** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C.  20549**

**FORM 10-K**

** **

**ý  ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For the fiscal year ended December 31, 2004**

**OR**

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

** **

**For the transition period from                 to                 **

** **

Commission File Number**  1-2385**

** **

**THEDAYTON POWER AND LIGHT COMPANY**

(Exact name of registrant as specified in its charter)

 

| **OHIO**  (State or other jurisdiction of incorporation or organization)

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

 

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

 

 

**Securities registered pursuant to Section 12(b) of the Act:  NONE**

 

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

 

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

YES  ý   NO  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K.         

 

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

YES  o   NO  ý

 

The aggregate market value ofthe voting and non-voting common equity held by nonaffiliates of the registrantas of June 30, 2004:  None.

 

Number of shares of registrant’scommon stock outstanding as of March 2, 2005, all of which were held by DPLInc., was 41,172,173.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

**None.**

 

 

 

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The Dayton Power and LightCompany

 

Index to Annual Report on Form10-K

# Fiscal Year EndedDecember 31, 2004

 
|       |                                                                                             | **Page No.** |
|------------|--------------------------------------------------------------------------------------------------|--------------|
| ** ** | **Part I**                                                                                       | ** **   |
| Item 1     | Business                                                                                         | 3            |
| Item  2    | Properties                                                                                       | 13           |
| Item 3     | Legal Proceedings                                                                                | 13           |
| Item  4    | Submission  of Matters to a Vote of Security Holders                                             | 15           |
|       |                                                                                             |         |
| ** ** | **Part II**                                                                                      | ** **   |
| Item  5    | Market  for Registrant’s Common Equity and Related Shareholder Matters                      | 16           |
| Item 6     | Selected Financial  Data                                                                         | 16           |
| Item  7    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      | 16           |
| Item  7A   | Quantitative  and Qualitative Disclosures about Market Risk                                      | 30           |
| Item  8    | Financial  Statements and Supplementary Data                                                     | 31           |
| Item  9    | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure            | 69           |
| Item 9A    | Controls and  Procedures                                                                         | 69           |
| Item 9B    | Other Information                                                                                | 69           |
|       |                                                                                             |         |
|       |                                                                                             |         |
|       |                                                                                             |         |
| ** ** | **Part III**                                                                                     | ** **   |
| Item  10   | Directors  and Executive Officers of the Registrant                                              | 70           |
| Item 11    | Executive Compensation                                                                           | 74           |
| Item  12   | Security  Ownership of Certain Beneficial Owners and Management and Related Shareholder  Matters | 91           |
| Item  13   | Certain  Relationships and Related Transactions                                                  | 92           |
| Item  14   | Principal  Accountant Fees and Services                                                          | 94           |
|       |                                                                                             |         |
| ** ** | **Part IV**                                                                                      | ** **   |
| Item  15   | Exhibits,  Financial Statement Schedules and Reports on Form 8-K                                 | 95           |
|       |                                                                                             |         |
| ** ** | **Other**                                                                                        | ** **   |
|       | Signatures                                                                                       | 103          |
|       | Schedule II -  Valuation and Qualifying Accounts                                                 | 105          |
|       | Subsidiaries of The Dayton Power and Light  Company                                              | 106          |
|       | Certifications                                                                                   | 107          |

## ** **

## **AvailableInformation**

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

 

The Company’spublic internet site is http://www.dplinc.com. The Company makes available through its internet site, its annualreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form8-K, and amendments to those reports filed or furnished pursuant to theSecurities Exchange Act of 1934, as amended, as soon as reasonably practicableafter it electronically files such material with, or furnishes it to, the SEC.

 

In addition,the Company’s public internet site includes other items related to corporategovernance matters, including, among other things, the Company’s governanceguidelines, charters of various committees of the Board of Directors and theCompany’s code of business conduct and ethics applicable to all employees,officers and directors.  You may obtaincopies of these documents, free of charge, by sending a request, in writing, toDP&L Investor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.

 

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## **PART I**

 
| **Item 1 - Business** |
|-----------------------|

 

**The DaytonPower and Light Company**

 

The DaytonPower and Light Company (DP&L or the Company) is a wholly-owned subsidiaryof DPL Inc. (DPL).  DP&L is a publicutility incorporated in 1911 under the laws of Ohio.  DP&L sells electricity to residential,commercial, industrial and governmental customers in a 6,000 square mile areaof West Central Ohio.  Electricity forDP&L’s 24-county service area is primarily generated at eight coal-firedpower plants and is distributed to more than 500,000 retail customers.  The Company also purchases retail peak loadrequirements from DPL Energy, LLC (DPLE), a wholly-owned subsidiary ofDPL.  Principal industries served includeautomotive, food processing, paper, plastic manufacturing and defense.  The Company’s sales reflect the generaleconomic conditions and seasonal weather patterns of the area.  In addition, DP&L sells any excess energyand capacity into the wholesale market.

 

The Companyemployed 1,441 persons as of December 31, 2004, of which 1,184 werefull-time employees and 257 were part-time employees.

 

All of theoutstanding shares of common stock of the Company are held by DPL, which becamethe Company’s corporate parent, effective April 21, 1986.

 

The Company’sprincipal executive and business office is located at 1065 Woodman Drive,Dayton, Ohio 45432 - telephone (937) 224-6000.

 

 

**SIGNIFICANT DEVELOPMENTS**

** **

**Governmental and Regulatory Inquiries**

On April 7, 2004, the Companyreceived notice that the staff of the Public Utilities Commission of Ohio(PUCO) is conducting an investigation into the financial condition of DP&Las a result of previously disclosed matters raised by a Company employee duringthe 2003 year-end financial closing process (the Thobe Memorandum).  On May 27, 2004, the PUCO ordered DP&L tofile a plan of utility financial integrity that outlines the actions theCompany has taken or will take to insulate DP&L utility operations andcustomers from its unregulated activities. The Company was required to file this plan by March 2, 2005.  On February 4, 2005, DP&L filed itsprotection plan with the PUCO and will continue to cooperate with the PUCO toresolve any outstanding issues in this investigation.

 

On or about June 24, 2004, theSEC commenced a formal investigation into the issues raised by the ThobeMemorandum.  The Company and DPL arecooperating with the investigation.

 

On May 28, 2004, the U.S.Attorney’s Office for the Southern District of Ohio, assisted by the FederalBureau of Investigation, notified the Company and DPL that it had initiated aninquiry involving the subject matters covered by the Company’s and DPL’sinternal investigation.  The Company andDPL are cooperating with this investigation.

 

Commencing on or about June 24,2004, the Internal Revenue Service (IRS) has issued a series of data requeststo the Company and DPL regarding issues raised in the Thobe Memorandum.  The staff of the IRS has requested that theCompany and DPL provide certain documents, including but not limited to,matters concerning executive/director deferred compensation plans, managementstock incentive plans and MVE, Inc. (MVE) financial statements.  MVE is a wholly-owned subsidiary of DPL whichis primarily responsible for the management of DPL’s financial assetportfolio.  The Company and DPL arecooperating with these requests.

 

On March 3, 2005, DP&L received a noticethat the FERC had instituted an operational audit of DP&L regarding its compliancewith its Code of Conduct within the transmission and generation areas.  The FERC has provided DP&L with a datarequest and DP&L is cooperating in the furnishing of requested information.  DP&L cannot predict the outcome of thisoperational audit.

 

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**PJMIntegration**

As part of Ohio’s electricderegulation law, all of the state’s investor-owned utilities are required tojoin a Regional Transmission Organization (RTO).  In October 2004, the Company successfullyintegrated its 1,000 miles of high-voltage transmission into the PJMInterconnection, L.L.C. (PJM) RTO.

 

The role of the RTO is toadminister an electric marketplace and insure reliability.  PJM ensures the reliability of the high-voltageelectric power system serving 44 million people in all or parts of Delaware,Indiana, Illinois, Kentucky, Maryland, Michigan, New Jersey, Ohio,Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.  PJM coordinates and directs the operation ofthe region’s transmission grid; administers a competitive wholesale electricitymarket, the world’s largest; and plans regional transmission expansionimprovements to maintain grid reliability and relieve congestion.

 

 

**COMPETITIONAND REGULATION**

DP&L hashistorically operated in a rate-regulated environment providing electricgeneration and energy delivery, consisting of transmission and distributionservices, as a single product to its retail customers.  Prior to the legislation discussed below,DP&L did not have retail competitors in its service territory.

 

In October1999, legislation became effective in Ohio that gave electric utility customersa choice of energy providers beginning on January 1, 2001.  Under this legislation, electric generation,power marketing, and power brokerage services supplied to retail customers inOhio are deemed to be competitive and are not subject to supervision andregulation by the PUCO.

 

As required bythis legislation, DP&L filed its transition plan (Electric Transition Plan)with the PUCO on December 20, 1999. DP&L received the PUCO approval of its plan on September 21, 2000.

 

The ElectricTransition Plan provided for a three-year transition period, which began onJanuary 1, 2001 and ended on December 31, 2003. The plan also provided for a 5% residential rate reduction on thegeneration component of the rates, which reduced annual revenue byapproximately $14 million; rate certainty for the three-year period for customersthat continued to purchase power from DP&L; guaranteed rates for a six-yearperiod for transmission and delivery services; and recovery by DP&L oftransition costs of approximately $600 million.

 

On October 28, 2002,DP&L filed with the PUCO a request for an extension of its market developmentperiod from December 31, 2003 to December 31, 2005 that, if granted, wouldcontinue DP&L’s current rate structure and provide its retail customerswith rate stability.  On May 28, 2003,DP&L filed with the PUCO a Stipulation and Recommendation entered into withfive other parties (Ohio Consumers’ Counsel (the OCC), Industrial EnergyUsers-Ohio, PUCO Staff, Partners for Affordable Energy, and Community ActionPartnership of the Greater Dayton Area). On September 2, 2003, the PUCO issued an Opinion and Order adopting theStipulation with modifications (the Stipulation). The Stipulation provides thefollowing:  DP&L’s market developmentperiod will continue through December 31, 2005; retail generation rates willremain frozen at present levels; a credit issued to customers who electcompetitive retail generation service will increase over two years; and a ratestabilization period from January 1, 2006 through December 31, 2008, duringwhich DP&L’s retail generation rates in effect on January 1, 2004 willserve as market-based rates.  TheStipulation also provides that beginning January 1, 2006, rates may be modifiedby up to 11% of generation rates to reflect increased costs associated withfuel, environmental compliance, taxes, regulatory changes, and securitymeasures.  Further, the PUCO may approvean increase to the residential generation discount commencing January 1,2006.  The PUCO denied applications forrehearing on October 22, 2003.  The PUCO’sdecision 

 

4

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was appealed to the OhioSupreme Court on December 19, 2003.  Thatappeal was argued before the Ohio Supreme Court on October 12, 2004.  On December 17, 2004, the Ohio Supreme Courtaffirmed the PUCO’s Order approving the Stipulation.

 

As a part ofthe Stipulation, DP&L agreed to implement a Voluntary Enrollment Processthat would provide customers with an option to choose a competitive supplier toprovide their retail generation service should switching not reach 20% in eachcustomer class by October 2004. Customers that volunteered for the program were bid out to Competitive RetailElectric Service (CRES) providers who are registered in DP&L’s serviceterritory.  On March 8, 2005, DP&Llearned that no bids were received and re-bidding will occur within 60days.  The magnitude of any customerswitching and the financial impact of this program are not expected to bematerial to DP&L’s results of operations, cash flows or financial positionin 2005.  Future period effects cannot bedetermined at this time.

 

On February 20, 2003,the PUCO issued an Entry requesting comments from interested stakeholders onthe proposed rules for the conduct of a competitive bidding process that willtake place at the end of the market development period.  DP&L submitted comments and replycomments on March 7 and March 21, 2003, respectively. The PUCO issued finalrules on December 23, 2003.  UnderDP&L’s Stipulation discussed above, these rules will not affect DP&Luntil January 1, 2009.

 

On March 20, 2003, thePUCO issued an Entry initiating a PUCO investigation regarding thedesirability, feasibility and timing of declaring that retail ancillarymetering, billing and/or collection services are competitive retail electricservices that consumers may obtain from any supplier.  The initiation of this investigation wasbased on a requirement in the 1999 Ohio deregulation legislation.  The PUCO asked interested stakeholders tofile comments by June 6, 2003 and reply comments by July 7, 2003.  DP&L filed comments and will activelyparticipate in this case and evaluate the potential outcome of this proceeding.

 

As of December31, 2004, three unaffiliated marketers were registered as CRES providers in theCompany’s service territory; to date, there has been no significant activityfrom these suppliers.  DPL EnergyResources, Inc. (DPLER), an affiliated company, is also a registered CRESprovider and accounted for nearly all load served by CRES providers withinDP&L’s service territory in 2004.  In addition, several communities inthe Company’s service area have passed ordinances allowing the communities tobecome government aggregators for the purpose of offering alternative electricgeneration supplies to their citizens. To date none of these communities have aggregated.

 

There was acomplaint filed on January 21, 2004 at the PUCO concerning the pricing ofDP&L’s billing services. Additionally, on December 16, 2003, a complaint was filed at the PUCOalleging that the Company has established improper barriers tocompetition.  On October 13, 2004, theparties reached a settlement on the pricing of DP&L’s billing services thatthe Company will charge CRES providers. Additionally, on October 19, 2004, DP&L entered into a settlementwith Dominion Retail, Green Mountain Energy, and the Staff of the PUCO thatresolves all matters in the competition barrier complaint.  This settlement provides that the Companywill modify the manner in which customer partial payments are applied tobilling charges and the Company will no longer offer to purchase thereceivables of CRES providers who operate in DP&L’s certifiedterritory.  On February 2, 2005, the PUCOissued an Order approving both settlements with minor modifications.  On March 4, 2005, the OCC filed a Motion forRehearing with the PUCO.  That motion ispending.

 

On March 1,2005, DP&L filed a pre-filing notice at the PUCO announcing its intent torequest a rate stablization surcharge effective January 1, 2006.  The request for a rate surcharge is expectedto be filed on or about April 4, 2005 and is pursuant to the Stipulationdiscussed above.  The proposed rate surchargerequest is expected to exceed  $100million and is designed to partially reimburse DP&L for certain increases inits costs of providing electric service related to fuel, environmentalcompliance, taxes, regulatory changes and security measures.  Pursuant to the stipulation discussed above,the surcharge is capped at 11% of the generation portion of DP&L’srates.  The surcharge, if approved, wouldproduce approximately $76 million in additional revenue in 2006.

 

Like otherelectric utilities and energy marketers, DP&L and DPLE may sell or purchaseelectric products on the wholesale market. DP&L and DPLE compete with other generators, power marketers, privatelyand municipally owned electric utilities, and rural electric cooperatives whenselling electricity.  The ability of DP&Land DPLE to sell this electricity will depend on how DP&L’s and DPLE’sprice, terms and conditions compare to those of other suppliers.

 

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DP&L providestransmission and wholesale electric service to 12 municipal customers inits service territory, which distribute electricity within their incorporatedlimits.  The Company also maintains aninterconnection agreement with one municipality that has the capability togenerate a portion of its energy requirements. Sales to these municipalities represented 1% of total electricity salesin 2004.  DP&L’s contract with onemunicipality expired in February 2005 creating reduced future generation salesto municipalities.

 

The Federal EnergyRegulatory Commission (FERC) issued a final rule on December 20, 1999, whichrequired all public utilities that own, operate, or control interstatetransmission lines to file a proposal to join a RTO by October 15, 2000 or filea description of efforts taken to participate in a RTO, reasons for notparticipating in a RTO, any obstacles to participation in a RTO and any plansfor further work toward participation. DP&L filed with the FERC to join the Alliance RTO.  On December 19, 2001, the FERC issued anorder rejecting the Alliance RTO as a stand-alone RTO.  The FERC has recognized in various ordersthat substantial losses were incurred to establish the Alliance RTO and that itwould consider proposals for rate recovery of prudently incurred costs.  The Company invested approximately$8 million in its efforts to join the Alliance RTO.  On May 28, 2002, DP&L filed a notice withthe FERC stating its intention to join PJM, an organization responsible for theoperation and control of the bulk electric power system throughout majorportions of five Mid-Atlantic states and the District of Columbia.  On July 31, 2002, the FERC granted the Companyconditional approval to join PJM.  InJune 2003, DP&L turned over certain transmission functions for PJM tooperate including management of certain information systems, scheduling, marketmonitoring and security coordination.  OnJuly 30, 2004, the Company made a filing with the FERC to withdraw itstransmission tariff and to become fully integrated into PJM’s tariff effectiveOctober 1, 2004.  The Company was fullyintegrated into PJM on October 1, 2004. As of December 31, 2004, DP&L had invested a total of approximately$18.0 million in its efforts to join a RTO.

 

Effective October 1,2004, PJM began to assess a FERC-approved administrative fee on every megawattconsumed by DP&L customers.  OnOctober 26, 2004, the Company filed an application with the PUCO for authorityto modify its accounting procedures to defer collection of this PJMadministrative fee, effective October 1, 2004, plus carrying charges, untilsuch time as DP&L has obtained the authority to adjust its rates (i.e.,after January 1, 2006) pursuant to the Company’s approved Stipulation andRecommendation.  While this applicationis pending, DP&L is expensing these administrative fees.

 

The FERC’s July 31, 2002Order also addressed the justness and reasonableness of the PJM and MidwestIndependent Transmission System Operator (MISO) rates and related revenuedistribution protocols.  On March 31,2003, an Initial Decision was issued finding that the PJM/MISO’s rates had notbeen shown to be unjust and unreasonable. On July 23, 2003, the FERC issued an Order rejecting in part the InitialDecision and found that the rates for transmission service through and out ofthe service territories of seven former Alliance RTO companies, includingDP&L, may be unjust, unreasonable, or unduly discriminatory orpreferential.  Subsequently, the FERCrequired the parties to enter into settlement discussions.  On March 19, 2004, the FERC approved asettlement agreement regarding transmission pricing that allowed the Company tocontinue to charge its existing transmission rate until December 1, 2004.  The settlement agreement also outlines theprinciples and procedures to arrive at a single, long-term transmission pricingstructure to be effective December 1, 2004.  On September 27, 2004, the FERC instituted aproceeding under Federal Power Act Section 206 to implement a new long-termtransmission pricing structure intended to eliminate seams in the PJM and MISOregions.  On October 1, 2004, DP&L,along with approximately 60 other parties filed a long-term pricing plan withthe FERC.  On November 18, 2004, the FERCapproved this rate design.  In addition,the FERC ordered transitional payments effective December 1, 2004 through March31, 2006.  On February 10, 2005, FERCissued an order that reaffirmed the pricing structure, but 

 

6

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set the rates forhearing, subject to refund.  The ultimatedisposition of this case may affect the recovery of transmission revenues bythe Company.

 

In a November 1, 2001Order, as modified on April 14, 2004, the FERC required entities withmarket-based rate authority to submit their triennial market-based reviewsusing new criteria.  In DP&L’s case,this submission would have been due August 11, 2004.  On July 30, 2004, the Company requested a newcompliance date 60 days after integration into PJM to enable it to provide ananalysis that reflects the market as it will exist in PJM.  On October 14, 2004, the FERC denied thatrequest and on October 15, 2004, DP&L filed its triennial market-basedreview with the FERC.  On December 15,2004, the FERC issued an order accepting the Company’s market power analysis,reaffirming DP&L’s market-based rate authority.

 

On January 25,2005, the FERC issued an Order that, in part, found that PJM is authorized incertain circumstances to limit the price at which certain generators can offerto sell their power to PJM during periods of electric transmission constraintsand thereby removed a previous exemption from these limitations for generationunits constructed after 1996.  DP&Lis actively appealing this decision.  ThisOrder does not impact DP&L’s coal-fired facilities.  The Company does not expect this Order tomaterially affect results of operations and financial condition for 2005.

 

On March 3, 2005, DP&L received a noticethat the FERC had instituted an operational audit of DP&L regarding itscompliance with Code of Conduct within the transmission and generationareas.  The FERC has provided DP&Lwith a data request and DP&L is cooperating in the furnishing of requestedinformation.  DP&L cannot predict theoutcome of this operational audit.

 

On April 7, 2004, theCompany received notice that the staff of the PUCO is conducting aninvestigation into its financial condition as a result of financial reportingand governance issues raised by the Thobe Memorandum.  On May 27, 2004, the PUCO ordered DPL to filea plan of utility financial integrity that outlines the actions that theCompany has taken or will take to insulate DP&L utility operations andcustomers from its unregulated activities. The Company was required to file this plan by March 2, 2005.  On February 4, 2005, the Company filed itsprotection plan with the PUCO and will continue to cooperate with the PUCO toresolve any outstanding issues in this investigation.

 

DP&L had requestedapproval from the PUCO to extend the filing of its Annual 2003 Report untilafter the filing of its 2003 Form 10-K. On February 1, 2005, the Company filed its Annual 2003 Report with thePUCO.  DP&L had also previouslyrequested approval from the FERC to extend the filing of its FERC Form 1and FERC Form 3-Qs until after the filing of its 2003 Form 10-K.  The Company filed its FERC Form 1 and alloutstanding FERC Form 3-Qs on December 30, 2004.

 

 

**CONSTRUCTIONADDITIONS**

Construction additions were $93 million, $98 million,$129 million in 2004, 2003 and 2002, respectively, and are expected toapproximate $173 million in 2005.

 

Planned construction additions for 2005 relate toDP&L’s environmental compliance program, power plant equipment, and itstransmission and distribution system. During the last three years, capital expenditures have been utilized tomeet the Company’s state and federal standards for Nitrogen Oxide (NOx)emissions from power plants and to make power plant improvements.

 

Capital projects are subject to continuing review andare revised in light of changes in financial and economic conditions, loadforecasts, legislative and regulatory developments and changing environmentalstandards, among other factors.  Over thenext four years, DP&L is projecting to spend an estimated $850 million incapital projects, approximately 60% of which is to meet changing environmentalstandards.  DP&L’s ability tocomplete its capital projects and the reliability of future service will beaffected by its financial condition, the availability of internal and externalfunds at reasonable cost, and adequate and timely return on these capitalinvestments.  DP&L expects to financeits construction additions in 2005 with internally-generated funds.

 

See ENVIRONMENTALCONSIDERATIONS for a description of environmental control projects andregulatory proceedings that may change the level of future constructionadditions.  The potential effect of theseevents on DP&L’s operations cannot be estimated at this time.

 

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**ELECTRICOPERATIONS AND FUEL SUPPLY**

DP&L’spresent summer generating capacity is approximately 3,300 megawatts (MW).  Of this capacity, approximately 2,800 MWis derived from coal-fired steam generating stations and the balance ofapproximately 500 MW consists of combustion turbine and diesel peakingunits.  Combustion turbine output isdependent on ambient conditions and is higher in the winter than in the summer.  The Company’s all-time net peak load was 3,130MW, occurring in 1999.

 

Approximately87% of the existing steam generating capacity is provided by certain unitsowned as tenants in common with The Cincinnati Gas & Electric Company(CG&E) and Columbus Southern Power Company (CSP).  As tenants in common, each company owns a specified undivided share of eachof these units, is entitled to its share of capacity and energy output, and hasa capital and operating cost responsibility proportionate to its ownershipshare.  DP&L’s remaining steamgenerating capacity (approximately 365 MW) is derived from a generating stationowned solely by it.  Additionally, theCompany, CG&E and CSP own as tenants in common, 884 circuit miles of345,000-volt transmission lines. DP&L has several interconnections with other companies for thepurchase, sale and interchange of electricity.

 

In 2004, DP&Lgenerated 99% of its electric output from coal-fired units and 1% from oil ornatural gas-fired units.

 

The following table setsforth the Company’s generating stations and where indicated, those stationswhich DP&L owns as  tenants incommon.

 
| ** **                    | ** ** | ** **      | ** ** | ** **            | ** ** | ** **        | ** ** | **Approximate Summer   MW Rating** | ** ** |
|-------------------------------|------------|-----------------|------------|-----------------------|------------|-------------------|------------|------------------------------------|------------|
| **Station**                   | ** ** | **Ownership *** | ** ** | **Operating Company** | ** ** | **Location**      | ** ** | **DP&L 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      |       | 820                                |       | 2,340 |   |
| Conesville-Unit 4             |       | C               |       | CSP                   |       | Conesville,  OH   |       | 129                                |       | 780 |   |
| Beckjord-Unit 6               |       | C               |       | CG&E              |       | New  Richmond, OH |       | 207                                |       | 414 |   |
| Miami Fort-Units 7 & 8    |       | C               |       | CG&E              |       | North Bend,  OH   |       | 360                                |       | 1,000 |   |
| East Bend-Unit 2              |       | C               |       | CG&E              |       | Rabbit Hash,  KY  |       | 186                                |       | 600 |   |
| Zimmer                        |       | C               |       | CG&E              |       | Moscow, OH        |       | 365                                |       | 1,300 |   |
|                          |       |            |       |                  |       |              |       |                               |       |   |   |
| Combustion Turbines or Diesel |       |            |       |                  |       |              |       |                               |       |   |   |
| Hutchings                     |       | W               |       | DP&L              |       | Miamisburg,  OH   |       | 23                                 |       | 23 |   |
| Yankee Street                 |       | W               |       | DP&L              |       | Centerville,  OH  |       | 107                                |       | 107 |   |
| Monument                      |       | W               |       | DP&L              |       | Dayton, OH        |       | 12                                 |       | 12 |   |
| Tait Diesels                  |       | W               |       | DP&L              |       | Dayton, OH        |       | 10                                 |       | 10 |   |
| Sidney                        |       | W               |       | DP&L              |       | Sidney, OH        |       | 12                                 |       | 12 |   |
| Tait Units 1-3                |       | W               |       | DP&L              |       | Moraine, OH       |       | 256                                |       | 256 |   |
| Killen                        |       | C               |       | DP&L              |       | Wrightsville,  OH |       | 12                                 |       | 18 |   |
| Stuart                        |       | C               |       | DP&L              |       | Aberdeen, OH      |       | 3                                  |       | 10 |   |

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            *W = Wholly-Owned

              C = Commonly-Owned

 

As of February 15, 2005,DP&L has contracted for 97% of its projected coal requirements for 2005with any incremental purchases made in the spot market.  The prices to be paid by the Company underits long-term coal contracts are either fixed or subject to periodicadjustment.  Each contract has featuresthat will limit price escalations in any given year.  The Company has also covered all of itsestimated 2005 emission allowance requirements. DP&L expects its 2005 coal and net emission allowance costs toexceed its 2004 coal and net emission allowance costs by approximately 10%.

 

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The averagecost of fuel used per kilowatt-hour (kWh) generated was 1.49¢  in 2004, 1.29¢ in 2003 and 1.26¢ in2002.  With the onset of competition inJanuary 2001, the Electric Fuel Component was frozen under DP&L’s ElectricTransition Plan and is reflected in the Standard Offer Generation rate to itscustomers.  See RATE REGULATION ANDGOVERNMENT LEGISLATION and ENVIRONMENTAL CONSIDERATIONS.

 

 

**SEASONALITY**

The powergeneration and delivery business is seasonal and weather patterns can have amaterial impact on operating performance. In the region served by DP&L, demand for electricity is generallygreater in the summer months associated with cooling and greater in the wintermonths associated with heating as compared to other times of the year.  Historically, the power generation anddelivery operations of the Company have generated less revenue and income whenweather conditions are milder in the winter and cooler in the summer.

 

 

**RATEREGULATION AND GOVERNMENT LEGISLATION**

DP&L’ssales to retail customers are subject to rate regulation by the PUCO.  The Company’s wholesale electric rates tomunicipal corporations and other distributors of electric energy are subject toregulation by the FERC under the Federal Power Act.

 

Ohio lawestablishes the process for determining rates charged by public utilities.  Regulation of rates encompasses the timing ofapplications, the effective date of rate increases, the cost basis upon whichthe rates are based and other related matters. Ohio law also established the OCC, which has the authority to representresidential consumers in state and federal judicial and administrative rateproceedings.

 

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 they relate to thecosts associated with the provision of public utility service.  Based on existing PUCO authorization,regulatory assets and liabilities are recorded on the Consolidated BalanceSheet.  (See Note 3 of Notes to ConsolidatedFinancial Statements.)

 

Underlegislation passed in 1999, the percentage of income payment plan (PIPP) foreligible low-income households was converted to a Universal Service Fund in2001.  The universal service program isadministered by the Ohio Department of Development and provides for fullrecovery of arrearages for qualifying low-income customers.

 

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

 

 

**ENVIRONMENTAL CONSIDERATIONS**

The operationsof  DP&L, including DP&L’scommonly-owned facilities, are subject to a wide range of federal, state andlocal environmental regulations and laws as to air and water quality, disposalof solid waste and other environmental matters, including the location,construction and operation of new and existing electric generating facilitiesand most electric transmission lines.  Assuch, existing environmental regulations may be periodically revised.  In addition to revised rules, new legislationcould be enacted that may affect the Company’s estimated constructionexpenditures.  See CONSTRUCTIONADDITIONS.  In the normal course ofbusiness, DP&L has ongoing programs and activities underway at thesefacilities to comply, or to determine compliance, with such existing, newand/or proposed regulations and legislation.

 

DP&L hasbeen identified, either by a government agency or by a private party seekingcontribution to site clean-up costs, as a potentially responsible party (PRP)at a number of sites pursuant to state and federal laws.  DP&L records liabilities for probableestimated loss in accordance with Statement of Financial Accounting StandardsNo. 5 (SFAS 5), “Accounting for 

 

9

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Contingencies.”  To the extent a probable loss can only beestimated by reference to a range of equally probable outcomes, and no amountwithin the range appears to be a better estimate than any other amount,DP&L accrues for the low end of the range. Because of uncertainties related to these matters, accruals are based onthe best information available at the time. DP&L evaluates the potential liability related to probable lossesquarterly and may revise its estimates. Such revisions in the estimates of the potential liabilities could havea material effect on the Company’s results of operations and financialposition.

 

**Air and Water Quality**

In November 1999, the United States Environmental Protection Agency(USEPA) filed civil complaints and Notices of Violations (NOVs) againstoperators and owners of certain generation facilities for alleged violations ofthe Clean Air Act (CAA).  Generationunits operated by CG&E (Beckjord 6) and Columbus Southern Power Company(CSP) (Conesville 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.  DP&L wasnot identified in the NOVs, civil complaints or state actions.  In December 2000, CG&E announced that ithad reached an Agreement in Principle with the USEPA and other plaintiffs in aneffort to settle the claims. As of December 31, 2004, discussions on the finalterms of the settlement continue and the outcome of these claims or the effect,if any, on DP&L has not been determined. In June 2000, the USEPA issued a NOV to DP&L-operated J.M. StuartStation (co-owned by DP&L, CG&E, and CSP) for alleged violations of theCAA.  The NOV contained allegationsconsistent with NOVs and complaints that the USEPA had recently brought againstnumerous other coal-fired utilities in the Midwest.  DP&L intends to vigorously challenge theNOV given the final routine maintenance repair and replacement rules discussedbelow.

 

On September 21, 2004, the Sierra Club filed a lawsuit against theCompany and the other owners of the Stuart Generating Station in the UnitedStates District Court for the Southern District of Ohio for alleged violationsof the CAA.  The Company intends tovigorously defend this matter.

 

On July 27, 2004, various residents of the Village of Moscow, Ohionotified CG&E, as the operator of Zimmer (co-owned by CG&E, DP&Land CSP), of their intent to sue for alleged violations of the CAA and airpollution nuisances.  On November 17,2004, a citizens’ suit was filed against CG&E (Freeman v. CG&E).  DP&L believes the allegations aremeritless and believes CG&E, on behalf of all co-owners, will vigorouslydefend the matter.

 

On November18, 2004, the State of New York and seven other states filed suit against theAmerican Electric Power Corporation (AEP) and various subsidiaries, allegingvarious CAA violations at a number of AEP electric generating facilities,including Conesville Unit 4 (co-owned by CG&E, DP&L and CSP).  DP&L believes the allegations are withoutmerit and that AEP, on behalf of all co-owners, will vigorously defend thematter.

