | ** ** | **(14,521**             | **)**      | (6,921            | )          | —     |       |
| Forfeited                             | ** ** | **—**              |       | (1,149            | )          | (1,553     | )          |
| Outstanding at  period end            | ** ** | **20,712**              |       | 15,546            |       | 13,573     |       |
| Exercisable at  period end            | ** ** | **—**              |       | —            |       | —     |       |

 

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The following table reflects information aboutnon-employee director RSU activity during the period:

 
| ** **                                                                                      | ** ** | **For  the years ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                      | ** ** | **December 31,**    | ** ** |
| **$ in millions**                                                                          | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted-average  grant date fair value of non-employee director RSUs granted during the period | ** ** | **$**                    | **0.5**    |   | $ | 0.5 |   | $ | 0.5 |   |
| Intrinsic value  of non-employee director RSUs exercised during the period                      | ** ** | **$**                    | **0.4**    |   | $ | 0.4 |   | $ | — |   |
| Proceeds from  non-employee director RSUs exercised during the period                           | ** ** | **$**                    | **—** |   | $ | — |   | $ | — |   |
| Excess tax  benefit from proceeds of non-employee director RSUs exercised                       | ** ** | **$**                    | **—** |   | $ | — |   | $ | — |   |
| Fair value of  non-employee director RSUs that vested during the period                         | ** ** | **$**                    | **0.5**    |   | $ | 0.5 |   | $ | 0.3 |   |
| Unrecognized  compensation expense                                                              | ** ** | **$**                    | **0.1**    |   | $ | 0.1 |   | $ | 0.1 |   |
| Weighted average  period to recognize compensation expense (in years)                           | ** ** | **0.3**                  |       | 0.3 |   | 0.3 |   |

 

**Management Performance Shares**

 

On May 28,2008, the Board of Directors granted compensation awards for select managementemployees.  The grants have a three yearrequisite service period and certain performance conditions during the performanceperiod.  The management performanceshares can only be awarded in **DPL**commonstock.

 
| ** **                            | ** ** | **Number  of**          | ** ** | **Weighted-Avg.** | ** ** |      |       |   |
|---------------------------------------|------------|-------------------------|------------|-------------------|------------|-----------|------------|--------|
| ** **                            | ** ** | **Mgt.  Performance**   | ** ** | **Grant  Date**   | ** ** |      |       |   |
| **$ in millions**                | ** ** | **Shares**              | ** ** | **Fair  Value**   | ** ** |      |       |   |
| Non-vested at  January 1, 2009   |       | 39,144                  |       | $                 | 1.1        |      |       |   |   |
| Granted in 2009                       |       | 48,719                  |       | 1.0               |       |      |       |   |
| Vested in 2009                        |       | —                  |       | —            |       |      |       |   |
| Forfeited in  2009                    |       | (3,622                  | )          | (0.1              | )          |      |       |   |
| Non-vested at  December 31, 2009 |       | 84,241                  |       | $                 | 2.0        |      |       |   |   |
|                                  |       |                    |       |              |       |      |       |   |
| ** **                            | ** ** | **For the years ended** | ** ** |
| ** **                            | ** ** | **December 31,**   | ** ** |
| ** **                            | ** ** | **2009**                | ** ** | **2008**          | ** ** | **2007*** | ** ** |
| Management  Performance Shares:       |       |                    |       |              |       |      |       |
| Outstanding at  beginning of year     | ** ** | **39,144**              |       | —            |       | —    |       |
| Granted                               | ** ** | **48,719**              |       | 39,144            |       | —    |       |
| Exercised                             | ** ** | **—**              |       | —            |       | —    |       |
| Forfeited                             | ** ** | **(3,622**              | **)**      | —            |       | —    |       |
| Outstanding at  period end            | ** ** | **84,241**              |       | 39,144            |       | —    |       |
| Exercisable at  period end            | ** ** | **—**              |       | —            |       | —    |       |

 

----

**Management performance shares werenot issued in 2007.*

 

Thefollowing table shows the assumptions used in the Monte Carlo Simulation tocalculate the fair value of the management performance shares granted duringthe period:

 
| ** **                            | ** ** | **For  the years ended** | ** ** |
|---------------------------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **December 31,**    | ** ** |
| ** **                            | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2007*** | ** ** |
| Expected  volatility                  | ** ** | **22.8**                 | **%**      | 14.9 | % | 0.0 | % |
| Weighted-average  expected volatility | ** ** | **22.8**                 | **%**      | 14.9 | % | 0.0 | % |
| Expected life  (years)                | ** ** | **3.0**                  |       | 3.0 |   | — |   |
| Expected  dividends                   | ** ** | **5.6**                  | **%**      | 3.9 | % | 0.0 | % |
| Weighted-average  expected dividends  | ** ** | **5.6**                  | **%**      | 3.9 | % | 0.0 | % |
| Risk-free  interest rate              | ** ** | **1.5**                  | **%**      | 2.9 | % | 0.0 | % |

 

----

**Managementperformance shares were not issued in 2007.*

 

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The following table reflects information aboutmanagement performance share activity during the period:

 
| ** **                                                                                         | ** ** | **For the years ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                         | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                                             | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007*** | ** ** |
| Weighted-average  grant date fair value of management perfomance shares granted during the  period | ** ** | **$**                   | **1.0**    |   | $ | 1.1 |   | $ | — |   |
| Intrinsic value  of management performance shares exercised during the period                      | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Proceeds from  management performance shares exercised during the period                           | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Excess tax  benefit from proceeds of management performance shares exercised                       | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Fair value of  management performance shares that vested during the period                         | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Unrecognized  compensation expense                                                                 | ** ** | **$**                   | **1.0**    |   | $ | 0.8 |   | $ | — |   |
| Weighted average  period to recognize compensation expense (in years)                              | ** ** | **1.6**                 |       | 2.0 |   | — |   |

 

----

**Management performance shares werenot issued in 2007.*

 

*13.  Redeemable Preferred Stock*

 

**DP&L**has $100 par value preferred stock,4,000,000 shares authorized, of which 228,508 are outstanding as of December 31,2009.  **DP&L**also has $25 par value preferred stock, 4,000,000 shares authorized, none ofwhich was outstanding as of December 31, 2009.  The table below details the preferred sharesoutstanding at December 31, 2009.

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

 

The **DP&L** preferred stock may be redeemed at **DP&L’s** option as determined by its Board of Directors atthe per-share redemption prices indicated above, plus cumulative accrueddividends.  In addition, **DP&L’s** Amended Articles of Incorporation containprovisions that permit preferred stockholders to elect members of the Board ofDirectors in the event that cumulative dividends on the preferred stock are inarrears in an aggregate amount equivalent to at least four full quarterlydividends.  Since this potentialredemption-triggering event is not solely within the control of **DP&L**, the preferred stock is presented on the BalanceSheets as “Redeemable Preferred Stock” in a manner consistent with temporaryequity.

 

Aslong as any **DP&L** preferred stock isoutstanding, **DP&L’s** Amended Articles ofIncorporation also contain provisions restricting the payment of cash dividendson any of its common stock if, after giving effect to such dividend, theaggregate of all such dividends distributed subsequent to December 31,1946 exceeds the net income of **DP&L**available for dividends on its common stock subsequent to December 31,1946, plus $1.2 million.  Thisdividend restriction has historically not impacted **DP&L’s**abilityto pay cash dividends and, as of December 31, 2009, **DP&L’s**retained earnings of $640.3 million were all available for common stockdividends payable to **DPL.** We do not expect this restriction to have aneffect on the payment of cash dividends in the future.  **DPL** recordsdividends on preferred stock of **DP&L** withinInterest expense on the Statements of Results of Operations.

 

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*14.  CommonShareholders’ Equity*

 

**DPL** has 250,000,000 authorized common shares, of which118,966,767 are outstanding at December 31, 2009.

 

**Dividend Reinvestment Plan**

 

On March 1, 2009, **DPL** introduceda new direct stock purchase and dividend reinvestment plan. The plan providesboth registered shareholders and new investors with the ability to purchaseshares and also to reinvest their dividends. This plan is administered by Computershare Trust Company, N.A., and notby **DPL**.

 

**Shareholder Rights Plan**

 

In September 2001, **DPL**’s Board ofDirectors renewed its Shareholder Rights Plan, attaching one right to eachcommon share outstanding at the close of business on December 13,2001.  The rights separate from thecommon shares and become exercisable at the exercise price of $130 per right inthe event of certain attempted business combinations.  The renewed plan expires on December 31,2011.

 

**Warrants**

 

In February 2000, **DPL** enteredinto a series of recapitalization transactions which included the issuance of31.6 million warrants for an aggregate purchase price of $50 million.  The warrants are exercisable, in whole or inpart, for common shares at any time during the twelve-year period commencing onMarch 13, 2000.  Each warrant isexercisable for one common share, subject to anti-dilution adjustments (e.g.,stock split, stock dividend) at an exercise price of $21.00 per common share.

 

In addition, in the event of a declaration, issuance or consummation ofany dividend, spin-off or other distribution or similar transaction by **DPL** of the capital stock of any of its subsidiaries,additional warrants of such subsidiary will be issued to the warrant holder sothat after the transaction, the warrant holder will have the same interest inthe fully diluted number of common shares of such subsidiary the warrant holderhad in **DPL** immediately prior to suchtransaction.

 

Pursuant to the warrant agreement, **DPL** hasauthorized common shares sufficient to provide for the exercise in full of alloutstanding warrants.

 

The table below details the net change during 2009 of **DPL’s** outstanding warrants:

 
| ** **                                              | ** ** | **Number**      | ** ** |
|---------------------------------------------------------|------------|-----------------|------------|
| **in millions**                                         | ** ** | **of Warrants** | ** ** |
|                                                    |       |            |       |
| Outstanding  warrants at January 1, 2009           |       | 19.6            |       |
| Warrants  repurchased at an average price of $2.94 each |       | (8.6            | )          |
| Warrants  exercised under cashless transactions         |       | (5.5            | )          |
| Warrants  exercised for cash                            |       | (3.7            | )          |
| Outstanding  warrants at December 31, 2009         |       | 1.8             |       |

 

The warrants repurchased were cancelled by **DPL**onthe dates they were repurchased.  As aresult of the warrants exercised under both cash and cashless provisions, **DPL** issued a total of 5.0 million shares of common stockfrom treasury stock and in turn received total cash proceeds of $77.7million.  **DPL**used a portion of the proceeds to repurchase warrants directly from holders andthe remaining proceeds were used to repurchase shares under its StockRepurchase Program discussed below.

 

**Stock Repurchase Program**

 

On October 28, 2009, the **DPL** Board ofDirectors approved a Stock Repurchase Program under which **DPL**may use proceeds from the exercise of warrants to repurchase warrants or itscommon stock from time to time in the open market, through private transactionsor otherwise. The Stock Repurchase Program will run through June 30, 2012,which is three months after the end of the warrant exercise period.  Under the Stock Repurchase Program, **DPL** repurchased a total of 2.4 million shares at an averageper share price of $26.96 during the quarter ended December 31, 2009.  At December 31, 2009, the amount stillavailable that could be used to repurchase stock under the Stock RepurchaseProgram is approximately $3.9 million but could be higher if additionalwarrants are exercised for cash in the future.

 

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**ESOP**

 

During October 1992,our Board of Directors approved the formation of a Company-sponsored ESOP tofund matching contributions to **DP&L’s** 401(k) retirementsavings plan and certain other payments to eligible full-time employees.  This leveraged ESOP is funded by an exemptloan, which is secured by the ESOP shares. As debt service payments are made on the loan, shares are released on apro rata basis.  ESOP shares used to fundmatching contributions to **DP&L’s** 401(k) vestafter three years of service; other compensation shares awarded vestimmediately.

 

In general, participantsare eligible for lump sum payments upon termination of their employment and thesubmission and subsequent approval of an application for benefits.  Earlier distributions can occur for aQualified Domestic Relations Order or for death.  Otherwise, distribution must occur within 60days after the plan year in which the later of one of the following eventsoccur: 65th birthday, 10th anniversary of participation, or terminationof employment.  Participants are allowedto take distributions during employment if older than 591⁄2 and/or for a hardshipas defined in the Plan document. Additionally, participants may elect on a quarterly basis to diversifytheir vested ESOP shares into **DP&L’s** 401(k) retirementsavings plan.  Distributions are made incash unless the participant requests the distribution be made in stock.  A repurchase obligation exists for vestedshares held by the ESOP if they cannot be sold in the open market.  The fair value of shares subject to therepurchase obligation at December 31, 2009 and 2008 was approximately$57.6 million and $42.4 million, respectively.

 

In 1992, the Plan enteredinto a $90 million loan agreement with **DPL** in order topurchase shares of **DPL** commonstock in the open market.  The term loanagreement provided for principal and interest on the loan to be paid prior to October 9,2007, with the right to extend the loan for an additional ten years.  In 2007, the maturity date was extended to October 7,2017.  Effective January 1, 2009,the interest on the loan was amended to a fixed rate of 2.06%, payableannually.  Dividends received by the ESOPfor unallocated shares are used to repay the principal and interest on the ESOPloan to **DPL**. Dividends on the allocated shares are charged to retained earnings.

 

The ESOP used the fullamount of the loan to purchase 4.7 million shares of **DPL**common stock in the open market.  As aresult of the 1997 stock split, the ESOP held 7.1 million shares of **DPL**common stock.  Thecost of shares held by the ESOP and not yet released is reported as a reductionof Common shareholders’ equity.  At December 31,2009, Common shareholders’ equity reflects the cost of 2.8 million unreleasedshares held in suspense by the DPL Inc. Employee Stock Ownership Trust.  The fair value of the 2.8 million ESOP sharesheld in suspense at December 31, 2009 was $77.5 million.  When shares are committed to be released fromthe ESOP, compensation expense is recorded based on the fair value of theshares committed to be released, with a corresponding credit to ourequity.  Compensation expense associatedwith the ESOP, which is based on the fair value of the shares committed to bereleased for allocation, amounted to $4.0 million in 2009, $1.5 million in 2008and $9.0 million in 2007.