 

On October 27, 2003, the USEPA published its finalrules regarding the equipment replacement provision of the routine maintenance,repair and replacement (RMRR) exclusion of the CAA.  Subsequently, on December 24, 2003, the U.S.Court of Appeals for the D.C. Circuit stayed the effective date of the rulepending its decision on the merits of the lawsuits filed by numerous states andenvironmental organizations challenging the final rules.  As a result of this ruling, it is expectedthat the Ohio Environmental Protection Agency (Ohio EPA) will delay itspreviously announced intent to adopt the RMRR rule.  At this time DP&L is unable to determinethe timing of this adoption.

 

In September1998, the USEPA issued a final rule requiring states to modify their StateImplementation Plans (SIPs) under the CAA. On July 18, 2002, the Ohio EPA adopted rules that constitute Ohio’s NOxSIP, which is substantially similar to the federal CAA Section 126 rulemakingand federal NOx SIP.  On August 5, 2003, theUSEPA published its conditional approval of Ohio’s NOx SIP, with an effectivedate of September 4, 2003.  Ohio’s SIPrequires NOx reductions at coal-fired generating units effective May 31,2004.  In order to meet these NOxrequirements, DP&L’s capital expenditures for the installation of selectivecatalytic reduction 

 

10

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(SCR)equipment totaled approximately $175 million.  On May 31, 2004, DP&L beganoperation of its SCRs.  DP&L’s NOxreduction strategy and associated expenditures to meet the federal reductionrequirements should satisfy the Ohio SIP NOx reduction requirements.

 

On December 17, 2003, the USEPA proposed theInterstate Air Quality Rule (IAQR) designed to reduce and permanently capsulfur dioxide (SO2) and nitrogen oxide emissions from electric utilities. The proposedIAQR focuses on states, including Ohio, whose power plant emissions arebelieved to be significantly contributing to fine particle and ozone pollutionin other downwind states in the eastern United States. On June 10, 2004,the USEPA issued a supplemental proposal to the IAQR, now renamed as the CleanAir Interstate Rule (CAIR). Until final rules are published, DP&L cannotdetermine the effect of the proposed rules on DP&L’s operations.

 

On January 30,2004, the USEPA published its proposal to restrict mercury and other air toxinsfrom coal-fired and oil-fired utility plants. DP&L is reviewing the various proposed options and the impact ofeach option.  Until final rules arepublished, DP&L cannot determine the effect of the proposed rules onDP&L’s operations.

 

Under theproposed cap and trade options for SO2 and NOx, as well as mercury,DP&L estimates it will spend more than $500 million from 2004 through2009 to install the necessary pollution controls.  Plant specific mercury controls may result inhigher costs.  Due to the uncertaintiesassociated with the proposed requirements, DP&L cannot project the finalcosts at this time.

 

On July 15,2003, the Ohio EPA submitted to the USEPA its recommendations for eight-hour ozonenonattainment boundaries for the metropolitan areas within Ohio.  On April 15, 2004, the USEPA issued itslist of ozone nonattainment designations. DP&L owns and/or operates a number of facilities in countiesdesignated as nonattainment with the ozone national ambient air qualitystandard.  DP&L does not know at thistime what future regulations may be imposed on its facilities and will closelymonitor the regulatory process. Following the final designation of the nonattainment areas, the Ohio EPAwill have three years to develop regulations to attain and maintain compliancewith the eight-hour ozone national ambient air quality standard.  The IAQR/CAIR addresses harmonization withthese issues.  It is expected that theOhio EPA will revise its SIP consistent with the IAQR/CAIR when these rules arefinalized.

 

On January 5,2005, the USEPA published its final nonattainment designations for the nationalambient air quality standard for Fine Particulate Matter 2.5 (PM 2.5)designations.  These designationsincluded counties and partial counties in which DP&L operates and/or ownsgenerating facilities.  On March 4, 2005,DP&L and other Ohio electric utilities and electric generators filed apetition for review in the D.C. Circuit Court of Appeals, challenging the finalrule creating these designations.  The OhioEPA will have three years to develop regulations to attain and maintaincompliance with the PM 2.5 national ambient air quality standard.  DP&L cannot determine the outcome of thepetition or the effect such Ohio EPA regulations will have on its operations.

 

In April 2002, the USEPAissued proposed rules governing existing facilities that have cooling waterintake structures.  Final rules werepublished in the Federal Register on July 9, 2004.  DP&L anticipates that future studies maybe needed at certain generating facilities. DP&L cannot predict the impact such studies may have on futureoperations.

 

On March 5,2004, the USEPA issued final national emissions standards for hazardous airpollutants for stationary combustion turbines. The effect of the final standards on DP&L’s operations is notexpected to be material.  On July 1,2004, the USEPA finalized, but has not yet published, rules that remove foursubcategories of new combustion turbines from regulation under the hazardousair pollutant regulations.

 

On April 14,2003, the USEPA issued proposed final rules for standards of performance forstationary gas turbines.  On May 23,2003, the USEPA withdrew the direct final rules.  The final rules were reissued on July 8, 2004and were determined to not have an impact on existing combustion turbinefacilities.

 

11

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On May 5,2004, the USEPA issued its proposed regional haze rule, which addresses how statesshould determine best available retrofit technology (BART) for sources coveredunder the regional haze rule.  Theproposal gives states three options for determining which sources should besubject to BART and provides guidelines for states on conducting the technicalanalysis of possible controls as BART. The proposal is being issued to respond to the D.C. Circuit’s remand ofthe regional haze rule in American Corn Growers Association v. USEPA,291 F.3d 1 (D.C. Cir. 2002), in which the court told the USEPA that the BARTdetermination has to include analysis of the degree of visibility improvementresulting from the use of control technology at each source subject to BART andthat the USEPA could not mandate that states follow a collective contributionapproach to determine whether sources in the state could reasonably beanticipated to contribute to visibility impairment in a Class I area.  DP&L is reviewing the proposed rule todetermine the impact on any of its facilities. The USEPA, in its June 10, 2004 supplemental CAIR, has proposedthat BART-eligible electric generating units (EGUs) may be exempted from BARTif the state complies with the CAIR requirements through the adoption of theCAIR Cap-and-trade program for SO2 and NOx emissions.  If Ohio adopts such a program, BART will notrequire any additional reductions.

 

On May 4,2004, the Ohio EPA issued a final National Pollutant Discharge EliminationSystem (NPDES) permit for J.M. Stuart Station that continues the station’s316(a) variance.  During the three-yearterm of the draft permit, DP&L will conduct a thermal discharge study toevaluate the technical feasibility and economic reasonableness of water coolingmethods other than cooling towers.

 

**Land Use**

DP&L andnumerous other parties have been notified by the USEPA or the Ohio EPA thatthey are Potentially Responsible Parties (PRPs) for clean-up at two superfundsites in Ohio:  the Tremont City Landfillin Springfield, Ohio and the South Dayton Dump landfill site in Dayton, Ohio.

 

DP&L andnumerous other parties received notification from the USEPA in January 2002that it considers them PRPs for the Tremont City Landfill site.  The information available to DP&L doesnot demonstrate that DP&L contributed any hazardous substances to thesite.  DP&L plans to vigorouslychallenge this action.

 

InSeptember 2002, DP&L and other parties received a special notice that theUSEPA considers them to be PRPs for the clean-up of hazardous substances at theSouth Dayton Dump landfill site.  Theinformation available to DP&L does not demonstrate that DP&Lcontributed hazardous substances to the site. The USEPA seeks recovery of past costs and funding for a RemedialInvestigation and Feasibility Study.  TheUSEPA has not provided an estimated clean-up cost for this site.  Should the USEPA pursue such action, DP&Lwill vigorously challenge it.

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**OPERATINGSTATISTICS**

**ELECTRIC OPERATIONS**

** **
| ** **                          | ** ** | **Years Ended December 31,** | ** **    |
|-------------------------------------|------------|------------------------------|---------------|
| ** **                          | ** ** | **2004**                     | ** **    | **2003** | ** ** | **2002** | ** ** |
| Electric Sales (millions of kWh)    |       |                         |          |   |   |   |   |
| Residential                         | ** ** | **5,140**                    |          | 5,071 |   | 5,302 |   |
| Commercial                          | ** ** | **3,777**                    |          | 3,699 |   | 3,710 |   |
| Industrial                          | ** ** | **4,393**                    |          | 4,330 |   | 4,472 |   |
| Other retail                        | ** ** | **1,407**                    |          | 1,409 |   | 1,405 |   |
| Total retail                        | ** ** | **14,717**                   |          | 14,509 |   | 14,889 |   |
| Wholesale                           | ** ** | **3,748**                    |          | 4,836 |   | 4,358 |   |
|                                |       |                         |          |   |   |   |   |
| Total                               | ** ** | **18,465**                   |          | 19,345 |   | 19,247 |   |
|                                |       |                         |          |   |   |   |   |
| Operating Revenues ($in thousands)  |       |                         |          |   |   |   |   |
| Residential                         | ** ** | **$**                        | **449,411**   |   | $ | 442,238 |   | $ | 463,197 |   |
| Commercial                          | ** ** | **239,952**                  |          | 243,474 |   | 259,496 |   |
| Industrial                          | ** ** | **128,059**                  |          | 160,801 |   | 204,627 |   |
| Other retail                        | ** ** | **111,076**                  |          | 94,697 |   | 95,463 |   |
| Total retail                        | ** ** | **928,498**                  |          | 941,210 |   | 1,022,783 |   |
| Wholesale                           | ** ** | **263,706**                  |          | 242,232 |   | 153,055 |   |
|                                |       |                         |          |   |   |   |   |
| Total                               | ** ** | **$**                        | **1,192,204** |   | $ | 1,183,442 |   | $ | 1,175,838 |   |
| ** **                          | ** ** | ** **                   | ** **    | ** ** | ** ** | ** ** | ** ** |
| Electric Customers at End of Period | ** ** | ** **                   | ** **    | ** ** | ** ** | ** ** | ** ** |
| Residential                         | ** ** | **453,653**                  |          | 450,958 |   | 449,153 |   |
| Commercial                          | ** ** | **48,172**                   |          | 47,253 |   | 47,400 |   |
| Industrial                          | ** ** | **1,851**                    |          | 1,863 |   | 1,905 |   |
| Other                               | ** ** | **6,337**                    |          | 6,322 |   | 6,304 |   |
|                                |       |                         |          |   |   |   |   |
| Total                               | ** ** | **510,013**                  |          | 506,396 |   | 504,762 |   |

 

 
| **Item 2 -  Properties** |
|--------------------------|

 

**Electric**

Information relating toDP&L’s electric properties is contained in Item 1 — CONSTRUCTION ADDITIONS,and ELECTRIC OPERATIONS AND FUEL SUPPLY, and Item 8 — Notes 9 and 10 of Notesto Consolidated Financial Statements.

 

Substantiallyall property and plant of the Company is subject to the lien of the Mortgagesecuring DP&L’s First Mortgage Bonds.

 

 
| **Item 3 -  Legal Proceedings** |
|---------------------------------|

 

In the normal course ofbusiness, DP&L is subject to various lawsuits, actions, proceedings, claimsand other matters asserted under laws and regulations.  The Company believes the amounts provided inits consolidated financial statements, as prescribed by generally acceptedaccounting procedures in the United States (GAAP), are adequate in light of theprobable and estimable contingencies. However, there can be no assurances that the actual amounts required tosatisfy alleged liabilities from various legal proceedings, claims, and othermatters discussed below, and to comply with applicable laws and regulations,will not exceed the amounts reflected in DP&L’s Consolidated FinancialStatements.  As such, costs, if any, thatmay be incurred in excess of those amounts provided as of December 31, 2004,cannot be reasonably determined.

 

On July 9, 2004, Mr.Forster and Ms. Muhlenkamp filed a lawsuit against the Company, DPL and MVE inthe Circuit Court, Fourth Judicial Circuit, in and for Duval County,Florida.  The complaint 

 

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asserts that theCompany, DPL and MVE (i) wrongfully terminated Mr. Forster and Ms. Muhlenkampby undermining their authority and responsibility to manage the companies andexcluding them from discussions on corporate financial issues and strategicplanning after the Thobe Memorandum was distributed and (ii) breached Mr.Forster’s consulting contract and Ms. Muhlenkamp’s employment agreement bydenying them compensation and benefits allegedly provided by the terms of suchcontract and agreement upon their termination from the Company and DPL.  Mr. Forster and Ms. Muhlenkamp seek damagesof an undetermined amount.  On August 9,2004, the defendants removed the case to the U.S. District Court for the MiddleDistrict of Florida, Jacksonville Division. On August 16, 2004, the defendants moved to dismiss the litigation basedon the Florida federal court’s lack of jurisdiction over the Company, DPL andMVE, all of whom are companies based in Dayton, Ohio.  In the alternative, the defendants requestedthat the court transfer the case to the U.S. District Court for the SouthernDistrict of Ohio, which has jurisdiction in Dayton, Ohio.  On September 17, 2004, Mr. Forster and Ms.Muhlenkamp filed memoranda opposing these motions.  On November 10, 2004, the U.S. District Courtfor the Middle District of Florida, Jacksonville Division granted defendants’motion to dismiss this case.

 

On August 24,2004, the Company, DPL and MVE filed a Complaint against Mr. Forster, Ms.Muhlenkamp and Mr. Koziar in the Court of Common Pleas of Montgomery County,Ohio asserting legal claims against them relating to the termination of theValley Partners Agreements, challenging the validity of the purportedamendments to the deferred compensation plans and to the employment andconsulting agreements with Messrs. Forster and Koziar and Ms. Muhlenkamp, andthe propriety of the distributions from the plans to Messrs. Forster and Koziarand Ms. Muhlenkamp, and alleging that Messrs. Forster and Koziar and Ms.Muhlenkamp breached their fiduciary duties and breached their consulting andemployment contracts.  The Company, DPL andMVE seek, among other things, damages in excess of $25 thousand, disgorgementof all amounts improperly withdrawn by Messrs. Forster and Koziar and Ms.Muhlenkamp from the deferred compensation plans and a court order declaringthat the Company, DPL and MVE have no further obligations under the consultingand employment contracts due to those breaches.

 

DefendantsForster, Koziar and Muhlenkamp filed motions to dismiss the Complaint andmotions to stay discovery.  The Companyand DPL have filed briefs opposing those motions.  In addition, pursuant to applicable statutes,regulations and agreements, the Company and DPL have been advancing certain ofDefendants’ attorneys’ fees and expenses with respect to various matters otherthan the litigation between Defendants and the Company and DPL in Florida andOhio, and believe that other requested advances are not required.  On February 7, 2005, Forster and Muhlenkampfiled a motion in the Company’s and DPL’s Ohio litigation seeking to compel theCompany and DPL to pay all attorneys’ fees and expenses that they have notadvanced to them.  The Company and DPLhave filed a brief opposing that motion. All of the foregoing motions are pending.

 

The Companyand DPL continue to evaluate all of these matters and are considering otherclaims against Defendants Forster, Koziar and/or Muhlenkamp that include, butare not limited to, breach of fiduciary duty or other claims relating topersonal and Company investments, the calculation of benefits under the SERPand financial reporting with respect to such benefits, and, with respect to Mr.Koziar, the fulfillment of duties owed to the Company and DPL as their legalcounsel.  Cumulatively through December31, 2004, the Company and DPL have accrued for accounting purposes, obligationsof approximately $40 million to reflect claims regarding deferred compensation,estimated MVE incentives and/or legal fees that Defendants assert are payableper contracts.  The Company and DPLdispute Defendants’ entitlement to any of those sums and, as noted above, arepursuing litigation against them contesting all such claims.  The Company and DPL cannot currently predictthe outcome of that litigation.

 

On or aboutJune 24, 2004, the SEC commenced a formal investigation into the issues raisedby the Thobe Memorandum.  The Company andDPL are cooperating with the investigation.

 

On April 7, 2004, the Companyreceived notice that the staff of the PUCO is conducting an investigation into itsfinancial condition as a result of the issues raised by the Thobe 

 

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Memorandum.  On May 27, 2004, the PUCO ordered DP&L tofile a plan of utility financial integrity that outlines the actions DPL hastaken or will take to insulate DP&L utility operations and customers fromits unregulated activities.  DPL wasrequired to file this plan by March 2, 2005. On February 4, 2005, DP&L filed its protection plan with the PUCOand will continue to cooperate to resolve any outstanding issues in thisinvestigation.

 

On May 28, 2004, the U.S.Attorney’s Office for the Southern District of Ohio, assisted by the FederalBureau of Investigation, notified the Company and DPL that it has initiated aninquiry involving the subject matters covered by the Company’s and DPL’s internalinvestigation.  The Company and DPL arecooperating with this investigation.

 

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

 

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

 

In June 2002, a contractor’semployee received a verdict against the Company for injuries he sustained whileworking at a DP&L power station.  TheCourt awarded the contractor’s employee compensatory damages of approximately$0.8 million and prejudgment interest of approximately $0.6 million.  On April 28, 2004, the appellate court upheldthis verdict except the award for prejudgment interest.  On September 1, 2004, the Ohio Supreme Courtrefused to hear the case, so the matter was remanded to the trial court for are-determination of whether prejudgment interest should be awarded.  The trial court heard this matter on October15, 2004.  On November 1, 2004, DP&Lpaid approximately $976 thousand to the contractor’s employee to satisfy thejudgment and post-judgment interest.  OnDecember 6, 2004, the trial court ruled that the prejudgment interest should bereduced to approximately $30 thousand. Both parties have appealed this decision. The appeal is pending.

 

Additional informationrelating to legal proceedings involving the Company is contained in Item 1 —COMPETITION AND REGULATION, ENVIRONMENTAL CONSIDERATIONS, and Item 8 — Note 12 of Notes toConsolidated Financial Statements.

 

 

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

 

There were no submissions to the security holders in the fourthquarter.

 

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**PART II**

 

**Item 5 -****Market for Registrant’sCommon Equity and Related Stockholder Matters**

 

TheCompany’s common stock is held solely by parent DPL and, as a result, is notlisted for trading on any stock exchange.

 

As long as any Preferred Stockis outstanding, DP&L’s Amended Articles of Incorporation contain provisionsrestricting the payment of cash dividends on any of its common stock if, aftergiving effect to such dividend, the aggregate of all such dividends distributedsubsequent to December 31, 1946 exceeds the net income of DP&L availablefor dividends on its Common Stock subsequent to December 31, 1946, plus $1.2million.  As of year-end, all earningsreinvested in the business of the Company were available for Common Stockdividends.

 

OnApril 30, 2004, the Company and DPL, announced that it suspended its quarterlydividend payments.  On December 1, 2004,the Company and DPL, resumed its regular quarterly dividends, includingpayments normally made in June and September.

 

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

 

Information regarding DP&L’s equity compensation plans as ofDecember 31, 2004, is disclosed in Item 12 — Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.

 

 

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

 

Selectedfinancial data is set forth in Item 8 — Selected Quarterly Information Financialand Statistical Summary.

 

 

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

 

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

 

Forward-lookingstatements speak only as of the date of the document in which they aremade.  The Company disclaims anyobligation or undertaking to provide any updates or revisions to any forward-lookingstatement to reflect any change in its expectations or any change in events,conditions or circumstances on which the forward-looking statement is based.(See FACTORS THAT MAY AFFECT FUTURE RESULTS.)

 

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**TRENDS, OVERVIEW AND FUTURE EXPECTATIONS**

 

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

 

As part of Ohio’s electricderegulation law, all of the state’s investor-owned utilities are required tojoin a RTO.  In October 2004, DP&Lsuccessfully integrated its 1,000 miles of high-voltage transmission into thePJM Interconnection, L.L.C. (PJM) RTO.

 

The role of the RTO is toadminister an electric marketplace and insure reliability.  PJM ensures the reliability of thehigh-voltage electric power system serving 44 million people in all or parts ofDelaware, Indiana, Illinois, Kentucky, Maryland, Michigan, New Jersey, Ohio,Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.PJM coordinates and directs the operation of the region’s transmission grid;administers a competitive wholesale electricity market, the world’s largest;and plans regional transmission expansion improvements to maintain gridreliability and relieve congestion.

 

In 2004, DP&L’s net incomedeclined $30.4 million compared to the prior year primarily driven by increasesin operating expenses.  Although totalrevenue of $1,192.2 million exceeded the prior year by $8.8 million reflectingincreased wholesale revenue, net electric margins declined in 2004 primarilyrelated to increased fuel and puchased power costs.  Operating expenses of $822.8 million in 2004exceeded the prior year by $34.2 million or 4% relating to higher fuel andpurchased power costs, corporate expenses, and electric production,transmission and distribution costs, partially offset by lower amortization ofregulatory assets.  DP&L reportedEarnings on Common Stock of $208.1 million in 2004 compared to $238.5 millionin 2003.  DP&L reported Earnings onCommon Stock of $244.7 million for 2002.

 

In September 2003, the PUCOissued an order extending DP&L’s market development period through December2005 and continues the Company’s current rate structure providing its retailcustomers with rate stability through 2008. DP&L believes its operations will remain strong and efficient, andexpects its existing liquidity and future cash flow from operations to fullyfund its dividend, capital expenditures and planned debt reductions in2005.  DP&L expects its 2005 coal andnet emission allowance costs to exceed its 2004 coal and net emission allowancecosts by approximately 10%.  The Companyanticipates revenue growth of approximately 3% in 2005.

 

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

 

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**RESULTS OF OPERATIONS**

 

**Income Statement Highlights**

** **
| **$ in millions**                                     | ** ** | **2004**  | ** **  | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------|------------|-----------|-------------|----------|------------|----------|------------|
|                                                       |       |      |        |     |       |     |       |
| Electric revenues                                          | ** ** | **$**     | **1,192.2** |     | $          | 1,183.4  |       | $ | 1,175.8 |   |
| Less: Fuel                                                 | ** ** | **257.0** |        | 226.2    |       | 208.6    |       |
| Purchased power                                            | ** ** | **116.4** |        | 92.7     |       | 106.9    |       |
| Net electric margins (a)                                   | ** ** | **$**     | **818.8**   |     | $          | 864.5    |       | $ | 860.3 |   |
|                                                       |       |      |        |     |       |     |       |
| Net electric margins as a percentage of  Electric revenues | ** ** | **68.7**  | **%**       | 73.1     | %          | 73.2     | %          |
|                                                       |       |      |        |     |       |     |       |
| Operating Income                                           | ** ** | **$**     | **369.4**   |     | $          | 394.8    |       | $ | 440.2 |   |

----

*(a)**               For purposes ofdiscussing operating results, DP&L presents and discusses net electric margins.  This format is useful to investors because itallows analysis and comparability of operating trends and includes the sameinformation that is used by management to make decisions regarding the Company’sfinancial performance.*

 

**Electric Revenues**

Electric revenues increased to $1,192.2million in 2004 compared to $1,183.4 million in 2003 reflecting higherwholesale revenues that increased $21.5 million or 9% in 2004 resulting fromhigher average market rates and additional ancillary revenues related to PJMthat did not exist in the prior year. The increase in wholesale revenues was largely offset by decreases inretail revenues of $12.7 million or 1% in 2004 that reflected lower averagerates, primarily driven from industrial customers buying generation fromalternative suppliers.  The decline inretail revenues was tempered by revenues from PJM services realized in 2004that did not exist during 2003.

 

2003 electric revenuesof $1,183.4 million increased from 2002 electric revenues of $1,175.8 millionreflecting higher wholesale revenues, which increased $89.2 million or 58% in2003 resulting from available generation and 15% higher average market pricesover the prior year.  This increase inwholesale revenues was partially offset by decreases in retail revenues of$81.6 million or 8% in 2003 primarily from mild summer weather.  Cooling degree-days were down 46% to 687 for2003 as compared to 1,272 in 2002.

 

## **ElectricMargins, Fuel and Purchased Power**

Net electric margins of $818.8million in 2004 decreased by $45.7 million from $864.5 million in 2003.  As a percentage of total electric revenues,net electric margins decreased by 4.4% to 68.7% in 2004 from 73.1% in2003.  This decline is primarily theresult of increased fuel and purchased power costs.  Fuel costs increased by $30.8 million or 14%in 2004 compared to 2003 primarily related to rising prices in the coal market.  Purchased power costs increased $23.7 millionor 26% in 2004 compared to 2003 primarily resulting from higher average marketprices.  In addition, DP&L incurredpurchased power charges in 2004 relating to PJM that did not exist in the prioryear.

 

Net electricmargins of $864.5 million in 2003 increased by $4.2 million from $860.3 millionin 2002.  As a percentage of totalelectric revenues, net electric margins slightly decreased by 0.1% to 73.1% in2003 from 73.2% in 2002.  This decline isprimarily the result of a lower volume of sales relating to retail customersand increased fuel and purchased power costs, partially offset by an increasein wholesale sales.  Fuel costs increasedby $17.6 million or 8% in 2003 compared to 2002 primarily related to increasedgeneration for wholesale sales, partially offset by lower average fuel costsrelating to wholesale sales.  Purchasedpower costs decreased by $14.2 million or 13% in 2003 compared to 2002,primarily resulting from lower volume of purchased power as the retail andwholesale capacity needs were met by internal generation.

 

18

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**Operation & Maintenance**

 
| **$ in millions**                                           | ** ** | **2004 vs. 2003**** change** | ** ** | **2003 vs. 2002**** change** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
|                                                             |       |                              |       |                              |       |
| Electric production,  transmission and distribution costs        | ** ** | **$**                             | **10.1**   |                              | $          | 9.0 |   |
| Pension and benefits (a)                                         | ** ** | **7.7**                           |       | 3.2                               |       |
| Sarbanes-Oxley compliance and  audit fees                        | ** ** | **6.4**                           |       | —                            |       |
| Directors’ and Officers’  liability insurance premiums | ** ** | **6.1**                           |       | 10.5                              |       |
| PJM administrative fees                                          | ** ** | **2.6**                           |       | —                            |       |
| Reduction in capitalized  insurance and claims costs             | ** ** | **2.4**                           |       | —                            |       |
| Staff and Executive incentives                                   | ** ** | **(3.2**                          | )          | 5.8                               |       |
| Executive and deferred  compensation                             | ** ** | **(10.6**                         | )          | 22.0                              |       |
| Other - net increase/decrease                                    | ** ** | **5.2**                           |       | (0.5                              | )          |
| Total O&M change                                             | ** ** | **$**                             | **26.7**   |                              | $          | 50.0 |   |

----

(a) Pension expense increased $6.3 million while postretirement benefitsdecreased $3.1 million in 2003 compared to 2002.

 

 

Operation andmaintenance expense increased $26.7 million or 14% in 2004 compared to prioryear primarily from higher corporate costs and increased electric productionexpenses.  Corporate costs were higher primarilyfrom $7.7 million in pension and benefits expenses, $6.1 million for Directors’and Officers’ liability insurance premiums, $3.6 million for Sarbanes-Oxley 404compliance, $2.8 million for audit fees, and a $2.4 million reduction incapitalized insurance and claims costs. Electric production expense increased $9.0 million primarily fromplanned maintenance during scheduled outages, ash disposal and othermaintenance charges.  PJM administrativefees of $2.6 million in 2004 for scheduling, system control, and dispatchservices, and higher transmission and distribution expenses of $1.1 millionprimarily related to line clearance also contributed to the increase in expense.  These increases were partially offset by a$10.6 million decrease in executive compensation and lower staff and executiveincentives of $3.2 million.

 

Operation andmaintenance expense increased $50.0 million or 34% in 2003 compared to 2002primarily as a result of higher corporate costs and increased electricproduction expenses.  Corporate costsincreased primarily resulting from $22 million increase in executivecompensation, $10.5 million increase for Directors & Officers liabilityinsurance premiums, $5.8 million increase in executive incentives and $6.3million increase in pension expense.** **Electric production expenseincreased $5.7 million primarily related to planned maintenance duringscheduled outages, ash disposal and the expensing of cost of removal forretired assets as required by FASB Statement of Financial Accounting StandardsNo. 143 “Accounting for Asset Retirement Obligation” (SFAS 143).  Transmission and distribution expensesincreased $3.3 million reflecting increased line clearance and maintenancecosts.  These increases were partiallyoffset by a $3.1 million decrease in postretirement benefits.

 

**Depreciationand Amortization**

Depreciationand amortization expense increased $5 million or 4% in 2004 compared to theprior year as a result of completed construction projects and additionalexpense from the installation of environmental compliance equipment in 2003.

 

Depreciation andamortization expense of $116.1 million in 2003 and $114.9 million in 2002reflected a relatively consistent plant base.

 

**Amortizationof Regulatory Assets**

Amortization ofregulatory assets expense of $0.7 million in 2004 declined $48.4 million or 99%compared to 2003.  This decreaseprimarily reflected the completion of the regulatory transition cost recoveryperiod on December 31, 2003, granted by the Public Utilities Commission of Ohiorelated to the state’s deregulation of electric generation.

 

19

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The $1.0 millionincrease in amortization of regulatory assets expense in 2003 compared to 2002reflected the completion of the regulatory transition cost recovery period onDecember 31, 2003.

 

**General Taxes**

General taxes decreased$3.6 million or 3% from prior year primarily from a 2003 excise tax of $5.4million related to the three-year regulatory transition period that ended in2003.

 

General taxesdeclined $2.6 million or 2% in 2003 compared to 2002 resulting from a lowerOhio kWh excise tax related to customer usage and reduced franchise tax.  This decrease was partially offset by higherproperty tax expense.

 

**InvestmentIncome (Loss)**

Investmentincome of $1 million in 2004 decreased $21.7 million or 96% compared to2003.  This decrease primarily reflectsthe $21.2 million of interest income realized from the settlement of interestrate hedges related to the $470 million First Mortgage Bond refinancing.  The settlement of these hedges also resultedin the $20.6 million increase in investment income in 2003 compared to 2002.

 

**OtherIncome (Deductions)**

OtherIncome (Deductions) decreased $4.2 million or 59% from 2003 primarily from bankand legal fees associated with DP&L’s revolving credit facilities andnon-operating income realized in 2003. In addition, $8.3 million of strategic planning consultant fees wereoffset by an $8.9 million gain on the sale of emission allowances.  In 2003, Other Income (Deductions) decreased$1.3 million to $7.1 million compared to $8.4 million in 2002.

 

## **InterestExpense**

Interest expense of $43.5million dropped $8.3 million or 16% compared to 2003 primarily related to therefinancing of debt in 2003 for which interest expense was lower by $11.7million, despite $2 million of additional interest incurred in 2004 relating tothe failure to file an exchange offer registration statement.  In addition, expense decreased $2 millionrelated to the completion of the amortization period for a loss incurred on anearlier debt refinancing.  Thesedecreases were partially offset by lower capitalized interest in 2004 forenvironmental compliance equipment installations that resulted in increasedinterest expense of $6.6 million.

 

Interestexpense decreased by $1.7 million in 2003 compared to 2002 as a result ofrefinancing First Mortgage Bonds at lower interest rates and lower interest onESOP debt relating to sinking fund payments.

## ** **

## **IncomeTax Expense**

Income tax expense decreased$29.6 million in 2004 compared to 2003 reflecting a 12% decrease in pre-taxincome as well as the recognition of $11.7 million for state tax creditsavailable related to the consumption of coal mined in Ohio.  The $1.2 million decrease in income taxexpense in 2003 compared to 2002 was reflective of lower pre-tax income.

 

## **CumulativeEffect of Accounting Change**

The cumulative effect of anaccounting change of $17 million in 2003 reflects the adoption of theprovisions of FASB Statement of Financial Accounting Standards No. 143, “Accountingfor Asset Retirement Obligations” (SFAS 143). (See Note 1 of Notes to Consolidated Financial Statements.)

 

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

DP&L’scash and temporary cash investments totaled $17.2 million at December 31, 2004and December 31, 2003.

 

The Companygenerated net cash from operating activities of $381.2 million, $363.6 million,and $360.8 million in 2004, 2003 and 2002, respectively.  Net cash provided by operating activities in 

 

20

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2004 wasprimarily driven by operating profitability and cash provided from workingcapital, specifically the timing of tax payments, offset by the rising cost ofcoal inventories.  The net cash fromoperating activities in 2003 was primarily the result of operatingprofitability offset by cash used for working capital, specifically the timingof tax payments.  Net cash provided byoperating activities in 2002 was primarily driven by operating profitabilityoffset by cash used for working capital. The tariff-based revenue of DP&L continues to be the principalsource of cash from operating activities. Management believes that the diversified retail customer mix ofresidential, commercial and industrial classes provides DP&L with areasonably predictable gross cash flow as well as other opportunities madeavailable with DP&L’s entrance into the PJM market on October 1, 2004.

 

Net cash flowsused for investing activities were $79.9 million, $65.1 million and $138.8million in 2004, 2003 and 2002, respectively. Net cash used for investing activities in 2004 reflected $82.2 millionfor capital expenditures partially offset by $2.3 million in cash realized fromthe sale of retired gas and steam property. The net cash used for investing activities in 2003 was primarily theresult of $116.5 million for capital expenditures, partially offset by thesettlement of the interest rate hedges. The net cash used in 2002 was the result of $138.8 million for capitalexpenditures.  DP&L’s capitalexpenditures have declined over the past three years with the completion ofmajor construction initiatives.

 

Net cash flowsused for financing activities were $301.3 million, $298.4 million and $205.8million in 2004, 2003 and 2002, respectively. Net cash used for financing activities in 2004 were for the payment ofcommon and preferred dividends and the retirement of long-term debt.  Net cash flows used for financing activitiesin 2003 primarily related to dividends paid on common stock and the retirementof long-term debt.  These uses werepartially offset by the net proceeds related to the issuance of long-termdebt.  Net cash used for financingactivities in 2002 primarily related to dividends paid on common stock.

 

The Company has obligations tomake future payments for capital, debt agreements, lease agreements, and otherlong-term purchase obligations; in addition, it has certain contingentcommitments such as guarantees.  TheCompany believes its cash flows from operations, the credit facilities(existing or future arrangements), and other short- and long-term debtfinancing will be sufficient to satisfy its future working capital, capitalexpenditures and other financing requirements for the foreseeable future.  DP&L’s ability to generate positive cashflows from operations is dependent on general economic conditions, competitivepressures, and other business and risk factors described in “Factors That MayAffect Future Results.”  If the Companyis unable to generate sufficient cash flows from operations, or otherwisecomply with the terms of its credit facilities, it may be required to refinanceall or a portion of its existing debt or seek additional financingalternatives.  A discussion of each of DP&L’scritical liquidity commitments is outlined below.

 

**Capital Requirements**

# Construction additionswere $93 million, $98 million and $129 million in 2004, 2003 and 2002,respectively, and are expected to approximate $173 million in 2005.

#  

# Planned constructionadditions for 2005 relate to DP&L’s environmental compliance program, powerplant equipment, and its transmission and distribution system.  During the last three years, capitalexpenditures have been utilized to meet the Company’s state and federalstandards for Nitrogen Oxide (NOx) emissions from power plants and to makepower plant improvements.

 

Capitalprojects are subject to continuing review and are revised in light of changesin financial and economic conditions, load forecasts, legislative andregulatory developments and changing environmental standards, among otherfactors.  Over the next four years,DP&L is projecting to spend an estimated $850 million in capital projects,approximately 60% of which is to meet changing environmental standards.  The Company’s ability to complete its capitalprojects and the reliability of future service will be affected by itsfinancial condition, the availability of internal and 

 

21

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externalfunds at reasonable cost, and adequate and timely return on these capitalinvestments.  DP&L expects to financeits construction additions in 2005 with internally-generated funds.

 

**Debt and Debt Covenants**

At December 31, 2004, the Company’sscheduled maturities of long-term debt, including capital lease obligations,over the next five years are $1.5 million in 2005, $1.3 million in 2006, $9.5million in 2007, $0.7 million in 2008, and $0.7 million in 2009. Substantiallyall property of DP&L is subject to the mortgage lien securing the firstmortgage bonds. Debt maturities in 2005 are expected to be financed withinternal funds. Certain debt agreements contain reporting and financialcovenants for which the Company is in compliance as of December 31, 2004 andexpects to be in compliance during the near term.

 

On September 29, 2003,DP&L issued $470 million principal amount of First Mortgage Bonds, 5.125%Series due 2013.  The net proceeds fromthe sale of the bonds, after expenses, were used on October 30, 2003, to (i)redeem $226 million principal amount of DP&L’s First Mortgage Bonds, 8.15%Series due 2026, at a redemption price of 104.075% of the principal amount plusaccrued interest to the redemption date and (ii) redeem $220 million principalamount of DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at a redemptionprice of 103.765% of the principal amount plus accrued interest to theredemption date.  The 5.125% Series due2013 were not registered under the Securities Act of 1933, but were offered andsold through a private placement in compliance with Rule 144A under theSecurities Act of 1933.  The bondsinclude step-up interest provisions requiring the Company to pay additionalinterest if (i) DP&L’s registration statement was not declared effective bythe SEC within 180 days from the issuance of the new bonds or (ii) the exchangeoffer was not completed within 210 days from the issuance of the newbonds.  The registration statement wasnot declared effective and the exchange offer was not timely completed and, asa result, the Company is required to pay additional interest of 0.50% until aregistration statement is declared effective at which point the additionalinterest shall be reduced by 0.25%.  Theremaining additional interest of 0.25% will continue until the exchange offeris completed.  The exchange offerregistration for these securities is expected to be filed during the firstquarter of 2005.

 

Issuance ofadditional amounts of first mortgage bonds by DP&L is limited by theprovisions of its mortgage; however, management believes that DP&L continuesto have sufficient capacity to issue first mortgage bonds to satisfy itsrequirements in connection with its current refinancing and constructionprograms.  The amounts and timing offuture financings will depend upon market and other conditions, rate increases,levels of sales and construction plans.

 

The Company had $150 million availablethrough an unsecured revolving credit agreement with a consortium ofbanks.  The agreement which was scheduledto expire on December 10, 2004, was terminated on June 1, 2004.  The facility was to be used to support theCompany’s business requirements.  Thefacility contained two financial covenants, including maximum debt to totalcapitalization and minimum earnings before interest and tax to interestcoverage.  Fees associated with thiscredit facility were approximately $0.8 million per year, but a two-stepincrease in DP&L’s credit rating would have reduced the facility’s interestrate by 0.38%.  A lower credit ratingwould not have increased the applicable interest rate.  The Company had no outstanding borrowingsunder this credit facility at year-end 2004 or 2003.

 

In June 2004, the Companyobtained a $100 million unsecured revolving credit agreement that extended andreplaced its revolving credit agreement of $150 million.  The new agreement, which expires on May 31,2005, provides credit support for DP&L’s business requirements during thisperiod and may be increased up to $150 million. The facility contains two financial covenants including maximum debt tototal capitalization, and minimum earnings before interest and taxes (EBIT) tototal interest expense.  These covenantsare currently met.  The Company had nooutstanding borrowings under this credit facility at year-end 2004.  Fees associated with this credit facility areapproximately $0.6 million per year. Changes in debt ratings, however, may affect the applicable interestrate for the Company’s revolving credit agreement.  A one-step increase in DP&L’s creditrating reduces the facility’s interest rate by 0.25% and a one-step decrease incredit rating increases the facility’s interest rate by 0.25%.

 

22

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In February2004, the Company entered into a $20 million Master Letter of CreditAgreement with a financial lending institution. This agreement supports performance assurance needs in the ordinarycourse of business.  DP&L has certaincontractual agreements for the sale and purchase of power, fuel and relatedenergy services that contain credit rating related clauses allowing the counterparties to seek additional surety under certain conditions.  As of December 31, 2004, the Company hadnine outstanding letters of credit for a total of $8.6 million.  On February 24, 2005, DP&L entered intoan amendment to extend the term of this Agreement for one year and reduce themaximum dollar volume of letters of credit to $10 million.

 

There are nointer-company debt collateralizations or debt guarantees between DP&L andits parent.  None of the debt obligationsof DP&L are guaranteed or secured by affiliates and nocross-collateralization exists.

 

**CreditRatings**

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

 
| ** **                        | ** ** | **Rating** | ** ** | ** **                         | **Outlook** | ** **     | ** ** | **Effective** |
|-----------------------------------|------------|------------|------------|------------------------------------|-------------|----------------|------------|---------------|
| Fitch  Ratings                    |       | BBB        |       | Rating watch  positive             |        | February  2005 |
|                              |       |       |       |                               |        |           |
| Moody’s  Investors Service   |       | Baa2       |       | Under review  for possible upgrade |        | February  2005 |
|                              |       |       |       |                               |        |           |
| Standard  & Poor’s Corp. |       | BBB-       |       | Rating watch  positive             |        | February  2005 |

 

As reflectedabove, DP&L’s secured debt credit ratings are investment grade.

 

**Off-Balance Sheet Arrangements**

DP&L does not have any off-balance sheetarrangements that have or are reasonably likely to have a current or futureeffect on DP&L’s financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources that ismaterial to investors.

 

**Long-termObligations and Commercial Commitments**

DP&L enters into variouscontractual and other long-term obligations that may affect the liquidity ofits operations.  At December 31, 2004,these include:

 
| ** **                                      | ** ** | **Payment Year** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| **Long-term Obligations  ($ in millions)** | ** ** | **2005**         | ** ** | **2006 & 2007** | ** ** | **2008 & 2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-term debt                                  |       | $                | 0.4        |   | $ | 9.0 |   | $ | — |   | $ | 673.8 |   | $ | 683.2 |   |
| Interest payments                               |       | 37.7             |       | 74.9 |   | 74.0 |   | 336.4 |   | 523.0 |   |
| Pension and Postretirement payments             |       | 23.2             |       | 45.9 |   | 46.3 |   | 117.9 |   | 233.3 |   |
| Capital leases                                  |       | 1.1              |       | 1.8 |   | 1.4 |   | 0.6 |   | 4.9 |   |
| Operating leases                                |       | 0.6              |       | 0.6 |   | — |   | — |   | 1.2 |   |
| Coal contracts (a)                              |       | 232.1            |       | 397.4 |   | 83.7 |   | 85.7 |   | 798.9 |   |
| Other long-term obligations                     |       | 8.4              |       | 8.7 |   | 0.5 |   | — |   | 17.6 |   |
| Total long-term obligations                     |       | $                | 303.5      |   | $ | 538.3 |   | $ | 205.9 |   | $ | 1,214.4 |   | $ | 2,262.1 |   |

----

*(a)  DP&L-operated units.*

 

Long-term debt:

Long-term debt as of December 31, 2004, consists of first mortgagebonds and guaranteed air quality development obligations and includes currentmaturities and unamortized debt discount. (See Note 7 of Notes to Consolidated Financial Statements.)

 

 

Interest payments:

Interest payments associated with the Long-term debt described above.

 

23

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Pension and Postretirement payments:

As of December 31, 2004, DP&L had estimated future benefit paymentsas outlined in Note 5 of Notes to Consolidated Financial Statements.  These estimated future benefit payments areprojected through 2014.

 

Capital leases:

As of December 31, 2004, the Company had two capital leases that expirein November 2007 and September 2010.

 

Operating leases:

As of December 31, 2004, the Company had several operating leases withvarious terms and expiration dates.

 

Coal contracts:

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

 

Other long-term obligations:

As of December 31, 2004, the Company had various other long-termobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

DP&L enters into variouscommercial commitments, which may affect the liquidity of its operations.  At December 31, 2004, these include:

 
| ** **                                           | ** ** | **Year of Expiration** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| **Commercial Commitments**

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

 

Credit facilities:

DP&L had $150 million available through an unsecured revolvingcredit agreement with a consortium of banks that was scheduled to expire onDecember 10, 2004.  In June 2004, theCompany replaced this facility with a $100 million, 364 day unsecured creditfacility that expires on May 31, 2005. At December 31, 2004, there were no borrowings outstanding under thiscredit agreement.  The new facility maybe increased up to $150 million.

 

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electricgeneration company.  As of December 31,2004, DP&L could be responsible for the repayment of 4.9%, or $14.9million, of a $305 million debt obligation and also 4.9%, or $2.9 million, of aseparate $60 million debt obligation. Both obligations mature in 2006.

 

 

**MARKETRISK**

 

As a result of itsoperating, investing and financing activities, DP&L is subject to certainmarket risks, including changes in commodity prices for electricity, coal,environmental emissions and gas; and fluctuations in interest rates.  Commodity pricing exposure include theimpacts of weather, market demand, increased competition and other economic conditions.  For purposes of potential risk analysis,DP&L uses sensitivity analysis to quantify potential impacts of market ratechanges on the results of operations. The sensitivity analysis represents hypothetical changes in marketvalues that may or may not occur in the future.

 

**Commodity Pricing Risk**

Approximately22 percent of DP&L’s 2004 electric revenues were from sales of excessenergy and capacity in the wholesale market. Energy and capacity in excess of the needs of existing retail customersis sold in the wholesale market when DP&L can identify opportunities withpositive margins.  As of December 31,2004, a hypothetical increase or decrease of 10%

 

24

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in annualwholesale revenues would result in a $16.7 million increase or decrease toearnings on common stock, assuming no increase in costs.

 

Fuel(including emission allowances) and purchased power costs as a percent of totaloperating costs in 2004 and 2003 were 45% and 40%, respectively.  Currently, DP&L has contracted for 97% ofits projected coal requirements for 2005 with any incremental purchases made inthe spot market.  The prices to be paidby the Company under its long-term coal contracts are either fixed or subjectto periodic adjustment.  Each contracthas features that will limit price escalations in any given year.  DP&L has also covered all of itsestimated 2005 emission allowance requirements. The Company expects its 2005 coal and net emission allowance costs toexceed its 2004 coal and net emission allowance costs by approximately10%.  Purchased power costs depend, inpart, upon the timing and extent of planned and unplanned outages of itsgenerating capacity.  DP&L willpurchase power on a discretionary basis when wholesale market conditionsprovide opportunities to obtain power at a cost below the Company’s internalproduction costs.  As of December 31,2004, a hypothetical increase or decrease of 10% in annual fuel and purchasedpower costs would result in a $23.7 million increase or decrease to earnings oncommon stock.

 

**Interest Rate Risk**

As a result of DP&L’s normal borrowing and leasing activities, theCompany’s results are exposed to fluctuations in interest rates, which theCompany manages through its regular financing activities.  DP&L maintains a limited amount of cashon deposit or investments in cash equivalents that may be affected by adverseinterest rate fluctuations.  The Company’slong-term debt represents  publicly heldsecured and unsecured instruments with both fixed and variable interestrates.  At December 31, 2004, DP&Lhad no short-term borrowings.

 

The carrying value of the Company’s debt was$688.1 million at December 31, 2004, consisting of first mortgage bonds,guaranteed air quality development obligations and capital leases.  The fair value of this debt was $681.9million, based on current market prices or discounted cash flows using currentrates for similar issues with similar terms and remaining maturities.  The principal cash repayments and relatedweighted average interest rates by maturity date for long-term, fixed-rate debtat December 31, 2004, are as follows:

 

 
| ** **            | ** ** | **Long-term Debt**       | ** **  |
|-----------------------|------------|--------------------------|-------------|
| **Expected Maturity** | ** ** | **Amount**               | ** **  | ** ** | ** ** |
| **Date**              | ** ** | **($ in millions)** | ** **  | **Average Rate** | ** ** |
|                  |       |                     |        |   |   |
| 2005                  |       | $                        |  1.5   |   | 4.4% |   |
| 2006                  |       | 1.3                      |        | 4.6% |   |
| 2007                  |       | 9.5                      |        | 6.1% |   |
| 2008                  |       | 0.7                      |        | 3.9% |   |
| 2009                  |       | 0.7                      |        | 3.9% |   |
| Thereafter            |       | 674.4                    |        | 5.5% |   |
| Total                 |       | $                        |  688.1 |   | 5.8% |   |
|                  |       |                     |        |   |   |
| Fair Value            |       | $                        |  681.9 |   |   |   |

 

At December 31, 2004, DP&L had no short-term debt outstanding.  Debt maturities in 2005 are expected to befinanced with internal funds.

 

25

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**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

This annual report and otherdocuments that DP&L files with the Securities and Exchange Commission (SEC)and other regulatory agencies, as well as other oral or written statements theCompany may make from time to time, contain information based on management’sbeliefs and include forward-looking statements (within the meaning of thePrivate Securities Litigation Reform Act of 1995) that involve a number ofknown and unknown risks, uncertainties and assumptions.  These forward-looking statements are notguarantees of future performance and there are a number of factors including,but not limited to, those listed below, which could cause actual outcomes andresults to differ materially from the results contemplated by suchforward-looking statements.  DP&Ldoes not undertake any obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, future eventsor otherwise.  These forward-lookingstatements are identified by terms and phrases such as “anticipate”, “believe”,“intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”,“predict”, “will”, and similar expressions.

 

**Regulation/Competition**

DP&L operates in a rapidlychanging industry with evolving industry standards and regulations.  In recent years a number of federal and statedevelopments aimed at promoting competition triggered industry restructuring.  Regulatory factors, such as changes in thepolicies or procedures that set rates; changes in tax laws, tax rates, andenvironmental laws and regulations; changes in the Company’s ability to recoverexpenditures for environmental compliance, fuel and purchased power costs andinvestments made under traditional regulation through rates; and changes to thefrequency and timing of rate increases, can affect the Company’s results ofoperations and financial condition. Additionally, financial or regulatory accounting principles or policiesimposed by governing bodies can increase DP&L’s operational and monitoringcosts affecting its results of operations and financial condition.

 

Changes in DP&L’s customerbase, including municipal customer aggregation, could lead to the entrance ofcompetitors in the Company’s marketplace affecting its results of operationsand financial condition.

 

**Economic Conditions**

Economic pressures, as well aschanging market conditions and other factors related to physical energy andfinancial trading activities, which include price, credit, liquidity,volatility, capacity, transmission, and interest rates, can have a significanteffect on DP&L’s operations and the operations of its retail, industrialand commercial customers.

 

**Reliance on Third Parties**

DP&L relies on manysuppliers for the purchase and delivery of inventory and components to operateits energy production, transmission and distribution functions.  Unanticipated changes in DP&L’s purchasingprocesses may affect the Company’s business and operating results.  In addition, the Company relies on others toprovide professional services, such as, but not limited to, actuarialcalculations, internal audit services, payroll processing and various consultingservices.

 

**Operating Results Fluctuations**

Future operating results couldbe affected and are subject to fluctuations based on a variety of factors,including but not limited to:  unusualweather conditions; catastrophic weather-related damage; unscheduled generationoutages; unusual maintenance or repairs; changes in coal costs, gas supplycosts, or availability constraints; environmental compliance, including costsof compliance with existing and future environmental requirements; and electrictransmission system constraints.

 

26

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A majority of DP&L’s employees are under a collective bargainingagreement expiring in 2005.  If theCompany is unable to negotiate this or future collective bargaining agreements,the Company could experience work stoppages, which may affect its business andoperating results.

 

**Regulatory Uncertainties and Litigation**

In the normal course ofbusiness, the Company is subject to various lawsuits, actions, proceedings,claims and other matters asserted under laws and regulations.  Additionally, the Company is subject todiverse and complex laws and regulations, including those relating to corporategovernance, public disclosure and reporting, and taxation, which are rapidlychanging and subject to additional changes in the future.  As further described in Item 3 — LegalProceedings, the Company is also currently involved in various litigation inwhich the outcome is uncertain. Compliance with these rapid changes may substantially increase costs toDP&L’s organization and could affect its future operating results.

 

**InternalControls**

DP&L’s internal controls, accounting policies and practices, andinternal information systems enable the Company to capture and processtransactions in a timely and accurate manner in compliance with accountingprinciples generally accepted in the United States of America, laws andregulations, taxation requirements, and federal securities laws andregulations. DP&L implemented corporate governance, internal control andaccounting rules issued in connection with the Sarbanes-Oxley Act of 2002.  The Company’s internal controls and policiesare being closely monitored by management, as well as the Board of Directors,as DP&L implements the procedures necessary under Section 404 of theAct.  While DP&L believes thesecontrols, policies, practices and systems are adequate to ensure 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 couldimpact the Company’s financial condition or results of operations.

 

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

DP&L’sconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (GAAP).  In connection with the preparation of thesefinancial statements, the Company’s management is required to make assumptions,estimates and judgments that affect the reported amounts of assets, liabilities,revenues, expenses and the related disclosure of contingent liabilities.  These assumptions, estimates and judgmentsare based on management’s historical experience and assumptions that arebelieved to be reasonable at the time. However, because future events and their effects cannot be determinedwith certainty, the determination of estimates requires the exercise ofjudgment.  DP&L’s critical accountingestimates are those which require assumptions to be made about matters that arehighly uncertain.

 

Differentestimates could have a material effect on its financial results.  Judgments and uncertainties affecting theapplication of these policies and estimates may result in materially differentamounts being reported under different conditions or circumstances.  Significant items subject to such judgmentsinclude the carrying value of property, plant and equipment; the valuation ofderivative instruments; the valuation of financial assets; the valuation of insuranceand claims costs; valuation allowances for receivables and deferred incometaxes; the valuation of reserves related to current litigation; and assets andliabilities related to employee benefits.

 

**Long-LivedAssets:**  Inaccordance with FASB Statement of Financial Accounting Standards No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets” (SFAS 144), 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.  DP&L determines the fair value of theseassets based upon estimates of future cash flows, market value of similarassets, if available, or independent appraisals, if required.  In analyzing the fair value andrecoverability using future cash flows, the Company makes projections based ona number of 

 

27

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assumptions and estimates ofgrowth rates, future economic conditions, assignment of discount rates andestimates of terminal values.  Animpairment loss is recognized if the carrying amount of the long-lived asset isnot recoverable from its undiscounted cash flows.  The measurement of impairment loss is the differencebetween the carrying amount and fair value of the asset.  Long-lived assets to be disposed of and/orheld for sale are reported at the lower of carrying amount or fair value lesscost to sell.  The Company determines thefair value of these assets in the same manner as described for assets held andused.

 

**IncomeTaxes:**  DP&Lapplies the provisions of FASB Statement of Financial Accounting Standards No.109, “Accounting for Income Taxes” (SFAS 109). SFAS 109 requires an asset and liability approach for financialaccounting and reporting of income taxes, with tax effects of differences,based on currently enacted income tax rates between the financial reporting andtax basis of accounting, reported as Deferred Taxes in the Consolidated BalanceSheet.  Deferred Tax Assets arerecognized for deductible temporary differences.  Valuation reserves are provided unless it ismore likely than not that the asset will be realized.

 

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

 

DPL files a consolidated U.S.federal income tax return in conjunction with its subsidiaries.  The consolidated tax liability is allocatedto each subsidiary as specified in the DPL tax allocation agreement whichprovides a consistent, systematic and rational approach. (See Note 4 of Notesto Consolidated Financial Statements.)

 

**Depreciationand Amortization:** Depreciation expense is calculated using the straight-line method, whichdepreciates the cost of property over its estimated useful life.  For generation, transmission and distributionassets, straight-line depreciation is applied on an average annual compositebasis using group rates that approximated 3.3% in 2004 and 2003, and 3.2% for2002.

 

**RegulatoryAssets and Liabilities:**  DP&L applies the provisions of FASBStatement of Financial Accounting Standards No. 71, “Accounting for the Effectsof Certain Types of Regulation” (SFAS 71).  Application of SFAS 71 depends on the Company’sability to collect cost based rates from customers.  The recognition of regulatory assets requiresa continued assessment of the recovery of the costs based on actions of theregulators.  The Company capitalizesincurred costs as deferred regulatory assets when there is a probableexpectation that the costs incurred will be recovered in future revenues as aresult of the regulatory process. Regulatory liabilities represent current recovery of expected futurecosts.  When applicable, the Companyapplies judgment in the use of these principles and the estimates are based onexpected usage by a customer class over the designated recovery period.  See Note 3 of Notes to Consolidated FinancialStatements for further disclosure of regulatory amounts.

 

**AssetRetirement Obligations: **Inaccordance with FASB Statement of Financial Accounting Standards No.143, “Accountingfor Asset Retirement Obligations” (SFAS 143), legal obligations associated withthe retirement of long-lived assets are required to be recognized at their fairvalue at the time those obligations are incurred.  Upon initial recognition of a legalliability, costs are capitalized as part of the related long-lived asset andallocated to expense over the useful life of the asset.  SFAS 143 also requires that components ofpreviously recorded depreciation related to the cost of removal of assets uponretirement, whether legal asset retirement obligations or not, must be removedfrom a company’s accumulated depreciation reserve.  DP&L makes assumptions, estimates andjudgments that affect the reported amounts of assets, liabilities and expensesas they relate to asset retirement obligations. These assumptions and estimates are based on historical experience andassumptions that are believed to be reasonable at the time.

 

**UnbilledRevenues:**  TheCompany records revenue for retail and other energy sales under the accrualmethod.  For retail customers, revenuesare recognized when the services are provided on the basis of periodic cyclemeter readings and include an estimated accrual for the value of electricityprovided from the meter reading date to the end of the reporting period.  These 

 

28

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estimates are based on thevolume of energy delivered, historical usage and growth by customer class, andthe effect of weather variations on usage patterns.

 

**FinancialInstruments: **DP&Lapplies the provisions of FASB Statement of Financial Accounting Standards No.115, “Accounting for Certain Investments in Debt and Equity Securities”**(SFAS 115), for its investments in debt and equityfinancial instruments of publicly traded entities and classifies the securitiesinto different categories: held-to-maturity and available-for-sale. Available-for-sale securities are carried at fair value and unrealizedgains and losses on those securities, net of deferred income taxes, arepresented as a separate component of shareholders’ equity.  Other than temporary declines in value arerecognized currently in earnings. Financial instruments classified as held-to-maturity are carried atamortized cost.  The valuation of publicequity security investments is based upon market quotations.  The cost basis for public equity security andfixed maturity investments is average cost and amortized cost, respectively.

 

**Insurance and Claims Costs:**  A wholly-owned captive insurance subsidiaryof DPL provides insurance coverage solely to DP&L and itssubsidiaries.  Liabilities on theConsolidated Balance Sheet include insurance reserves which are based onactuarial methods and loss experience data. Such reserves are actuarially determined, in the aggregate, based on areasonable estimation of probable insured events occurring.  There is uncertainty associated with the lossestimates and actual results could differ from the estimates.  Modification of these loss estimates based onexperience and changed circumstances are reflected in the period in which theestimate is re-evaluated.

 

**Pension and PostretirementBenefits:**  DP&L accountsfor its pension and postretirement benefit obligations in accordance with theprovisions of FASB Statement of Financial Accounting Standards No. 87, “Employers’Accounting for Pensions” and No. 106 “Employers’ Accounting for PostretirementBenefits Other than Pensions.”  Thesestandards require the use of assumptions, such as the long-term rate of returnon assets, in determining the obligations, annual cost, and fundingrequirements of the plans.  The Companydiscloses its pension and postretirement benefit plans as prescribed byStatement of Financial Accounting Standards No. 132, “Employers’ Disclosuresabout Pensions and Other Postretirement Benefits, an amendment of FASBStatements No. 87, 88, and 106.”

 

In 2005, the Companymaintained its long-term rate of return assumptions of 8.50% for pensions and6.75% for other postretirement benefits assets that reflect the effect ofrecent trends on its long-term view. However, in 2005, DP&L lowered its assumed discount rate forpensions and postretirement benefits expense by 50 basis points to 5.75% toreflect current interest rate conditions. Changes in the discount rate and other components used in thedetermination of pension and postretirement benefits costs will result in anoverall increase of approximately $2 million in such costs in 2005 compared to2004.

 

In future periods,differences in the actual return on pension plan assets and assumed return orchanges in the discount rate will affect the timing of contributions to thepension plan, if any, and the determination of whether or not a minimumliability should be recorded.  TheCompany provides postretirement healthcare benefits to employees who retiredprior to 1987.  A one percentage pointchange in the assumed healthcare trend rate would affect postretirement benefitcosts by approximately $0.1 million.

 

**Contingencies:**  The Company records liabilities for probableestimated loss in accordance with FASB Statement of Financial AccountingStandards No. 5, “Accounting for Contingencies” (SFAS 5). To the extent aprobable loss can only be estimated by reference to a range of equally probableoutcomes, and no amount within the range appears to be a better estimate thanany other amount, DP&L accrues for the low end of the range.  Because of uncertainties related to thesematters, accruals are based on the best information available at the time.  The Company evaluates the potential liabilityrelated to probable losses quarterly and may revise its estimates.

 

29

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Suchrevisions in the estimates of the potential liabilities could have a materialeffect on the Company’s results of operations and financial position.

 

**RecentlyIssued Accounting Pronouncements**

A discussion of recentlyissued accounting pronouncements is described in Note 1 of Notes toConsolidated Financial Statements and such discussion is incorporated byreference in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations and made a part hereof.

 

## **LEGAL AND OTHER MATTERS**

A discussion of LEGALAND OTHER MATTERS is described in Note 12 of Notes to Consolidated FinancialStatements and in Item 3 - LEGAL PROCEEDINGS. Such discussions are incorporated by reference in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations andmade a part hereof.