 

For purposes of EPScomputations and in accordance with GAAP, we treat ESOP shares as outstandingif they have been allocated to participants, released or have been committed tobe released.  As of December 31,2009, the ESOP has 4.2 million shares allocated to participants with anadditional 21 thousand shares which have been released but unallocated toparticipants.  ESOP cumulative sharesoutstanding for the calculation of EPS were 4.2 million in 2009, 4.0 million in2008 and 3.9 million in 2007.

 

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*15.  Comprehensive Income (Loss)*

 

Comprehensive income(loss) is defined as the change in equity (net assets) of a business entityduring a period from transactions and other events and circumstances fromnon-owner sources.  It includes allchanges in equity during a period except those resulting from investments byowners and distributions to owners.  Comprehensive income (loss) has two components: Net income (loss) andOther comprehensive income (loss).

 

The following tableprovides the tax effects allocated to each component of Other comprehensiveincome (loss) for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                                           | ** ** | **DPL**    | ** ** | **DP&L**    | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|-----------------|------------|
| ** **                                                           | ** ** | **Amount** | ** ** | **Tax**         | ** ** | ** ** | ** ** | **Amount** | ** ** | **Tax** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **before** | ** ** | **(expense) /** | ** ** | **Amount** | ** ** | **before** | ** ** | **(expense) /** | ** ** | **Amount** | ** ** |
| **$ in millions**                                               | ** ** | **tax**    | ** ** | **benefit**     | ** ** | **after tax** | ** ** | **tax** | ** ** | **benefit** | ** ** | **after tax** | ** ** |
|                                                                 |       |       |       |            |       |   |   |   |   |   |   |   |   |
| **2007:**                                                            |       |       |       |            |       |   |   |   |   |   |   |   |   |
| Unrealized gains  / (losses) on financial instruments                |       | $          | (1.4       | )               | $          | 0.5 |   | $ | (0.9 | ) | $ | (11.9 | ) | $ | 4.2 |   | $ | (7.7 | ) |
| Deferred gains /  (losses) on cash flow hedges                       |       | (7.1       | )          | 1.6             |       | (5.5 | ) | (7.1 | ) | 1.6 |   | (5.5 | ) |
| Unrealized gains  / (losses) on pension and postretirement benefits  |       | 3.4        |       | (1.2            | )          | 2.2 |   | 3.4 |   | (1.2 | ) | 2.2 |   |
| Other  comprehensive income (loss)                                   |       | $          | (5.1       | )               | $          | 0.9 |   | $ | (4.2 | ) | $ | (15.6 | ) | $ | 4.6 |   | $ | (11.0 | ) |
|                                                                 |       |       |       |            |       |   |   |   |   |   |   |   |   |
| **2008:**                                                            |       |       |       |            |       |   |   |   |   |   |   |   |   |
| Unrealized gains  / (losses) on financial instruments                |       | $          | (0.8       | )               | $          | 0.3 |   | $ | (0.5 | ) | $ | (15.0 | ) | $ | 5.2 |   | $ | (9.8 | ) |
| Deferred gains /  (losses) on cash flow hedges                       |       | (1.3       | )          | (0.4            | )          | (1.7 | ) | (1.3 | ) | (0.4 | ) | (1.7 | ) |
| Unrealized gains  / (losses) on pension and postretirement benefits  |       | (33.1      | )          | 11.6            |       | (21.5 | ) | (33.4 | ) | 11.7 |   | (21.7 | ) |
| Other  comprehensive income (loss)                                   |       | $          | (35.2      | )               | $          | 11.5 |   | $ | (23.7 | ) | $ | (49.7 | ) | $ | 16.5 |   | $ | (33.2 | ) |
| ** **                                                           | ** ** | ** ** | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2009:**                                                            |       |       |       |            |       |   |   |   |   |   |   |   |   |
| Unrealized gains  / (losses) on financial instruments                |       | **$**      | **0.8**    |            | **$**      | **(0.3** | **)** | **$** | **0.5** |   | **$** | **4.2** |   | **$** | **(1.5** | **)** | **$** | **2.7** |   |
| Deferred gains /  (losses) on****cash flow hedges                    | ** ** | **(4.3**   | **)**      | **0.6**         | ** ** | **(3.7** | **)** | **(4.3** | **)** | **0.6** | ** ** | **(3.7** | **)** |
| Unrealized gains  / (losses) on pension and  postretirement benefits | ** ** | **(4.1**   | **)**      | **1.4**         | ** ** | **(2.7** | **)** | **(4.1** | **)** | **1.4** | ** ** | **(2.7** | **)** |
| Other  comprehensive income (loss)                                   | ** ** | **$**      | **(7.6**   | **)**           | **$**      | **1.7** | ** ** | **$** | **(5.9** | **)** | **$** | **(4.2** | **)** | **$** | **0.5** | ** ** | **$** | **(3.7** | **)** |

 

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The following tableprovides the detail of each component of Other comprehensive income (loss)reclassified to Net income during the years ended December 31, 2009, 2008and 2007:

 

**DPL**

 
| **$ in millions**                                                                                                                                                             | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                                                                               |       |     |       |     |       |     |       |
| Unrealized gains  on financial instruments net of income tax expense of $1.1 million in 2007.  There were no unrealized gains or losses reclassified to earnings in 2009 or  2008. | ** ** | **$**    | **—** |     | $          | —   |       | $ | 2.0 |   |
| Deferred gains  on cash flow hedges net of income tax expenses of $1.8 million, $2.2 million  and $1.5 million, respectively.                                                      | ** ** | **5.9**  |       | 6.5      |       | 5.1      |       |
| Unrealized  losses on pension and postretirement benefits net of income tax benefits of  $1.1 million, $0.7 million and $0.8 million, respectively.                                | ** ** | **(2.1** | **)**      | (1.3     | )          | (1.5     | )          |
|                                                                                                                                                                               | ** ** | **$**    | **3.8**    |     | $          | 5.2      |       | $ | 5.6 |   |

 

**DP&L**

 
| **$ in millions**                                                                                                                              | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized gains  on financial instruments net of income tax expenses of $0.4 million, $1.4  million and $6.3 million, respectively.                | ** ** | **$**      | **0.7**    |       | $          | 2.7        |       | $ | 11.6 |   |
| Deferred gains  on cash flow hedges net of income tax expenses of $1.8 million, $2.2 million  and $1.5 million, respectively.                       | ** ** | **5.9**    |       | 6.5        |       | 5.1        |       |
| Unrealized  losses on pension and postretirement benefits net of income tax benefits of  $1.1 million, $0.7 million and $0.8 million, respectively. | ** ** | **(2.1**   | **)**      | (1.3       | )          | (1.5       | )          |
|                                                                                                                                                | ** ** | **$**      | **4.5**    |       | $          | 7.9        |       | $ | 15.2 |   |

 

**AccumulatedOther Comprehensive Income (Loss)**

 

AOCI is included on ourbalance sheets within the Common shareholders’ equity sections.  Thefollowing table provides the components that constitute the balance sheetamounts in AOCI at December 31, 2009 and 2008:

 

**DPL**

 
| **$ in millions**                           | ** ** | **2009**  | ** ** | **2008** | ** ** |
|--------------------------------------------------|------------|-----------|------------|----------|------------|
|                                             |       |      |       |     |       |
| Financial  instruments, net of tax               | ** ** | **$**     | **0.2**    |     | $          | (0.3 | ) |
| Cash flow  hedges, net of tax                    | ** ** | **13.3**  |       | 17.0     |       |
| Pension and  postretirement benefits, net of tax | ** ** | **(42.5** | **)**      | (39.8    | )          |
| Total                                            | ** ** | **$**     | **(29.0**  | **)**    | $          | (23.1 | ) |

 

**DP&L**

 
| **$ in millions**                           | ** ** | **2009**  | ** ** | **2008** | ** ** |
|--------------------------------------------------|------------|-----------|------------|----------|------------|
|                                             |       |      |       |     |       |
| Financial  instruments, net of tax               | ** ** | **$**     | **9.5**    |     | $          | 6.7 |   |
| Cash flow  hedges, net of tax                    | ** ** | **13.3**  |       | 17.0     |       |
| Pension and  postretirement benefits, net of tax | ** ** | **(42.5** | **)**      | (39.8    | )          |
| Total                                            | ** ** | **$**     | **(19.7**  | **)**    | $          | (16.1 | ) |

 

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*16.  EPS*

 

BasicEPS is based on the weighted-average number of **DPL** common shares outstanding during the year.  Diluted EPS is based on the weighted-averagenumber of **DPL** common andcommon-equivalent shares outstanding during the year, except in periods wherethe inclusion of such common-equivalent shares is anti-dilutive.  Excluded from outstanding shares for theseweighted-average computations are shares held by **DP&L’s**Master Trust Plan for deferred compensation and unreleased shares held by **DPL’s** ESOP.

 

The common-equivalentshares excluded from the calculation of diluted EPS, because they wereanti-dilutive, were not material for all the periods ended December 31,2009, 2008 and 2007.  These shares may bedilutive in the future.

 

The following illustratesthe reconciliation of the numerators and denominators of the basic and dilutedEPS computations:

 
| ** **                                            | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **$ and shares in millions  except**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Per**    | ** ** | ** ** | ** ** | ** ** | ** ** | **Per** | ** ** | **(a)** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **per share amounts**                                 | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share**  | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic  EPS**                                        | ** ** | **$**      | **229.1**  | ** ** | **112.9**  | ** ** | **$**      | **2.03** |   | $ | 244.5 |   | 110.2 |   | $ | 2.22 |   | $ | 221.8 |   | 107.9 |   | $ | 2.06 |   |
| ** **                                            | ** ** | ** ** | ** ** | ** ** |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Effect  of Dilutive Securities:**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock Incentive  Units                                | ** ** | ** ** | ** ** | **—** | ** ** | ** ** |       |   |   | — |   |   |   |   |   | 0.5 |   |   |   |
| Warrants (b)                                          | ** ** | ** ** | ** ** | **1.1**    | ** ** | ** ** |       |   |   | 5.0 |   |   |   |   |   | 8.6 |   |   |   |
| Stock options,  performance and restricted shares (c) | ** ** | ** ** | ** ** | **0.2**    | ** ** | ** ** |       |   |   | 0.2 |   |   |   |   |   | 0.8 |   |   |   |
| ** **                                            | ** ** | ** ** | ** ** | ** ** |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Diluted  EPS**                                      | ** ** | **$**      | **229.1**  | ** ** | **114.2**  | ** ** | **$**      | **2.01** |   | $ | 244.5 |   | 115.4 |   | $ | 2.12 |   | $ | 221.8 |   | 117.8 |   | $ | 1.88 |   |

 

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*(a)    Income after discontinued operations.*

*(b)    For information relating to warrant activity,see Note 14 of Notes to Consolidated Financial Statements.*

*(c)    Starting January 1, 2009, restrictedshares are included in Basic Shares pursuant to the update to FASC 260,*

*“Earnings per Share.” See Note 1 of Notes to Consolidated Financial Statements.*

 

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*17.  Executive Litigation*

 

On May 21, 2007, wesettled litigation with three former executives.  As part of thissettlement, the three former executives relinquished and dismissed all theirclaims including those related to certain deferred compensation, RSUs, MVEincentives, stock options and legal fees. The RSUs and stock optionsrelinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, we had accruedobligations of $64.2 million.  Included in these amounts was $3.1 millionassociated with the forfeiture of stock options.  In exchange for our payment of $25 millionand the relinquishment by the former executives of certain contestedcompensation discussed above, all of these claims by all parties were settledand released.

 

**DPL**

 

As a result of thissettlement, during 2007, **DPL**realizeda net pre-tax gain in continuing and discontinued operations of approximately$31.0 million and $8.2 million, respectively.  The net gain is comprisedof the reversal of the $64.2 million of accrued obligations less the $25million settlement.  The obligations related to the discontinuedoperations were associated with the management of **DPL’s**financial asset portfolio, which was conducted in our MVE subsidiary.  The MVE operations were discontinued in 2005with the sale of the financial asset portfolio. The $25 million settlement expense was allocated between continuing anddiscontinued operations based on the proportionate share of the obligations ofeach.

 

**DP&L**

 

As a result of thissettlement during 2007, **DP&L**realizeda net pre-tax gain in continuing operations of $35.3 million.  Accruedobligations associated with the former executives’ litigation were recorded by **DP&L** since the obligations were associated with ournon-qualified benefit plans.  **DP&L** had no ownership of **DPL’s**discontinued financial asset portfolio business, therefore these liabilitieswere reversed and **DP&L’s** netpre-tax gain was recorded within continuing operations.

 

The $25 millionsettlement was funded from the sale of financial assets held in **DP&L’s** Master Trust Plan for deferred compensation.  As part of this transaction, during thesecond quarter ended June 30, 2007, **DPL** and **DP&L** recorded a $3.2 million realized gain which wasreflected in investment income**.**

 

*18.  Insurance Recovery*

 

On April 30, 2007, **DP&L** executed a settlement agreementfor $14.5 million with one of our insurers, Associated Electric & GasInsurance Services (AEGIS), under a fiduciary liability policy to recoup aportion of legal fees associated with our litigation against three formerexecutives.  This was recorded as areduction to operation and maintenance expense during 2007.

 

On May 16, 2007, **DPL** filed a claim with Energy InsuranceMutual (EIM) to recoup legal expenses associated with our litigation againstcertain former executives.  Arbitration on that claim occurred on May 13,2009.  Thearbitration panel issued a ruling in Phase 1 of the arbitration on September 25,2009, finding that most of the claims involving the former executives werecovered.  Inaccordance with GAAP, **DPL** recordedexpenses totaling $7.5 million in 2008 but has not recorded any assets forpossible recovery of these expenses.  Thematter is pending.

 

*19.  Contractual Obligations, CommercialCommitments and Contingencies*

 

**DPL —Guarantees**

 

In the normal course ofbusiness, **DPL**enters into various agreements with itswholly-owned subsidiaries, DPLE and DPLER, providing financial or performanceassurance to third parties.  Theseagreements are entered into primarily to support or enhance thecreditworthiness otherwise attributed to DPLE and DPLER on a stand-alone basis, thereby facilitating the extension ofsufficient credit to accomplish DPLE’s and DPLER’s intended commercialpurposes.