 

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

### * *

### *The information required by this item of Form 10-K is setforth in the MARKET RISK section under Item 7 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations.*

 

30

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| **Item 8 — Financial Statements and Supplementary Data** |
|---------------------------------------------------------------|

 

**THEDAYTON POWER AND LIGHT COMPANY**

** **

**ConsolidatedStatement of Results of Operations**

 
| ** **                                                                 | ** ** | **For the years ended December 31,** | ** **  |
|----------------------------------------------------------------------------|------------|--------------------------------------|-------------|
| **$ in millions**                                                     | ** ** | **2004**                             | ** **  | **2003** | ** ** | **2002** | ** ** |
|                                                                       |       |                                 |        |   |   |   |   |
| **Revenues**                                                               |       |                                 |        |   |   |   |   |
| Electric                                                                   | ** ** | **$**                                | **1,192.2** |   | $ | 1,183.4 |   | $ | 1,175.8 |   |
|                                                                       |       |                                 |        |   |   |   |   |
| **Operating Expenses**                                                     |       |                                 |        |   |   |   |   |
| Fuel                                                                       | ** ** | **257.0**                            |        | 226.2 |   | 208.6 |   |
| Purchased power                                                            | ** ** | **116.4**                            |        | 92.7 |   | 106.9 |   |
| Operation and maintenance                                                  | ** ** | **224.4**                            |        | 197.7 |   | 147.7 |   |
| Depreciation and amortization                                              | ** ** | **121.1**                            |        | 116.1 |   | 114.9 |   |
| Amortization of regulatory assets, net  (Note 3)                           | ** ** | **0.7**                              |        | 49.1 |   | 48.1 |   |
| General taxes                                                              | ** ** | **103.2**                            |        | 106.8 |   | 109.4 |   |
| Total operating expenses                                                   | ** ** | **822.8**                            |        | 788.6 |   | 735.6 |   |
|                                                                       |       |                                 |        |   |   |   |   |
| **Operating Income**                                                       | ** ** | **369.4**                            |        | 394.8 |   | 440.2 |   |
|                                                                       |       |                                 |        |   |   |   |   |
| Investment income (Note 1)                                                 | ** ** | **1.0**                              |        | 22.7 |   | 2.1 |   |
| Other income (deductions)                                                  | ** ** | **2.9**                              |        | 7.1 |   | 8.4 |   |
| Interest expense                                                           | ** ** | **(43.5**                            | )           | (51.8 | ) | (53.5 | ) |
|                                                                       |       |                                 |        |   |   |   |   |
| **Income Before Income Taxes and Cumulative  Effect of Accounting Change** | ** ** | **329.8**                            |        | 372.8 |   | 397.2 |   |
|                                                                       |       |                                 |        |   |   |   |   |
| Income tax expense                                                         | ** ** | **120.8**                            |        | 150.4 |   | 151.6 |   |
|                                                                       |       |                                 |        |   |   |   |   |
| **Income Before Cumulative Effect of  Accounting Change**                  | ** ** | **209.0**                            |        | 222.4 |   | 245.6 |   |
|                                                                       |       |                                 |        |   |   |   |   |
| Cumulative effect of accounting change, net  of tax (Note 1)               | ** ** | **—**                           |        | 17.0 |   | — |   |
|                                                                       |       |                                 |        |   |   |   |   |
| **Net Income**                                                             | ** ** | **209.0**                            |        | 239.4 |   | 245.6 |   |
|                                                                       |       |                                 |        |   |   |   |   |
| Preferred dividends                                                        | ** ** | **0.9**                              |        | 0.9 |   | 0.9 |   |
|                                                                       |       |                                 |        |   |   |   |   |
| **Earnings on Common Stock**                                               | ** ** | **$**                                | **208.1**   |   | $ | 238.5 |   | $ | 244.7 |   |

 

*See Notesto Consolidated Financial Statements.*

** **

**31**

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** **

**THEDAYTON POWER AND LIGHT COMPANY**

 

**Consolidated Statement of CashFlows**

 
| ** **                                               | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|
| **$ in millions**                                   | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                     |       |                                 |       |   |   |   |   |
| **Operating**  **Activities**                       |       |                                 |       |   |   |   |   |
| Net income                                               | ** ** | **$**                                | **209.0**  |   | $ | 239.4 |   | $ | 245.6 |   |
| Adjustments:                                             |       |                                 |       |   |   |   |   |
| Depreciation and amortization                            | ** ** | **121.1**                            |       | 116.1 |   | 114.9 |   |
| Amortization of regulatory assets, net                   | ** ** | **0.7**                              |       | 49.1 |   | 48.1 |   |
| Deferred income taxes                                    | ** ** | **(16.2**                            | )          | (13.5 | ) | (13.4 | ) |
| Income from interest rate hedges (Note 1)                |       | —                               |       | (21.2 | ) | — |   |
| Gain on sale of property                                 | ** ** | **(1.8**                             | )          | — |   | — |   |
| Cumulative effect of accounting change, net  of tax      |       | —                               |       | (17.0 | ) | — |   |
| Changes in working capital:                              |       |                                 |       |   |   |   |   |
| Accounts receivable                                      | ** ** | **6.6**                              |       | (1.0 | ) | (3.1 | ) |
| Accounts payable                                         | ** ** | **11.5**                             |       | 7.3 |   | (10.9 | ) |
| Net intercompany receivables from parent                 | ** ** | **(0.2**                             | )          | 0.4 |   | (7.5 | ) |
| Accrued taxes payable                                    | ** ** | **58.4**                             |       | (30.6 | ) | (5.3 | ) |
| Accrued interest payable                                 | ** ** | **0.5**                              |       | (8.8 | ) | — |   |
| Prepayments                                              | ** ** | **0.6**                              |       | (8.2 | ) | (4.6 | ) |
| Inventories                                              | ** ** | **(20.2**                            | )          | 4.5 |   | 7.2 |   |
| Deferred compensation assets                             | ** ** | **8.8**                              |       | 50.4 |   | (0.3 | ) |
| Deferred compensation obligations                        | ** ** | **5.2**                              |       | (46.8 | ) | (7.0 | ) |
| Other                                                    | ** ** | **(2.8**                             | )          | 43.5 |   | (2.9 | ) |
| Net cash provided by operating activities                | ** ** | **381.2**                            |       | 363.6 |   | 360.8 |   |
|                                                     |       |                                 |       |   |   |   |   |
| **Investing Activities**                                 |       |                                 |       |   |   |   |   |
| Capital expenditures                                     | ** ** | **(82.2**                            | )          | (116.5 | ) | (138.8 | ) |
| Settlement of interest rate hedges (Note 1)              | ** ** | **—**                           |       | 51.4 |   | — |   |
| Proceeds from sale of property                           | ** ** | **2.3**                              |       | — |   | — |   |
| Net cash used for investing activities                   | ** ** | **(79.9**                            | )          | (65.1 | ) | (138.8 | ) |
|                                                     |       |                                 |       |   |   |   |   |
| **Financing Activities**                                 |       |                                 |       |   |   |   |   |
| Dividends paid on common stock                           | ** ** | **(300.0**                           | )          | (298.7 | ) | (204.5 | ) |
| Issuance of long-term debt, net of issue  costs (Note 7) |       | —                               |       | 465.1 |   | — |   |
| Retirement of long-term debt (Note 7)                    | ** ** | **(0.4**                             | )          | (463.9 | ) | (0.4 | ) |
| Dividends paid on preferred stock                        | ** ** | **(0.9**                             | )          | (0.9 | ) | (0.9 | ) |
| Net cash used for financing activities                   | ** ** | **(301.3**                           | )          | (298.4 | ) | (205.8 | ) |
|                                                     |       |                                 |       |   |   |   |   |
| **Cash and Cash Equivalents:**                           |       |                                 |       |   |   |   |   |
| Net change                                               | ** ** | **—**                           |       | 0.1 |   | 16.2 |   |
| Balance at beginning of year                             | ** ** | **17.2**                             |       | 17.1 |   | 0.9 |   |
| Balance at end of year                                   | ** ** | **$**                                | **17.2**   |   | $ | 17.2 |   | $ | 17.1 |   |
|                                                     |       |                                 |       |   |   |   |   |
| **Cash Paid During the Year For:**                       |       |                                 |       |   |   |   |   |
| Interest                                                 | ** ** | **$**                                | **39.5**   |   | $ | 56.2 |   | $ | 49.4 |   |
| Income taxes                                             | ** ** | **$**                                | **79.9**   |   | $ | 200.1 |   | $ | 180.2 |   |

 

*See Notesto Consolidated Financial Statements.*

** **

**32**

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** **

**THEDAYTON POWER AND LIGHT COMPANY**

 

**Consolidated Balance Sheet**

 
| ** **                                                                                     | ** ** | **At December 31,** | ** **  |
|------------------------------------------------------------------------------------------------|------------|---------------------|-------------|
| **$ in  millions**                                                                        | ** ** | **2004**            | ** **  | **2003** | ** ** |
|                                                                                           |       |                |        |   |   |
| ***Assets***                                                                                   |       |                |        |   |   |
|                                                                                           |       |                |        |   |   |
| **Property**                                                                                   |       |                |        |   |   |
| Property, plant and equipment                                                                  | ** ** | **$**               | **3,944.6** |   | $ | 3,875.4 |   |
| Less: Accumulated depreciation and  amortization                                               | ** ** | **(1,864.4**        | )           | (1,769.1 | ) |
| Net property                                                                                   | ** ** | **2,080.2**         |        | 2,106.3 |   |
|                                                                                           |       |                |        |   |   |
| **Current Assets**                                                                             |       |                |        |   |   |
| Cash and cash equivalents (Note 1)                                                             | ** ** | **17.2**            |        | 17.2 |   |
| Accounts receivable, less provision for  uncollectible accounts of $1.1 and $3.6, respectively | ** ** | **153.8**           |        | 160.4 |   |
| Inventories, at average cost (Note 2)                                                          | ** ** | **69.8**            |        | 49.6 |   |
| Prepaid taxes                                                                                  | ** ** | **46.4**            |        | 46.4 |   |
| Other (Note 2)                                                                                 | ** ** | **24.8**            |        | 24.4 |   |
| Total current assets                                                                           | ** ** | **312.0**           |        | 298.0 |   |
|                                                                                           |       |                |        |   |   |
| **Other Assets**                                                                               |       |                |        |   |   |
| Income taxes recoverable through future  revenues                                              | ** ** | **32.5**            |        | 43.3 |   |
| Other regulatory assets                                                                        | ** ** | **41.5**            |        | 36.1 |   |
| Other (Note 2)                                                                                 | ** ** | **175.2**           |        | 176.4 |   |
| Total other assets                                                                             | ** ** | **249.2**           |        | 255.8 |   |
|                                                                                           |       |                |        |   |   |
| **Total Assets**                                                                               | ** ** | **$**               | **2,641.4** |   | $ | 2,660.1 |   |

 

*See Notesto Consolidated Financial Statements.*

 

33

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**THEDAYTON POWER AND LIGHT COMPANY**

 

**Consolidated Balance Sheet**

(continued)

 

 
| ** **                               | ** ** | **At December 31,** | ** **  |
|------------------------------------------|------------|---------------------|-------------|
| **$ in millions**                   | ** ** | **2004**            | ** **  | **2003** | ** ** |
|                                     |       |                |        |   |   |
| ***Capitalization and Liabilities***     |       |                |        |   |   |
|                                     |       |                |        |   |   |
| **Capitalization**                       |       |                |        |   |   |
| Common shareholder’s equity         |       |                |        |   |   |
| Common stock                             | ** ** | **$**               | **0.4**     |   | $ | 0.4 |   |
| Other paid-in capital                    | ** ** | **782.9**           |        | 780.5 |   |
| Accumulated other comprehensive income   | ** ** | **43.1**            |        | 38.2 |   |
| Earnings reinvested in the business      | ** ** | **229.7**           |        | 321.7 |   |
| Total common shareholders’ equity   | ** ** | **1,056.1**         |        | 1,140.8 |   |
|                                     |       |                |        |   |   |
| Preferred stock (Note 6)                 | ** ** | **22.9**            |        | 22.9 |   |
|                                     |       |                |        |   |   |
| Long-term debt (Note 7)                  | ** ** | **686.6**           |        | 687.3 |   |
| Total capitalization                     | ** ** | **1,765.6**         |        | 1,851.0 |   |
| ** **                               | ** ** | ** **          | ** **  | ** ** | ** ** |
| **Current Liabilities**                  | ** ** | ** **          | ** **  | ** ** | ** ** |
| Accounts payable                         | ** ** | **107.8**           |        | 88.9 |   |
| Accrued taxes                            | ** ** | **124.8**           |        | 66.4 |   |
| Accrued interest                         | ** ** | **10.7**            |        | 10.2 |   |
| Other (Note 2)                           | ** ** | **22.1**            |        | 24.6 |   |
| Total current liabilities                | ** ** | **265.4**           |        | 190.1 |   |
| ** **                               | ** ** | ** **          | ** **  | ** ** | ** ** |
| **Deferred Credits and Other**           | ** ** | ** **          | ** **  | ** ** | ** ** |
| Deferred taxes                           | ** ** | **365.8**           |        | 381.7 |   |
| Unamortized investment tax credit        | ** ** | **49.3**            |        | 52.2 |   |
| Other (Note 2)                           | ** ** | **195.3**           |        | 185.1 |   |
| Total deferred credits and other         | ** ** | **610.4**           |        | 619.0 |   |
|                                     |       |                |        |   |   |
| **Contingencies (Note 12)**              |       |                |        |   |   |
|                                     |       |                |        |   |   |
| **Total Capitalization and Liabilities** | ** ** | **$**               | **2,641.4** |   | $ | 2,660.1 |   |

 

*See Notesto Consolidated Financial Statements.*

** **

**34**

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** **

**THEDAYTON POWER AND LIGHT COMPANY**

 

**Consolidated Statement of Shareholders’ Equity**

 
| ** **                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | **Accumulated**   | ** ** | **Earnings** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|--------------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                                        | ** ** | **Common  Stock (a)** | ** ** | ** ** | ** ** | **Other**          | ** ** | **Reinvested**    | ** ** | ** **   | ** ** |
| ** **                                                                                                        | ** ** | **Outstanding**       | ** ** | ** ** | ** ** | **Other  Paid-In** | ** ** | **Comprehensive** | ** ** | **In the**   | ** ** | ** ** | ** ** |
| **$ in  millions**                                                                                           | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Capital**        | ** ** | **Income**        | ** ** | **Business** | ** ** | **Total**  | ** ** |
|                                                                                                              |       |                  |       |       |       |               |       |              |       |         |       |       |       |
| 2002 Beginning  balance                                                                                           |       | 41,172,173            |       | $          | 0.4        |               | $          | 820.4             |       | $            | 13.4       |       | $          | 341.8 |   | $ | 1,176.0 |   |
|                                                                                                              |       |                  |       |       |       |               |       |              |       |         |       |       |       |
| 2002 :                                                                                                            |       |                  |       |       |       |               |       |              |       |         |       |       |       |
| Net income                                                                                                        |       |                  |       |       |       |               |       |              |       | 245.6        |       |       |       |
| Net change in unrealized gains (losses) on financial  instruments, net of reclassification  adjustments |       |                  |       |       |       |               |       | (25.1             | )          |         |       |       |       |
| Minimum pension liability                                                                                         |       |                  |       |       |       |               |       | (0.2              | )          |         |       |       |       |
| Deferred income taxes related to unrealized gains  (losses)                                                  |       |                  |       |       |       |               |       | 11.0              |       |         |       |       |       |
| Total  comprehensive income                                                                                       |       |                  |       |       |       |               |       |              |       |         |       | 231.3      |       |
| Common stock  dividend                                                                                            |       |                  |       |       |       |               |       |              |       | (204.5       | )          | (204.5     | )          |
| Preferred stock  dividend                                                                                         |       |                  |       |       |       |               |       |              |       | (0.9         | )          | (0.9       | )          |
| Parent company  capital contribution                                                                              |       |                  |       |       |       |               |       |              |       |         |       | —     |       |
| Employee /  Director stock plans                                                                                  |       |                  |       |       |       | (40.3              | )          |              |       |         |       | (40.3      | )          |
| Other                                                                                                             |       |                  |       |       |       |               |       | 0.1               |       | (0.1         | )          | —     |       |
| ** **                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| Ending balance                                                                                                    |       | 41,172,173            |       | $          | 0.4        |               | $          | 780.1             |       | $            | (0.8       | )          | $          | 381.9 |   | $ | 1,161.6 |   |
| ** **                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| 2003:                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net income                                                                                                        |       |                  |       |       |       |               |       |              |       | 239.4        |       |       |       |
| Net change in unrealized gains (losses) on financial  instruments, net of reclassification  adjustments |       |                  |       |       |       |               |       | 17.0              |       |         |       |       |       |
| Net change in deferred gains on cash flow hedges                                                             |       |                  |       |       |       |               |       | 29.5              |       |         |       |       |       |
| Minimum pension liability                                                                                         |       |                  |       |       |       |               |       | (0.2              | )          |         |       |       |       |
| Deferred income taxes related to unrealized gains  (losses)                                                  |       |                  |       |       |       |               |       | (7.3              | )          |         |       |       |       |
| Total  comprehensive income                                                                                       |       |                  |       |       |       |               |       |              |       |         |       | 278.4      |       |
| Common stock  dividend                                                                                            |       |                  |       |       |       |               |       |              |       | (298.7       | )          | (298.7     | )          |
| Preferred stock  dividend                                                                                         |       |                  |       |       |       |               |       |              |       | (0.9         | )          | (0.9       | )          |
| Parent company  capital contribution                                                                              |       |                  |       |       |       |               |       |              |       |         |       | —     |       |
| Employee /  Director stock plans                                                                                  |       |                  |       |       |       | 0.3                |       |              |       |         |       | 0.3        |       |
| Other                                                                                                             |       |                  |       |       |       | 0.1                |       | —            |       | —       |       | 0.1        |       |
|                                                                                                              |       |                  |       |       |       |               |       |              |       |         |       |       |       |
| Ending balance                                                                                                    |       | 41,172,173            |       | $          | 0.4        |               | $          | 780.5             |       | $            | 38.2       |       | $          | 321.7 |   | $ | 1,140.8 |   |
| ** **                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| **2004:**                                                                                                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net income                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | **209.0**    | ** ** | ** ** | ** ** |
| Net change in unrealized gains (losses) on financial  instruments, net of reclassification  adjustments | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | **12.6**          | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net change in deferred gains on cash flow hedges                                                             | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | **(1.5**          | **)**      | ** **   | ** ** | ** ** | ** ** |
| Minimum pension liability                                                                                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | **(0.4**          | **)**      | ** **   | ** ** | ** ** | ** ** |
| Deferred income taxes related to unrealized gains  (losses)                                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | **(5.8**          | **)**      | ** **   | ** ** | ** ** | ** ** |
| Total  comprehensive income                                                                                       | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | **213.9**  | ** ** |
| Common stock  dividend                                                                                            | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | **(300.0**   | **)**      | **(300.0** | **)**      |
| Preferred stock  dividend                                                                                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | **(0.9**     | **)**      | **(0.9**   | **)**      |
| Parent company  capital contribution                                                                              | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | **—** | ** ** |
| Employee / Director  stock plans                                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** | **2.3**            | ** ** | ** **        | ** ** | ** **   | ** ** | **2.3**    | ** ** |
| Other                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** | **0.1**            | ** ** | **—**        | ** ** | **(0.1**     | **)**      | **—** | ** ** |
| ** **                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| Ending balance                                                                                                    | ** ** | **41,172,173**        | ** ** | **$**      | **0.4**    | ** **         | **$**      | **782.9**         | ** ** | **$**        | **43.1**   | ** ** | **$**      | **229.7** | ** ** | **$** | **1,056.1** | ** ** |

----

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

 

*See Notes to Consolidated Financial Statements.*

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**Notes to ConsolidatedFinancial Statements**

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

 

**Descriptionof Business**

The DaytonPower and Light Company (DP&L or the Company) is a wholly-owned subsidiaryof DPL Inc. (DPL).  DP&L is a publicutility incorporated in 1911 under the laws of Ohio.  DP&L sells electricity to residential,commercial, industrial and governmental customers in a 6,000 square mile areaof West Central Ohio.  Electricity forDP&L’s 24-county service area is primarily generated at eight coal-firedpower plants and is distributed to more than 500,000 retail customers.  The Company also purchases retail peak loadrequirements from DPL Energy, LLC (DPLE), a wholly-owned subsidiary ofDPL.  Principal industries served includeautomotive, food processing, paper, plastic manufacturing and defense.  The Company’s sales reflect the generaleconomic conditions and seasonal weather patterns of the area.  In addition, DP&L sells any excess energyand capacity into the wholesale market.

 

**Basis ofConsolidation**

DP&L prepares its consolidated financial statements in accordancewith accounting principles generally accepted in the United States of America(GAAP).  The consolidated financialstatements include the accounts of the Company and its majority-ownedsubsidiaries.  Investments that are notmajority owned are accounted for using the equity method when DP&L’sinvestment allows it the ability to exert significant influence, as defined byGAAP.  Undivided interests injointly-owned generation facilities are consolidated on a pro rata basis.  All material intercompany accounts andtransactions are eliminated in consolidation.

 

**Estimates,Judgments and Reclassifications**

The preparation of financial statements in conformity with GAAPrequires management to make estimates and judgments that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements and the revenues andexpenses of the period reported.   Significant items subject to such estimatesand judgments include the carrying value of property, plant and equipment; thevaluation of derivative instruments; the valuation of financial assets; thevaluation of insurance and claims costs; valuation allowance for receivablesand deferred income taxes; and assets and liabilities related to employeebenefits.  Actual results may differ fromthose estimates.  Certain amounts fromprior periods have been reclassified to conform to the current reportingpresentation.

 

## **Revenuesand Fuel**

DP&Lrecords revenue for services provided but not yet billed to more closely matchrevenues with expenses.  AccountsReceivable on the Consolidated Balance Sheet include unbilled revenue of $60.5million and $60.0 million in 2004 and 2003, respectively.  Also included in revenues are amounts chargedto customers through a surcharge for recovery of uncollected amounts fromcertain eligible low-income households. These charges were $8.3 million for 2004, $6.3 million for 2003, and$11.7 million in 2002.

 

**Allowance for Uncollectible Accounts**

DP&Lestablishes provisions for uncollectible accounts using both historical averagecredit loss percentages of accounts receivable balances to project futurelosses and specific provisions for known credit issues.

 

**Property, Plant and Equipment**

DP&Lrecords its ownership share of its undivided interest in jointly-held plants asan asset in property, plant and equipment. Property, plant and equipment is stated at cost.  For regulated plant, cost includes directlabor and material, allocable overhead costs and an allowance for funds usedduring construction (AFUDC).  AFUDCrepresents the cost of borrowed funds and equity 

 

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used tofinance regulated construction projects. Capitalization of AFUDC ceases at either project completion or the datespecified by regulators.  AFUDCcapitalized for borrowed funds was zero in 2004, $0.1 million in 2003, and $0.1million in 2002.  AFUDC capitalized forequity funds was $0.5 million in 2004, $0.6 million in 2003, and $0.4 millionin 2002.

 

Forunregulated plant, cost includes direct labor and material, allocable overheadcosts and interest capitalized during construction.  Capitalized interest was $1.8 million in2004, $8.3 million in 2003 and $12.7 million in 2002.

 

Forsubstantially all depreciable property, when a unit of property is retired, theoriginal cost of that property less any salvage value is charged to AccumulatedDepreciation and Amortization.

 

Property isevaluated for impairment when events or changes in circumstances indicate thatits carrying amount may not be recoverable.

 

## **Depreciation**

Depreciationexpense is calculated using the straight-line method, which depreciates thecost of property over its estimated useful life.  For generation, transmission and distributionassets, straight-line depreciation is applied on an average annual compositebasis using group rates that approximated 3.3% for 2004, 3.3% for 2003 and 3.2%for 2002.  Depreciation expense was$121.1 million in 2004, $116.1 million in 2003, and $114.9 million in 2002.

 

The followingis a summary of property, plant and equipment with corresponding compositedepreciation rates at December 31, 2004 and 2003:

 
| **$ in millions**              | ** ** | **2004**  | ** **  | **Composite Rate** | ** ** | **2003**   | ** ** | **Composite Rate** | ** ** |
|-------------------------------------|------------|-----------|-------------|--------------------|------------|------------|------------|--------------------|------------|
| Regulated:                          |       |      |        |               | ** ** |       |       |               |       |
| Transmission                        | ** ** | **$**     | **337.8**   | ** **         | **2.6%**   | ** ** | $          | 335.2              |       | 2.5% |   |
| Distribution                        | ** ** | **929.6** | ** **  | **3.6%**           | ** ** | 889.1      |       | 3.7%               |       |
| General                             | ** ** | **58.9**  | ** **  | **8.7%**           | ** ** | 53.7       |       | 8.0%               |       |
| Non-depreciable                     | ** ** | **54.4**  | ** **  | **0.0%**           | ** ** | 54.4       |       | 0.0%               |       |
| Total regulated                     | ** ** | **$**     | **1,380.7** |               |       | ** ** | $          | 1,332.4            |       |   |   |
|                                |       |      |        |               | ** ** |       |       |               |       |
| Unregulated:                        |       |      |        |               | ** ** |       |       |               |       |
| Production                          | ** ** | **$**     | **2,476.8** | ** **         | **3.1%**   | ** ** | $          | 2,330.6            |       | 3.1% |   |
| Non-depreciable                     | ** ** | **15.1**  | ** **  | **0.0%**           | ** ** | 15.5       |       | 0.0%               |       |
| Total unregulated                   | ** ** | **$**     | **2,491.9** |               |       | ** ** | $          | 2,346.1            |       |   |   |
|                                |       |      |        |               | ** ** |       |       |               |       |
| Total property in service           | ** ** | **$**     | **3,872.6** | ** **         | **3.3%**   | ** ** | $          | 3,678.5            |       | 3.3% |   |
| Construction work in progress       | ** ** | **72.0**  | ** **  | **0.0%**           | ** ** | 196.9      |       | 0.0%               |       |
|                                |       |      |        |               | ** ** |       |       |               |       |
| Total property, plant and equipment | ** ** | **$**     | **3,944.6** |               |       | ** ** | $          | 3,875.4            |       |   |   |

 

## ** **

## **AssetRetirement Obligations**

DP&Ladopted the provisions of the Financial Accounting Standards Board (FASB)Statement of Financial Accounting Standards No. 143, “Accounting for AssetRetirement Obligations” (SFAS 143) during 2003. SFAS 143 requires legal obligations associated with the retirement oflong-lived assets to be recognized at their fair value at the time thoseobligations are incurred.  Upon initialrecognition of a legal liability, costs are capitalized as part of the relatedlong-lived asset and allocated to expense over the useful life of theasset.  SFAS 143 also requires thatcomponents of previously recorded depreciation related to the cost of removalof assets upon retirement, whether legal asset retirement obligations or not,must be removed from a company’s accumulated depreciation reserve.  DP&L’s legal obligations associated withthe retirement of its long-lived assets consist primarily of river intake anddischarge structures, coal unloading facilities, loading docks, ice breakersand ash disposal facilities.  Applicationof SFAS 143 in 2003 resulted in an increase in net property, plant andequipment of $0.8 million, the recognition of an asset retirement obligation of$4.6 million and reduced DP&L’s accumulated depreciation reserve by 

 

37

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$32.1 milliondue to cost of removal related to the non-regulated generation assets to otherdeferred credits.  Beginning in January2003, depreciation rates were reduced to reflect the discontinuation of thecost of removal accrual for applicable non-regulated generation assets.  In addition, costs for the removal of retiredassets are charged to operation and maintenance when incurred.  Since the generation assets are not subjectto Ohio regulation, DP&L recorded the net effect of adopting this standardin its Consolidated Statement of Results of Operations.  The total cumulative effect of the adoptionof SFAS 143 increased net income and shareholders’ equity by $28.3 millionbefore tax in 2003.

 

DP&Lcontinues to record cost of removal for its regulated transmission anddistribution assets through its depreciation rates and recovers those amountsin rates charged to its customers.  Thereare no known legal asset retirement obligations associated with theseassets.  The Company has recorded $77.5million and $72.0 million in estimated costs of removal atDecember 31, 2004 and 2003, respectively, as regulatory liabilities forits transmission and distribution property. (See Note 3 of Notes to ConsolidatedFinancial Statements.)

 

**Regulatory Accounting**

DP&Lapplies the provisions of FASB Statement of Financial Accounting Standards No.71, “Accounting for the Effects of Certain Types of Regulation”**(SFAS 71).  Inaccordance with SFAS 71, regulatory assets and liabilities are recorded in theConsolidated Balance Sheet.  Regulatoryassets are the deferral of costs expected to be recovered in future customerrates and regulatory liabilities represent current recovery of expected futurecosts.

 

If DP&L wasrequired to terminate application of SFAS 71 for all of its regulatedoperations, the Company would have to record the amounts of all regulatoryassets and liabilities in the Consolidated Statement of Results of Operationsat that time.  (See Note 3 of Notes toConsolidated Financial Statements.)

 

**Inventory**

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

 

## **Repairsand Maintenance**

Costs associatedwith all planned work and maintenance activities, primarily power plantoutages, are recognized at the time the work is performed.  These costs, which include labor, materialsand supplies, and outside services required to maintain equipment and facilities,are either capitalized or expensed based on defined units of property asrequired by the Federal Energy Regulatory Commission (FERC).

## ** **

## **Stock-BasedCompensation**

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

 
| ** **                                                                                            | ** ** | **Years Ended December 31,** | ** **      |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------|-----------------|
| **$ in millions**                                                                                | ** ** | **2004**                     | ** **      | **2003** | ** ** | **2002** | ** ** |
| Earnings on common stock, as reported                                                                 | ** ** | **$**                        | ** 208.1** |   | $ |  238.5 |   | $ |  244.7 |   |
| Add: Total stock-based compensation expense  determined under APB 25, net of related tax effects      | ** ** | **—**                   |            | — |   | 0.7 |   |
| Deduct: Total stock-based compensation  expense determined under SFAS 123, net of related tax effects | ** ** | **(3.0**                     | )               | (2.7 | ) | (2.5 | ) |
| Pro-forma earnings on common stock                                                                    | ** ** | **$**                        | ** 205.1** |   | $ |  235.8 |   | $ |  242.9 |   |

 

38

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**Income Taxes**

DP&L applies the provisionsof FASB Statement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes” (SFAS 109).  SFAS 109requires an asset and liability approach for financial accounting and reportingof income taxes with tax effects of differences, based on currently enactedincome tax rates between the financial reporting and tax basis of accounting,reported as Deferred Taxes in the Consolidated Balance Sheet.  Deferred Tax Assets are recognized fordeductible temporary differences. Valuation reserves are provided unless it is more likely than not thatthe asset will be realized.

 

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

 

DPL files aconsolidated U.S. federal income tax return in conjunction with itssubsidiaries, including the Company.  Theconsolidated tax liability is allocated to DPL, DP&L and other subsidiariesas specified in the DPL tax allocation agreement which provides a consistent,systematic and rational approach.  (SeeNote 4 of Notes to Consolidated Financial Statements.)

 

## **Cashand Cash Equivalents**

## **Cashand cash equivalents are stated at cost, which approximates fair value.  All highly liquid short-term investments withoriginal maturities of three months or less are considered cashequivalents.  Cash and cash equivalentswere $17.2 million at December 31, 2004 and 2003.**

 

**Insuranceand Claims Costs**

A wholly-ownedcaptive subsidiary of DPL provides insurance coverage solely to DP&L and itssubsidiaries.  Premiums for coverage aredetermined by a third-party actuary and charged to expense by the insured overthe terms of the policies.  Liabilitieson the Consolidated Balance Sheet include insurance reserves, which are basedon actuarial methods and loss experience data. Such reserves are actuarially determined, in the aggregate, based on areasonable estimation of probable insured events occurring.  There is uncertainty associated with the lossestimates, and actual results may differ from the estimates.  Modification of these loss estimates based onexperience and changed circumstances are reflected in the period in which theestimate is re-evaluated.

 

During the three-yearregulatory transition period ending December 31, 2003, business interruptionpolicy payments from the captive subsidiary to DP&L occurred and werereflected in income.  In June 2003, theultimate value of the business interruption risk coverage was settled betweenthe captive insurance subsidiary and DP&L. During the third quarter of 2003, the captive subsidiary settled thereceivable recognized by DP&L for insurance claims under this policy.

 

### ***Financial Derivatives***

DP&L follows FASBStatement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activity” (SFAS 133), as amended.  SFAS 133 requires that all derivatives berecognized as either assets or liabilities in the Consolidated Balance Sheetand be measured at fair value and that changes in the fair value be recorded inearnings, unless they are designated as a cash flow hedge of a forecastedtransaction.

 

The Companyalso follows FASB Statement of Financial Accounting Standards No. 149, “Amendmentof Statement 133 on Derivative Instruments and Hedging Activities” (SFAS149).  SFAS 149 amends and clarifiesfinancial accounting and reporting for derivative instruments, including thoseembedded in other contracts, and for hedging activities and is effective for 

 

39

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contractsentered into or modified after June 30, 2003. This standard did not have a material effect on the Company.

 

DP&L usesforward contracts and options to reduce the Company’s exposure to changes inenergy and commodity prices and as a hedge against the risk of changes in cashflows associated with expected electricity purchases.  These purchases are required to meet fullload requirements during times of peak demand or during planned and unplannedgeneration facility outages.  The Companyalso holds forward sales contracts that hedge against the risk of changes incash flows associated with power sales during periods of projected generationfacility availability.  The FASBconcluded that electric utilities could apply the normal purchases and salesexception for option-type contracts and forward contracts in electricitysubject to specific criteria for the power buyers and sellers under capacitycontracts.  Accordingly, DP&L appliesthe normal purchases and sales exception as defined in SFAS 133 and accountsfor these contracts upon settlement.

 

In May 2003,DP&L entered into 60-day interest rate swaps designed to capture existingfavorable interest rates in anticipation of future financings of $750 millionfirst mortgage bonds.  These hedges weresettled in July 2003 at a fair value of $51.4 million, reflecting increasingU.S. Treasury interest rates, and as a result, DP&L received this amount.  During 2003, the ultimate effectiveness ofthe hedges resulted in a gain of $30.2 million and was recorded in AccumulatedOther Comprehensive Income on the Consolidated Balance Sheet.  This amount is amortized into income as areduction to interest expense over the ten- and fifteen-year lives of thehedges.  The ineffective portion of thehedge of $21.2 million was recognized as Other Income on the ConsolidatedStatement of Results of Operations during 2003.

 

DP&L alsoholds emission allowance options that are classified as derivatives not subjectto hedge accounting.  The fair value ofthese contracts, which are in effect through 2004, is reflected as OtherCurrent Assets or Other Current Liabilities on the Consolidated Balance Sheetand changes in fair value are recorded as Other Income (Deductions) on the ConsolidatedStatement of Results of Operations.  Theeffect was not material to results of operations during 2002 through 2004.

 

**FinancialInstruments**

DP&L applies the provisions of FASB Statement of FinancialAccounting Standards No. 115, “Accounting for Certain Investments in Debt andEquity Securities”**(SFAS 115), for its investmentsin debt and equity financial instruments of publicly traded entities andclassifies the securities 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 valuation of publicequity security investments is based upon market quotations.  The cost basis for public equity security andfixed maturity investments is average cost and amortized cost, respectively.

 

**Pension and PostretirementBenefits**

DP&L accounts forits pension and postretirement benefit obligations in accordance with theprovisions of FASB Statement of Financial Accounting Standards No. 87, “Employers’Accounting for Pensions” and No. 106 “Employers’ Accounting for PostretirementBenefits Other than Pensions.”  Thesestandards require the use of assumptions, such as the long-term rate of returnon assets, in determining the obligations, annual cost, and fundingrequirements of the plans.  The Companydiscloses its pension and postretirement benefit plans as prescribed byStatement of Financial Accounting Standards No. 132, “Employers’ Disclosuresabout Pensions and Other Postretirement Benefits, an amendment of FASBStatements No. 87, 88, and 106.”

 

40

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**Legal, Environmental and RegulatoryContingencies**

DP&L, in the normal courseof business, is subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  The Company believes the amounts provided inits consolidated financial statements, as prescribed by GAAP, adequatelyreflect probable and estimable contingencies. However, there can be no assurances that the actual amounts required tosatisfy alleged liabilities from various legal proceedings, claims, and othermatters, and to comply with applicable laws and regulations, will not exceedthe amounts reflected in DP&L’s consolidated financial statements or willnot have a material adverse effect on its consolidated results of operations,financial condition or cash flows.  Assuch, costs, if any, that may be incurred in excess of those amounts providedas of December 31, 2004 cannot currently be reasonably determined.

 

**Restatementof Financial Statements Previously Reported in the 2003 Form 10-K**

On October 28, 2004, DP&L’sAudit Committee determined that the Company’s previously issued financialstatements for the fiscal years ended December 31, 2001, 2002, and 2003 and forthe quarters ended March 31, 2002 through September 30, 2003 should berestated.  The Audit Committee discussedthe issues surrounding the restatement for the periods ending on or before December31, 2002 with the Company’s independent accountants, PricewaterhouseCoopers LLP(PwC) and for periods ending after December 31, 2002 with the Company’sindependent accountants, KPMG LLP (KPMG). Both PwC and KPMG informed the Audit Committee that they concurred withthe restatement decision.

 

As a result, the Companyrestated its consolidated financial statements for the fiscal years endedDecember 31, 2001 and 2002, and for the quarters ended March 31, 2002through December 31, 2002.  This restatement increased net income by $2.1million to $245.6 million for 2002 and reduced net income by $1.7 million to$233.6 million for 2001.  The beginningbalance in Earnings Reinvested in the Business for 2001 was reduced by$13.9 million to $191.5 million.  Allapplicable financial information contained in this Form 10-K and the 2003 Form10-K gives effect to the following adjustments.

 

Thefollowing table identifies the adjustments made to previously-releasedconsolidated financial statements:

 

 
| ** **                                  | ** ** | **Net Income Increase (Decrease)**    | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **For the years ended December  31,** | ** ** |
| ** **                                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                            | ** ** | ** ** | ** ** | **Periods Prior to** | ** ** |
| **($ in millions)**                    | ** ** | **2002**                              | ** ** | **2001** | ** ** | **2001** | ** ** |
| Description of Adjustment                   |       |                                  |       |   |   |   |   |
| Supplemental Executive  Retirement Plan (1) |       | $                                     | 3.8        |   | $ | (0.8 | ) | $ | (19.0 | ) |
| Stock incentive units (2)                   |       | 0.4                                   |       | — |   | — |   |
| Accrued expenses (3)                        |       | (0.1                                  | )          | (1.1 | ) | (0.3 | ) |
| Sub-total pre-tax impact                    |       | 4.1                                   |       | (1.9 | ) | (19.3 | ) |
|                                        |       |                                  |       |   |   |   |   |
| Income taxes on non-deductible  costs (4)   |       | (0.4                                  | )          | (0.5 | ) | (1.2 | ) |
| Income taxes (5)                            |       | (1.6                                  | )          | 0.7 |   | 6.6 |   |
| Total Net Income Impact                     |       | $                                     | 2.1        |   | $ | (1.7 | ) | $ | (13.9 | ) |

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(1) Reflects adjustment to record a settlement of the Company’s SupplementalExecutive Retirement Plan for certain executives in 1997 and 2000 which had notbeen previously recorded, in addition to an adjustment to record the propertreatment for Company assets previously thought to be segregated and restrictedsolely for purposes of funding this plan. Adjustments made subsequent to 2000 reflect revisions to actuarialcomputations to consider impact of those settlements on future actuarialcalculations for the plan.

Consolidated Statement ofResults of Operations:  Adjustment(increased) decreased Operation and Maintenance expense by approximately $3.5million in 2002, $(1.1) million in 2001, and $(21.5) million in prior periods.  Adjustment also increased Investment Incomeby approximately $0.3 million in 2002 and 2001, and $2.4 million in priorperiods.

 

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Consolidated Balance Sheet:  AtDecember 31, 2002, adjustment increased Deferred Credits and Other — Otherby $19.0 million, Other Current Assets by $0.1 million, Accrued Taxes by$0.6 million, and reduced Accumulated Other Comprehensive Income by$2.3 million, Deferred Taxes by $7.3 million and Other Assets — Otherby $0.6 million.

Consolidated Statement of Shareholders’ Equity:  At January 1, 2001, adjustment decreasedEarnings Reinvested in the Business by $12.4 million and Accumulated OtherComprehensive Income by $2.4 million.

(2) Reflects adjustment to record outstanding stock incentive units at fairvalue following a change in the operation of the Management Stock IncentivePlan made as of January 1, 2002, that allowed certain retirees to diversifystock incentive awards to investments other than DPL common stock.

Consolidated Statement of Results ofOperations:  Adjustment decreasedOperation and Maintenance expense by the amounts set forth in this table.

Consolidated Balance Sheet:  At December 31, 2002, adjustment increasedOther Paid-in Capital, Net of Treasury Stock by $8.4 million, and reducedDeferred Credits and Other — Other by $8.8 million and Other Assets —Other by $0.1 million.

(3) Reflects adjustment to record accrued expenses in the period in whichthese items were incurred.

Consolidated Statement of Results ofOperations:  Adjustment decreased OtherIncome by $0.1 million in 2002; and increased Operation and Maintenance expenseby $0.9 million and reduced Investment Income by $0.2 million in 2001.

Consolidated Balance Sheet:  At December 31, 2002, adjustmentincreased Accounts Payable by $1.1 million and reduced Accrued Taxes by $0.4million and Current Assets — Other by $0.1 million.

(4) Reflects adjustment to record tax expense for non-deductible costs notpreviously considered and provisions for estimated tax exposures.

Consolidated Statement of Results ofOperations:  Adjustment increased IncomeTax expense by the amounts set forth in this table.

Consolidated Balance Sheet:  At December 31, 2002, adjustmentincreased Accrued Taxes by $2.4 million.

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

Consolidated Statement of Results ofOperations:  Adjustment (increased)decreased Income Tax expense by the amounts set forth in the table.

(6)  Total net income cumulativeamount for periods prior to 2001 are reflected as a reduction to 2001 beginningEarnings Reinvested in the Business on the Consolidated Balance Sheet.

 

 

**Recently Issued Accounting Standards**

 

***Stock-Based Compensation***

In December 2004, the FASBissued SFAS******No.123 (revised 2004), “Share-BasedPayment” (SFAS 123R). SFAS 123R replaces SFAS 123, “Accounting for Stock-BasedCompensation”, and supersedes Accounting Principles Board Opinion No. 25(Opinion 25), “Accounting for Stock Issued to Employees”.  SFAS 123R will provide investors and otherusers of financial statements with more complete and neutral financialinformation by requiring that the compensation cost relating to share-basedpayment transactions be recognized in financial statements.  That cost will be measured based on the fairvalue of the equity or liability instruments issued.  SFAS 123R covers a wide range of share-basedcompensation arrangements including share options, restricted share plans,performance-based awards, share appreciation rights, and employee sharepurchase plans.  SFAS 123R establishes standardsin which to account for transactions where an entity exchanges its equityinstruments for goods or services or incurs liabilities in exchange for goodsor services that are based on the fair value of the entity’s equity instrumentsor settled by issuance of equity instruments. This statement focuses primarily on accounting for employee servicespaid for by share-based transactions. SFAS 123R requires a public entity to measure the cost of employeeservices received and paid for by equity instruments to be based on thefair-value of such equity on the grant date. This cost is recognized in results of operations over the period inwhich employees are required to provide service.  Liabilities initially incurred will be basedon the fair-value of equity instruments and then be re-measured at eachsubsequent reporting date until the liability is ultimately settled.  The fair-value for employee share options andother similar instruments at the grant date will be estimated usingoption-pricing models and excess tax benefits will be recognized as an additionto paid-in capital.  Cash retained fromthe excess tax benefits will be presented in the statement of cash flows asfinancing cash inflows.  The provisionsof this 

 

42

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Statement shall be effectivefor fiscal periods beginning after June 15, 2005.  DP&L is currently accounting for suchshare-based transactions granted after January 1, 2003, using SFAS 123, “Accountingfor Stock-Based Compensation.”  DP&Lis evaluating the effect of this new standard on the Company’s results ofoperations, cash flows and financial position.

 

***Inventory Costs***

In November 2004, the FinancialAccounting Standards Board issued Statement of Financial Accounting StandardsNo. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (SFAS151).  The amendments made by SFAS 151clarify that abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials (spoilage) should be recognized as current-periodcharges and require the allocation of fixed production overheads to inventorybased on the normal capacity of the production facilities.  The guidance is effective for inventory costsincurred during fiscal years beginning after June 15, 2005.  Earlier application is permitted forinventory costs incurred during fiscal years beginning after November 23,2004.  The Company is evaluating theimpact of the adoption of SFAS 151, and does not believe the impact will be significantto the Company’s overall results of operations, cash flows or financialposition.

 

***Exchange of Nonmonetary Assets***

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

 

***Medicare Prescription Drug,Improvement and Modernization Act of 2003***

InMay 2004, the FASB issued FASB Staff Position No. 106-2 (FSP 106-2), “Accountingand Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003”, which supersedes FSP 106-1.  FSP 106-2 provides guidance on the accountingfor the effects of the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the Act) for employers that sponsor postretirement healthcare plans that provide prescription drug benefits.  It also requires certain disclosuresregarding the effect of the federal subsidy provided by the Act.  FSP 106-2 is effective for the first interimor annual period beginning after June 15, 2004.  The Company adopted FSP 106-2 on July 1, 2004and the effect was not material to the Company’s results of operations, cashflows or financial position.

 

***Other-Than-Temporary Impairmentfor Certain Investments***

In June 2004, the EmergingIssues Task Force (EITF) issued EITF 03-01, ***“***TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments” which applied for periods effective beginning after June 15,2004.  EITF 03-01 addresses the meaningof other-than-temporary impairment and its application to debt and equitysecurities within the scope of Statement of Financial Accounting Standards No.115 “Accounting for Certain Investments in Debt and Equity Securities” (SFAS115), certain debt and equity securities within the scope of Statement ofFinancial Accounting Standards No. 124 “Accounting for Certain Investments Heldby Not-for-Profit Organizations” (SFAS 124), and equity securities that are notsubject to the scope of SFAS 115 and not accounted for under the equity methodof accounting.  The Company adopted EITF03-01 on July 1, 2004, and the effect was not material to the Company’s resultsof operations, cash flows or financial position.  In addition, the Company is disclosingunrealized gains and unrealized losses in accordance with this issue,specifically segregating the unrealized losses less than and greater than 12months.

 

43

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***Equity Method of Accounting forCertain Investments***

In September2004, the EITF issued EITF 02-14, ***“***Whether anInvestor Should Apply the Equity Method of Accounting to Investments Other ThanCommon Stock”, which applied for periods effective beginning after September15, 2004.  EITF 02-14 addresses:  (1) whether an investor should apply theequity method of accounting to investments other than common stock, (2) if theequity method should be applied to investments other than common stock, how theequity method of accounting should be applied to those investments and, (3)whether investments other than common stock that have a “readily determinablefair value” under paragraph 3 of SFAS 115 should be accounted for in accordancewith SFAS 115 rather than pursuant to EITF 02-14.  The Company evaluated the impact of thisissue and determined it did not have a material impact on results ofoperations, cash flows or financial position.

 

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

On October 22, 2004, thePresident signed the American Jobs Creation Act of 2004 (the Act).  On December 21, 2004, the FinancialAccounting Standards Board (FASB) issued two FASB Staff Positions (FSP)regarding the accounting implications of the Act related to (1) the deductionfor qualified domestic production activities (FSP FAS 109-1) and (2) theone-time tax benefit for the repatriation of foreign earnings (FSP FAS109-2).  The guidance in the FSPs appliesto financial statements for periods ending after the date the Act wasenacted.  The Act provides a deduction upto 9 percent (when fully phased-in) of the lesser of (a) qualified production activitiesincome, as defined by the Act, or (b) taxable income (after the deduction forthe utilization of any net operating loss carryforwards).  This tax deduction is limited to 50 percentof W-2 wages paid by the taxpayer.  TheAct also creates a temporary incentive for U.S. corporations to repatriateaccumulated income earned abroad by providing an 85 percent dividends receiveddeduction for certain dividends from controlled foreign corporations.  DP&L is still evaluating the impact ofthe Act on its results of operations, financial condition or cash flows.

 

**DiscontinuedOperations**

In November, 2004, the EITFissued EITF 03-13, “Applying the Conditions in Paragraph 42 of FASB statementNo. 144, *Accounting for the Impairment or Disposal of Long -Lived Assets,* in Determining whether to Report DiscontinuedOperations.”  This guidance should beapplied to a component of an enterprise that is either disposed of orclassified as held for sale in fiscal periods beginning after December 15,2004.  Operating results related to acomponent that is either disposed of or classified as held for sale within anenterprise’s fiscal year that includes November 30, 2004, may be classified toreflect the consensus.  The Company hasnot completed its evaluation of this pronouncement but does not anticipate anymaterial impact to its results of operations, cash flow or financial position.

 

44

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*2.**              SupplementalFinancial Information*

 
| ** **                                              | ** ** | **At December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------|------------|
| **$ in millions**                                  | ** ** | **2004**            | ** ** | **2003** | ** ** |
|                                                    |       |                |       |   |   |
| **Inventories, at average cost**                        |       |                |       |   |   |
| Plant materials and supplies                            | ** ** | **$**               | **29.1**   |   | $ | 29.3 |   |
| Fuel                                                    | ** ** | **40.1**            |       | 19.5 |   |
| Other                                                   | ** ** | **0.6**             |       | 0.8 |   |
| Total inventories, at average cost                      | ** ** | **$**               | **69.8**   |   | $ | 49.6 |   |
|                                                    |       |                |       |   |   |
| **Other current assets**                                |       |                |       |   |   |
| Prepayments                                             | ** ** | **$**               | **11.2**   |   | $ | 10.8 |   |
| Deposits and other advances                             | ** ** | **1.6**             |       | 5.2 |   |
| Current deferred income taxes                           | ** ** | **6.8**             |       | 4.3 |   |
| Miscellaneous work in progress                          | ** ** | **4.5**             |       | 3.1 |   |
| Other                                                   | ** ** | **0.7**             |       | 1.0 |   |
| Total other current assets                              | ** ** | **$**               | **24.8**   |   | $ | 24.4 |   |
|                                                    |       |                |       |   |   |
| **Other deferred assets**                               |       |                |       |   |   |
| Master Trust assets                                     | ** ** | **$**               | **106.4**  |   | $ | 102.9 |   |
| Prepaid pension                                         | ** ** | **38.2**            |       | 39.7 |   |
| Unamortized loss on reacquired debt                     | ** ** | **23.8**            |       | 26.6 |   |
| Unamortized debt expense                                | ** ** | **5.6**             |       | 5.9 |   |
| Other                                                   | ** ** | **1.2**             |       | 1.3 |   |
| Total other deferred assets                             | ** ** | **$**               | **175.2**  |   | $ | 176.4 |   |
|                                                    |       |                |       |   |   |
| **Other current liabilities**                           |       |                |       |   |   |
| Customer security deposits and other  advances          | ** ** | **$**               | **17.3**   |   | $ | 10.6 |   |
| Payroll taxes payable                                   | ** ** | **—**          |       | 10.1 |   |
| Unearned revenues                                       | ** ** | **0.3**             |       | 1.2 |   |
| Current portion—long-term debt                     | ** ** | **1.5**             |       | 1.1 |   |
| Other                                                   | ** ** | **3.0**             |       | 1.6 |   |
| Total other current liabilities                         | ** ** | **$**               | **22.1**   |   | $ | 24.6 |   |
|                                                    |       |                |       |   |   |
| **Other deferred credits**                              |       |                |       |   |   |
| Asset retirement obligations — regulated  property | ** ** | **$**               | **77.5**   |   | $ | 72.0 |   |
| Trust obligations                                       | ** ** | **68.2**            |       | 65.3 |   |
| Retirees’ health and life benefits                 | ** ** | **32.4**            |       | 33.7 |   |
| Environmental reserves                                  | ** ** | **0.1**             |       | 0.2 |   |
| Legal reserves                                          | ** ** | **3.3**             |       | 2.1 |   |
| Asset retirement obligations — generation          | ** ** | **5.1**             |       | 4.9 |   |
| Other                                                   | ** ** | **8.7**             |       | 6.9 |   |
| Total other deferred credits                            | ** ** | **$**               | **195.3**  |   | $ | 185.1 |   |

 

 

*3.**              Regulatory Matters*

 

DP&L applies theprovisions of SFAS 71 to its regulated operations.  This accounting standard defines regulatoryassets as the deferral of costs expected to be recovered in future customerrates and regulatory liabilities as current cost recovery for expected futureexpenditures.

 

Regulatory assets arereflected on the Consolidated Balance Sheet as “Income taxes recoverablethrough future revenues” and “Other regulatory assets”.  Regulatory liabilities are reflected on theConsolidated Balance Sheet under the caption entitled “Deferred Credits andOther — Other”.  Regulatory assets andliabilities on the Consolidated Balance Sheet include:

 

45

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| ** **                                        | ** ** | **At December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|
| **$ in millions**                            | ** ** | **2004**            | ** ** | **2003** | ** ** |
| **Regulatory Assets:**                            |       |                |       |   |   |
| Income taxes recoverable through future  revenues | ** ** | **$**               | **32.5**   |   | $ | 43.3 |   |
| Electric Choice systems costs                     | ** ** | **19.8**            |       | 18.8 |   |
| Regional transmission organization costs          | ** ** | **13.6**            |       | 12.2 |   |
| Power plant emission fees                         | ** ** | **3.6**             |       | 1.7 |   |
| Other costs                                       | ** ** | **4.5**             |       | 3.4 |   |
| Total regulatory assets                           | ** ** | **$**               | **74.0**   |   | $ | 79.4 |   |
|                                              |       |                |       |   |   |
| **Regulatory Liabilities:**                       |       |                |       |   |   |
| Asset retirement obligations-regulated  property  | ** ** | **$**               | **77.5**   |   | $ | 72.0 |   |
| Total regulatory liabilities                      | ** ** | **$**               | **77.5**   |   | $ | 72.0 |   |

 

 

**Regulatory Assets**

Managementevaluates its regulatory assets each period and believes recovery of theseassets is probable.  DP&L does notearn a return on any of its regulatory assets.

 

Incometaxes recoverable through future revenues represent amounts due from customersfor accelerated tax benefits that have been previously flowed through tocustomers and are expected to be recovered in the future as the accelerated taxbenefits reverse.  This item will berecovered over the life of the utility plant.

 

Regionaltransmission organization costs represent costs incurred to join a RegionalTransmission Organization that controls the receipts and delivery of bulk powerwithin the service area.

 

Power plantemission fees represent costs paid to the State of Ohio for environmentaloversight that are recovered under a PUCO rate rider from customers.

 

Other costsinclude consumer education advertising regarding electric deregulation andexcessive storm damage costs incurred to restore customer service.

 

ElectricChoice systems costs represent costs incurred to modify the customer billingsystem for unbundled rates and electric choice bills relative to othergeneration suppliers, supplier energy settlements, and information reportsprovided to the state administrator of the low-income electric program.  In February 2005, the Public UtilitiesCommission of Ohio (PUCO) approved a stipulation allowing DP&L recovery forcertain costs incurred for modifications to its billing system from allcustomers in its service territory beginning January 1, 2006.  On March 4, 2005, the OCC filed a Motion forRehearing.  That motion is pending.

 

**Regulatory Liabilities**

Assetretirement obligations reflect an estimate of amounts recovered in rates thatare expected to be expended to remove existing regulated transmission anddistribution property from service upon retirement.

 

46

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*4.**              Income Taxes*

 
| ** **                                | ** ** | **For the years ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| **$ in millions**                    | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Computation of Tax Expense**            |       |                                 |       |   |   |   |   |
| Federal income tax (a)                    | ** ** | **$**                                | **111.7**  |   | $ | 124.0 |   | $ | 132.5 |   |
| State income tax (b)                      | ** ** | **10.8**                             |       | 16.7 |   | 18.5 |   |
| Increases (decreases) in tax from—   |       |                                 |       |   |   |   |   |
| Depreciation                              | ** ** | **(4.0**                             | )          | (2.3 | ) | 2.1 |   |
| Investment tax credit amortized           | ** ** | **(2.9**                             | )          | (2.9 | ) | (2.9 | ) |
| Non-deductible compensation               | ** ** | **—**                           |       | 13.3 |   | — |   |
| Provision in excess of statutory rate (c) | ** ** | **5.3**                              |       | 4.6 |   | 3.4 |   |
| Other, net                                | ** ** | **(0.1**                             | )          | (3.0 | ) | (2.0 | ) |
| Total tax expense (d)                     | ** ** | **$**                                | **120.8**  |   | $ | 150.4 |   | $ | 151.6 |   |
|                                      |       |                                 |       |   |   |   |   |
| **Components of Tax Expense**             |       |                                 |       |   |   |   |   |
| Taxes currently payable (b)               | ** ** | **$**                                | **136.8**  |   | $ | 163.9 |   | $ | 165.0 |   |
| Deferred taxes—                      | ** ** | ** **                           |       |   |   |   |   |
| Regulatory assets                         | ** ** | **—**                           |       | (17.3 | ) | (16.8 | ) |
| Liberalized depreciation and amortization | ** ** | **(10.0**                            | )          | (10.2 | ) | (1.4 | ) |
| Fuel and gas costs                        | ** ** | **—**                           |       | — |   | — |   |
| Other                                     | ** ** | **(3.1**                             | )          | 16.9 |   | 7.7 |   |
| Deferred investment tax credit, net       | ** ** | **(2.9**                             | )          | (2.9 | ) | (2.9 | ) |
| Total tax expense (d)                     | ** ** | **$**                                | **120.8**  |   | $ | 150.4 |   | $ | 151.6 |   |

 

 

Components of Deferred Tax Assets andLiabilities

 
| ** **                        | ** ** | **At December 31,** | ** ** |
|-----------------------------------|------------|---------------------|------------|
| **$ in millions**            | ** ** | **2004**            | ** ** | **2003** | ** ** |
| **Net Non-Current (Liabilities)** |       |                |       |   |   |
| Depreciation/property basis       | ** ** | **$**               | **(381.8** | ) | $ | (400.8 | ) |
| Income taxes recoverable          | ** ** | **(11.4**           | )          | (15.2 | ) |
| Regulatory assets                 | ** ** | **(6.5**            | )          | (6.2 | ) |
| Investment tax credit             | ** ** | **17.3**            |       | 18.3 |   |
| Investment loss                   | ** ** | **—**          |       | — |   |
| Compensation/employee benefits    | ** ** | **34.9**            |       | 30.9 |   |
| Other (e)                         | ** ** | **(18.3**           | )          | (8.7 | ) |
| Net non-current (liability)       | ** ** | **$**               | **(365.8** | ) | $ | (381.7 | ) |
|                              |       |                |       |   |   |
| **Net Current Asset**             | ** ** | **$**               | **6.8**    |   | $ | 4.3 |   |

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

*(b)**       The Company has recorded$11.7 million, $1.8 million and $2.7 million in 2004, 2003 and 2002,respectively, for state tax credits available related to the consumption ofcoal mined in Ohio.*

*(c)**        The Company has recorded$5.3 million, $4.6 million and $3.4 million in 2004, 2003 and2002, respectively, of tax provision for tax deduction or income position takenin prior tax returns that the Company believes were properly treated on suchtax returns but for which it is possible that these positions may becontested.  The Internal Revenue Serviceis currently examining returns for 1999 through 2003, and periods prior to 1999have been closed.*

*(d)**       Excludes $11.3 million in2003 of income taxes reported as cumulative effect of accounting change, net ofincome  taxes.*

*(e)**        Other non-currentliabilities include deferred tax assets related to state tax net operating losscarryforwards, net of any related valuation reserves of zero in 2004 and 2003,and $0.5 million in 2002.  These net operatinglosses expire in 2016 and 2017.*

 

 

*5.**              Pension andPostretirement Benefits*

 

DP&L sponsors a definedbenefit plan for substantially all its employees.  For collective bargaining employees, thedefined benefits are based on a specific dollar amount per year of service.  For all other employees, the defined benefitplan is based primarily on compensation and years of service. The Company fundspension plan benefits as accrued in accordance with the 

 

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minimum funding requirements ofthe Employee Retirement Income Security Act of 1974 (ERISA).

 

Qualified employees who retiredprior to 1987 and their dependents are eligible for health care and lifeinsurance benefits.  DP&L has fundedthe union-eligible health benefit using a Voluntary Employee BeneficiaryAssociation Trust.

 

DP&L uses a December 31measurement date for the majority of its plans.

 

The following tables set forththe Company’s pension and postretirement benefit plans obligations, assets andamounts recorded on the Consolidated Balance Sheet as of December 31.  The amounts presented in the following tablesfor pension include both the defined benefit pension plan and the SupplementalExecutive Retirement Plan in the aggregate.

 

 
| **Change in Projected Benefit Obligation**

**($ in millions)** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|----------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **                                                           | ** ** | **2004**    | ** ** | **2003**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                 |       |        |       |               |       |   |   |   |   |
| Projected benefit obligation at January 1                            | ** ** | **$**       | **264.5**  |               | $          | 248.5 | ** ** | **$** | **33.5** |   | $ | 35.7 |   |
| Service cost                                                         | ** ** | **3.5**     |       | 3.3                | ** ** | **—** |   | — |   |
| Interest cost                                                        | ** ** | **16.0**    |       | 16.3               | ** ** | **1.9** |   | 2.2 |   |
| Actuarial (gain) loss                                                | ** ** | **15.0**    |       | 14.7               | ** ** | **(0.3** | ) | (1.1 | ) |
| Benefits paid                                                        | ** ** | **(18.5**   | )          | (18.3              | **)**      | **(3.1** | ) | (3.3 | ) |
| Projected benefit obligation at December 31                          | ** ** | **$**       | **280.5**  |               | $          | 264.5 | ** ** | **$** | **32.0** |   | $ | 33.5 |   |

 
| **Change in Plan Assets**

**($ in millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Fair value of plan assets at January 1              | ** ** | **$**      | **258.9**  |       | $          | 247.1      | ** ** | **$**      | **9.7**    |   | $ | 10.7 |   |
| Actual return on plan assets                        | ** ** | **25.1**   |       | 29.7       | ** ** | **0.2**    |       | 0.3        |       |
| Contributions to plan assets                        | ** ** | **0.4**    |       | 0.4        | ** ** | **2.1**    |       | 2.0        |       |
| Benefits paid                                       | ** ** | **(18.5**  | )          | (18.3      | **)**      | **(3.1**   | )          | (3.3       | )          |
| Fair value of plan assets at December 31            | ** ** | **$**      | **265.9**  |       | $          | 258.9      | ** ** | **$**      | **8.9**    |   | $ | 9.7 |   |

 
| **Reconciliation to the**                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Consolidated Balance Sheet**

**($ in millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Funded status of the plan                                | ** ** | **$**      | **(14.6**  | )          | $          | (5.6       | **)**      | **$**      | **(23.1**  | ) | $ | (23.8 | ) |
| Unrecognized transition (asset) liability                | ** ** | **—** |       | —     | ** ** | **0.5**    |       | 0.7        |       |
| Unrecognized prior service cost                          | ** ** | **10.2**   |       | 13.0       | ** ** | **—** |       | —     |       |
| Unrecognized net (gain) loss                             | ** ** | **64.9**   |       | 55.2       | ** ** | **(11.2**  | )          | (12.4      | )          |
| Net amount recognized                                    | ** ** | **$**      | **60.5**   |       | $          | 62.6       | ** ** | **$**      | **(33.8**  | ) | $ | (35.5 | ) |

 
| **Total Amounts Recognized in the**

**Consolidated Balance Sheet**

**($ in millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Other assets                                                                                  | ** ** | **$**      | **56.6**   |       | $          | 59.1       | ** ** | **$**      | **—** |   | $ | — |   |
| Accumulated other comprehensive income                                                        | ** ** | **3.9**    |       | 3.5        | ** ** | **—** |       | —     |       |
| Other deferred credits                                                                        | ** ** | **—** |       | —     | ** ** | **(33.8**  | )          | (35.5      | )          |
| Net amount recognized                                                                         | ** ** | **$**      | **60.5**   |       | $          | 62.6       | ** ** | **$**      | **(33.8**  | ) | $ | (35.5 | ) |

 

The accumulated benefitobligation for DP&L’s defined benefit plans was $269.4 million and $254.7million at December 31, 2004, and 2003, respectively.

 

48

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

 
| **Net Periodic Benefit (Income) Cost**

**($ in millions)** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **                                                       | ** ** | **2004**    | ** ** | **2003**           | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Service cost                                                     | ** ** | **$**       | **3.5**    |               | $          | 3.3 |   | $ | 3.7 | ** ** | **$** | **—** |   | $ | — |   | $ | — |   |
| Interest cost                                                    | ** ** | **16.0**    |       | 16.3               |       | 17.9 | ** ** | **1.9** |   | 2.1 |   | 2.4 |   |
| Expected return on assets (a)                                    | ** ** | **(21.7**   | )          | (25.1              | )          | (30.7 | **)** | **(0.6** | ) | (0.7 | ) | (0.7 | ) |
| Amortization of unrecognized:                                    |       |        |       |               |       |   |   |   |   |   |   |   |   |
| Actuarial (gain) loss                                            | ** ** | **2.0**     |       | 0.1                |       | (2.7 | **)** | **(1.1** | ) | (1.3 | ) | (1.2 | ) |
| Prior service cost                                               | ** ** | **2.7**     |       | 2.8                |       | 2.9 | ** ** | **—** |   | — |   | — |   |
| Transition obligation                                            | ** ** | **—**  | ** ** | **—**         | ** ** | **—** | ** ** | **0.2** |   | 0.2 |   | 2.9 |   |
| Net pension benefit (income) cost                                | ** ** | **$**       | **2.5**    |               | $          | (2.6 | ) | $ | (8.9 | **)** | **$** | **0.4** |   | $ | 0.3 |   | $ | 3.4 |   |

----

*(a)**       The market-related value ofassets is equal to the fair value of assets at implementation with subsequentasset gains and losses recognized in the market-related value systematicallyover a three-year period.*

 

DP&L’s pension andpostretirement plan assets were comprised of the following asset categories atDecember 31:

 
| **Asset Category**                 | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **                         | ** ** | **2004**    | ** ** | **2003**           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Common stocks                      | ** ** | **9%**      | ** ** | 7%                 |       | **—** |   | **—** | ** ** |
| Mutual funds                       | ** ** | **84%**     | ** ** | 78%                |       | **-** |   | **-** | ** ** |
| Cash and cash equivalents          | ** ** | **3%**      | ** ** | 6%                 |       | **4%** | ** ** | 2% |   |
| Fixed income government securities | ** ** | **—**  | ** ** | 1%                 |       | **96%** | ** ** | 98% |   |
| Alternative investments            | ** ** | **4%**      | ** ** | 8%                 |       | **—** | ** ** | **—** | ** ** |
| Total                              | ** ** | **100%**    | ** ** | 100%               |       | **100%** | ** ** | 100% |   |

 

Plan assets are invested usinga total return investment approach whereby a mix of equity securities, mutualfunds, fixed income investments, alternative investments, and cash and cashequivalents are used to preserve asset values, diversify risk and achieve theCompany’s target investment return benchmark. Investment strategies and asset allocations are based on carefulconsideration of plan liabilities, the plan’s funded status and financialcondition of the Company.  Investmentperformance and asset allocation is measured and monitored on an ongoingbasis.  At December 31, 2004, $22.6million of DPL Inc. common stock was held as plan assets.