 

At December 31,2009, **DPL** had $51 million ofguarantees to third parties for future financial or performance assurance undersuch agreements, on behalf of DPLE and DPLER. The guarantee arrangements entered into by**DPL**with these third parties cover all present and future obligations of DPLE andDPLER to such beneficiaries and are terminable at any time by **DPL** upon written notice to the beneficiaries. The carryingamount of obligations for commercial transactions covered by these guaranteesand recorded in our Consolidated Balance Sheets was $0.6 million and$1.6 million at December 31, 2009 and 2008, respectively.

 

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In twoseparate transactions in November and December 2006, **DPL** also agreed to be a guarantor of the obligations of DPLEregarding the sale, in April 2007, of the Darby Electric Peaking Stationto American Electric Power and the sale of the Greenville Electric PeakingStation to Buckeye Electric Power, Inc. In both cases, **DPL** agreed toguarantee the obligations of DPLE over a multiple-year period as follows:

 
| **$ in millions** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Darby                  |       | $        | 23.0       |     | $          | 15.3     |       | $ | 7.7 |   |
|                   |       |     |       |     |       |     |       |
| Greenville             |       | $        | 11.1       |     | $          | 7.4      |       | $ | 3.7 |   |

 

To date, neither **DPL** nor **DP&L**haveincurred any losses related to the guarantees of DPLE’s obligations and webelieve it is remote that either **DPL**or **DP&L** would be required toperform or incur any losses in the future associated with any of the aboveguarantees of DPLE’s obligations.

 

**DP&L— Equity Ownership Interest**

 

**DP&L** owns a 4.9% equity ownership interest in an electricgeneration company which is recorded using the cost method of accounting underGAAP.  As of December 31, 2009, **DP&L** could be responsible for therepayment of 4.9%, or $54.4 million, of a $1,110 million debt obligation thatmatures in 2026.  This would only happenif this electric generation company defaulted on its debt payments.  As of December 31, 2009, we have noknowledge of such a default.

 

**Contractual Obligations and CommercialCommitments**

 

We enter into various contractualobligations and other commercial commitments that may affect the liquidity ofour operations.  At December 31,2009, these include:

 
| ** **                                         | ** ** | ** ** | ** ** | **Payment Year** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------------|------------|
| **$ in millions**                             | ** ** | **Total**  | ** ** | **2010**         | ** ** | **2011-2012** | ** ** | **2013-2014** | ** ** | **Thereafter** | ** ** |
| **DPL**                                            |       |       |       |             |       |   |   |   |   |   |   |
|                                               |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                                     |       | $          | 1,324.4    |             | $          | 100.0 |   | $ | 297.4 |   | $ | 470.0 |   | $ | 457.0 |   |
| Interest  payments                                 |       | 740.0      |       | 71.5             |       | 115.1 |   | 71.4 |   | 482.0 |   |
| Pension and  postretirement payments               |       | 253.8      |       | 23.8             |       | 48.9 |   | 51.1 |   | 130.0 |   |
| Capital leases                                     |       | 0.6        |       | 0.6              |       | — |   | — |   | — |   |
| Operating leases                                   |       | 0.5        |       | 0.3              |       | 0.2 |   | — |   | — |   |
| Coal contracts  (a)                                |       | 1,694.3    |       | 498.1            |       | 577.2 |   | 184.4 |   | 434.6 |   |
| Limestone  contracts (a)                           |       | 48.4       |       | 5.5              |       | 11.4 |   | 12.0 |   | 19.5 |   |
| Purchase orders  and other contractual obligations |       | 162.6      |       | 56.9             |       | 84.9 |   | 14.6 |   | 6.2 |   |
| Total contractual  obligations                     |       | $          | 4,224.6    |             | $          | 756.7 |   | $ | 1,135.1 |   | $ | 803.5 |   | $ | 1,529.3 |   |
|                                               |       |       |       |             |       |   |   |   |   |   |   |
| **DP&L**                                       |       |       |       |             |       |   |   |   |   |   |   |
|                                               |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                                     |       | $          | 884.4      |             | $          | 100.0 |   | $ | — |   | $ | 470.0 |   | $ | 314.4 |   |
| Interest  payments                                 |       | 454.8      |       | 39.4             |       | 78.3 |   | 48.2 |   | 288.9 |   |
| Pension and  postretirement payments               |       | 253.8      |       | 23.8             |       | 48.9 |   | 51.1 |   | 130.0 |   |
| Capital leases                                     |       | 0.6        |       | 0.6              |       | — |   | — |   | — |   |
| Operating leases                                   |       | 0.5        |       | 0.3              |       | 0.2 |   | — |   | — |   |
| Coal contracts  (a)                                |       | 1,694.3    |       | 498.1            |       | 577.2 |   | 184.4 |   | 434.6 |   |
| Limestone  contracts (a)                           |       | 48.4       |       | 5.5              |       | 11.4 |   | 12.0 |   | 19.5 |   |
| Purchase orders  and other contractual obligations |       | 164.8      |       | 58.0             |       | 86.0 |   | 14.6 |   | 6.2 |   |
| Total  contractual obligations                     |       | $          | 3,501.6    |             | $          | 725.7 |   | $ | 802.0 |   | $ | 780.3 |   | $ | 1,193.6 |   |

 

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(a) Total at **DP&L**-operated units

 

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Long-termdebt:

 

**DPL’s** long-term debt as of December 31, 2009, consistsof **DP&L’s** first mortgage bondsand tax-exempt pollution control bonds and **DPL’s**unsecured senior notes.  These long-termdebt amounts include current maturities but exclude unamortized debt discounts.

 

**DP&L’s** long-term debt as of December 31,2009, consists of first mortgage bonds and tax-exempt pollution controlbonds.  These long-term debt amountsinclude current maturities but exclude unamortized debt discounts.

 

See Note 7 of Notes to Consolidated FinancialStatements.

 

Interest payments:

 

Interest payments associated with the long-term debtdescribed above.  The interest paymentsrelating to variable-rate debt are projected using the interest rate prevailingat December 31, 2009.

 

Pension and postretirement payments:

 

As of December 31, 2009, **DPL,**through its principal subsidiary **DP&L**,had estimated future benefit payments as outlined in Note 9 of Notes toConsolidated Financial Statements.  Theseestimated future benefit payments are projected through 2019.

 

Capital leases:

 

As of December 31, 2009, **DPL,**through its principal subsidiary **DP&L**,had one immaterial capital lease that expires in September 2010.

 

Operating leases:

 

As of December 31, 2009, **DPL,**through its principal subsidiary **DP&L**,had several immaterial operating leases with various terms and expirationdates.

 

Coal contracts:

 

**DPL,**through its principalsubsidiary **DP&L**, has entered into various long-term coalcontracts to supply the coal requirements for the generating plants itoperates.  Some contract prices aresubject to periodic adjustment and have features that limit price escalation inany given year.

 

Limestonecontracts:

 

**DPL,**through its principalsubsidiary **DP&L**, has entered into various limestonecontracts to supply limestone used in the operation of FGD equipment at itsgenerating facilities.

 

Purchase orders and other contractual obligations:

 

As of December 31, 2009, **DPL** and **DP&L**had various other contractual obligations including non-cancelable contracts topurchase goods and services with various terms and expiration dates.

 

Reserve for uncertain tax positions:

 

Due to the uncertainty regarding the timing of futurecash outflows associated with our unrecognized tax benefits of $19.3 million,we are unable to make a reliable estimate of the periods of cash settlementwith the respective tax authorities and have not included such amounts in thecontractual obligations table above.

 

**Contingencies**

 

In the normalcourse of business, we are subject to various lawsuits, actions, proceedings,claims and other matters asserted under laws and regulations.  We believe the amounts provided in ourConsolidated Financial Statements, as prescribed by GAAP, are adequate in lightof the probable and estimable contingencies. However, there can be no assurances that the actual amounts required tosatisfy alleged liabilities from various legal proceedings, claims, taxexaminations, and other matters, including the matters discussed below, and tocomply with applicable laws and regulations, will not exceed the amountsreflected in our Consolidated Financial Statements.  As such, costs, if any, that may be incurredin excess of those amounts provided as of December 31, 2009, cannot bereasonably determined.

 

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**Governmental andRegulatory Inquiries**

 

On March 10, 2004, **DPL’s** and **DP&L’s**Corporate Controller sent a memorandum (the Memorandum) to the Chairman of theAudit Committee of our Board of Directors. The Memorandum expressed the Corporate Controller’s “concerns,perspectives and viewpoints” regarding financial reporting and governanceissues within **DPL** and **DP&L**.  In response, the Board initiated an internalinvestigation whose findings and recommendations led to corrective action takenregarding internal controls, process issues and the tone at the top.

 

On May 28, 2004, theU.S. Attorney’s Office for the Southern District of Ohio, assisted by theFederal Bureau of Investigation, notified **DPL**and **DP&L** that it had initiatedan inquiry involving matters connected to our internal investigation.  This inquiry remains pending.

 

On or about June 24,2004, the SEC commenced a formal investigation into the issues raised by theMemorandum.  This investigation remainspending.

 

**EnvironmentalMatters**

 

**DPL**,**DP&L** and oursubsidiaries’ facilities and operations are subject to a wide range ofenvironmental regulations and laws by federal, state and localauthorities.  As well as imposingcontinuing compliance obligations, these laws and regulations authorize theimposition of substantial penalties for noncompliance, including fines,injunctive relief and other sanctions. In the normal course of business, wehave investigatory and remedial activities underway at these facilities tocomply, or to determine compliance, with such regulations.  We record liabilitiesfor losses that are probable of occurring and can be reasonably estimated.**  DPL,**through its wholly owned captive insurance subsidiary MVIC, has an actuariallycalculated reserve of $1.2 million for environmental matters.  We evaluate the potential liability relatedto probable losses quarterly and may revise our estimates.  Suchrevisions in the estimates of the potential liabilities could have a materialeffect on our results of operations, financial position or cash flows.

 

Air Quality

 

In 1990, the federalgovernment amended the CAA to further regulate air pollution.  Under the law, the USEPA sets limits on howmuch of a pollutant can be in the air anywhere in the United States.  The CAA allows individual states to havestronger pollution controls, but states are not allowed to have weakerpollution controls than those set for the whole country.  The CAA has a material effect on ouroperations and such effects are detailed below with respect to certain programsunder the CAA.

 

On October 27, 2003,the USEPA published final rules regarding the equipment replacementprovision (ERP) of the routine maintenance, repair and replacement (RMRR)exclusion of the CAA.  Activities at power plants that fall within thescope of the RMRR exclusion do not trigger new source review requirements,including the imposition of stricter emission limits.  On December 24, 2003, the United StatesCourt of Appeals for the D.C. Circuit stayed the effective date of the rule pendingits decision on the merits of the lawsuits filed by numerous states andenvironmental organizations challenging the final rules.  On June 6, 2005, the USEPA issued itsfinal response on the reconsideration of the ERP exclusion.  The USEPA clarified its position, but did notchange any aspect of the 2003 final rules. This decision was appealed and the D.C. Circuit vacated the final rules onMarch 17, 2006.  The scope of theRMRR exclusion remains uncertain due to this action by the D.C Circuit, as wellas multiple litigations not directly involving us where courts are defining thescope of the exception with respect to the specific facts and circumstances ofthe particular power plants and activities before the courts.  While we believe that we have not engaged inany activities with respect to our existing power plants that would trigger thenew source review requirements, if new source review requirements were imposedon any of **DP&L’s** existing power plants, theresults could be materially adverse to us.

 

The USEPA issued aproposed rule on October 20, 2005 concerning the test for measuringwhether modifications to electric generating units should trigger applicationof New Source Review (NSR) standards under the CAA.  A supplemental rule was also proposed onMay 8, 2007 to include additional options for determining if there is anemissions increase when an existing electric generating unit makes a physicalor operational change.  The rule waschallenged by environmental organizations and has not been finalized.  While we cannot at this time predict theoutcome of this rulemaking, any finalized rules could materially affectour operations.

 

On December 17,2003, the USEPA proposed the Interstate Air Quality Rule (IAQR) designedto reduce and permanently cap SO2 and NOx emissions from electricutilities.  The proposed IAQR focused onstates, including Ohio, whose power plant emissions are believed to besignificantly 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 the CAIR.  The final rules weresigned on March 10, 2005 and were published on May 12, 2005.  CAIR created an interstate trading programfor annual NOx emission

 

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allowances and mademodifications to an existing trading program for SO2.  On August 24, 2005, the USEPA proposedadditional revisions to the CAIR.  On July 11,2008, the U.S. Court of Appeals for the District of Columbia Circuit issued adecision to vacate the USEPA’s CAIR and its associated Federal ImplementationPlan and remanded to the USEPA with instructions to issue new regulations thatconformed with the procedural and substantive requirements of the CAA.  The Court’s decision, in part, invalidatedthe new NOx annual emission allowance trading program and the modifications tothe SO2 emission trading program established by the March 10,2005 rules, and created uncertainty regarding future NOx and SO2 emissionreduction requirements and their timing. The USEPA and a group representing utilities filed a request on September 24,2008 for a rehearing before the entireCourt.  On December 23, 2008, the U.S. Court of Appeals issuedan order on reconsideration that permits CAIR to remain in effect until theUSEPA issues new regulations that would conform to the CAA requirements and theCourt’s July 11, 2008 decision.  In January 2010, the Courtordered the USEPA to file a response to a Petition for Mandamus filed byparties in the original case who are now seeking a Court order to require theUSEPA to issue new regulations by March 1, 2010.  We are currentlyunable to predict the outcome of this Petition or the timing or impact of anynew regulations relating to CAIR.  CAIRhas and will continue to have a material effect on our operations.

 

In 2007, the OhioEPA revised their State Implementation Plan (SIP) to incorporate a CAIR programconsistent with the IAQR.  The Ohio EPAhad received partial approval from the USEPA and had been awaiting full programapproval from the USEPA when the U.S. Court of Appeals issued its July 11,2008 decision.  As a result of the December 23,2008 order, the Ohio EPA proposed revised rules on May 11, 2009,which were finalized on July 15, 2009. On September 25, 2009, theUSEPA issued a full SIP approval for the Ohio CAIR program.  We do not expect that full SIP approval ofthe Ohio CAIR program will have a significant impact on operations.

 

Inthe fourth quarter of 2007, **DP&L** begana program for selling excess emission allowances, including annual NOxemission allowances andSO2 emissionallowances that were the subject of CAIR trading programs.  In subsequent quarters, **DP&L**recognized gains from the sale of excess emission allowances to thirdparties.  The court’s CAIR decisionaffected the trading market for excess allowances and impacted **DP&L’s** program for selling additional excess allowancesin 2008.  Although in January 2009we resumed selling excess allowances due to the revival of the trading market,the long-term impact of the court’s decision, and of the actions the USEPA orothers will take in response to this decision,****isnot fully known at this time and could have an adverse effect on us.

 

On January 30,2004, the USEPA published its proposal to restrict mercury and other air toxinsfrom coal-fired and oil-fired utility plants. The USEPA “de-listed” mercury as a hazardous air pollutant fromcoal-fired and oil-fired utility plants and, instead, proposed a cap-and-tradeapproach to regulate the total amount of mercury emissions allowed from suchsources.  The final Clean Air Mercury Rule (CAMR)was signed March 15, 2005 and was published on May 18, 2005.  On March 29, 2005, nine states sued theUSEPA, opposing the cap-and-trade regulatory approach taken by the USEPA.  In 2007, the Ohio EPA adopted rules implementingthe CAMR program.  On February 8,2008, the U.S. Court of Appeals for the District of Columbia Circuit struckdown the USEPA regulations, finding that the USEPA had not complied withstatutory requirements applicable to “de-listing” a hazardous air pollutant andthat a cap-and-trade approach was not authorized by law for “listed” hazardousair pollutants.  A request for rehearingbefore the entire Court of Appeals was denied and a petition for review beforethe U.S. Supreme Court was filed on October 17, 2008.  On February 23, 2009, the U.S. SupremeCourt denied the petition.  The USEPA isexpected to move forward on setting Maximum Available Control Technology (MACT)standards for coal- and oil-fired electric generating units.  Upon publication in the federal registerfollowing finalization, affected exempt generating units (EGUs) will have threeyears to come into compliance with the new requirements.  At this time, **DP&L**is unable to determine the impact of the promulgation of new MACT standards onits financial position or results of operations; however, a MACT standard couldhave a material adverse effect on our operations, in particular, our unscrubbedunits.  We cannot at this time projectthe final costs we may incur to comply with any resulting mercury restrictionregulations.

 

On January 5,2005, the USEPA published its final non-attainment designations for the NationalAmbient Air Quality Standard (NAAQS) for Fine Particulate Matter 2.5 (PM2.5).  These designations included counties and partial counties in which **DP&L** operates and/or owns generating facilities. On March 4, 2005, **DP&L** andother Ohio electric utilities and electric generators filed a petition forreview in the D.C. Circuit Court of Appeals, challenging the final rule creatingthese designations.  On November 30, 2005, the court ordered theUSEPA to decide on all petitions for reconsideration by January 20,2006.  On January 20, 2006, theUSEPA denied the petitions for reconsideration. On July 7, 2009, the D.C. Circuit Court of Appeals upheld the USEPAnon-attainment designations for the areas impacting **DP&L’s**generation plants, however, on October 8, 2009, the USEPA issued newdesignations based on 2008 monitoring data that showed all areas in attainmentto the standard with the exception of several counties in northeasternOhio.  The USEPA is expected to propose revisionsto the PM 2.5 standard in late 2010 as part of its routine five-yearrule review cycle.  At this time, **DP&L** is unable to determine the impact the revisions tothe PM 2.5 standard will have on its financial position or results ofoperations.

 

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On May 5,2004, the USEPA issued its proposed regional haze rule, which addresses howstates should determine the Best Available Retrofit Technology (BART) forsources covered under the regional haze rule.  Final rules werepublished July 6, 2005, providing states with several options fordetermining whether sources in the state should be subject to BART.  Inthe final rule, the USEPA made the determination that CAIR achieves greaterprogress than BART and may be used by states as a BART substitute. Numerous units owned and operated by us will be impacted by BART.  Wecannot determine the extent of the impact until Ohio determines how BART will beimplemented.

 

In response to a U.S.Supreme Court decision that the USEPA has the authority to regulate CO2 emissions frommotor vehicles, the USEPA made a finding that CO2 and certain other gases are pollutants underthe CAA.  The USEPA has not yet identified the specifics of how thesenewly designated pollutants will be regulated. In April 2009, the USEPA issued a proposed endangerment findingunder the CAA.  The proposed findingdetermined that CO2 and other GHGs from motor vehicles threatenthe health and welfare of future generations by contributing to climatechange.  If the proposed finding isfinalized, it could lead to the regulation of CO2 and other GHGs from sources other than motorvehicles, including coal-fired plants that we own and operate.  Recently, several bills have been introducedat the federal level to regulate GHG emissions. In June 2009, the U.S. House of Representatives passed H.R. 2454,the American Clean Energy and Security Act (ACES).  This proposed legislation targets a reductionin the emission of GHGs from large sources by 80% in 2050 through an economywide cap and trade program.  ACES alsoincludes energy efficiency and renewable energy initiatives.  Approximately 99% of the energy we produce isgenerated by coal.  **DP&L’s**share of CO2 emissions at generating stations we ownand co-own is approximately 16 million tons annually.  Proposed GHG legislation finalized at afuture date could have a significant effect on **DP&L’**soperations and costs, which could adversely affect our net income, cash flowsand financial position.  However, due tothe uncertainty associated with such legislation, we are currently unable topredict the final outcome or the financial impact that this legislation willhave on us.  On September 22, 2009,the USEPA issued a final rule for mandatory reporting of GHGs from largesources that emit 25,000 metric tons per year or more of CO2,  includingelectric generating units.  The firstreport is due in March 2011 for 2010 emissions.  This reporting rule will guide developmentof policies and programs to reduce emissions. **DP&L** does not anticipate that thisreporting rule will result in any significant cost or other impact oncurrent operations.

 

On July 15,2009, the USEPA proposed revisions to its primary National Ambient Air QualityStandard (NAAQS) for nitrogen dioxide. This change could affect certain emission sources in heavy traffic areaslike the I-75 corridor between Cincinnati and Dayton.  At this point, **DP&L**cannot determine the effect of this potential change, if any, on itsoperations.

 

TheUSEPA proposed revisions to its primary NAAQS for SO2 on November 16, 2009.  This would replace the current 24-hourstandard and current annual standard. This regulation is expected to be finalized in 2010.  At this time, **DP&L**cannot determine the effect of this potential change, if any, on itsoperations.

 

On September 16,2009, the USEPA announced that it would reconsider the 2008 national groundlevel ozone standard.  A more stringentambient ozone standard may lead to stricter NOx emission standards in thefuture.  At this point, **DP&L** cannot determine the effect of this potentialchange, if any, on its operations.

 

*AirQuality — Litigation Involving Co-Owned Plants*

 

In March 2000, asamended in June 2004, the U.S. Department of Justice filed a complaint inthe United States District Court, Southern District of Indiana, IndianapolisDivision against Cinergy Corp. (now part of Duke Energy) and two Cinergysubsidiaries for alleged violations of the CAA at various generation unitsoperated by PSI Energy, Inc. and CG&E, including generation unitsco-owned by  **DP&L** (Beckjord Unit 6 and Miami Fort Unit 7). A retrial has been held in which the second jury found for Duke Energy on someallegations, but for plaintiffs with respect to units at another one of DukeEnergy’s wholly-owned facilities.  In aseparate phase II remedies trial with respect to violations found in the firsttrial, Duke Energy was ordered to close down three of its wholly-ownedgenerating units by September 2009, surrender some emission allowances andpay a fine.  None of the violations foundor remedies ordered relate to generating units owned in part by **DP&L**.

 

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In2004, eight states and the City of New York filed a lawsuit in Federal DistrictCourt for the Southern District of New York against American Electric PowerCompany, Inc. (AEP), one of AEP’s subsidiaries, Cinergy Corp. (asubsidiary of Duke Energy Corporation (Duke Energy)) and four other electricpower companies.  A similar lawsuit wasfiled against these companies in the same court by Open Space Institute, Inc.,Open Space Conservancy, Inc. and The Audubon Society of NewHampshire.  The lawsuits allege that thecompanies’ emissions of CO2 contribute to global warming and constitute apublic or private nuisance.  The lawsuitsseek injunctive relief in the form of specific emission reduction commitments.  In 2005, the Federal District Court dismissedthe lawsuits, holding that the lawsuits raised political questions that shouldnot be decided by the courts.  Theplaintiffs appealed.  Finding that theplaintiffs have standing to sue and can assert federal common law nuisanceclaims, the United States Court of Appeals for the Second Circuit on September 21,2009 vacated the dismissal of the Federal District Court and remanded thelawsuits back to the Federal District Court for further proceedings.  Although we are not named as a party to theselawsuits, **DP&L** is a co-owner of coal-firedplants with Duke Energy and AEP (or their subsidiaries) that could be affectedby the outcome of these lawsuits.  TheSecond Circuit Court’s decision could also encourage these or other plaintiffsto file similar lawsuits against other electric power companies, includingus.  We are unable at this time topredict with certainty the impact that these lawsuits might have on us.

 

On September 21,2004, the Sierra Club filed a lawsuit against **DP&L**andthe other owners of the J.M. Stuart generating station in the U.S. DistrictCourt for the Southern District of Ohio for alleged violations of the CAA andthe station’s operating permit.  On August 7,2008, a consent decree was filed in the U.S. District Court in full settlementof these CAA claims.  Under the terms of the consent decree, **DP&L** and the other owners of the J.M. Stuart generatingstation agreed to: (i) certain emission targets related to NOx, SO2 and particulatematter; (ii) make energy efficiency and renewable energy commitments thatare conditioned on receiving PUCO approval for the recovery of costs; (iii) forfeit5,500 SO2 allowances; and (iv) provide funding to athird party non-profit organization to establish a solar water heater rebateprogram.  **DP&L**and the other owners of the station also entered into an attorneys’ feeagreement to pay a portion of the Sierra Club’s attorney and expert witnessfees.  The parties to the lawsuit filed a joint motion on October 22,2008, seeking an order by the U.S. District Court approving the consent decreewith funding for the third party non-profit organization set at $300,000.  On October 23, 2008, the U.S. DistrictCourt approved the consent decree.  On October 21,2009, the Sierra Club filed with the U.S. District Court a motion forenforcement of the consent decree based on the Sierra Club’s interpretation ofthe consent decree that would require certain NOx emissions that **DP&L** has been excluding from its computations to beincluded for purposes of complying with the emission targets and reportingrequirements of the consent decree.  **DP&L**believes that it is properly computing and reporting NOx emissions under theconsent decree and has opposed the Sierra Club’s motion.  A decision on the motion is expected beforethe end of the first quarter 2010. Because J.M. Stuart Station’s NOx emissions are well below the 2009 and2010 limits in the consent decree under either method of calculation, anadverse decision would have no effect in 2010 on operations or costs.  An adverse decision could affect compliancecosts in future years when the NOx limits are further reduced under the consentdecree.

 

*AirQuality — Notices of Violation Involving Co-Owned Plants*

 

 On March 13, 2008, Duke Energy Ohio Inc., the operator of theZimmer generating station, received a NOV and a Finding of Violation from theUSEPA alleging violations of the CAA, the Ohio State Implementation Program(SIP) and permits for the Station in areas including SO2, opacity and increased heat input.  **DP&L** is aco-owner of the Zimmer generating station and could be affected by the eventualresolution of this matter.  Duke EnergyOhio Inc. is expected to act on behalf of itself and the co-owners with respectto this matter.  At this time, **DP&L** is unable to predict the outcome of this matter.

 

 In June 2000, the USEPA issued a NOV to the **DP&L**-operated J.M. Stuart generating station (co-ownedby **DP&L**, CG&E, and CSP)for alleged violations of the CAA.  TheNOV contained allegations consistent with NOVs and complaints that the USEPAhad recently brought against numerous other coal-fired utilities in theMidwest.  The NOV indicated the USEPAmay: (1) issue an order requiring compliance with the requirements of theOhio SIP; or (2) bring a civil action seeking injunctive relief and civilpenalties of up to $27,500 per day for each violation.  To date, neither action has been taken.  At this time, **DP&L**cannot predict the outcome of this matter.

 

In November 1999,the USEPA filed civil complaints and NOVs against operators and owners ofcertain generation facilities for alleged violations of the CAA.  Generation units operated by CG&E(Beckjord Unit 6) and CSP (Conesville Unit 4) and co-owned by **DP&L** 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.  Although **DP&L** was not identified in the NOVs,civil complaints or state actions, the results of such proceedings couldmaterially affect **DP&L’s**co-owned plants.

 

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 In December 2007, the Ohio EPA issued a NOV to the **DP&L**-operated Killen generating station (co-owned by **DP&L** and CG&E) for alleged violations of theCAA.  The NOVs alleged deficiencies inthe continuous monitoring of opacity.  Wesubmitted a compliance plan to the Ohio EPA on December 19, 2007.  To date, no further actions have been takenby the Ohio EPA.

 

*AirQuality — Other Issues Involving Co-Owned Plants*

 

In 2006, **DP&L** detected a malfunction with its emission monitoringsystem at the **DP&L**-operated Killengenerating station (co-owned by **DP&L** andCG&E) and ultimately determined its SO2 and NOx emissions data were underreported.  **DP&L**has petitioned the USEPA to accept an alternative methodology for calculatingactual emissions for 2005 and the first quarter 2006.  **DP&L**hassufficient allowances in its general account to cover the understatement and isworking with the USEPA to resolve the matter. Management does not believe the ultimate resolution of this matter willhave a material impact on results of operations, financial position or cashflows.