 

DP&L’s expected return onplan asset assumptions, used to determine benefit obligations, are based onhistorical long-term rates of return on investment, which uses the widelyaccepted capital market principle that assets with higher volatility generate agreater return over the long run. Current market factors, such as inflation 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 reasonabilityand appropriateness.

 

DP&L’s overall expectedlong-term rate of return on assets is approximately 8.50%.  The expected long-term rate of return isbased on the assets as a whole, and not on the sum of the returns on individualasset categories.  This expected returnis based exclusively on historical returns, without adjustments.  There can be no assurance of DP&L’sability to generate that rate of return in the future.

 

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

 
| **Benefit Obligation Assumptions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **                         | ** ** | **2004**    | ** ** | **2003**           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate for obligations      | ** ** | **5.75%**   | ** ** | 6.25%              |       | **5.75%** | ** ** | 6.25% |   |
| Increase rate of compensation      | ** ** | **4.00%**   | ** ** | 4.00%              |       | **—** |   | — |   |

 

49

----

 

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

 
| **Net Periodic Benefit**

**(Income) Cost Assumptions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|---------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **                                              | ** ** | **2004**    | ** ** | **2003**           | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Discount rate                                           | ** ** | **6.25%**   | ** ** | 6.75%              |       | 7.25% |   | **6.25%** | ** ** | 6.75% |   | 7.25% |   |
| Expected rate of return on plan assets                  | ** ** | **8.50%**   | ** ** | 8.75%              |       | 9.00% |   | **6.75%** | ** ** | 6.75% |   | 7.00% |   |
| Increase rate of compensation                           | ** ** | **4.00%**   | ** ** | 4.00%              |       | 4.00% |   | **—** |   | — |   | — |   |

 

The assumed health care costtrend rates at December 31 are as follows:

 
| ** **                                       | ** ** | **Expenses** | ** ** | **Benefit Obligation** | ** ** |
|--------------------------------------------------|------------|--------------|------------|------------------------|------------|
| **Health Care Cost Assumptions**                 | ** ** | **2004**     | ** ** | **2003**               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                             |       |         |       |                   |       |   |   |   |   |
| Current health care cost trend rate              | ** ** | **10.00**    | **%**      | ** **             | 8.00       | **%** |   | 10.00 | % |   | 8.00 | % |   |
| Ultimate health care cost trend rate             | ** ** | **5.00**     | **%**      | ** **             | 5.00       | **%** |   | 5.00 | % |   | 5.00 | % |   |
| Ultimate health care cost trend rate — year | ** ** | **2009**     | ** ** |                   | 2007       |   |   | 2010 |   |   | 2007 |   |   |

 

The assumed health care costtrend rates have a significant effect on the amounts reported for the healthcare plans.  A one-percentage pointchange in assumed health care cost trend rates would have the following effectson the net periodic postretirement benefit cost and the accumulatedpostretirement benefit obligation:

 
| **Effect of Change in Health**                | ** ** | ** **      | ** ** | ** **      | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-----------------|------------|
| **Care Cost Trend Rate ($ in millions)** | ** ** | **Increase 1%** | ** ** | **Decrease 1%** | ** ** |
|                                          |       |            |       |            |       |
| Service cost plus interest cost               |       | $               | 0.1        |            | $          | (0.1 | ) |
| Benefit obligation                            |       | $               | 2.0        |            | $          | (1.9 | ) |

 

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

 
| **Estimated Future Benefit Payments** | ** ** | ** **  | ** ** | ** **         | ** ** |
|---------------------------------------|------------|-------------|------------|--------------------|------------|
| **($ in millions)**              | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|                                  |       |        |       |               |       |
| 2005                                  |       | $           | 19.3       |               | $          | 3.9 |   |
| 2006                                  |       | $           | 19.3       |               | $          | 3.5 |   |
| 2007                                  |       | $           | 19.7       |               | $          | 3.4 |   |
| 2008                                  |       | $           | 19.8       |               | $          | 3.4 |   |
| 2009                                  |       | $           | 19.8       |               | $          | 3.3 |   |
| 2010 - 2014                           |       | $           | 104.1      |               | $          | 13.8 |   |
|                                  |       |        |       |               |       |

 

DP&L expects to contribute$0.4 million to its pension plan and $2.0 million to its other postretirementbenefits plan in 2005.

 

 
| *6.     Preferred Stock* |
|----------------------------------------------|

 

$25 par value, 4,000,000 sharesauthorized, no shares outstanding; and $100 par value, 4,000,000 sharesauthorized, 228,508 shares without mandatory redemption provisions outstanding.
| **Preferred Stock**   | ** ** | **Rate**   | ** ** | **Current Redemption  Price** | ** ** | **Current Shares  Outstanding at  December 31,  2004** | ** ** | **Par Value  at December 31,  2004 and 2003  ($ in millions)** | ** ** |
|-----------------------|------------|------------|------------|-------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **            | ** ** | ** ** | ** ** | ** **                    | ** ** | ** **                                             | ** ** | ** **                                                          | ** ** |
| Series A              |       | 3.75%      |       | $                             | 102.50     |                                                   | 93,280     | ** **                                                          | **$**      | **9.3** | ** ** |
| Series B              |       | 3.75%      |       | $                             | 103.00     |                                                   | 69,398     | ** **                                                          | ** ** | **7.0** | ** ** |
| Series C              |       | 3.90%      |       | $                             | 101.00     |                                                   | 65,830     | ** **                                                          | ** ** | **6.6** | ** ** |
| Total Preferred Stock |       |       | ** ** | ** **                    | ** ** | 228,508                                                | ** ** | **$**                                                               | **22.9**   | ** ** |

 

50

----

 

The preferredstock may be redeemed at the option of the Company at the per share pricesindicated, plus cumulative accrued dividends.

 

As long as anypreferred stock is outstanding, DP&L’s Amended Articles of Incorporationcontain provisions restricting the payment of cash dividends on any of itsCommon Stock if, after giving effect to such dividend, the aggregate of allsuch dividends distributed subsequent to December 31, 1946 exceeds the netincome of DP&L available for dividends on its Common Stock subsequent toDecember 31,1946, plus $1.2 million.  Asof year-end, all earnings reinvested in the business of DP&L were availablefor Common Stock dividends.

 

*7.**              Long-term Debt, NotesPayable, and Compensating Balances*

* *
| ** **                                                                | ** ** | **At December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------|------------|
| **$ in millions**                                                    | ** ** | **2004**            | ** ** | **2003** | ** ** |
| First mortgage bonds maturing:                                            |       |                |       |   |   |
| 2013 - 5.125%                                                             | ** ** | **$**               | **470.0**  |   | $ | 470.0 |   |
| Pollution control series maturing through  2027 - 6.43% (a)               | ** ** | **104.4**           |       | 104.8 |   |
| ** **                                                                |       | **574.4**           |       | 574.8 |   |
| Guarantee of Air Quality Development Obligations  - 6.10% Series due 2030 | ** ** | **110.0**           |       | 110.0 |   |
| Obligation for capital leases                                             | ** ** | **3.8**             |       | 4.3 |   |
| Unamortized debt discount and premium (net)                               | ** ** | **(1.6**            | )          | (1.8 | ) |
| Total                                                                     | ** ** | **$**               | **686.6**  |   | $ | 687.3 |   |

----

*(a)**       Weighted average interest ratesfor 2004 and 2003.*

 

# The amounts ofmaturities and mandatory redemptions for first mortgage bonds and the capitalleases are $1.5 million in 2005, $1.3 million in 2006, $9.5 million in 2007,$0.7 million in 2008 and $0.7 million in 2009. Substantially all property of DP&L is subject to the mortgage liensecuring the first mortgage bonds.

 

On September29, 2003, DP&L issued $470 million principal amount of First MortgageBonds, 5.125% Series due 2013.  The netproceeds from the sale of the bonds, after expenses, were used on October 30,2003, to (i) redeem $226 million principal amount of DP&L’s First MortgageBonds, 8.15% Series due 2026, at a redemption price of 104.075% of theprincipal amount plus accrued interest to the redemption date and (ii) redeem$220 million principal amount of DP&L’s First Mortgage Bonds, 7.875% Seriesdue 2024, at a redemption price of 103.765% of the principal amount plusaccrued interest to the redemption date. The 5.125% Series due 2013 were not registered under the Securities Actof 1933, but were offered and sold through a private placement in compliancewith Rule 144A under the Securities Act of 1933.  The bonds include step-up interest provisionsrequiring the Company to pay additional interest if (i) DP&L’s registrationstatement was not declared effective by the SEC within 180 days from issuanceof new bonds or (ii) the exchange offer was not completed within 210 days fromthe issuance of the new bonds.  Theregistration statement was not declared effective and the exchange offer wasnot timely completed and, as a result, the Company is required to payadditional interest of 0.50% until a registration statement is declaredeffective at which point the additional interest shall be reduced by 0.25%.  The remaining additional interest of 0.25%will continue until the exchange offer is completed.  The exchange offer registration for thesesecurities is expected to be filed during the first quarter of 2005.

 

In December 2003, DP&L had$150 million available through an unsecured revolving credit agreement with aconsortium of banks.  The agreement,which was scheduled to expire on December 10, 2004, was terminated on June 1,2004.  The facility was to be used tosupport the Company’s business requirements. The facility contained two financial covenants, including maximum debtto total capitalization and minimum earnings before interest and taxes (EBIT)to 

 

51

----

 

interest coverage.  Fees associated with this credit facilitywere approximately $0.8 million.  TheCompany had no outstanding borrowings under its revolving credit facility andno outstanding commercial paper balances at year-end 2004 or 2003.

 

In February2004, DP&L entered into a $20 million Master Letter of Credit Agreementwith a financial lending institution. This agreement supports performance assurance needs in the ordinarycourse of business.  The Company hascertain contractual agreements for the sale and purchase of power, fuel andrelated energy services that contain credit rating related clauses allowing thecounterparties to seek additional surety under certain conditions.  As of December 31, 2004, DP&L hadnine outstanding letters of credit for a total of $8.6 million.  On February 24, 2005, the Company enteredinto an amendment to extend the term of this Agreement for one year and reducethe maximum dollar volume of letters of credit to $10 million.

 

InJune 2004, DP&L obtained a $100 million unsecured revolving creditagreement that extended and replaced the Company’s revolving credit agreementof $150 million.  The new agreement,which expires on May 31, 2005, provides credit support for DP&L’s businessrequirements during this period and may be increased up to $150 million.  The facility contains two financial covenantsincluding maximum debt to total capitalization and minimum earnings beforeinterest and taxes (EBIT) to total interest expense.  These covenants are currently met.  The Company had no outstanding borrowingsunder this credit facility at year-end 2004. Fees associated with this credit facility were approximately $0.6million per year.  Changes in debtratings, however, may affect the applicable interest rate for DP&L’srevolving credit agreement.

 

There are nointer-company debt collateralizations or debt guarantees between DP&L andits parent.  None of the debt obligationsof DP&L are guaranteed or secured by its parent or affiliates, and nocross-collateralization exists between the Company and DPL or any affiliate.

 

*8.**              Employee Stock Plans*

 

In 2000, DPL’sBoard of Directors adopted and its shareholders approved The DPL Inc. StockOption Plan.  The plan provides that “nosingle Participant shall receive Options with respect to more than 2,500,000shares.”  On February 1, 2000, optionswere granted at an exercise price of $21.00, which was above the market priceof $19.06 per share on that date.  Theexercise price of options granted after that date approximated the market priceof the stock on the date of grant. Options granted in 2000 and 2001 represent three-year awards, which vestover five years from the grant date, and expire ten years from the grantdate.  Options granted in 2002 vest overthree years and expire ten years from the grant date.  Options granted in 2003 vest in five years andexpire ten years from the grant date.  In2004, 200,000 options were granted that vest over two years and expire sevenyears from the grant date, 20,000 options were granted that vest in one yearand expire ten years from the grant date, and 30,000 options were granted thatvest over three years and expire ten years from the grant date.  At December 31, 2004, there were 789,832options available for grant.

 

52

----

 

Summarizedstock option activity was as follows:

 
| ** **                                | ** ** | **2004**      | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-------------------------------------------|------------|---------------|------------|-----------|------------|-----------|------------|
| Options:                                  |       |          |       |      |       |      |       |
| Outstanding at beginning of year          | ** ** | **6,960,168** |       | 7,143,500 |       | 7,232,500 |       |
| Granted (a)                               | ** ** | **250,000**   |       | 100,000   |       | 700,000   |       |
| Exercised                                 | ** ** | **—**    |       | —    |       | —    |       |
| Forfeited                                 | ** ** | **—**    |       | (283,332  | )          | (789,000  | )          |
| Outstanding at year-end                   | ** ** | **7,210,168** |       | 6,960,168 |       | 7,143,500 |       |
| Exercisable at year-end                   | ** ** | **—**    |       | —    |       | —    |       |
|                                      |       |          |       |      |       |      |       |
| Weighted average option prices per share: |       |          |       |      |       |      |       |
| Outstanding at beginning of year          | ** ** | **$**         | **20.81**  |      | $          | 21.05     |       | $ | 21.99 |   |
| Granted                                   | ** ** | **$**         | **21.86**  |      | $          | 15.88     |       | $ | 14.95 |   |
| Exercised                                 | ** ** | **—**    |       | —    |       | —    |       |
| Forfeited                                 | ** ** | **—**    |       | $         | 25.04      |      | $          | 21.96 |   |
| Outstanding at year-end                   | ** ** | **$**         | **21.23**  |      | $          | 20.81     |       | $ | 21.05 |   |
| Exercisable at year-end                   | ** ** | **—**    |       | —    |       | —    |       |

----

*(a)**       DPL originally granted300,000 options during 2002 to Mr. Peter H. Forster, formerly DPL’s Chairman,that caused the number of options to be held by Mr. Forster to exceed themaximum number allowed to be held by one participant under the option planapproved by the shareholders.  Therefore,200,000 options, representing the excess over the allowable maximum, have beenrevoked.  As a result of the lawsuitfiled by the Company, DPL and MVE against Mr. Forster, the Company seeks torevoke other options.*

 

The weighted-average fair value of options granted was $4.23, $2.68 and$2.56 per share in 2004, 2003 and 2002, respectively.  The fair values of the options were estimatedas of the dates of grant using a Black-Scholes option pricing model utilizingthe following assumptions:

 
| ** **              | ** ** | **2004** | ** ** | **2003**   | ** ** | **2002** | ** ** |
|-------------------------|------------|----------|------------|------------|------------|----------|------------|
|                    |       |     |       |       |       |     |       |
| Volatility              | ** ** | **28.5** | **%**      | ** ** | 24.0       | **%**    |       | 24.0 | **%** |   |
| Expected life (years)   | ** ** | **6.4**  | ** ** | ** ** | 8.0        |     |       | 8.0 |   |   |
| Dividend yield rate     | ** ** | **4.8**  | **%**      | ** ** | 4.5        | **%**    |       | 4.3 | **%** |   |
| Risk-free interest rate | ** ** | **3.9**  | **%**      | ** ** | 3.7        | **%**    |       | 3.4 | **%** |   |

 

 

The following tablereflects information about stock options outstanding at December 31, 2004:

 
| ** **                   | ** **   | ** **      | ** ** | **Options Outstanding**               | ** ** | **Options Exercisable**             | ** ** |
|------------------------------|--------------|-----------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **Range of Exercise Prices** | ** **   | **Outstanding** | ** ** | **Weighted-Average Contractual Life** | ** ** | **Weighted-Average Exercise Price** | ** ** | **Exercisable** | ** ** | **Weighted-Average Exercise Price** | ** ** |
|                         |         |            |       |                                  |       |                                |       |   |   |   |   |
| $                            | 14.95-$21.00 |            | 6,731,668  |                                  | 5.4 years  |                                | $          | 20.48 |   | — |   | — |   |
| $                            | 21.01-$29.63 |            | 478,500    |                                  | 6.2 years  |                                | $          | 28.76 |   | — |   | — |   |

 

*9. Ownership of Facilities*

 

DP&L and other Ohio utilities have undivided ownership interests inseven electric generating facilities and numerous transmission facilities.  Certain expenses, primarily fuel costs forthe generating units, are allocated to the owners based on their energyusage.  The remaining expenses, as wellas investments in fuel inventory, plant materials and operating supplies, andcapital additions, are allocated to the owners in accordance with theirrespective ownership interests.  As ofDecember 31, 2004, DP&L had $27 million of construction in progress atsuch facilities.  DP&L’s share of theoperating cost of such facilities is included in the Consolidated Statement ofResults of Operations, and its share of the investment in the facilities isincluded in the Consolidated Balance Sheet.

 

 

53

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DP&L’s undivided ownership interest in such facilities at December31, 2004, is as follows:

 
| ** **                            | ** ** | ** **         | ** ** | ** **     | ** ** | **DP&L**             | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------|------------|--------------------------|------------|
| ** **                            | ** ** | **DP&L Share** | ** ** | **Investment** | ** ** |
| ** **                            | ** ** | ** **         | ** ** | **Production** | ** ** | **Gross Plant**          | ** ** |
| ** **                            | ** ** | **Ownership**      | ** ** | **Capacity**   | ** ** | **In Service**           | ** ** |
| ** **                            | ** ** | **(%)**            | ** ** | **(MW)**       | ** ** | **($ in millions)** | ** ** |
| Production Units:                     |       |               |       |           |       |                     |       |
| Beckjord Unit 6                       |       | 50.0               |       | 207            |       | $                        | 61         |   |
| Conesville Unit 4                     |       | 16.5               |       | 129            |       | 31                       |       |
| East Bend Station                     |       | 31.0               |       | 186            |       | 184                      |       |
| Killen Station                        |       | 67.0               |       | 414            |       | 421                      |       |
| Miami Fort Units 7 & 8            |       | 36.0               |       | 360            |       | 194                      |       |
| Stuart Station                        |       | 35.0               |       | 823            |       | 353                      |       |
| Zimmer Station                        |       | 28.1               |       | 365            |       | 1,041                    |       |
|                                  |       |               |       |           |       |                     |       |
| Transmission (at varying percentages) |       |               |       |           |       | 88                       |       |
|                                       |            |                    |            |                |            |                          |            |  |

 

*10. Business Segment Reporting*

 

DP&L is a public utility providing electric services to over500,000 retail customers in West Central Ohio. Assets and related costs associated with the Company’s transmission anddistribution and base load and peaking generation operations are managed andevaluated as a single operating segment captioned Electric.

 

 
| ** **                                       | ** ** | **For the years ended December 31,** | ** **  |
|--------------------------------------------------|------------|--------------------------------------|-------------|
| **$ in millions**                           | ** ** | **2004**                             | ** **  | **2003** | ** ** | **2002** | ** ** |
| **Revenues**                                     |       |                                 |        |   |   |   |   |
| Electric                                         | ** ** | **$**                                | **1,192.2** |   | $ | 1,183.4 |   | $ | 1,175.8 |   |
|                                             |       |                                 |        |   |   |   |   |
| **Operating income**                             |       |                                 |        |   |   |   |   |
| Electric                                         | ** ** | **$**                                | **418.3**   |   | $ | 445.8 |   | $ | 445.6 |   |
| Other *(a)*                                      | ** ** | **(48.9**                            | )           | (51.0 | ) | (5.4 | ) |
| Total operating income                           | ** ** | **369.4**                            |        | 394.8 |   | 440.2 |   |
|                                             |       |                                 |        |   |   |   |   |
| Investment income                                | ** ** | **1.0**                              |        | 22.7 |   | 2.1 |   |
| Interest expense                                 | ** ** | **(43.5**                            | )           | (51.8 | ) | (53.5 | ) |
| Other income (deductions)                        | ** ** | **2.9**                              |        | 7.1 |   | 8.4 |   |
| Income before income taxes and accounting change | ** ** | **$**                                | **329.8**   |   | $ | 372.8 |   | $ | 397.2 |   |
|                                             |       |                                 |        |   |   |   |   |
| **Depreciation and amortization**                |       |                                 |        |   |   |   |   |
| Electric                                         | ** ** | **$**                                | **121.1**   |   | $ | 116.1 |   | $ | 114.9 |   |
|                                             |       |                                 |        |   |   |   |   |
| **Expenditures — construction additions**   |       |                                 |        |   |   |   |   |
| Electric                                         | ** ** | **$**                                | **92.7**    |   | $ | 98.1 |   | $ | 129.4 |   |
|                                             |       |                                 |        |   |   |   |   |
| **Assets**                                       |       |                                 |        |   |   |   |   |
| Electric                                         | ** ** | **$**                                | **2,497.7** |   | $ | 2,519.0 |   | $ | 2,600.4 |   |
| Unallocated corporate assets                     | ** ** | **143.7**                            |        | 141.1 |   | 156.9 |   |
| Total assets                                     | ** ** | **$**                                | **2,641.4** |   | $ | 2,660.1 |   | $ | 2,757.3 |   |

----

*(a) Includes unallocated corporate items.*

 

 

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*11. FinancialInstruments*

 

# The fair value ofDP&L’s financial instruments is based on current public market prices,discounted cash flows using current rates for similar issues with similar termsand remaining maturities, or independent party valuations, which are believedto approximate market.  The table belowpresents the fair value, unrealized gains and losses, and cost of theseinstruments at December 31, 2004 and 2003.

#  

| ** **                            | ** ** | **At  December 31,** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2004**             | ** ** | **2003** | ** ** |
| ** **                            | ** ** | ** **           | ** ** | **Gross  Unrealized** | ** ** | ** ** | ** ** | ** ** | ** ** | **Gross  Unrealized** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **           | ** ** | ** ** | ** ** | **Losses** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Losses** | ** ** | ** ** | ** ** |
| **$ in  millions**               | ** ** | **Fair  Value**      | ** ** | **Gains** | ** ** | **less  than 12 months** | ** ** | **more  than 12 months** | ** ** | **Cost** | ** ** | **Fair  Value** | ** ** | **Gains** | ** ** | **less  than 12 months** | ** ** | **more  than 12 months** | ** ** | **Cost** | ** ** |
| **Assets**                            |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale  securities        | ** ** | **$**                | **92.4**   | ** ** | **$** | **34.5** | ** ** | **$** | **—** | ** ** | **$** | **(2.9** | **)** | **$** | **60.8** | ** ** | **$** | **72.9** | ** ** | **$** | **21.7** | ** ** | **$** | **(0.1** | **)** | **$** | **(3.0** | **)** | **$** | **54.3** | ** ** |
| Other                                 | ** ** | **0.8**              | ** ** | **0.8** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **(0.1** | **)** | **—** | ** ** | **0.1** | ** ** |
| Held-to-maturity  debt securities (a) | ** ** | **14.7**             | ** ** | **—** | ** ** | **(0.1** | **)** | **—** | ** ** | **14.8** | ** ** | **30.6** | ** ** | **0.2** | ** ** | **—** | ** ** | **-** | ** ** | **30.4** | ** ** |
|                                  |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                          | ** ** | **$**                | **107.9**  | ** ** | ** ** |   |   |   |   |   | **$** | **75.6** |   | $ | 103.5 |   |   |   |   |   |   |   | $ | 84.8 |   |
|                                  |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**                       |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt  (b)                   | ** ** | **$**                | **681.9**  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | **$** | **688.1** |   | **$** | **692.6** |   |   |   |   |   |   |   | **$** | **688.4** |   |
|                                       |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

*(a)  Maturitiesrange from 2005 to 2031.*

*(b)  Includescurrent maturities.*

 

Realized gains and (losses) for available-for-sale securities were $0.1million and an insignificant loss in 2004, $1.1 million and $(0.8) million in 2003, and $0.3 million and $(2.8)million in 2002, respectively.

 

In the normal course ofbusiness, DP&L enters into various financial instruments, includingderivative financial instruments.  Theseinstruments consist of forward contracts and options that are used to reducethe Company’s exposure to changes in energy and commodity prices.  These financial instruments are designated atinception as highly effective cash-flow hedges and are measured foreffectiveness both at inception and on an ongoing basis, with gains or lossesdeferred in Accumulated Other Comprehensive Income until the underlying hedgedtransaction is realized, canceled or otherwise terminated.  The forward contracts and options generallymature within twelve months.

 

**Concentration of Credit Risk**

Financial instruments expose DP&L to counterparty credit risk fornonperformance and to market risk related to changes in interest rates.  The Company manages the exposure tocounterparty credit risk through diversification and monitoring concentrationsof credit risk.  The counterparties aresubstantial investment and commercial banks and other creditworthycounterparties.  DP&L monitors theimpact of market risk by considering changes in interest rates and restrictsthe use of derivative financial instruments to hedging activities.

 

*12. Commitments and Contingencies*

 

**Contingencies**

In the normal course of business, DP&L issubject to various lawsuits, actions, proceedings, claims and other mattersasserted under laws and regulations.  TheCompany believes the amounts provided in its consolidated financial statements,as prescribed by GAAP, are adequate in light of the probable and estimablecontingencies.  (See Note 2 of Notes toConsolidated Financial Statements.) However, there can be no assurances that the actual amounts required tosatisfy alleged liabilities from various legal proceedings, claims, and othermatters discussed below, and to comply with applicable laws and regulations,will not exceed the amounts reflected in DP&L’s 

 

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Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amountsprovided as of December 31, 2004, cannot be reasonably determined.

 

**Environmental Matters**

DP&L’s facilities andoperations are subject to a wide range of environmental regulations andlaw.  In the normal course of business,the Company has investigatory and remedial activities underway at thesefacilities to comply, or to determine compliance, with such regulations.  The Company has been identified, either by agovernment agency or by a private party seeking contribution to site clean-upcosts, as a potentially responsible party (PRP) at two sites pursuant to stateand federal laws.  The Company recordsliabilities for probable estimated loss in accordance with Statement ofFinancial Accounting Standards No. 5, “Accounting for Contingencies” (SFAS).  To the extent a probable loss can only beestimated by reference to a range of equally probable outcomes, and no amountwithin the range appears to be a better estimate than any other amount, theCompany accrues for the low end of the range. Because of uncertainties related to these matters, accruals are based onthe best information available at the time. DP&L evaluates the potential liability related to probable lossesquarterly and may revise its estimates. Such revisions in the estimates of the potential liabilities could havea material effect on the Company’s results of operations and financialposition.

 

**Legal Matters**

On July 9, 2004, Mr.Forster and Ms. Muhlenkamp filed a lawsuit against the Company, DPL and MVE inthe Circuit Court, Fourth Judicial Circuit, in and for Duval County,Florida.  The complaint asserted that theCompany, DPL and MVE (i) wrongfully terminated Mr. Forster and Ms. Muhlenkampby undermining their authority and responsibility to manage the companies andexcluding them from discussions on corporate financial issues and strategicplanning after the Thobe Memorandum was distributed and (ii) breached Mr. Forster’sconsulting contract and Ms. Muhlenkamp’s employment agreement by denying themcompensation and benefits allegedly provided by the terms of such contract andagreement upon their termination from the Company and DPL.  Mr. Forster and Ms. Muhlenkamp seek damagesof an undetermined amount.  (See Note 14of Notes to Consolidated Financial Statements for further information.)  On August 9, 2004, the defendants removed thecase to the U.S. District Court for the Middle District of Florida,Jacksonville Division.  On August 16,2004, the defendants moved to dismiss the litigation based on the Floridafederal court’s lack of jurisdiction over the Company, DPL and MVE, all of whomare companies based in Dayton, Ohio.  Inthe alternative, the defendants requested that the court transfer the case tothe U.S. District Court for the Southern District of Ohio, which hasjurisdiction in Dayton, Ohio.  OnSeptember 17, 2004, Mr. Forster and Ms. Muhlenkamp filed memoranda opposingthese motions.  On November 10, 2004,U.S. District Court for the Middle District of Florida, Jacksonville Division,granted defendants’ motion to dismiss this case.

 

On August 24,2004, the Company, DPL and MVE filed a Complaint against Mr. Forster, Ms.Muhlenkamp and Mr. Koziar in the Court of Common Pleas of Montgomery County,Ohio asserting legal claims against them relating to the termination of theValley Partners Agreements, challenging the validity of the purported amendmentsand the propriety of the distributions and alleging that Messrs. Forster andKoziar and Ms. Muhlenkamp breached their fiduciary duties and breached theirconsulting and employment contracts.  TheCompany, DPL and MVE seek, among other things, damages in excess of $25thousand, disgorgement of all amounts improperly withdrawn by Messrs. Forsterand Koziar and Ms. Muhlenkamp from the deferred compensation plans and a courtorder declaring that the Company, DPL and MVE have no further obligations underthe consulting and employment contracts due to those breaches.

 

DefendantsForster, Koziar and Muhlenkamp filed motions to dismiss the Complaint andmotions to stay discovery.  The Companyand DPL have filed briefs opposing those motions.  In addition, pursuant to applicable statues,regulations and agreements, the Company and DPL have been advancing certain ofDefendants’ attorneys’ fees and expenses with respect to various matters otherthan the litigation between Defendants and the Company and DPL in Florida andOhio, and believe that other requested advances are not required.  On February 7, 2005, Forster and Muhlenkampfiled a motion in the Company’s and DPL’s Ohio litigation seeking to compel the

 

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Company andDPL to pay all attorneys’ fees and expenses that they have not advanced tothem.  The Company and DPL have filed abrief opposing that motion.  All of theforegoing motions are pending.  TheCompany and DPL continue to evaluate all of these matters and are consideringother claims against Defendants Forster, Koziar and/or Muhlenkamp that include,but are not limited to, breach of fiduciary duty or other claims relating topersonal and Company investments, the calculation of benefits under the SERPand financial reporting with respect to such benefits, and, with respect to Mr.Koziar, the fulfillment of duties owed to the Company and DPL as their legalcounsel.  Cumulatively through December31, 2004, the Company and DPL have accrued for accounting purposes, obligationsof approximately $40 million to reflect claims regarding deferred compensation,estimated MVE incentives and/or legal fees that Defendants assert are payableper contracts.  The Company and DPLdispute Defendants’ entitlement to any of those sums and, as noted above, arepursuing litigation against them contesting all such claims.  The Company and DPL cannot currently predictthe outcome of that litigation.

 

On or about June 24, 2004, the SEC commenceda formal investigation into the issues raised by the Thobe Memorandum.  The Company and DPL are cooperating with theinvestigation.

 

On April 7, 2004, the Company received noticethat the staff of the PUCO is conducting an investigation into its financialcondition as a result of the issues raised by the Thobe Memorandum.  On May 27, 2004, the PUCO ordered DP&L tofile a plan of utility financial integrity that outlines the actions DPL hastaken or will take to insulate DP&L utility operations and customers fromits unregulated activities.  DP&L wasrequired to file this plan by March 2, 2005. On February 4, 2005, DP&L filed its protection plan with the PUCOand will continue to cooperate to resolve any outstanding issues in theinvestigation.

 

On May 28, 2004, the U.S.Attorney’s Office for the Southern District of Ohio, assisted by the FederalBureau of Investigation, notified the Company and DPL that it has initiated aninquiry involving matters connected to the Company’s and DPL’s internalinvestigation.  The Company and DPL arecooperating with this investigation.

 

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

 

On March 3, 2005, DP&Lreceived a notice that the FERC had instituted an operational audit of DP&Lregarding its compliance with its Code of Conduct within the transmission andgeneration areas.  The FERC has providedDP&L with a data request and DP&L is cooperating in the furnishing of requestedinformation.  DP&L cannot predict theoutcome of this operational audit.

 

On December 12, 2003, theOffice of Federal Contract Compliance Programs (OFCCP) notified DP&L byletter alleging it had discriminated in the hiring of meter readers during2000-2001 by utilizing credit checks to determine if applicants had paid theirelectric bills.  On February 12, 2004,DP&L and the OFCCP entered into a Conciliation Agreement whereby DP&Lagreed to distribute approximately $0.2 million in compensation to certainaffected applicants.  DP&L hascompleted these payments to the affected applicants.

 

In June 2002, a contractor’semployee received a verdict against DP&L for injuries he sustained whileworking at a DP&L power station.  TheCourt awarded the contractor’s employee compensatory damages of approximately$0.8 million and prejudgment interest of approximately $0.6 million.  On April 28, 2004, the appellate court upheldthis verdict except the award for prejudgment interest.  On September 1, 2004, the Ohio Supreme Courtrefused to hear the case, so the matter was remanded to the trial court for are-determination of whether prejudgment interest should be awarded.  The trial court heard this matter on October15, 2004.  On November 1, 2004, DP&Lpaid approximately $976 thousand to the contractor’s employee to satisfy thejudgment and post-judgment interest.  OnDecember 6, 2004, the trial court ruled that prejudgment interest should bereduced to approximately $30 thousand. Both parties have appealed this decision.  The appeal is pending.