 

*AirQuality — Notices of Violation Involving Wholly-Owned Plants*

 

In2007, the Ohio EPA and the USEPA issued NOVs to **DP&L**for alleged violations of the CAA at the O.H. Hutchings Station.  The NOVs alleged deficiencies relate to stackopacity and particulate emissions. Discussions are under way with the USEPA, the U.S. Department of Justiceand Ohio EPA.  **DP&L**has provided data to those agencies regarding its maintenance expenses andoperating results.  On December 15,2008, **DP&L** received a request from theUSEPA for additional documentation with respect to those issues and other CAAissues including issues relating to capital expenses and any changes incapacity or output of the units at the O.H. Hutchings station.  During2009, **DP&L** has continued tosubmit various other operational and performance data to the USEPA in compliancewith its request.  **DP&L**iscurrently unable to determine the timing, costs or method by which the issuesmay be resolved and continues to work with the USEPA on this issue.

 

On November 18,2009, the USEPA issued a NOV to **DP&L** foralleged New Source Review (NSR) violations of the CAA at the O.H. HutchingsStation relating to capital projects performed in 2001 involving Unit 3 andUnit 6.  **DP&L**does not believe that that the two projects described in the NOV weremodifications subject to NSR.  **DP&L** is unable to determine the timing, costs or methodby which these issues may be resolved and continues to work with the USEPA onthis issue.

 

Water Quality

 

On July 9,2004, the USEPA issued final rules pursuant to the Clean Water Actgoverning existing facilities that have cooling water intake structures. The rules require an assessment of impingement and/or entrainment oforganisms as a result of cooling water withdrawal.  A number of parties appealed the rules tothe Federal Court of Appeals for the Second Circuit in New York and the Courtissued an opinion on January 25, 2007 remanding several aspects of the rule tothe USEPA for reconsideration.  Several parties petitioned the U.S.Supreme Court for review of the lower court decision.  On April 14, 2008, the Supreme Courtelected to review the lower court decision on the issue of whether the USEPAcan compare costs with benefits in determining the best technology availablefor minimizing adverse environmental impact at cooling water intakestructures.  Briefs were submitted to theCourt in the summer of 2008 and oral arguments were held in December 2008.  In April 2009, the U.S. Supreme Courtruled that the USEPA did have the authority to compare costs with benefits indetermining best technology available. The USEPA is developing proposed regulations which it hopes to issue forpublic comment by mid-2010.

 

On May 4,2004, the Ohio EPA issued a final National Pollutant Discharge EliminationSystem permit (the Permit) for J.M. Stuart Station that continued our authorityto discharge water from the station into the Ohio River.  During the three-year term of the Permit, we conducted a thermal discharge studyto evaluate the technical feasibility and economic reasonableness of water coolingmethods other than cooling towers.  In December 2006,we submitted an application for the renewal of the Permit that was due toexpire on June 30, 2007.  In July 2007we received a draft permit proposing to continue our authority to dischargewater from the station into the Ohio River. On February 5, 2008 we received a letter from Ohio EPA indicatingthat they intended to impose a compliance schedule as part of the final Permit,that requires us to implement one of two diffuser options for the discharge ofwater from the station into the Ohio River as identified in the thermaldischarge study.  Subsequently,representatives from **DP&L** andthe Ohio EPA have agreed to allow **DP&L** torestrict public access to the water discharge area as an alternative to installingone of the diffuser options.  Ohio EPAissued a revised draft permit that was received on November 12, 2008.  In December 2008, the USEPA requestedthat the Ohio EPA provide additional information regarding the thermaldischarge in the draft permit.  In June 2009,**DP&L** provided information to theUSEPA in response to their request to Ohio EPA. The timing for issuance of a final permit is uncertain.

 

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In September 2009,the USEPA announced that it will be revising technology-based regulationsgoverning water discharges from steam electric generating facilities such asJ.M. Stuart, Killen and O.H. Hutchings Stations.  The rulemaking will include the collection ofinformation via an industry-wide questionnaire as well as targeted watersampling efforts at selected facilities. Subsequent to the information collection effort, it is anticipated thatthe USEPA will release a proposed rule in 2011 with final regulationsissued in late 2012 or early 2013.  Atpresent, **DP&L** is unable to predict theimpact this rulemaking will have on its operations.

 

Land Use and Solid Waste Disposal

 

In September 2002, **DP&L** and other parties received a special notice that theUSEPA considers us to be a PRP for the clean-up of hazardous substances at theSouth Dayton Dump landfill site.  In August 2005,**DP&L** and other partiesreceived a general notice regarding the performance of a Remedial Investigationand Feasibility Study (RI/FS) under a Superfund Alternative Approach.  In October 2005, **DP&L** received a special notice letterinviting it to enter into negotiations with the USEPA to conduct theRI/FS.  No recent activity has occurredwith respect to that notice or PRP status. More recently, **DP&L** hasreceived requests by the USEPA and the existing PRP group to allow access to begiven to **DP&L’s** service center buildingsite, which is across the street from the landfill site.  The USEPA requested access to drillmonitoring and test wells to determine the extent of the landfill site’scontamination as well as to assess whether certain chemicals used at theservice center building site might have migrated through groundwater to thelandfill site.  Pursuant to anAdministrative Order issued by the USEPA requiring access to **DP&L’s** service center building site, **DP&L** has granted such access and drilling of soilborings and installation of monitoring wells occurred in the fall of 2009.  **DP&L**believesthe chemicals used at its service center building site were appropriatelydisposed of and have not contributed to the contamination at the South DaytonDump landfill site.  While **DP&L** is unable at this time to predict the outcome ofthis matter, if **DP&L** were required tocontribute to the clean-up of the site, it could have a material adverse effecton us.  **DP&L**is also unable at this time to predict whether the monitoring and test wellsmay lead to any actions relating to the service center building siteindependent of the South Dayton Dump clean-up.

 

In December 2003,**DP&L**and other parties received aspecial notice that the USEPA considers us to be a PRP for the clean-up ofhazardous substances at the Tremont City landfill site.  Information available to **DP&L**doesnot demonstrate that it contributed hazardous substances to the site.  While **DP&L** isunable at this time to predict the outcome of this matter, if **DP&L** were required to contribute to the clean-up of thesite, it could have a material adverse effect on us.

 

In November 2007,a PRP group contacted **DP&L**seeking our financial participation in a settlement that the group had reachedwith the federal government with respect to the clean-up of an industrial siteonce owned by Carolina Transformer, Inc. **DP&L**’s business records clearlyshow we did not conduct business with Carolina Transformer that would requireour participation in any clean-up of the site. **DP&L**has declined to participate inthe clean-up of this site.  While **DP&L** is unable at this time to predict the outcome ofthis matter, if **DP&L** were required tocontribute to the clean-up of the site, it could have a material adverse effecton us.

 

During 2008, amajor spill occurred at an ash pond owned by the Tennessee Valley Authority(TVA) as a result of a dike failure.  Thespill generated a significant amount of national news coverage, and support fortighter regulations for the storage and handling of coal combustion products.  **DP&L** hasash ponds at the Killen, O.H. Hutchings and J.M. Stuart stations which itoperates, and also at generating stations operated by others but in which **DP&L** has an ownership interest.  We frequently inspect our ash ponds and donot anticipate any similar failures.  Itis widely expected that the federal government will propose new regulationscovering ash generated from the combustion of coal and including additionalmonitoring, testing, or construction standards with respect to ash ponds andash landfills.  During March 2009,the USEPA, through a formal Information Collection Request, collectedinformation on ash pond facilities across the country, including those atKillen and J.M. Stuart stations. Subsequently the USEPA collected similar information for O.H. HutchingsStation.  In addition, during August andOctober 2009, representatives of the USEPA visited J.M. Stuart Station tocollect information on plant operations relative to the production and handlingof by-products.  Due to the wide range ofpossible outcomes, **DP&L** isunable at this time to predict the timing or the financial impact of any futuregovernmental initiative that may occur.

 

Inaddition, as a result of the TVA ash pond spill, there has been increasingadvocacy to regulate coal combustion byproducts as hazardous waste under theResource Conservation Recovery Act, Subtitle C. On October 15, 2009, the USEPA provided a draft rule to theOffice of Management and Budget for interagency review.  The draft rule proposed to regulate coalash as a hazardous waste, with limited beneficial reuse.  **DP&L** isunable at this time to predict the financial impact of this regulation, but ifcoal combustion byproducts are regulated as hazardous waste, it is expected tohave a material adverse impact on operations.

 

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**Legal andOther Matters**

 

In February 2007, **DP&L** filed a lawsuit against a coal supplier seekingdamages incurred due to the supplier’s failure to supply approximately 1.5million tons of coal to two jointly owned plants under a coal supply agreement,of which approximately 570 thousand tons was **DP&L’s**share.  **DP&L** obtained replacement coalto meet its needs.  The supplier hasdenied liability, and is currently in federal bankruptcy proceedings.  **DP&L** isunable to determine the ultimate resolution of this matter at this time.  **DP&L** has not recorded any assets relating to possiblerecovery of costs in this lawsuit.

 

On May 16, 2007, **DPL** filed a claim with Energy InsuranceMutual (EIM) to recoup legal expenses associated with our litigation againstcertain former executives.  Arbitration on that claim occurred on May 13,2009.  Thearbitration panel issued a ruling in Phase 1 of the arbitration on September 25,2009, finding that most of the claims involving the former executives werecovered.  The matter is pending.

 

As a member of PJM, **DP&L**is also subject to charges and costs associated with PJM operations as approvedby the FERC.  FERC Orders issued in 2007 regarding the allocation of costsof large transmission facilities within PJM, could result in additional costsbeing allocated to **DP&L**ofapproximately $12 million or more annually by 2012.  **DP&L** filed a notice of appeal to theU.S. Court of Appeals, D.C. Circuit on March 18, 2008 challenging theallocation method.  The appeal was consolidated with other appeals takenby other interested parties of the same FERC Orders and the consolidated caseswere assigned to the 7th Circuit.  On August 6, 2009, the 7th Circuit ruled that theFERC had failed to provide a reasoned basis for the allocation method it hadapproved.  Rehearings were filed by otherinterested litigants and denied by the Court, which then remanded the matter tothe FERC for further proceedings.  On January 21,2010, the FERC issued a procedural order on remand establishing a paper hearingprocess under which PJM will make an informational filing in lateFebruary.  Subsequently PJM and other parties, including **DP&L**, will be able to file initial comments, testimony,and recommendations and reply comments.  Absent future changes to theprocedural schedule that may occur for a number of reasons including ifsettlement discussions are held, the paper hearing process should be completeand the case ready for FERC consideration in 2010.  FERC did not establisha deadline for its issuance of a substantive order.  **DP&L**cannot predict the timing or the likely outcome of the proceeding.  Until such time as FERC may act to approve achange in methodology, PJM will continue to apply the allocation methodologythat had been approved by FERC in 2007. Although we continue to maintain that these costs should be borne by thebeneficiaries of these projects and that **DP&L** is notone of these beneficiaries, any new credits or additional costs resulting fromthe ultimate outcome of this proceeding will be reflected in **DP&L’s** TCRR rider which is already in place to passthrough RTO-related costs and credits.

 

In June 2009, theNERC, a FERC-certified electric reliability organization responsible fordeveloping and enforcing mandatory reliability standards, commenced a routineaudit of **DP&L’s** operations.  The audit, which was for the period June 18,2007 to June 25, 2009, evaluated **DP&L’s**compliance with 42 requirements in 18 NERC-reliability standards.  **DP&L** iscurrently subject to a compliance audit at a minimum of once every three yearsas provided by the NERC Rules of Procedure. This audit was concluded in June 2009and its findings revealed that **DP&L** hadsome Possible Alleged Violations (PAVs) associated with five NERC ReliabilityStandards.  In response to thereport, **DP&L** filed mitigation plans withNERC to address the PAVs.  Thesemitigation plans have been accepted and **DP&L** iscurrently awaiting a proposal for settlement from NERC.  While we are currently unable to determinethe extent of penalties, if any, that may be imposed on **DP&L**,we do not believe such penalties will have a material impact on our results ofoperations.

 

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*20.  Selected QuarterlyInformation (Unaudited)*

 

**DPL**

 
| ** **                                      | ** **  | **For the three months ended** | ** ** |
|-------------------------------------------------|-------------|--------------------------------|------------|
| **$ in millions except per  share amount** | ** **  | **March 31,**             | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **and common stock market  price**              | ** **  | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                        | ** **  | **$**                          | **415.0**  |   | $ | 416.1 | ** ** | **$** | **361.2** |   | $ | 378.8 | ** ** | **$** | **407.3** |   | $ | 414.5 | ** ** | **$** | **405.4** |   | $ | 392.2 |   |
| Operating income                                | ** **  | **127.0**                      |       | 142.7 | ** ** | **81.9** |   | 85.6 | ** ** | **116.5** |   | 96.2 | ** ** | **102.8** |   | 111.0 |   |
|                                            |        |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                      | ** **  | **$**                          | **69.2**   |   | $ | 77.3 | ** ** | **$** | **42.1** |   | $ | 47.6 | ** ** | **$** | **67.9** |   | $ | 48.0 | ** ** | **$** | **49.9** |   | $ | 71.6 |   |
|                                            |        |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per  share of common stock:            |        |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                           | ** **  | **$**                          | **0.62**   |   | $ | 0.71 | ** ** | **$** | **0.38** |   | $ | 0.43 | ** ** | **$** | **0.60** |   | $ | 0.44 | ** ** | **$** | **0.43** |   | $ | 0.64 |   |
| Diluted                                         | ** **  | **$**                          | **0.61**   |   | $ | 0.66 | ** ** | **$** | **0.37** |   | $ | 0.41 | ** ** | **$** | **0.59** |   | $ | 0.42 | ** ** | **$** | **0.43** |   | $ | 0.63 |   |
|                                            |        |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends  declared and paid per share          | ** **  | **$**                          | **0.285**  |   | $ | 0.275 | ** ** | **$** | **0.285** |   | $ | 0.275 | ** ** | **$** | **0.285** |   | $ | 0.275 | ** ** | **$** | **0.285** |   | $ | 0.275 |   |
|                                            |        |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common stock market price                       | — High | ** **                     | **$**      | **23.28** |   | $ | 30.18 | ** ** | **$** | **23.46** |   | $ | 28.70 | ** ** | **$** | **26.53** |   | $ | 26.76 | ** ** | **$** | **28.68** |   | $ | 24.59 |   |
|                                            | — Low  | ** **                     | **$**      | **19.27** |   | $ | 24.58 | ** ** | **$** | **21.18** |   | $ | 26.10 | ** ** | **$** | **22.79** |   | $ | 23.00 | ** ** | **$** | **25.16** |   | $ | 19.16 |   |