 

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**Long-termObligations and Commercial Commitments**

DP&L enters into variouscontractual and other long-term obligations that may affect the liquidity ofits operations.  At December 31, 2004,these include:

 
| ** **                                          | ** ** | **Payment Year** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|
| **Long-term Obligations**

**($ in millions)** | ** ** | **2005**         | ** ** | **2006 & 2007** | ** ** | **2008 & 2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-term debt                                      |       | $                | 0.4        |   | $ | 9.0 |   | $ | — |   | $ | 673.8 |   | $ | 683.2 |   |
| Interest payments                                   |       | 37.7             |       | 74.9 |   | 74.0 |   | 336.4 |   | 523.0 |   |
| Pension and Postretirement payments                 |       | 23.2             |       | 45.9 |   | 46.3 |   | 117.9 |   | 233.3 |   |
| Capital leases                                      |       | 1.1              |       | 1.8 |   | 1.4 |   | 0.6 |   | 4.9 |   |
| Operating leases                                    |       | 0.6              |       | 0.6 |   | — |   | — |   | 1.2 |   |
| Coal contracts *(a)*                                |       | 232.1            |       | 397.4 |   | 83.7 |   | 85.7 |   | 798.9 |   |
| Other long-term obligations                         |       | 8.4              |       | 8.7 |   | 0.5 |   | — |   | 17.6 |   |
| Total long-term obligations                         |       | $                | 303.5      |   | $ | 538.3 |   | $ | 205.9 |   | $ | 1,214.4 |   | $ | 2,262.1 |   |

----

*(a)  DP&L-operated units.*

 

Long-term debt:

Long-term debt as of December 31, 2004, consists of first mortgagebonds and guaranteed air quality development obligations and includes currentmaturities and unamortized debt discount. (See Note 7 of Notes to Consolidated Financial Statements.)

 

Interest payments:

Interest payments associated with the Long-term debt described above.

 

Pension and Postretirement payments:

As of December 31, 2004, DP&L had estimated future benefit paymentsas outlined in Note 5 of Notes to Consolidated Financial Statements.  These estimated future benefit payments areprojected through 2014.

 

Capital leases:

As of December 31, 2004, the Company had two capital leases that expirein November 2007 and September 2010.

 

Operating leases:

As of December 31, 2004, the Company had several operating leases withvarious terms and expiration dates.

 

Coal contracts:

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

 

Other long-term obligations:

As of December 31, 2004, the Company had various other long-termobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

DP&L enters into variouscommercial commitments, which may affect the liquidity of its operations.  At December 31, 2004, these include:

 
| ** **                                           | ** ** | **Year of Expiration** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| **Commercial Commitments**

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

 

Credit facilities:

DP&L had $150 million available through an unsecured revolvingcredit agreement with a consortium of banks that was scheduled to expire onDecember 10, 2004.  In June 2004, the 

 

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Company replaced this facility with a $100 million, 364 day unsecuredcredit facility that expires on May 31, 2005. At December 31, 2004, there were no borrowings outstanding under thiscredit agreement.  The new facility maybe increased up to $150 million.

 

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electricgeneration company.  As of December 31,2004, DP&L could be responsible for the repayment of 4.9%, or $14.9million, of a $305 million debt obligation and also 4.9%, or $2.9 million, of aseparate $60 million debt obligation. Both obligations mature in 2006.

 

 

*13. CertainRelationships and Related Transactions*

Under the Securityholders and Registration RightsAgreement among DPL Capital Trust I, Dayton Ventures LLC and Dayton Ventures,Inc., KKR had the right to designate one person for election to, and one personto attend as a non-voting observer at all meetings of, the DP&L and DPLBoards of Directors for as long as Dayton Ventures LLC and its affiliatescontinue to beneficially own at least 12.64 million common shares of DPL,including shares issuable upon exercise of warrants.  Scott M. Stuart, adirector during fiscal 2003, and George R. Roberts, a non-voting observer, werethe KKR designees in 2003 pursuant to this agreement.  Mr. Stuart resignedfrom the Board and Mr. Roberts ceased to be a non-voting observer of the Boardas of April 2004.  As a result of thetransfer of warrants from KKR to an unaffiliated third party during December2004 through January 2005, KKR no longer owns any warrants or common stock of DPL.  Accordingly, KKR no longer has the right toappoint one member and one observer to both the Company and DPL Boards ofDirectors and the Securityholders and Registration Rights Agreement was amendedto delete these, and other, rights.

In 1996, the Company and DPL entered into a consultingcontract pursuant to which Peter H. Forster agreed to (i) serve, in anon-employee capacity, as Chairman of the Board of Directors of the Company,DPL and MVE, and as Chairman of the Executive Committee of the Board ofDirectors of the Company and DPL and (ii) provide advisory and strategicplanning consulting services.  The termsand conditions of such consulting contracts are described in the sectionentitled “Consulting Contract and Employment Agreements.”

Mr. Forster resigned on May 16, 2004.  Inconnection with Mr. Forster’s resignation, the Company and DPL reserved allrights and defenses and Mr. Forster reserved all rights and entitlements underapplicable law and under any existing agreement between Mr. Forster, theCompany and all of its subsidiaries.  Mr. Forster filed a lawsuit againstthe Company, DPL and MVE alleging claims against the Company, DPL and MVE forbreach of contract, conversion, promissory estoppel and declaratory judgmentrelating to his consulting agreement.  That lawsuit, filed in Florida, wasdismissed in November 2004 for lack of jurisdiction.  The Company, DPL and MVE have filed a lawsuitagainst Mr. Forster alleging that he breached his fiduciary duties and breachedhis consulting contract and claim that they no longer owe Mr. Forster anyfurther benefits under his contract.  (See Note 12 of Notes toConsolidated Financial Statements.)

In October 2001, the Company and DPL entered into anAdministrative Services Agreement (the ASA) with Valley Partners, Inc. (Valley)and the individual trustees of certain master trusts which hold the assets ofvarious executive and director compensation plans.  The ASA engaged Valley to provideadministrative and recordkeeping functions on behalf of the master trusts upona change of control of the Company or DPL in exchange for a 1.25%administration fee based on the market value of all assets of the mastertrusts.  The ASA also called for Valley to provide investment advice asrequested by the trustees.  The 1.25% fee payable to Valley under the ASAwas in addition to the annual management fee payable to Valley.

In October 2001, the Company and DPL also entered intoa Trustee Fee Agreement (the TFA) with Richard Chernesky, Richard Broock andFrederick Caspar, attorneys at Chernesky, Heyman & Kress P.L.L., a law firmthat represented the Company and DPL.  Upon a change of control of 

 

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the Company or DPL, Messrs. Chernesky, Broock andCaspar would become the sole trustees of the master trusts and would succeed toall of the duties of DPL’s Compensation Committee under the compensation plansfunded through the master trusts in exchange for an annual fee of $500 thousand. This fee would not be reduced by payments made to Valley under the ASA.

The MSAs, ASA and TFA (Valley Partners Agreements)were terminated by an agreement executed in January 2004, but effective as ofDecember 15, 2003.  The financial assets were not sold or transferredprior to such termination and therefore the agreements never became effectiveand no compensation was ever paid under them.  Mr. Forster’s andMs. Muhlenkamp’s consulting and compensation arrangements were governed bythe terms of the consulting contract between the Company, DPL andMr. Forster and the employment agreement between the Company, DPL andMs. Muhlenkamp, respectively.

On February 2 and 3, 2004 Mr. Koziar sent letters toMr. Forster and Ms. Muhlenkamp purporting to amend their consulting andemployment agreements to provide change of control protections regarding theirMVE payments.  In addition, on February2, 2004, Mr. Koziar sent Mr. Forster a letter purporting to amend hisconsulting agreement to provide additional terms and to increase hiscompensation.  However, none of thosepurported amendments had been approved by the DPL Compensation Commitee.

On April 26, 2004, the Company and DPL entered into anew Trustee Fee Agreement (New TFA) with Messrs. Chernesky, Broock and Casparthat would have become effective upon a change of control of the Company orDPL.  If the New TFA became effective, it provided that Messrs. Chernesky,Broock and Caspar would serve as the sole trustees of the master trusts inexchange for an annual fee of $250 thousand during the New TFA’s term.  OnOctober 14, 2004, at the request of the Company and DPL, Messrs. Chernesky,Broock and Caspar submitted their resignations to the Company and DPL.

The Company has reviewed the termination of the ValleyPartners Agreements, and the purported amendments and agreements sent to Mr.Forster and Ms. Muhlenkamp on February 2, 2004, and has initiated legalproceedings asserting breach of fiduciary duty by Messrs. Forster and Koziarand Ms. Muhlenkamp, and challenging the propriety and/or validity of thoseterminations, purported amendments and agreements.

 

*14.  Subsequent Events*

 

**January Ice Storm**

During January 2005, the Company incurred approximately $8.2 millionrelating to a severe ice storm.  TheCompany believes these costs are recoverable and in January 2005 recorded thesecosts as regulatory assets.

 

*15.  Other Matters*

 

**Audit Committee Investigation and RelatedMatters**

On March 10, 2004, the Company’scontroller, Daniel Thobe, sent a memorandum (the Thobe Memorandum) to W AugustHillenbrand, the Chairman of the DPL Audit Committee of the Board of Directors(the Audit Committee).  The ThobeMemorandum expressed Mr. Thobe’s “concerns, perspectives and viewpoints”regarding financial reporting and governance issues within the Company.  The four general categories of issuesidentified by Mr. Thobe were: (i) “disclosure issues” concerningagreements with Valley Partners, Inc. (a company owned by Peter H. Forster,formerly DPL’s and DP&L’s Chairman, and Caroline E. Muhlenkamp, formerlyDPL’s and DP&L’s Group Vice President and interim Chief Financial Officer),the reporting of executive perquisite compensation in DPL’s proxy statement,segment reporting concerning DPL’s subsidiary, MVE, and disclosure of Ms.Muhlenkamp’s compensation; (ii) “internal control issues” including a lack ofinformation regarding certain journal entries and a lack of supportingdocumentation for travel-related expenses of certain senior executives; (iii) “processissues,” which include the processes relating to recent purported amendments tothe Company’s and DPL’s deferred compensation plans, the classification of Mr.Forster as an independent contractor, and untimely payroll processing; and (iv)“communication issues” relating to changes to the 2003 management bonus thatwere not communicated to the staff and “current practices and processes” thathave created an unfavorable “tone at the top” environment.

 

On March 15, 2004, the AuditCommittee retained the law firm of Taft, Stettinius & Hollister LLP(TS&H) to represent the Audit Committee in an independent review of each ofthe matters raised by the Thobe Memorandum. TS&H subsequently retained an accounting firm as a forensicaccountant to assist in this review.  OnApril 27, 2004, TS&H submitted a written report of its findings to themembers of the Audit Committee (the Report). A copy of the Report was filed as an exhibit to the 2003Form 10-K.  TS&H stated in itsReport that no person had indicated to it, nor had it uncovered in the courseof its review, any uncorrected material inaccuracies in the Company’s and DPL’sbooks and records.  Further, TS&Hreported that it had determined that some of 

 

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Mr. Thobe’s concerns werebased on incomplete information or were matters of judgment.  TS&H did, however, recommend furtherfollow-up by the Audit Committee and improvements relating to disclosures,communication, access to information, internal controls and the culture of theCompany and DPL Inc. in certain areas.

 

The findings in the Reportinclude:

 

        (i)        Nomaterial deficiency was found concerning the amounts reported as perquisitesreceived by named executive officers in DPL’s recent proxy filings.

 

        (ii)       Nonew information was uncovered that would cause TS&H to conclude that DPLmust change its position on the issue of segment reporting for its MVE, Inc.subsidiary.  TS&H stated that DPLshould continue to make this accounting judgment.  For 2003, DPL reevaluated the financialreporting requirements under FASB Statement of Accounting Standards No. 131 “Disclosuresabout Segments of an Enterprise and Related Information” and concluded it wasappropriate in 2003 to begin reporting its Financial Asset Portfolio as aseparate business segment because of the increased executive-level attentionand emphasis on financial reporting during the year.

 

        (iii)      There is evidence of a reasonable basisfor the DPL’s position that Ms. Muhlenkamp was not an executive officer priorto her appointment as Group Vice President and interim Chief Financial Officerin April 2003.

 

        (iv)      TS&H did not discover any uncorrectedmaterial inaccuracies in the Company’s or DPL’s journal entries.

 

        (v)       There is evidence to support the Company’sand DPL’s position that Mr. Forster was an independent contractor for taxpurposes.  The Company and DPL had consistentlytaken this position since 1996.

 

        (vi)      The Company’s and DPL’s employee bonusprogram appears to have been handled by the Company and DPL in accordance withtheir discretionary authority.

 

        (vii)     TS&H’s recommendation that the Companyand DPL disclose and file certain agreements with Valley Partners, Inc., whichare no longer in effect.  Such disclosurewas made in the DPL Inc. and DP&L 2003 Form 10-Ks and the agreements werereferenced as Exhibits.

 

        (viii)    Approximately $355 thousand of businessexpense reimbursements of Mr. Forster and Ms. Muhlenkamp for the years 2001through 2003 lacked complete documentation that would verify a businesspurpose.  The Report also stated thatapproximately $355 thousand of expenses related to use of the corporateaircraft by Messrs. Koziar and Forster and Ms. Muhlenkamp for the years 2001through 2003 also lack complete documentation that would verify a businesspurpose.  The Report statedMessrs. Koziar and Forster and Ms. Muhlenkamp have stated that theybelieve all such charges are legitimate business expenses.

 

        (ix)       The Company’s DPL’s deferred compensationplans were amended in December 2003 with the approval of the DPL CompensationCommittee to permit cash distributions to participants with balances in excessof $500 thousand or mandated share holding amounts from their respectivedeferred compensation accounts.  Theeffect was to permit cash distributions from such accounts only toMessrs. Forster and Koziar and Ms. Muhlenkamp.  According to the Report, DPL’s loss of futuredeductibility of the distributions to Mr. Koziar and Ms. Muhlenkamp resulted ina reduction in DPL’s after-tax income for 2003 of approximately $9.5million.  TS&H viewed the planning,presentation and adoption of these purported plan amendments as a processweakness by the Company’s and DPL’s management that should be addressed by theCompensation and Audit Committees. Notwithstanding this finding, as discussed in Note 12, the Company andDPL have initiated legal proceedings challenging the effectiveness of these purportedamendments.

 

61

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        (x)        An isolated instance of untimely payrollprocessing appears to have been caused by employee miscommunication during theperiod the Company and DPL, converted its payroll to the ADP system.

 

        (xi)       The Report notes several instances ofweakness in internal communication and recommends that the Audit Committeereview internal communication and employee access to information at theCompany, as well as coordination with outside legal and accountingprofessionals.

 

        (xii)       The Report also notes that a scrubbing softwareprogram was installed and used on Mr. Forster’s computer beforeMr. Forster delivered his computer to TS&H for forensics analysis.

 

        (xiii)     The Report includes recommendations forstrengthening policies or procedures, or otherwise addressing the substance ofTS&H’s findings.

 

Based upon information receivedafter issuing the Report, TS&H revised its analysis and prepared asupplement to the Report, dated May 15, 2004 (the Supplement).

 

According to the Supplement:

 

        (i)        Except as specifically modified oramplified by the Supplement, the findings, conclusions and recommendations ofthe Report remain unchanged.

 

        (ii)       While additional information concerningbusiness purpose was provided for many more of the travel and expensereimbursements, no additional documentation or receipts were provided by Mr.Forster or Ms. Muhlenkamp.

 

        (iii)      Additional information and documentationprovided by senior management verified a business purpose for more of thepersonal usage of corporate aircraft by Messrs. Forster and Koziar and Ms.Muhlenkamp, thereby decreasing the potential underreported taxable income forsuch individuals from the original estimate of $335 thousand to approximately$225 thousand.

 

        (iv)      TS&H reviewed the historical accrualof deferred compensation for Messrs. Forster and Koziar and Ms. Muhlenkamp from1998 through 2003 and was provided some form of documentation relating to theDPL Compensation Committee’s action or state of knowledge regarding each of thedeferred compensation awards except for an award to Mr. Forster in the amountof $100 thousand and an award to Ms. Muhlenkamp in the amount of $1.0million.

 

The Audit Committee consideredthe Report and Supplement at a meeting held on May 16, 2004.  After its review and consideration, the AuditCommittee recommended that the full Board of Directors accept the Report andthe Supplement.  At a meeting held onMay 16, 2004, the Board of Directors accepted the Report and Supplement,including the findings and recommendations set forth therein.

 

In 2004 corrective action wastaken with regard to internal controls, process issues and tone at the top asidentified in the Report.  The AuditCommittee, the Company’s and DPL’s senior management continue to evaluate theReport and Supplement, and are considering what additional action, if any, totake in response to the findings and recommendations therein.

 

**Governmentaland Regulatory Inquiries**

On April 7, 2004, the Companyreceived notice that the staff of the Public Utilities Commission of Ohio(PUCO) is conducting an investigation into the financial condition of DP&Las a result of the issues raised by the Thobe Memorandum.  On May 27, 2004, the PUCO ordered DP&L tofile a plan of utility financial integrity that outlines the actions DPL hastaken or will take to insulate DP&L utility operations and customers fromits unregulated activities.  DP&L wasrequired to file this plan by March 2, 2005. On February 4, 2005, DP&L filed its protection plan with the PUCOand will continue to cooperate with the PUCO to resolve any outstanding issuesin this investigation.

 

62

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On May 28, 2004, the U.S.Attorney’s Office for the Southern District of Ohio, assisted by the FederalBureau of Investigation, notified the Company that it has initiated an inquiryinvolving matters connected to the Company’s internal investigation.  The Company is cooperating with thisinvestigation.

 

On or about June 24, 2004, theSEC commenced a formal investigation into the issues raised by the ThobeMemorandum.  The Company is cooperatingwith the investigation.

 

Commencing on or aboutJune 24, 2004, the Internal Revenue Service (IRS) has issued a series of datarequests to the Company regarding issues raised in the Thobe Memorandum.  The staff of the IRS has requested that theCompany provide, certain documents, including but not limited to, mattersconcerning executive/director deferred compensation plans, management stockincentive plans and MVE financial statements. The Company is cooperating with these requests.

 

On March 3, 2005, DP&L received a noticethat the FERC had instituted an operational audit of DP&L regarding itscompliance with its Code of Conduct within the transmission and generationareas.  The FERC has provided DP&Lwith a data request and DP&L is cooperating in the furnishing of requestedinformation.  DP&L cannot predict theoutcome of this operational audit.

 

63

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** **

** **

** **

**Report of Independent Registered Public AccountingFirm**

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

We have audited the accompanying consolidated balance sheets of TheDayton Power and Light Company and subsidiaries (DP&L) as of December 31,2004 and 2003, and the related consolidated statements of results ofoperations, shareholders’ equity, and cash flows  for each of the years in the two year periodended December 31, 2004. In connection with our audits of the consolidatedfinancial statements, we have audited the consolidated financial statementschedule, “Schedule II — Valuation and Qualifying Accounts” for the years endedDecember 31, 2004 and 2003. These consolidated financial statements and thefinancial statement schedule are the responsibility of the DP&L’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of DP&L as of December 31, 2004and 2003, and the consolidated results of their operations and their cash flowsfor each of the years in the two-year period ended December 31, 2004, inconformity with United States generally accepted accounting principles. Also,in our opinion, the related financial statement schedules when considered inrelation to the basic consolidated financial statements taken as a whole,present fairly in all material respects, the information set forth therein.

 
| /s/ KPMG LLP           |   |
|------------------------|--------|
|                   |
| KPMG LLP               |
| Kansas City,  Missouri |
| March 9,  2005         |

 

64

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**Report of Independent Registered Public AccountingFirm on Internal Controls**

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

We have audited management’sassessment, included in the Management’s Report on Internal Control OverFinancial Reporting appearing under Item 9A, that The Dayton Power and LightCompany and subsidiaries (DP&L) maintained effective internal control overfinancial reporting as of December 31, 2004, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). DP&L’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of DP&L’s internal controlover financial reporting based on our audit.

 

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

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial 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 the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions 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 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, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment thatDP&L maintained effective internal control over financial reporting as ofDecember 31, 2004, is fairly stated, in all material respects, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Also,in our opinion, DP&L maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2004, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).

 

 

65

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We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheet of DP&L as of December 31,2004 and 2003, and the related consolidated statements of results ofoperations, shareholder’s equity, and cash flows for the years ended December31, 2004 and 2003, and our report dated March 9, 2005, expressed an unqualifiedopinion on those consolidated financial statements.

 
| /s/ KPMG LLP           |   |
|------------------------|--------|
|                   |
| KPMG LLP               |
| Kansas City,  Missouri |
| March 9,  2005         |

 

 

66

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**Report ofIndependent Registered Public Accounting Firm**

 

 

To the Board of Directors andShareholders

of The Dayton Power and LightCompany:

 

 

In our opinion, the accompanyingconsolidated statements of results of operations, of cash flows, and ofshareholder’s equity of The Dayton Power and Light Company and its subsidiariespresent fairly, in all material respects, the results of their operations andtheir cash flows for the year ended December 31, 2002, in conformity with accountingprinciples generally accepted in the United States of America.  In addition, in our opinion, the financialstatement schedule, “Schedule II — Valuation and Qualifying Accounts” for theyear ended December 31, 2002, presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements.  Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management; our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audit.  We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

As described in Note 1, the consolidatedfinancial statements for the year ended December 31, 2002 have been restated.

 

 
| /s/ PricewaterhouseCoopers LLP                                       |   |
|----------------------------------------------------------------------|--------|
|                                                                 |
| PricewaterhouseCoopers  LLP                                          |
| Philadelphia, Pennsylvania                                           |
| January 27, 2003, except for Note 1 which  is as of October 28, 2004 |

 

 

67

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**Selected Quarterly Information (Unaudited)**

** **
| ** **                                                              | ** ** | **For the three months ended** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | **March 31,**                  | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                                                  | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Electric Revenues                                                       | ** ** | **$**                          | **300.4**  |   | $ | 295.7 | ** ** | **$** | **282.8** |   | $ | 271.4 | ** ** | **$** | **310.2** |   | $ | 323.2 | ** ** | **$** | **298.8** |   | $ | 293.1 |   |
| Operating Income                                                        | ** ** | **106.9**                      |       | 114.8 | ** ** | **89.6** |   | 80.5 | ** ** | **106.7** |   | 118.3 | ** ** | **66.2** |   | 81.2 |   |
| Income Before  Income Taxes and  Cumulative Effect of Accounting Change | ** ** | **99.3**                       |       | 103.0 | ** ** | **77.7** |   | 72.2 | ** ** | **95.3** |   | 126.7 | ** ** | **57.5** |   | 70.9 |   |
| Income Before  Cumulative Effect of Accounting Change                   | ** ** | **62.0**                       |       | 63.8 | ** ** | **47.0** |   | 45.4 | ** ** | **55.5** |   | 78.8 | ** ** | **44.5** |   | 34.4 |   |
| Net Income                                                              | ** ** | **62.0**                       |       | 80.8 | ** ** | **47.0** |   | 45.4 | ** ** | **55.5** |   | 78.8 | ** ** | **44.5** |   | 34.4 |   |
| Earnings on  Common Stock                                               | ** ** | **61.8**                       |       | 80.6 | ** ** | **47.0** |   | 45.2 | ** ** | **55.5** |   | 78.5 | ** ** | **43.8** |   | 34.2 |   |
| Cash Dividends  Paid                                                    | ** ** | **75.0**                       |       | 82.5 | ** ** | **75.0** |   | 30.2 | ** ** | **—** |   | 100.0 | ** ** | **150.0** |   | 86.0 |   |
|                                                                         |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

**Financial and Statistical Summary (Unaudited)**

** **
| **For the years ended December 31,**    | ** ** | **2004**   | ** **  | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** | **2000** | ** ** |
|-----------------------------------------|------------|------------|-------------|------------|------------|------------|------------|------------|------------|----------|------------|
| ** **                              | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(a)**  | ** ** |
| Electric revenues (millions)            | ** ** | **$**      | **1,192.2** |       | 1,183.4    |       | 1,175.8    |       | 1,188.2    |     | 1,110.1    |   |
| Gas revenues (millions)                 | ** ** | **$**      | **—**  |       | —     |       | —     |       | —     |     | 183.8      |   |
| Earnings on common stock (millions)     | ** ** | **$**      | **208.1**   |       | 238.5      |       | 244.7      |       | 232.7      |     | 290.1      |   |
|                                    |       |       |        |       |       |       |       |       |       |     |       |
| Cash dividends paid (millions)          | ** ** | **$**      | **300.0**   |       | 298.7      |       | 204.5      |       | 82.4       |     | 606.4      |   |
|                                    |       |       |        |       |       |       |       |       |       |     |       |
| Electric sales (millions of kWh)        |       |       |        |       |       |       |       |       |       |     |       |
| Residential                             | ** ** | **5,140**  |        | 5,071      |       | 5,302      |       | 4,909      |       | 4,816    |       |
| Commercial                              | ** ** | **3,777**  |        | 3,699      |       | 3,710      |       | 3,618      |       | 3,540    |       |
| Industrial                              | ** ** | **4,393**  |        | 4,330      |       | 4,472      |       | 4,568      |       | 4,851    |       |
| Other retail                            | ** ** | **1,407**  |        | 1,409      |       | 1,405      |       | 1,369      |       | 1,370    |       |
| Total retail                            | ** ** | **14,717** |        | 14,509     |       | 14,889     |       | 14,464     |       | 14,577   |       |
| Wholesale                               | ** ** | **3,748**  |        | 4,836      |       | 4,358      |       | 3,591      |       | 2,946    |       |
| Total                                   | ** ** | **18,465** |        | 19,345     |       | 19,247     |       | 18,055     |       | 17,523   |       |
|                                    |       |       |        |       |       |       |       |       |       |     |       |
| Gas sales (thousands of MCF)(b)         |       |       |        |       |       |       |       |       |       |     |       |
| Residential                             | ** ** | **—** |        | **—** |       | **—** |       | **—** |       | 18,538   |       |
| Commercial                              | ** ** | **—** |        | **—** |       | **—** |       | **—** |       | 5,838    |       |
| Industrial                              | ** ** | **—** |        | **—** |       | **—** |       | **—** |       | 2,034    |       |
| Other                                   | ** ** | **—** |        | **—** |       | **—** |       | **—** |       | 776      |       |
| Transported gas                         | ** ** | **—** |        | **—** |       | **—** |       | **—** |       | 16,105   |       |
| Total                                   | ** ** | **—** |        | **—** |       | **—** |       | **—** |       | 43,291   |       |
|                                    |       |       |        |       |       |       |       |       |       |     |       |
| At December 31,                         |       |       |        |       |       |       |       |       |       |     |       |
| Total assets (millions)                 | ** ** | **$**      | **2,641.4** |       | 2,660.1    |       | 2,757.3    |       | 2,792.1    |     | 2,834.3    |   |
| Long-term debt (millions)               | ** ** | **$**      | **686.6**   |       | 687.3      |       | 665.5      |       | 666.6      |     | 666.5      |   |
|                                    |       |       |        |       |       |       |       |       |       |     |       |
| First mortgage bond ratings—       |       |       |        |       |       |       |       |       |       |     |       |
| Fitch Ratings                           | ** ** | **BBB**    |        | A          |       | A          |       | AA         |       | AA       |       |
| Moody’s Investors Service          | ** ** | **Baa3**   |        | Baa1       |       | A2         |       | A2         |       | A2       |       |
| Standards & Poor’s Corporation | ** ** | **BBB-**   |        | BBB-       |       | BBB        |       | BBB+       |       | BBB+     |       |
|                                    |       |       |        |       |       |       |       |       |       |     |       |
| Number of Preferred Shareholders        | ** ** | **357**    |        | 402        |       | 426        |       | 476        |       | 471      |       |

----

* (a)Certain changes have been made to results in this year as discussed in Note 1to Consolidated Financial  Statements.*

*      In 2000, Earnings on common stock previously reported as $297.9 andTotal assets previously reported as*

*      $2,721.5 million.*

*(b) The Company completed the sale of itsnatural gas retail distribution assets and certain liabilities on October 31,2000.*

 

68

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**Item 9 — Changes in and Disagreements with Accountants on Accountingand Financial Disclosure**

 

None.

 

 

**Item 9A — Controls and Procedures**

 

**DisclosureControls and Procedures**

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

 

During 2004, the Companyremediated two material weaknesses and certain other matters involving internalcontrol deficiencies considered to be reportable conditions under standardsestablished by the Public Company Accounting Oversight Board (PCAOB).  Those issues had been identified during the2003 financial close process by the Company’s independent accountants and hadbeen reported to management and the Audit Committee of the Board ofDirectors.  Reportable conditions arematters coming to the attention of the auditors that, in their judgment, relateto significant deficiencies in the design and operation of internal controlsand could adversely affect the organization’s ability to record, process,summarize and report financial data consistent with the assertions ofmanagement in the financial statements. A material weakness is a reportable condition in which the design oroperation of one or more internal control components does not reduce to arelatively low level of risk that errors or fraud in amounts that would bematerial in relation to the financial statements being audited may occur andnot be detected within a timely period by employees in the normal course ofperforming their assigned functions.  Thefollowing report is management’s report on internal control over financialreporting as of December 31, 2004.

 

**Management’sReport on Internal Control Over Financial Reporting**

Management is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined in ExchangeAct Rule 13a-15(f).  Under thesupervision and with the participation of management, including the principalexecutive officer and principal financial officer, the Company conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on an evaluation under the framework in *InternalControl - Integrated Framework,*management concluded that theCompany’s internal control over financial reporting was effective as ofDecember 31, 2004.

 

Management’s assessment of the effectiveness of our internal controlover financial reporting as of December 31, 2004, has been audited by KPMG LLP,an independent registered public accounting firm, as stated in their reportwhich is included herein.

 

 

**Item 9B — Other Information**

 

None.