 

**DP&L**

 
| ** **                                | ** ** | **For the three months ended** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **March 31,**             | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                    | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                  | ** ** | **$**                          | **403.6**  |   | $ | 413.9 | ** ** | **$** | **351.9** |   | $ | 376.4 | ** ** | **$** | **398.2** |   | $ | 401.5 | ** ** | **$** | **396.7** |   | $ | 381.1 |   |
| Operating income                          | ** ** | **$**                          | **124.8**  |   | $ | 146.4 | ** ** | **$** | **78.9** |   | $ | 90.5 | ** ** | **$** | **115.2** |   | $ | 93.5 | ** ** | **$** | **103.0** |   | $ | 106.2 |   |
| Net income                                | ** ** | **$**                          | **77.0**   |   | $ | 89.0 | ** ** | **$** | **46.8** |   | $ | 63.3 | ** ** | **$** | **74.0** |   | $ | 54.8 | ** ** | **$** | **61.1** |   | $ | 78.7 |   |
| Earnings on  common stock                 | ** ** | **$**                          | **76.8**   |   | $ | 88.8 | ** ** | **$** | **46.6** |   | $ | 63.1 | ** ** | **$** | **73.8** |   | $ | 54.6 | ** ** | **$** | **60.8** |   | $ | 78.4 |   |
| Dividends paid  on common stock to parent | ** ** | **$**                          | **175.0**  |   | $ | 80.0 | ** ** | **$** | **45.0** |   | $ | — | ** ** | **$** | **50.0** |   | $ | — | ** ** | **$** | **55.0** |   | $ | 75.0 |   |

 

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**Reportof Independent Registered Public Accounting Firm**

** **

The Board ofDirectors and Stockholders

DPL Inc.:

 

We have audited theaccompanying Consolidated Balance Sheets of DPL Inc. and subsidiaries (theCompany) as of December 31, 2009 and 2008, and the related ConsolidatedStatements of Results of Operations, Shareholders’ Equity and Cash Flows foreach of the years in the three-year period ended December 31, 2009. Inconnection with our audits of the consolidated financial statements, we haveaudited the consolidated financial statement schedule, “Schedule II — Valuationand Qualifying Accounts.” We also have audited the Company’s internal controlover financial reporting as of December 31, 2009, based on criteriaestablished in *Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The Company’s management is responsible for these consolidatedfinancial statements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Report on InternalControl Over Financial Reporting. Our responsibility is to express an opinionon these consolidated financial statements and an opinion on the Company’sinternal control over financial reporting based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement and whether effective internal control overfinancial reporting was maintained in all material respects. Our audits of theconsolidated financial statements included examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. Our audit ofinternal control over financial reporting included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk. Our audits alsoincluded performing such other procedures as we considered necessary in thecircumstances. We believe that our audits provide a reasonable basis for ouropinions.

 

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) providereasonable assurance that transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

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, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of December 31,2009 and 2008, and the results of its operations and its cash flows for each ofthe years in the three-year period ended December 31, 2009, in conformitywith U.S. generally accepted accounting principles. Also in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2009, based on criteria establishedin *Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

KPMG LLP

 

Philadelphia, PennsylvaniaFebruary 11, 2010

 

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**Reportof Independent Registered Public Accounting Firm**

** **

The Board ofDirectors and Stockholder

The Dayton Power and Light Company:

 

We have audited theaccompanying Balance Sheets of The Dayton Power and Light Company (DP&L) asof December 31, 2009 and 2008, and the related Statements of Results ofOperations, Shareholder’s Equity and Cash Flows for each of the years in thethree-year period ended December 31, 2009. In connection with our auditsof the financial statements, we have audited the financial statement schedule, “ScheduleII — Valuation and Qualifying Accounts.” We also have audited DP&L’sinternal control over financial reporting as of December 31, 2009, basedon criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). DP&L’s management isresponsible for these financial statements, for maintaining effective internalcontrol over financial reporting, and for its assessment of the effectivenessof internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on these financial statements and anopinion on DP&L’s internal control over financial reporting based on ouraudits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement and whether effective internal control overfinancial reporting was maintained in all material respects. Our audits of thefinancial statements included examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. Our audit of internal controlover financial reporting included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk. Our audits also includedperforming such other procedures as we considered necessary in thecircumstances. We believe that our audits provide a reasonable basis for ouropinions.

 

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) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

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, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of DP&L as of December 31, 2009 and2008, and the results of its operations and its cash flows for each of theyears in the three-year period ended December 31, 2009, in conformity withU.S. generally accepted accounting principles. Also in our opinion, DP&Lmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2009, based on criteria established in *Internal Control — Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

KPMG LLP

 

Philadelphia, Pennsylvania

February 11, 2010

 

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**Item 9 —  Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A —Controls and Procedures**

 

**DisclosureControls and Procedures**

 

Our Chief ExecutiveOfficer (CEO) and Chief Financial Officer (CFO) are responsible forestablishing and maintaining our disclosure controls and procedures.  These controls and procedures were designedto ensure that material information relating to us and our subsidiaries arecommunicated to the CEO and CFO.  Weevaluated these disclosure controls and procedures as of the end of the periodcovered by this report with the participation of our CEO and CFO.  Based on this evaluation, our CEO and CFOconcluded that our disclosure controls and procedures are effective: (i) toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the SEC’s rules and forms; and (ii) toensure that information required to be disclosed by us in the reports that wesubmit under the Exchange Act is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,or persons performing similar functions, as appropriate, to allow timelydecisions regarding required disclosure.

 

There was no change inour internal control over financial reporting during the most recentlycompleted fiscal period that has materially affected, or is reasonably likelyto materially affect, internal control over financial reporting.

 

The following report isour report on internal control over financial reporting as of December 31,2009.

 

**Management’sReport on Internal Control over Financial Reporting**

 

Weare responsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with theparticipation of management, including the CEO and CFO, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on an evaluation under the framework in *Internal Control - Integrated Framework,*we concluded thatour internal control over financial reporting was effective as of December 31,2009.

 

Our internal control over financial reporting as of December 31,2009, has been audited by KPMG LLP, the independent registered publicaccounting firm that audited the financial statements contained herein, asstated in their report which is included herein.

 

**Item 9B —Other Information**

 

None.

 

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**PART III**

 

**Item 10 —Directors, Executive Officers and Corporate Governance**

 

The informationrequired to be furnished pursuant to this item with respect to Directors andExecutive Officers of **DPL** will be setforth under the captions “Election of Directors” and “Executive Officers” in **DPL’s** proxy statement (the Proxy Statement) to be furnishedto shareholders in connection with the solicitation of proxies by our Board ofDirectors for use at the 2010 Annual Meeting of Shareholders to be held on April 28,2010 and is incorporated herein by reference.

 

Theinformation required to be furnished pursuant to this item for **DPL** with respect to Section 16(a) BeneficialOwnership Reporting Compliance, the Audit Committee, the Audit Committeefinancial expert and the registrant’s code of ethics will be set forth under inthe “Corporate Governance” section in the Proxy Statement and is incorporatedherein by reference.

 

**Item 11 —****ExecutiveCompensation**

 

Theinformation required to be furnished pursuant to this item for **DPL**will be set forth under the captions “ExecutiveCompensation,” “Compensation Discussion and Analysis (CD&A)” and “CompensationCommittee Report on Executive Compensation” in the Proxy Statement and isincorporated herein by reference.

 

**Item 12 —****SecurityOwnership of Certain Beneficial Owners and Management and Related ShareholderMatters**

 

The information requiredto be furnished pursuant to this item for **DPL**will be setforth under the captions “Security Ownership of Certain Beneficial Owners,” “SecurityOwnership of Management” and “Equity Compensation Plan Information” in theProxy Statement and is incorporated herein by reference.

 

**Item 13 —Certain Relationships and Related Transactions, and Director Independence**

 

The information requiredto be furnished pursuant to this item for **DPL**will be setforth under the caption “Related Person Transactions” and “Independence” in theProxy Statement and is incorporated herein by reference.

 

**Item 14 —Principal Accountant Fees and Services**

 

Theinformation required to be furnished pursuant to this item for **DPL**will be set forth under the caption “Audit and Non-AuditFees” in the Proxy Statement and is incorporated herein by reference.

 

**Accountant Fees and Services**

 

The following tablepresents the aggregate fees billed for professional services rendered to **DPL** and **DP&L** byKPMG LLP for 2009 and 2008.  Other thanas set forth below, no professional services were rendered or fees billed byKPMG LLP during 2009 and 2008.

 
| **KPMG LLP**           | ** ** | **2009 Fees Billed** | ** **    | **2008 Fees Billed** | ** ** |
|------------------------|------------|----------------------|---------------|----------------------|------------|
| Audit Fees (1)         | ** ** | **$**                | **1,394,680** |                 | $          | 1,409,800 |   |
| Audit-Related Fees (2) | ** ** | **46,000**           |          | 84,800               |       |
| Tax Fees (3)           | ** ** | **7,870**            |          | —               |       |
| All Other Fees         | ** ** | **—**           |          | —               |       |
| Total                  | ** ** | **$**                | **1,448,550** |                 | $          | 1,494,600 |   |

 

----

(1)                      Audit fees relate to professionalservices rendered for the audit of our annual financial statements and thereviews of our quarterly financial statements.

(2)                      Audit-related fees relate to servicesrendered to us for assurance and related services.

(3)                      Tax fees consisted principally of taxcompliance services. Tax compliance services are services rendered based uponfacts already in existence or transactions that have already occurred todocument, compute, and obtain government approval for amounts to be included intax filings.

 

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**PART IV**

** **

**Item 15 —Exhibits and Financial Statement Schedules**

 

(a)       The following documents are filed as partof this report:

 
| ** **                                                                                                                                       | **Page No.** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|
|                                                                                                                                             |              |
| 1.             **Financial  Statements**                                             |              |
|                                                                                                                                             |              |
| **DPL - Consolidated  Statements of Results of Operations for each of the three years in the period  ended December 31, 2009**         | 67                |
| **DPL - Consolidated  Statements of Cash Flows for each of the three years in the period ended  December 31, 2009**                         | 68                |
| ** **                                                                                                                                       |              |
| **DPL - Consolidated Balance Sheets at  December 31, 2009 and 2008**                                                                        | 69                |
| ** **                                                                                                                                       |              |
| **DPL - Consolidated  Statement of Shareholders’ Equity for each of the three years in the period  ended December 31, 2009**      | 71                |
| **DP&L -  Consolidated Statements of Results of Operations for each of the three years  in the period ended December 31, 2009**    | 72                |
| **DP&L - Consolidated Statements of Cash Flows for each  of the three years in the period ended December 31, 2009**                     | 73                |
| ** **                                                                                                                                       |              |
| **DP&L -  Consolidated Balance Sheets at December 31, 2009 and 2008**                                                                   | 74                |
| ** **                                                                                                                                       |              |
| **DP&L -  Consolidated Statement of Shareholder’s Equity for each of the three years in  the period ended December 31, 2009** | 76                |
|                                                                                                                                             |              |
| Notes to Consolidated Financial Statements                                                                                                       | 77                |
| ** **                                                                                                                                       |              |
| **DPL - Report of Independent Registered Public  Accounting Firm**                                                                               | 136               |
| ** **                                                                                                                                       |              |
| **DP&L - Report of Independent Registered Public  Accounting Firm**                                                                          | 137               |
|                                                                                                                                             |              |
|                                                                                                                                             |              |
| 2.             **Financial  Statement Schedule**                                     | ** **        |
|                                                                                                                                             |              |
| For each of the three years in the period ended  December 31, 2009:                                                                         |              |
|                                                                                                                                             |              |
| Schedule II — Valuation and Qualifying Accounts                                                                                             | 151               |

 

Theinformation required to be submitted in Schedules I, III, IV and V is omittedas not applicable or not required under rules of Regulation S-X.

 

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3.               **Exhibits**

 

**DPL** and **DP&L**exhibits are incorporated by reference as described unless otherwise filed as setforth herein.

 

The exhibits filed aspart of DPL’s and DP&L’s Annual Report on Form 10-K, respectively,are:

 
| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                               | ** ** | **Location(1)**                                                                                                         |
|---------------|------------|--------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|
|          |       |         |       |                |       |                                                                                                                                                                                                      |       |                                                                                                                    |
| X             |       |         |       | 3(a)                |       | Amended Articles of  Incorporation of DPL Inc., as of September 25, 2001                                                                                                                             |       | Exhibit 3 to  Report on Form 10-K/A for the year ended December 31, 2001 (File  No. 1-9052)         |
|          |       |         |       |                |       |                                                                                                                                                                                                      |       |                                                                                                                    |
| X             |       |         |       | 3(b)                |       | Amended Regulations of  DPL Inc., as of April 27, 2007                                                                                                                                               |       | Exhibit 3(b) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052)   |
|          |       |         |       |                |       |                                                                                                                                                                                                      |       |                                                                                                                    |
|          |       | X            |       | 3(c)                |       | Amended Articles of  Incorporation of The Dayton Power and Light Company, as of January 4,  1991                                                                                                     |       | Exhibit 3(b) to  Report on Form 10-K/A for the year ended December 31, 1991 (File  No. 1-2385) |
|          |       |         |       |                |       |                                                                                                                                                                                                      |       |                                                                                                                    |
|          |       | X            |       | 3(d)                |       | Regulations of The  Dayton Power and Light Company, as of April 9, 1981                                                                                                                              |       | Exhibit 3(a) to  Report on Form 8-K filed on May 3, 2004 (File No. 1-2385)                     |
|          |       |         |       |                |       |                                                                                                                                                                                                      |       |                                                                                                                    |
| X             |       | X            |       | 4(a)                |       | Composite Indenture  dated as of October 1, 1935, between The Dayton Power and Light Company  and Irving Trust Company, 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)   |
|          |       |         |       |                |       |                                                                                                                                                                                                      |       |                                                                                                                    |
| X             |       | X            |       | 4(b)                |       | Forty-First  Supplemental Indenture dated as of February 1, 1999, between The Dayton  Power and Light Company 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)   |
|          |       |         |       |                |       |                                                                                                                                                                                                      |       |                                                                                                                    |
| X             |       | X            |       | 4(c)                |       | Forty-Second  Supplemental Indenture dated as of September 1, 2003, between The Dayton  Power and Light Company 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. 1-9052)   |
|          |       |         |       |                |       |                                                                                                                                                                                                      |       |                                                                                                                    |
|          |       |         |       |                |       |                                                                                                                                                                                                      |       |                                                                                                                    |
| X             |       | X            |       | 4(d)                |       | Forty-Third  Supplemental Indenture dated as of August 1, 2005, between The Dayton  Power and Light Company and The Bank of New York, Trustee                                                        |       | Exhibit 4.4 to  Report on Form 8-K filed August 24, 2005 (File No. 1-2385)                          |
|          |       |         |       |                |       |                                                                                                                                                                                                      |       |                                                                                                                    |
| X             |       | X            |       | 4(e)                |       | Rights Agreement dated  September 25, 2001 between DPL Inc. and Equiserve Trust Company, N.A.                                                                                                        |       | Exhibit 4 to Report  on Form 8-K filed September 28, 2001 (File No. 1-9052)                         |

 

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| ** **     | ** ** | ** **   | ** ** | ** **          | ** ** | ** **                                                                                                                                                                                         | ** ** | ** **                                                                                                            |
|----------------|------------|--------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
| **DPL   Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                        | ** ** | **Location(1)**                                                                                                       |
|           |       |         |       |                |       |                                                                                                                                                                                               |       |                                                                                                                  |
| X              |       |         |       | 4(f)                |       | Securities Purchase  Agreement dated as of February 1, 2000 by and among DPL Inc., and DPL  Capital Trust I, Dayton Ventures LLC and Dayton Ventures, Inc. and  certain exhibits thereto |       | Exhibit 99(b) to  Schedule TO-I filed February 4, 2000 (File No. 1-9052)                          |
|           |       |         |       |                |       |                                                                                                                                                                                               |       |                                                                                                                  |
| X              |       |         |       | 4(g)                |       | Amendment to Securities  Purchase Agreement dated as of February 24, 2000 among DPL Inc., DPL  Capital Trust I, Dayton Ventures LLC and Dayton Ventures, Inc.                            |       | Exhibit 4(g) to  Report on Form 10-K for the year ended December 31, 2005 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                               |       |                                                                                                                  |
| X              |       |         |       | 4(h)                |       | Form of Warrant to  Purchase Common Shares of DPL Inc.                                                                                                                                        |       | Exhibit 4(h) to  Report on Form 10-K for the year ended December 31, 2005 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                               |       |                                                                                                                  |
| X              |       |         |       | 4(i)                |       | Securityholders and  Registration Rights Agreement dated as of March 13, 2000 among DPL Inc.,  DPL Capital Trust I, Dayton Ventures LLC and Dayton Ventures, Inc.                        |       | Exhibit 4(i) to  Report on Form 10-K for the year ended December 31, 2005 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                               |       |                                                                                                                  |
| X              |       |         |       | 4(j)                |       | Amendment to  Securityholders and Registration Rights Agreement, dated August 24, 2001  among DPL Inc., DPL Capital Trust I, Dayton Ventures LLC and Dayton  Ventures, Inc.              |       | Exhibit 4(j) to  Report on Form 10-K for the year ended December 31, 2005 (File No. 1-9052)  |
|           |       |         |       |                |       |                                                                                                                                                                                               |       |                                                                                                                  |
| X              |       |         |       | 4(k)                |       | Amendment to  Securityholders and Registration Rights Agreement, dated December 6,  2004 among DPL Inc., DPL Capital Trust I, Dayton Ventures LLC and Dayton  Ventures, Inc.             |       | Exhibit 4(k) to  Report on Form 10-K for the year ended December 31, 2005 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                               |       |                                                                                                                  |
| X              |       |         |       | 4(l)                |       | Amendment to  Securityholders and Registration Rights Agreement, dated as of  January 12, 2005 among DPL Inc., DPL Capital Trust I, Dayton Ventures  LLC and Dayton Ventures, Inc             |       | Exhibit 4(j) to  Report on Form 10-K for the year ended December 31, 2005 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                               |       |                                                                                                                  |
| X              |       |         |       | 4(m)                |       | Indenture dated as of  March 1, 2000 between DPL Inc. and Bank One Trust Company, National  Association                                                                                       |       | Exhibit 4(b) to  Registration Statement No. 333-37972                                                  |

 

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| **DPL   Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                                                       | ** ** | **Location(1)**                                                                                                       |
|----------------|------------|--------------|------------|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
|           |       |         |       |                |       |                                                                                                                                                                                                                                              |       |                                                                                                                  |
| X              |       |         |       | 4(n)                |       | Exchange and  Registration Rights Agreement dated as of August 24, 2001 between DPL  Inc., Morgan Stanley & Co. Incorporated, Bank One Capital  Markets, Inc., Fleet Securities, Inc. and NatCity  Investments, Inc. |       | Exhibit 4(a) to  Registration Statement No. 333-74568                                                  |
|           |       |         |       |                |       |                                                                                                                                                                                                                                              |       |                                                                                                                  |
| X              |       |         |       | 4(o)                |       | Officer’s Certificate  of DPL Inc. establishing exchange notes, dated August 31, 2001                                                                                                                                                   |       | Exhibit 4(c) to  Registration Statement No. 333-74568                                                  |
|           |       |         |       |                |       |                                                                                                                                                                                                                                              |       |                                                                                                                  |
| X              |       |         |       | 4(p)                |       | Indenture dated as of  August 31, 2001 between DPL Inc. and The Bank of New York, Trustee                                                                                                                                                    |       | Exhibit 4(a) to  Registration Statement No. 333-74630                                                  |
|           |       |         |       |                |       |                                                                                                                                                                                                                                              |       |                                                                                                                  |
| X              |       |         |       | 4(q)                |       | First Supplemental  Indenture dated as of August 31, 2001 between DPL Inc. and The Bank of  New York, as Trustee                                                                                                                             |       | Exhibit 4(b) to  Registration Statement No. 333-74630                                                  |
|           |       |         |       |                |       |                                                                                                                                                                                                                                              |       |                                                                                                                  |
| X              |       |         |       | 4(r)                |       | Amended and Restated  Trust Agreement dated as of August 31, 2001 among DPL Inc., The Bank of  New York, The Bank of New York (Delaware), the administrative trustees named  therein, and several Holders as defined therein                 |       | Exhibit 4(c) to  Registration Statement No. 333-74630                                                  |
|           |       |         |       |                |       |                                                                                                                                                                                                                                              |       |                                                                                                                  |
|           |       | X            |       | 4(s)                |       | Forty-Fourth  Supplemental Indenture dated as of September 1, 2006 between the Bank of  New York, Trustee and The Dayton Power and Light Company                                                                                             |       | Filed herewith as  Exhibit 4(s)                                                                                  |
|           |       |         |       |                |       |                                                                                                                                                                                                                                              |       |                                                                                                                  |
| X              |       |         |       | 4(t)                |       | Exchange and  Registration Rights Agreement dated as of August 24, 2001 among DPL  Inc., DPL Capital Trust II and Morgan Stanley & Co.  Incorporated                                                                           |       | Exhibit 4(d) to  Registration Statement No. 333-74630                                                  |
|           |       |         |       |                |       |                                                                                                                                                                                                                                              |       |                                                                                                                  |
| X              |       | X            |       | 4(u)                |       | Forty-Sixth  Supplemental Indenture dated as of December 1, 2008 between The Bank of  New York Mellon, Trustee and The Dayton Power and Light Company                                                                                        |       | Exhibit 4(x) to  Report on Form 10-K for the year ended December 31, 2008 (File  No. 1-2385) |

 

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| **DPL   Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                         | ** ** | **Location(1)**                                                                                                        |
|----------------|------------|--------------|------------|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|
|           |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                   |
| X              |       | X            |       | 10(a)*              |       | The Dayton Power and  Light Company Directors’ Deferred Stock Compensation Plan, as amended through  December 31, 2000                                                    |       | Exhibit 10(a) to  Report on Form 10-K for the year ended December 31, 2000 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                   |
| X              |       | X            |       | 10(b)*              |       | The Dayton Power and  Light Company 1991 Amended Directors’ Deferred Compensation Plan, as amended  and restated through December 31, 2007                                |       | Exhibit 10(b) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                   |
| X              |       | X            |       | 10(c)*              |       | The Dayton Power and  Light Company Management Stock Incentive Plan as amended and restated through  December 31, 2007                                                         |       | Exhibit 10(c) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                   |
| X              |       | X            |       | 10(d)*              |       | The Dayton Power and  Light Company Key Employees Deferred Compensation Plan, as amended through  December 31, 2000                                                            |       | Exhibit 10(d) to  Report on Form 10-K for the year ended December 31, 2000 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                   |
| X              |       | X            |       | 10(e)*              |       | Amendment No. 1 to  The Dayton Power and Light Company Key Employees Deferred Compensation Plan,  as amended through December 31, 2000, 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) |
|           |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                   |
| X              |       | X            |       | 10(f)*              |       | The Dayton Power and  Light Company Supplemental Executive Retirement Plan, as amended  February 1, 2000                                                                       |       | Filed herewith as  Exhibit 10(f)                                                                                  |
|           |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                   |
| X              |       | X            |       | 10(g)*              |       | Amendment No. 1 to  The Dayton Power and Light Company Supplemental Executive Retirement Plan, as  amended through 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)  |
|           |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                   |
| X              |       |         |       | 10(h)*              |       | DPL Inc. Stock Option  Plan                                                                                                                                                         |       | Exhibit 10(f) to  Report on Form 10-K for the year ended December 31, 2000 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                   |
| X              |       |         |       | 10(i)*              |       | 2003 Long-Term  Incentive Plan of DPL Inc.                                                                                                                                          |       | Exhibit 10(aa) to  Report on Form 10-K for the year ended December 31, 2003 (File  No. 1-9052)     |

 

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| **DPL   Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                        | ** ** | **Location(1)**                                                                                                        |
|----------------|------------|--------------|------------|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|
|           |       |         |       |                |       |                                                                                                                               |       |                                                                                                                   |
| X              |       | X            |       | 10(j)*              |       | 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) |
|           |       |         |       |                |       |                                                                                                                               |       |                                                                                                                   |
| X              |       |         |       | 10(k)*              |       | DPL Inc. Executive  Incentive Compensation Plan, as amended and restated through  December 31, 2007                           |       | Exhibit 10(l) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                               |       |                                                                                                                   |
| X              |       |         |       | 10(l)*              |       | DPL Inc. 2006 Equity  and Performance Incentive Plan as amended and restated through  December 31, 2007                       |       | Exhibit 10(m) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                               |       |                                                                                                                   |
| X              |       |         |       | 10(m)*              |       | Form of DPL Inc.  Amended and Restated Long-Term Incentive Plan - Performance Shares Agreement                                |       | Exhibit 10(n) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                               |       |                                                                                                                   |
| X              |       |         |       | 10(n)*              |       | DPL Inc. Severance Pay  and Change of Control Plan, as amended and restated through December 31,  2007                        |       | Exhibit 10(o) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                               |       |                                                                                                                   |
| X              |       |         |       | 10(o)*              |       | DPL Inc. Supplemental  Executive Defined Contribution Retirement Plan, as amended and restated  through December 31, 2007     |       | Exhibit 10(p) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                               |       |                                                                                                                   |
| X              |       |         |       | 10(p)*              |       | DPL Inc. 2006 Deferred  Compensation Plan For Executives, as amended and restated through  December 31, 2007                  |       | Exhibit 10(q) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                               |       |                                                                                                                   |
| X              |       |         |       | 10(q)*              |       | DPL Inc. Pension  Restoration Plan, as amended and restated through December 31, 2007                                         |       | Exhibit 10(r) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                               |       |                                                                                                                   |
| X              |       | X            |       | 10(r)*              |       | Participation Agreement  dated August 2, 2007 among DPL Inc., The Dayton Power and Light  Company and Teresa F. Marrinan |       | Exhibit 10(s) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                               |       |                                                                                                                   |
| X              |       | X            |       | 10 (s)*             |       | Participation Agreement  dated March 27, 2007 among DPL Inc., The Dayton Power and Light  Company and Scott J. Kelly     |       | Exhibit 10(t) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |

 

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| **DPL   Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                    | ** ** | **Location(1)**                                                                                                        |
|----------------|------------|--------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|
|           |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                                   |
| X              |       | X            |       | 10(t)*              |       | Participation Agreement  and Waiver dated February 27, 2006 among DPL Inc., The Dayton  Power and Light Company and Gary G. Stephenson               |       | Exhibit 10(u) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                                   |
| X              |       | X            |       | 10 (u)*             |       | Participation Agreement  dated January 13, 2007 among DPL Inc., The Dayton Power and Light  Company and Daniel J. McCabe                                  |       | Exhibit 10(x) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                                   |
| X              |       |         |       | 10(v)*              |       | Management Stock Option  Agreement dated as of January 1, 2001 between DPL Inc. and Arthur G.  Meyer                                                      |       | Exhibit 10(cc) to  Report on Form 10-K for the year ended December 31, 2005 (File  No. 1-9052)     |
|           |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                                   |
| X              |       | X            |       | 10(w)*              |       | Participation Agreement  and Waiver dated March 6, 2006 among DPL Inc., The Dayton Power and  Light Company and Arthur G. Meyer, dated March 6, 2006 |       | Filed herewith as  Exhibit 10(w)                                                                                  |
|           |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                                   |
| X              |       | X            |       | 10(x)*              |       | Participation Agreement  dated September 8, 2006 among DPL Inc., The Dayton Power and Light  Company and Paul M. Barbas                                   |       | Exhibit 10.2 to  Form 8-K filed September 8, 2006 (File No. 1-9052)                                |
|           |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                                   |
| X              |       | X            |       | 10(y)*              |       | Participation Agreement  dated June 30, 2006 among DPL Inc., The Dayton Power and Light Company  and Frederick J. Boyle                                   |       | Exhibit 10.1 to  Form 8-K filed July 3, 2006 (File No. 1-9052)                                     |
|           |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                                   |
| X              |       |         |       | 10(z)*              |       | Letter Agreement  between DPL Inc. and Glenn E. Harder, dated June 20, 2006                                                                               |       | Exhibit 10.1 to  Form 8-K filed June 21, 2006 (File No. 1-9052)                                    |

 

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| **DPL   Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                                                   | ** ** | **Location(1)**                                                                                                            |
|----------------|------------|--------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|
|           |       |         |       |                |       |                                                                                                                                                                                                                                          |       |                                                                                                                       |
| X              |       | X            |       | 10(aa)              |       | Credit Agreement, dated  as of November 21, 2006 among The Dayton Power and Light Company,  KeyBank National Association and certain lending institutions, and Amendment  No. 1 to Credit Agreement, dated as of April 9, 2009 |       | Filed herewith as  Exhibit 10(aa)                                                                                     |
|           |       |         |       |                |       |                                                                                                                                                                                                                                          |       |                                                                                                                       |
| X              |       | X            |       | 10(bb)              |       | Credit Agreement, dated  as of April 21, 2009 by and among The Dayton Power and Light Company and  the lenders party thereto and PNC Bank, National Association                                                                          |       | Exhibit 10.1 to  Form 8-K filed October 8, 2009 (File No. 1-2385)                                      |
|           |       |         |       |                |       |                                                                                                                                                                                                                                          |       |                                                                                                                       |
| X              |       |         |       | 10(cc)*             |       | Form of DPL Inc.  Amended and Restated Non-Employee Director Restricted Stock Units Agreement                                                                                                                                            |       | Exhibit 10(uu) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052)         |
|           |       |         |       |                |       |                                                                                                                                                                                                                                          |       |                                                                                                                       |
| X              |       |         |       | 10(dd)*             |       | DPL Inc. 2006 Deferred  Compensation Plan for Non-Employee Directors, as amended and restated through  December 31, 2007                                                                                                                 |       | Exhibit 10(v v) to  Report on Form 10-K for the year ended December 31, 2007 (File  No. 1-9052)        |
|           |       |         |       |                |       |                                                                                                                                                                                                                                          |       |                                                                                                                       |
| X              |       | X            |       | 10(ee)*             |       | Participation Agreement  dated January 3, 2008 among DPL Inc., The Dayton Power and Light Company  and Douglas C. Taylor                                                                                                                 |       | Exhibit 10(a) to  Form 10-Q for the quarter ended March 31, 2008 (File  No. 1-9052)               |
|           |       |         |       |                |       |                                                                                                                                                                                                                                          |       |                                                                                                                       |
| X              |       |         |       | 10(ff)*             |       | Restricted Stock  Agreement dated May 6, 2008 by and between DPL Inc. and Paul M. Barbas                                                                                                                                                 |       | Exhibit 99.1 to  Form 8-K filed May 8, 2008 (File No. 1-9052)                                          |
|           |       |         |       |                |       |                                                                                                                                                                                                                                          |       |                                                                                                                       |
| X              |       |         |       | 10(gg)*             |       | Form of DPL Inc. Restricted  Stock Agreement                                                                                                                                                                                             |       | Exhibit 10(d) to  Report on Form 10-Q for the quarter ended June 30, 2009 (File  No. 1-9052)      |
|           |       |         |       |                |       |                                                                                                                                                                                                                                          |       |                                                                                                                       |
| X              |       |         |       | 10(hh)*             |       | Form of DPL Inc.  2009 Career Grant and Matching Restricted Stock Agreement                                                                                                                                                              |       | Exhibit 10(b) to  Report on Form 10-Q for the quarter ended September 30, 2009 (File  No. 1-9052) |
|           |       |         |       |                |       |                                                                                                                                                                                                                                          |       |                                                                                                                       |
| X              |       | X            |       | 10(ii)*             |       | Participation Agreement  dated May 18, 2009, among DPL Inc., The Dayton Power and Light Company  and Joseph W. Mulpas                                                                                                                    |       | Exhibit 10(c) to  Report on Form 10-Q for the quarter ended June 30, 2009 (File  No. 1-9052)      |

 

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| **DPL   Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                               | ** ** | **Location(1)**                       |
|----------------|------------|--------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|
|           |       |         |       |                |       |                                                                                                      |       |                                  |
| X              |       | X            |       | 21                  |       | List of Subsidiaries of  DPL Inc. and The Dayton Power and Light Company                                  |       | Filed herewith as  Exhibit 21    |
|           |       |         |       |                |       |                                                                                                      |       |                                  |
| X              |       |         |       | 23(a)               |       | Consent of KPMG LLP                                                                                       |       | Filed herewith as  Exhibit 23(a) |
|           |       |         |       |                |       |                                                                                                      |       |                                  |
| X              |       |         |       | 31(a)               |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |       | Filed herewith as  Exhibit 31(a) |
|           |       |         |       |                |       |                                                                                                      |       |                                  |
| X              |       |         |       | 31(b)               |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |       | Filed herewith as  Exhibit 31(b)      |
|           |       |         |       |                |       |                                                                                                      |       |                                  |
|           |       | X            |       | 31(c)               |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |       | Filed herewith as  Exhibit 31(c) |
|           |       |         |       |                |       |                                                                                                      |       |                                  |
|           |       | X            |       | 31(d)               |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |       | Filed herewith as  Exhibit 31(d)      |
|           |       |         |       |                |       |                                                                                                      |       |                                  |
| X              |       |         |       | 32(a)               |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |       | Filed herewith as  Exhibit 32(a)      |
|           |       |         |       |                |       |                                                                                                      |       |                                  |
| X              |       |         |       | 32(b)               |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |       | Filed herewith as  Exhibit 32(b)      |
|           |       |         |       |                |       |                                                                                                      |       |                                  |
|           |       | X            |       | 32(c)               |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |       | Filed herewith as  Exhibit 32(c)      |
|           |       |         |       |                |       |                                                                                                      |       |                                  |
|           |       | X            |       | 32(d)               |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |       | Filed herewith as  Exhibit 32(d)      |

 

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* Management contract orcompensatory plan

Exhibits referencing FileNo. 1-9052 have been filed by DPL Inc. and those referencing File No. 1-2385have been filed by The Dayton Power and Light Company

 

Pursuant to paragraph (b) (4) (iii) (A) ofItem 601 of Regulation S-K, we have not filed as an exhibit to this Form 10-Kcertain instruments with respect to long-term debt if the total amount ofsecurities authorized thereunder does not exceed 10% of the total assets of usand our subsidiaries on a consolidated basis, but we hereby agree to furnish tothe SEC on request any such instruments.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, **DPL Inc.** and **The****Dayton Power and Light Company** has dulycaused this report to be signed on their behalf by the undersigned, thereuntoduly authorized.

 
| ** **             | ** ** | **DPL Inc.**                                           |
|------------------------|------------|--------------------------------------------------------|
| ** **             | ** ** | ** **                                             |
| ** **             | ** ** | ** **                                             |
| February 11, 2010 | By:        | ** **                                             |
|                   |       | /s/ Paul M. Barbas                                     |
|                   |       | Paul M. Barbas

President and Chief  Executive Officer |
|                   |       | (principal executive  officer)                         |

 

 
| ** **             | ** ** | **The Dayton Power and Light  Company** |
|------------------------|------------|-----------------------------------------|
| ** **             | ** ** | ** **                              |
| ** **             | ** ** | ** **                              |
| ** **             | By:        | ** **                              |
| February 11, 2010 |       | /s/ Paul M. Barbas                      |
|                   |       | Paul M. Barbas                          |
|                   |       | President and Chief  Executive Officer  |
|                   |       | (principal executive  officer)          |

 

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Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of **DPL Inc.** and**The Dayton Power andLight Company** and in the capacities and on the dates indicated.

 

 
| /s/ P.M.  Barbas |   | Director, President and  Chief Executive Officer         |   | February 10, 2010 |
|-----------------------|--------|----------------------------------------------------------|--------|------------------------|
| (P.M. Barbas)         |   | (principal executive  officer)                           |   |                   |
|                  |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
| /s/ R. D. Biggs       |   | Director                                                 |   | February 10, 2010 |
| (R. D. Biggs)         |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
| /s/ P. R. Bishop      |   | Director and  Vice-Chairman                              |   | February 10, 2010 |
| (P. R. Bishop)        |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
| /s/ F.F.  Gallaher    |   | Director                                                 |   | February 10, 2010 |
| (F.F. Gallaher)       |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
| /s/ B. S. Graham      |   | Director                                                 |   | February 10, 2010 |
| (B. S. Graham)        |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
| /s/ G.E. Harder       |   | Director and Chairman                                    |   | February 10, 2010 |
| (G.E. Harder)         |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
| /s/ L.L. Lyles        |   | Director                                                 |   | February 10, 2010 |
| (L.L. Lyles)          |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
| /s/ P.B. Morris       |   | Director                                                 |   | February 10, 2010 |
| (P.B. Morris)         |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
| /s/ N.J.  Sifferlen   |   | Director                                                 |   | February 10, 2010 |
| (N.J. Sifferlen)      |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
| /s/ F.J. Boyle        |   | Senior Vice President, Chief  Financial Officer and      |   | February 10, 2010 |
| (F.J. Boyle)          |   | Treasurer (principal  financial officer)                 |   |                   |
|                  |   |                                                     |   |                   |
|                  |   |                                                     |   |                   |
| /s/ J.W. Mulpas       |   | Vice President,  Controller and Chief Accounting Officer |   | February 10, 2010 |
| (J.W. Mulpas)         |   |  (principal accounting officer)                     |   |                   |

 

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**Schedule II**

 

DPL Inc.

VALUATION AND QUALIFYINGACCOUNTS

 

For the years ended December 31,2007 - 2009

 

$ in thousands

 
| ** **                                                                            | ** ** | **Balance  at** | ** ** | ** **    | ** ** | ** **     | ** ** | ** **         | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|----------------|------------|--------------------|------------|
| ** **                                                                            | ** ** | **Beginning**   | ** ** | ** **    | ** ** | **Deductions** | ** ** | **Balance  at**    | ** ** |
| **Description**                                                                       | ** ** | **of  Period**  | ** ** | **Additions** | ** ** | **(1)**        | ** ** | **End of  Period** | ** ** |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| 2009:                                                                                 |       |            |       |          |       |           |       |               |       |
| Deducted from accounts  receivable — Provision for uncollectible accounts        |       | $               | 1,084      |          | $          | 5,168          |       | $                  | 5,151      |   | $ | 1,101 |   |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| Deducted from deferred  tax assets — Valuation allowance for deferred tax assets |       | $               | 10,685     |          | $          | 1,270          |       | $                  | —     |   | $ | 11,955 |   |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| 2008:                                                                                 |       |            |       |          |       |           |       |               |       |
| Deducted from accounts  receivable — Provision for uncollectible accounts        |       | $               | 1,518      |          | $          | 4,277          |       | $                  | 4,711      |   | $ | 1,084 |   |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| Deducted from deferred  tax assets — Valuation allowance for deferred tax assets |       | $               | 12,429     |          | $          | 1,482          |       | $                  | 3,226      |   | $ | 10,685 |   |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| 2007:                                                                                 |       |            |       |          |       |           |       |               |       |
| Deducted from accounts  receivable — Provision for uncollectible accounts        |       | $               | 1,430      |          | $          | 5,678          |       | $                  | 5,590      |   | $ | 1,518 |   |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| Deducted from deferred  tax assets — Valuation allowance for deferred tax assets |       | $               | 10,132     |          | $          | 2,676          |       | $                  | 379        |   | $ | 12,429 |   |

 

----

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

 

The Dayton Power andLight Company

VALUATION AND QUALIFYINGACCOUNTS

 

For the years ended December 31,2007 - 2009

 

$ in thousands

 
| ** **                                                                            | ** ** | **Balance  at** | ** ** | ** **    | ** ** | ** **     | ** ** | ** **         | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|----------------|------------|--------------------|------------|
| ** **                                                                            | ** ** | **Beginning**   | ** ** | ** **    | ** ** | **Deductions** | ** ** | **Balance  at**    | ** ** |
| **Description**                                                                       | ** ** | **of  Period**  | ** ** | **Additions** | ** ** | **(1)**        | ** ** | **End  of Period** | ** ** |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| 2009:                                                                                 |       |            |       |          |       |           |       |               |       |
| Deducted from accounts  receivable — Provision for uncollectible accounts        |       | $               | 1,084      |          | $          | 5,168          |       | $                  | 5,151      |   | $ | 1,101 |   |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| Deducted from deferred  tax assets — Valuation allowance for deferred tax assets |       | $               | —     |          | $          | —         |       | $                  | —     |   | $ | — |   |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| 2008:                                                                                 |       |            |       |          |       |           |       |               |       |
| Deducted from accounts  receivable — Provision for uncollectible accounts        |       | $               | 1,518      |          | $          | 4,277          |       | $                  | 4,711      |   | $ | 1,084 |   |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| Deducted from deferred  tax assets — Valuation allowance for deferred tax assets |       | $               | 348        |          | $          | —         |       | $                  | 348        |   | $ | — |   |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| 2007:                                                                                 |       |            |       |          |       |           |       |               |       |
| Deducted from accounts  receivable — Provision for uncollectible accounts        |       | $               | 1,430      |          | $          | 5,678          |       | $                  | 5,590      |   | $ | 1,518 |   |
|                                                                                  |       |            |       |          |       |           |       |               |       |
| Deducted from deferred  tax assets — Valuation allowance for deferred tax assets |       | $               | 277        |          | $          | 71             |       | $                  | —     |   | $ | 348 |   |

 

----

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

 

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