 

69

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**PART III**

 
| **Item 10 - Directors and Executive Officers of the Registrant** |
|------------------------------------------------------------------|

 

**Directors and Executive Officers**

 

** **
| **Name**           | ** ** | **Age**    | ** ** | **Background and Experience**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Robert D. Biggs    |       | 62         |       | Director since 2004;  Executive Chairman since May 16, 2004. Retired Managing Partner,  PricewaterhouseCoopers, Indianapolis, Indiana since October 1999; Managing  Partner, PricewaterhouseCoopers July 1992 to October 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|               |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Paul R. Bishop     |       | 62         |       | Director since 2003.  Chairman and Chief Executive Officer, H-P Products, Inc., Louisville, Ohio  (manufacturer of central vacuum, VACUFLO, and fabricated tubing and fittings  for industry) since 2001; President, H-P Products, Inc. from 1996 to 2001.  Mr. Bishop is a Director of Hawk Corporation and is a member of Stark  Development Board, Mt. Union College Board and Aultman Health  Foundation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **         | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| James F. Dicke, II |       | 59         |       | Director since 1990.  Chairman and Chief Executive Officer, Crown Equipment Corporation, New  Bremen, Ohio (international manufacturer and distributor of electric lift  trucks and material handling products) since 2002; President, Crown Equipment  Corporation from 1980 to 2002. Mr. Dicke is a Director of Gulf States Paper  Co. and a Trustee of Trinity University. Mr. Dicke also is a  Commissioner of the Smithsonian American Art Museum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|               |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Barbara S. Graham  |       | 56         |       | Nominee for Director  2005; Senior Vice President of CorporateServices, Pepco Holdings, Inc.,  Washington, D.C. (utility holding company formed with merger of Pepco and  Connectiv) from June 2002 to July 2003; Senior Vice President of Shared  Services and CIO, Connectiv (electric and gas utility formed with 1998 merger  of Atlantic Energy, Inc. and Delmarva Power and Light Company) from January  1999 to June 2002; Senior Vice President and CFO, Connectiv from March 1998  to January 1999. Mrs. Graham is a Director of Artisan’s Bank and Chair of the  Executive Committee of Swingin’ with a star (a non-profit organization)                                                                                                                                                                                                                                                                                                              |
| ** **         | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Ernie Green        |       | 66         |       | Director since 1991. President and Chief Executive  Officer, Ernie Green Industries, Dayton, Ohio (automotive components  manufacturer) since 1981. Mr. Green is a Director of Pitney Bowes Inc. and  Eaton Corp. Mr. Green also is Chairman, Central State University Foundation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|               |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Glenn E. Harder    |       | 54         |       | Director since 2004. President of GEH Advisory  Services, LLC (a firm specializing in strategic advisory services) since  October 2002; Executive Leader, Business Services of Baptist State Convention  of North Carolina (the largest non-profit organization in North Carolina,  involving over 4,000 churches and over 1 million members) since February  2004; Executive Vice President and Chief Financial Officer of Coventor, Inc.  from May 2000 through October 2002; Executive Vice President and Chief  Financial Officer of Carolina Power and Light from October 1994 through March  2000. Prior to that, Mr. Harder held a variety of financial positions during  his 16 years with Entergy Corporation, including Vice President of Financial  Strategies, Vice President of Accounting and Treasurer. He has a Bachelor of  Science in Mathematics and a Master of Business Administration from Tulane  University and is a Certified Public Accountant. |

 

70

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| W August Hillenbrand                   |       | 64         |       | Director since 1992; Vice-Chairman since  May 16, 2004. Principal, Hillenbrand Capital Partners and Retired  President and Chief Executive Officer, Hillenbrand Industries, Batesville,  Indiana (a diversified public holding company that manufactures caskets, hospital  furniture, hospital supplies and provides funeral planning services) since  2001; Chief Executive Officer, Hillenbrand Industries from 1999 to 2000. Mr.  Hillenbrand is a Director of Hillenbrand Industries and Pella Corporation and  is a Trustee of Batesville Girl Scouts and Trustee Emeritus of Denison  University.                                                                                                                                                                                                                                                                                                                                |
|----------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                             | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Lester L. Lyles, General,  USAF (Ret.) |       | 58         |       | Director since 2004.  Commander of Air Force Materiel Command from April 2000 to August 2003, the  27th Vice Chief of Staff of the United States Air Force from 1999 to 2000.  General Lyles is a Trustee of Wright State University, a Director and member  of the Audit Committee of General Dynamics Corp. and Director of MTC  Technologies. He is also a member of The President’s Commission on U.S. Space  Policy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                   |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| James V. Mahoney                       |       | 59         |       | Director since 2004.  President and Chief Executive Officer of DPL Inc. and DP&L since  May 16, 2004; President, DPL Energy LLC, a wholly-owned subsidiary  responsible for wholesale and retail energy sales and marketing since 2003;  President, Energy Market Solutions, an energy consulting firm from August  2002 to January 2003; President and Chief Executive Officer, EarthFirst  Technologies, Incorporated, a company that licenses evolving technologies for  environmental and alternate energy solutions from August 2001 to August 2002;  Senior Vice President, PG&E National Energy Group, a wholesale power  supplier from May 1999 to July 2001; Senior Vice President, U.S. Generating  Company from March 1998 to May 1999. Mr. Mahoney serves on the Rebuilding  Together Dayton Board and is the Vice Chair of the 2004 Fund Campaign for  Culture Works. Mr. Mahoney joined the Company in 2003. |
|                                   |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Ned J. Sifferlen, PhD                  |       | 63         |       | Director since 2004;  President Emeritus, Sinclair Community College from September 2003 to  present; President, Sinclair Community College from September 1997 to August  2003. Dr. Sifferlen is Chairman of the Board of Trustees of Good  Samaritan Hospital and Samaritan Health Partners and is a Director on the  Board for both Premier Health Partners and Think TV Public Television.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

**Executive Officers who are not Directors**

 
| **Name**           | ** ** | **Age** | ** ** | **Position, Principal Occupation,  Business Experience and Directorships**                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------------------|------------|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Miggie E. Cramblit |       | 49      |       | Vice President, General  Counsel and Corporate Secretary, DPL Inc. and DP&L since January 2005;  Vice President and General Counsel, DPL Inc. and DP&L from June 2003 to  December 2004; Counsel and Corporate Secretary, Greater Minnesota Synergy  from October 2001 to June 2003; Chief Operating Officer, Family Financial  Strategies from June 1999 to May 2001; Vice President and General Counsel,  Reliant Energy/Minnegasco from December 1990 to May 1999. Ms. Cramblit joined  the Company in 2003. |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| John J. Gillen     |       | 51      |       | Senior Vice President  and Chief Financial Officer, DPL Inc. and DP&L since December 2004;  Consultant, October 2003 to November 2004; Partner, PricewaterhouseCoopers  LLP from October 1990 to September 2003. Mr. Gillen joined the Company in  2004.                                                                                                                                                                                                                                                            |

 

71

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| Pamela Holdren     |   | 43     |   | Vice President and  Treasurer since March 2005; Treasurer, DPL Inc. and DP&L from December  2004 to March 2005; Interim Chief Financial Officer and Treasurer from May  2004 to December 2004; Treasurer, DPL Inc. and DP&L from June 2003 to May  2004; Controller, MVE, Inc. from January 2002 to June 2003; Manager,  Financial Planning, DPL Inc. and DP&L from August 2001 to January 2002;  Group Controller, DPL Inc. and DP&L from January 2000 to August 2001. Ms.  Holdren joined the Company in 2000.                  |
|--------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Arthur G. Meyer    |   | 55     |   | Vice President, DPL  Inc. and DP&L from January 2005; Vice President and Corporate Secretary,  DPL Inc. and DP&L from August 2002 to December 2004; Vice President,  Legal and Corporate Affairs, DP&L from November 1997 to August 2002. Mr.  Meyer joined the Company in 1992.                                                                                                                                                                                                                                                      |
|               |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Gary Stephenson    |   | 40     |   | Vice President,  Commercial Operations of DPL Inc. and DP&L since September 2004; Vice  President, Commercial Operations, InterGen from April 2002 to September 2004;  Vice President, Portfolio Management, PG&E National Energy Group  (successor to PG&E Energy Trading) from January 2000 to April 2002;  Director, Portfolio Management, PG&E Energy Trading from January 1998 to  December 1999. Mr. Stephenson joined the Company in 2004.                                                                                 |
|               |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Patricia K. Swanke |   | 46     |   | Vice President,  Operations, DP&L since September 1999 (responsible for electric  transmission and distribution operations); Managing Director, DP&L from  September 1996 to September 1999. Ms. Swanke joined the Company in 1990.                                                                                                                                                                                                                                                                                                       |
|               |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Daniel L. Thobe    |   | 54     |   | Corporate Controller of  DPL Inc. and DP&L since July 21, 2003; Vice President, Financial  Services, Moto Franchise Corporation from February 2003 to July 2003  (successor to Moto Photo, Inc.); Corporate Controller, Moto Photo, Inc. from  June 2000 to February 2003; Vice President, Controller and Chief Accounting  Officer, Roberds, Inc. from November 1999 to June 2000; Vice President,  Corporate Controller, Breuners Home Furnishings Corporation from June 1997 to  November 1999. Mr. Thobe joined the Company in 2003. |
|               |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| W. Steven Wolff    |   | 51     |   | President, Power  Production, DPL Inc. and DP&L since 2003; Vice President, Power  Production, DPL Inc. and DP&L from August 2002 to January 2003; Director,  Power Production, DP&L from January 2002 to August 2002; Manager, O.H.  Hutchings Station, DP&L from August 2001 to January 2002; Captain, US  Navy from November 1996 to August 2001. Mr. Wolff is a member of the Board of  Directors for the Miami Valley Council of the Boy Scouts of America and Cox  Arboretum. Mr. Wolff joined the Company in 2001.         |

 

**Directorand Management Changes**

Effective May 16, 2004, the Board of Directors unanimously electedcurrent directors Robert D. Biggs as Executive Chairman andW August Hillenbrand as Vice-Chairman.  The Board of Directors also appointed DPLEPresident, James V. Mahoney, as President and Chief Executive Officerof the Company and DPL and current Treasurer, Pamela Holdren, as interimChief Financial Officer of the Company and DPL.

 

Theelections and appointments followed the retirement of Stephen F. Koziar,Jr., director, President and Chief Executive Officer of the Company and DPL,director and Secretary/Treasurer of MVE, and the resignations ofPeter H. Forster, Chairman of the Board, director and consultant tothe Company, DPL and MVE, and Caroline E. Muhlenkamp, director andPresident of MVE and Group Vice President and interim Chief Financial Officerof the Company and DPL.  In connectionwith Mr. Koziar’s

 

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retirementand Mr. Forster and Ms. Muhlenkamp’s resignations, each of the Company,DPL, Mr. Koziar, Mr. Forster and Ms. Muhlenkamp reserved allrights under applicable law and under any existing agreements.  Mr. Forster and Ms. Muhlenkamp have filed alawsuit against the Company, DPL and MVE claiming that they were wrongfullyterminated and are entitled to certain rights and benefits.  The Company, DPL and MVE have filed a lawsuitagainst Mr. Koziar, Mr. Forster and Ms. Muhlenkamp alleging that they breachedtheir fiduciary duties and breached their consulting and employmentcontracts.  (See Note 12 of Notes toConsolidated Financial Statements.)

 

OnSeptember 17, 2004, the Company and DPL appointed Gary Stephenson as VicePresident, Commercial Operations.

 

OnSeptember 28, 2004, the Company and DPL appointed Glenn E. Harder, GeneralLester L. Lyles, Dr. Ned J. Sifferlen and James V. Mahoney to the Board ofDirectors to fill vacancies created by resignations and retirement.

 

OnDecember 21, 2004, the Company and DPL appointed John J. Gillen as Senior VicePresident and Chief Financial Officer.

 

Mrs. Jane G. Haley, Chairman, President and ChiefExecutive Officer, Gosiger Inc., and a director since 1978, has chosen not tostand for re-election in 2005.

 

**Audit Committee**

DPL Inc. (DPL) has a separately-designated standingaudit committee (the Audit Committee) that oversees the Company’s auditing,accounting, financial reporting and internal control functions, appoints theCompany’s independent public accounting firm and approves its services.  One of its functions is to assure that theindependent public accountants have the freedom, cooperation and opportunitynecessary to accomplish their functions. The Audit Committee also assures that appropriate action is taken on therecommendations of the independent public accountants.  DPL’s revised Charter of the Audit Committee,which describes all of the Audit Committee’s responsibilities, is posted on DPL’swebsite at www.dplinc.com.

 

The Audit Committee currently consists of thefollowing independent directors:  WAugust Hillenbrand, Chair, Ernie Green, Glenn Harder and Ned Sifferlen,PhD.  The Board of Directors havedetermined that each member of the Audit Committee meets the independencerequirements contained in the NYSE Corporate Governance Rules and Rule 10A-3(b)(1)of the Exchange Act and is financially literate as defined by the NYSE.  In addition, Mr. Harder qualifies as an “auditcommittee financial expert” within the meaning of SEC regulations.

 

**Code of Business Conduct and Ethics**

All Company directors, officers and employees must actethically at all times and in accordance with DPL’s Code of Business Conductand Ethics.  This code satisfies thedefinition of “code of ethics” pursuant to the rules and regulations of the SECand complies with the requirements of the NYSE.

 

Any changes or waivers to the Code of Business Conductand Ethics for the Company’s executive officers or directors may only be madeby the Board or a committee thereof and must be disclosed promptly toshareholders.

 

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DPL’s Corporate Governance Guidelines, Code ofBusiness Conduct and Ethics, and the charters of the Audit Committee,Compensation Committee and the Nominating and Corporate Governance Committeeare posted on DPL’s website at www.dplinc.com.

 

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

Section 16(a) of the Securities Exchange Act of 1934,as amended, requires DPL’s directors and executive officers to file reports ofownership and changes of ownership of DPL common shares and common share unitswith the SEC.  DPL believes that duringfiscal 2004 all filing requirements applicable to its directors and executiveofficers were timely met, except that in November 2004 Forms 4 reportingdeferrals of directors’ fees into restricted share units during the second andthird quarter of 2004 were filed for each of Messrs. Bishop, Dicke, Green,Hillenbrand and Mrs. Haley.

 

**Shareholder Communications**

Shareholders and other interested persons may contactthe non-management directors individually or as a group by writing to suchdirector(s) at The Dayton Power and Light Company, c/o Corporate Secretary,1065 Woodman Drive, Dayton, OH 45432.  Shareholders may also sendcommunications within the meaning of Item 7(h) of Schedule 14A under theExchange Act to one or more members of the Board by writing to such director(s)or to the whole Board at The Dayton Power and Light Company, c/o CorporateSecretary, 1065 Woodman Drive, Dayton, OH 45432.

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

** **

**Summary Compensation Table**

Set forth below is certain information concerning thecompensation of the Chief Executive Officer and each of the four most highlycompensated executive officers of the Company and its parent company, DPL andfor its consultant for the last three fiscal years, for services rendered inall capacities.

 
| ** **                      | ** ** | ** ** | ** ** | ** **       | ** ** | ** **     | ** ** | ** **        | ** ** | **Long  Term**   | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------|------------|------------------|------------|----------------|------------|-------------------|------------|------------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** **       | ** ** | ** **     | ** ** | ** **        | ** ** | **Compensation** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Annual**       | ** ** | **Securities** | ** ** | ** **        | ** ** | ** **       | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Compensation** | ** ** | **underlying** | ** ** | ** **        | ** ** | **All  Other**   | ** ** |
| ** **                      | ** ** | ** ** | ** ** | ** **       | ** ** | ** **     | ** ** | **Other  Annual** | ** ** | **Options**      | ** ** | **LTIP**   | ** ** | **Compensation** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Salary**       | ** ** | **Bonus**      | ** ** | **Compensation**  | ** ** | **(1)**          | ** ** | **(2)**    | ** ** | **(3)** | ** ** |
| **Name and Principal Position** | ** ** | **Year**   | ** ** | **($)**          | ** ** | **($)**        | ** ** | **($)**           | ** ** | **(#)**          | ** ** | **($)**    | ** ** | **($)** | ** ** |
| James V. Mahoney *(7)*          |       | 2004       |       | 471,000          |       | 269,000        | *(6)*      | —            | * *   | 20,000           |       | 394,000    |       | 6,000 |   |
| President and Chief             |       | 2003       |       | 425,000          |       | 150,000        | *(6)*      | 258,000           | *(11)*     | 100,000          |       | 184,000    |       | 5,000 |   |
| Executive Officer               |       | 2002       |       | —           |       | —         | * *   | —            | * *   | —           |       | —     |       | — |   |
| DPL Inc. and DP&L           |       |       |       |             |       |           | * *   |              | * *   |             |       |       |       |   |   |
|                            |       |       |       |             |       |           | * *   |              | * *   |             |       |       |       |   |   |
| Stephen F. Koziar, Jr. *(4)*    |       | 2004       |       | 417,000          |       | —         | * *   | —            | * *   | —           |       | —     |       | 1,000 |   |
| Former President and  Chief     |       | 2003       |       | 600,000          |       | 2,320,000      | *(5)*      | 4,206             | * *   | —           |       | 2,365,000  |       | 6,000 |   |
| Executive Officer               |       | 2002       |       | 375,000          |       | 210,000        | *(6)*      | 5,026             | * *   | 300,000          |       | —     |       | 1,000 |   |
| DPL Inc. and DP&L           |       |       |       |             |       |           | * *   |              | * *   |             |       |       |       |   |   |
|                            |       |       |       |             |       |           | * *   |              | * *   |             |       |       |       |   |   |
| Robert D. Biggs                 |       | 2004       |       | 149,000          |       | 500,000        | *(6)*      | 1,634,000         | *(13)*     | 200,000          |       | —     |       | 350,000 | *(14)* |
| Executive Chairman              |       | 2003       |       | —           |       | —         | * *   | —            | * *   | —           |       | —     |       | — |   |
| DPL Inc. and DP&L           |       | 2002       |       | —           |       | —         | * *   | —            | * *   | —           |       | —     |       | — |   |

 

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| Peter H. Forster *(8)*      |   | 2004   |   | 650,000 |   | —    | * * | — | * * | —  |   | —  |   | 158,000 | *(10)*   |
|-----------------------------|--------|--------|--------|---------|--------|-----------|----------|--------|----------|---------|--------|---------|--------|---------|----------|
| Former Chairman and         |   | 2003   |   | 650,000 |   | 5,200,000 | *(9)*    | — | * * | —  |   | 700,000 |   | 249,000 | *(10)*   |
| Consultant                  |   | 2002   |   | 650,000 |   | 100,000   | *(6)*    | — | * * | 100,000 |   | —  |   | 39,375  | *(10)*   |
| DPL Inc. and DP&L       |   |   |   |    |   |      | * * |   | * * |    |   |    |   |    | * * |
|                        |   |   |   |    |   |      | * * |   | * * |    |   |    |   |    | * * |
| Arthur G. Meyer             |   | 2004   |   | 208,000 |   | 160,000   | *(6)*    | — | * * | —  |   | 147,000 |   | 4,000   | * * |
| Vice President              |   | 2003   |   | 199,000 |   | 88,000    | *(6)*    | — | * * | —  |   | 47,000  |   | 4,000   | * * |
| DPL Inc. and DP&L       |   | 2002   |   | 191,000 |   | 51,000    | *(6)*    | — | * * | —  |   | —  |   | 4,000   | * * |
|                        |   |   |   |    |   |      | * * |   | * * |    |   |    |   |    | * * |
| Patricia K. Swanke          |   | 2004   |   | 249,000 |   | 211,000   | *(6)*    | — | * * | —  |   | 260,000 |   | 1,000   | * * |
| Vice President,  Operations |   | 2003   |   | 230,000 |   | 116,000   | *(6)*    | — | * * | —  |   | 193,000 |   | 1,000   | * * |
| DP&L                    |   | 2002   |   | 215,000 |   | 68,000    | *(6)*    | — | * * | —  |   | —  |   | 1,000   | * * |
|                        |   |   |   |    |   |      | * * |   | * * |    |   |    |   |    | * * |
| W. Steven Wolff *(11)*      |   | 2004   |   | 263,000 |   | 119,000   | *(6)*    | 36,000 | *(12)*   | —  |   | 220,000 |   | 1,000   | * * |
| President, DPL Power        |   | 2003   |   | 250,000 |   | 113,000   | *(6)*    | — | * * | —  |   | 279,000 |   | 1,000   | * * |
| Production                  |   | 2002   |   | 200,000 |   | 54,000    | *(6)*    | — | * * | —  |   | —  |   | 1,000   | * * |
| DPL Inc. and DP&L       |   |   |   |    |   |      | * * |   | * * |    |   |    |   |    | * * |

 

----

*(1)**                               Amountsin this column represent a grant of stock options to each person under the DPLStock Option Plan.  See “Option Grants inLast Fiscal Year.”  In connection withlitigation brought against Messrs. Forster and Koziar and Ms. Muhlenkamp (seeItem 3 - Legal Proceedings), the Company and DPL may seek to revoke certain ofthese options.  Further, the DPL Inc.Stock Option Plan provides that “no single Participant shall receive Optionswith respect to more than 2,500,000 shares.” The September 24, 2002 grant of 300,000 options to Mr. Forster broughthis total options to 2.7 million.  UnderMr. Forster’s Option Agreement, the DPL Inc. Stock Option Plan documentcontrols.  Therefore, this table reflectsa conforming total of 2.5 million options.*

 

*(2)**                               Amountsin this column represent annualized incentives earned based on achievement ofpredetermined total return to shareholder measures and under a long-termincentive program for individuals managing all financial assets.  In 2004 and 2003, total return toshareholders met the criteria and amounts were earned; in 2002 total return toshareholders did not meet the criteria and no incentive was earned.  In 2003 and 2002 no incentives based onperformance of financial assets were earned.*

 

*(3)**                               AllOther Compensation includes:  (i)employer matching contributions of $1,000 on behalf of each person, other thanMr. Biggs and Mr. Forster, under the DP&L Employee Savings Plan madeto the DPL Inc. Employee Stock Ownership Plan and (ii) except for Messrs. Koziarand Forster, insurance premiums for group term life policies paid on behalf ofeach person.*

 

*(4)**                               Mr.Koziar retired as President and Chief Executive Officer of DPL and DP&L onMay 16, 2004.*

 

*(5)**                               $1.9 millionof the amount shown for Mr. Koziar represents a discretionarypayment.  The amount of this payment wascalculated by applying the benefit formula that had been in effect under theCompany’s Supplemental Executive Retirement Plan (SERP) to the compensationearned by Mr. Koziar from the effective date of Mr. Koziar’s entrydate into the SERP (August 1, 1969). The discretionary payment was calculated as if Mr. Koziar continued toparticipate in the SERP through April 30, 2003. Mr. Koziar’s participation in the SERP was terminated in 2000 inanticipation of an acquisition of the Company that was not completed.  $420,000 of the amount shown representscompensation based on achievement of specific predetermined operating andmanagement goals in the year indicated and paid in the year earned or in thefollowing year.*

 

*(6)**                               Theamount in this column represents compensation based on achievement of specificpredetermined operating and management goals in the year indicated and paid inthe year earned or in the following year. Amounts do not include distributions of earnings that had beenpreviously deferred.*

 

*(7)**                               Mr.Mahoney joined DPL in January 2003.  Mr.Mahoney was appointed President and CEO of DPL and DP&L on May 16,2004.*

 

*(8)**                               Mr.Forster resigned as Chairman and consultant to the Company and DPL onMay 16, 2004.*

 

*(9)**                               $4.9million of the amount shown for Mr. Forster represents a discretionarypayment.  The amount of this payment wascalculated by applying the benefit formula that had been in effect under theSERP to*

 

75

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*the compensation earned by Mr. Forster fromthe effective date of Mr. Forster’s entry date into SERP (June 1,1974).  The present value of such annualbenefit stream was credited to Mr. Forster’s deferred compensation planaccount in 2003.  $300,000 of the amountshown represents compensation based on achievement of specific predeterminedoperating and management goals in the year indicated and paid in the yearearned or in the following year .*

 

*(10)**                        Representsthe amount of fees and value of stock awards received for services as adirector.*

 

*(11)**                        Representsrelocation expense reimbursement, grossed-up to reimburse for the additionaltax liability.*

 

*(12)**                        Represents$14,000 for interest on 2003 LTIP award and $22,000 for executive health plan.*

 

*(13)**                        Represents$897,000 for annuity, $671,000 for gross-up due to annuity and $66,000relocation expense reimbursement, grossed up to reimburse for additional taxliability.*

* *

*(14)        Includes$348,000 for director fees.*

 

**Option Grants in Last Fiscal Year**

The following table sets forth information concerningindividual grants of DPL stock options made to the named executive officersduring the fiscal year ended December 31, 2004.

 
| ** **       | ** ** | **Individual Grants**                                             | ** ** |
|------------------|------------|-------------------------------------------------------------------|------------|
| **Name**         | ** ** | **Number of  Securities  Underlying  Options  Granted  (#)*(2)*** | ** ** | **% of Total  Options  Granted to  Employees  in Fiscal  year** | ** ** | **Exercise  Price  ($/Sh)** | ** ** | **Expiration  Date** | ** ** | **Grant Date Present  Value ($)*(3)*** | ** ** |
| James V. Mahoney |       | 20,000                                                            | (2)        |   | 9 | % |   | $ | 24.90 |   | 12/21/2014 |   | 93,600 |   |   |
|             |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |
| Robert D. Biggs  |       | 200,000                                                           | (1)        |   | 91 | % |   | $ | 20.94 |   | 05/16/2011 |   | 818,000 |   |   |

 

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*(1)**      **Options granted pursuant to DPLInc. Stock Option Plan on October 5, 2004. These options vest and become exercisable 50% on May 16, 2005 and 50% onMay 16, 2006.*

 

*(2)**      **Options granted pursuant to theDPL Inc. Stock Option Plan on December 21, 2004. These options vest and becomeexercisable on May 16, 2005.*

 

*(3)**      **The grant date present value wasdetermined using the Black-Scholes pricing model. Significant assumptions usedin the model were: expected volatility 28.5%, risk-free rate of return 3.91%,dividend yield of 4.78% and time of exercise 8 years.*

 

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

The following table sets forth information concerningexercise of stock options during fiscal 2004 by each of the directors andexecutive officers and the fiscal year-end value of unexercised options.

 

76

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| **Name**                     | ** ** | **Shares  acquired  on  exercise  (#)** | ** ** | **Value  realized** | ** ** | **Number of securities  underlying unexercised options  at fiscal year end  (#)** | ** ** | **Value of unexercised in-the  money options at fiscal year-  end (1)** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                   | ** ** | ** **                              | ** ** | ** **          | ** ** | **Exercisable**                                                                   | ** ** | **Unexercisable**                                                       | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Peter H. Forster *(2) (3)*   |       | —                                  |       | —              |       | —                                                                            |       | 2,500,000                                                               |       | $ | — |   | $ | 10,880,000 |   |
| Stephen F. Koziar, Jr. *(3)* |       | —                                  |       | —              |       | —                                                                            |       | 795,000                                                                 |       | — |   | 5,082,450 |   |
| James V. Mahoney             |       | —                                  |       | —              |       | —                                                                            |       | 120,000                                                                 |       | — |   | 927,200 |   |
| Patricia K. Swanke           |       | —                                  |       | —              |       | —                                                                            |       | 50,000                                                                  |       | — |   | — |   |
| W. Steven Wolff              |       | —                                  |       | —              |       | —                                                                            |       | —                                                                  |       | — |   | — |   |
| Robert D. Biggs              |       | —                                  |       | —              |       | —                                                                            |       | 200,000                                                                 |       | — |   | 834,000 |   |
| Arthur G. Meyer              |       | —                                  |       | —              |       | —                                                                            |       | 50,000                                                                  |       | — |   | — |   |
|                              |            |                                         |            |                     |            |                                                                                   |            |                                                                         |            |  |  |  |  |  |  |

 

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*(1)**       Unexercised options werein-the-money if the fair market value of the underlying shares exceeded theexercise price of the option at December 31, 2004.*

*(2)**       The DPL Inc. Stock OptionPlan provides that “no single Participant shall receive Options with respect tomore than 2,500,000 shares.”  TheSeptember 24, 2002 grant of 300,000 options to Mr. Forster brought his totaloptions to 2.7 million.  Under Mr.Forster’s Option Agreement, the DPL Inc. Stock Option Plan documentcontrols.  Therefore, this table reflectsa conforming total of 2.5 million options.*

*(3)**       The Company, DPL and MVEhave filed a lawsuit against Messrs. Forster and Koziar and Ms. Muhlenkampalleging breach of fiduciary duty and breach of their respective employmentagreements.  (See Item 3 - LegalProceedings.)  In connection with thatlitigation, the Company and DPL may seek to revoke certain of these options.*

 

**Pension Plans**

The following table sets forth the estimated totalannual benefits payable under the DP&L Retirement Income Plan to executiveofficers at normal retirement date (age 65) based upon years of creditedservice and final average annual compensation (including base and incentivecompensation) for the three highest years during the last five years:

 
| **Final Average  Annual Earnings** | ** ** | **Total Annual Retirement Benefits for  Years of Credited Service at Age 65** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **10 Years**                                                                  | ** ** | **15 Years** | ** ** | **20 Years** | ** ** | **30 Years** | ** ** |
| $                                  | 205,000    |                                                                          | $          | 47,853 |   | $ | 71,780 |   | $ | 95,706 |   | $ | 128,585 |   |
|                               | 400,000    |                                                                          |       | 103,428 |   |   | 155,142 |   |   | 206,856 |   |   | 239,735 |   |
|                               | 600,000    |                                                                          |       | 160,428 |   |   | 240,642 |   |   | 320,856 |   |   | 353,735 |   |
|                               | 800,000    |                                                                          |       | 217,428 |   |   | 326,142 |   |   | 434,856 |   |   | 467,735 |   |
|                               | 1,000,000  |                                                                          |       | 274,428 |   |   | 411,642 |   |   | 548,856 |   |   | 581,735 |   |
|                               | 1,200,000  |                                                                          |       | 331,428 |   |   | 497,142 |   |   | 662,856 |   |   | 695,735 |   |
|                               | 1,400,000  |                                                                          |       | 388,428 |   |   | 582,642 |   |   | 776,856 |   |   | 809,735 |   |
|                               |       |                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |

 

The years of credited service are Mr. Forster - 23 years;Mr. Koziar – 35 yrs.; Mr. Mahoney – 0 yrs.; Mr. Biggs – 0 yrs.; Mr.Meyer – 11 yrs.; Mr. Wolff – 2 yrs.; and Ms. Swanke – 13 yrs. [To BeUpdated]  Benefits are computed on astraight-life annuity basis, are subject to deduction for Social Securitybenefits and may be reduced by benefits payable under retirement plans of otheremployers.

 

**Deferred Compensation Distributions**

The Company and DPL maintain a Key Employee DeferredCompensation Plan (the DCP) and a 1991 Amended Directors’ Deferred CompensationPlan (the Directors’ DCP and collectively with the DCP, the DeferredCompensation Plans) for certain senior executives, directors and other key employees.  The Deferred Compensation Plans generallyenable participants to defer all or a portion of their cash compensation earnedin a particular year.  If an individual elects to defer any amount, suchdeferred amounts are reported as compensation in the year earned and arecredited to the individual’s deferred compensation plan account.  The Company and DPL have funded itsobligations to participants through a trust, which is included in theConsolidated Balance Sheet in “Other Assets – Other.”  Deferred compensation plan account balancesaccrue earnings based on the investment options selected by theparticipant.   Interest, dividendsand market value changes are reflected in the individual’s deferredcompensation plan account.  Deferred compensation plan account balances generally are paid followingthe termination of the participant’s employment with the Company and DPL, in alump sum or over time as determined by the participant’s deferral electionform, and in-service distributions generally are not allowed. In certaincircumstances the

 

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plan provides for a 10% penalty for earlywithdrawal.  Payments under the DCP are in cash or DPL common shares,provided that distributions attributable to investments in DPL common sharesmust be paid in common shares.  Certain purportedamendments to the Deferred Compensation Plans purportedly made in December 2003had the effect of eliminating some of these restrictions for certain seniorexecutives and facilitating these executive officers to receive cashdistributions from their deferred compensation balances.  The Company and DPL have initiated legalproceedings challenging the validity of these purported amendments and thedistributions.

 

The Company and DPL also have maintained a ManagementStock Incentive Plan (the MSIP and together with the Deferred CompensationPlans, the Plans) for key employees selected by the CompensationCommittee.  New awards under the MSIPwere discontinued in 2000 and the plan was eliminated.  Under the MSIP, the Committee granted StockIncentive Units (SIUs) to MSIP participants, with each SIU representing one DPLcommon share.  SIUs were earned based onthe achievement of performance criteria set by the Compensation Committee andvested over time (subject to acceleration of earning and vesting on theoccurrence of certain events or at the discretion of the Company’s and DPL’sChief Executive Officer or the Compensation Committee).  Earned SIUs were credited to a participant’saccount under the MSIP and accrue dividends like DPL common shares.  Underthe MSIP, earned and vested SIUs were to be paid in DPL common shares in a lumpsum or over time as determined by the participant’s deferral election.

 

The Company and DPL have found that restated versionsof the MSIP exist that incorporate amendments purportedly made in May 2002 andDecember 2003, but the Company and DPL are unable to substantiate that theBoard or the Compensation Committee ever authorized those purported amendments.  The May 2002 purported amendment providedthat effective January 1, 2002, upon termination of employment of a participantwho also participates in the DCP, the participant’s earned SIUs would betransferred to the participant’s deferred compensation account and deemedinvested in shares of DPL common stock.  Six months after termination ofthe participant’s employment, the participant, the Company or DPL would beentitled to elect to allocate the value of the credited DPL common shares toother investments under the DCP that are designated by the participant.  The December 2003 purported amendment wouldhave deleted a provision, added in 2000 when DPL’s Stock Option Plan wasadopted, locking up until January 1, 2005 certain MSIP awards that previouslyhad been granted to participants who were receiving options under the new StockOption Plan.  The Company and DPL haveinitiated legal proceedings which challenge the validity of that purportedamendment.  (See Item 3 - LegalProceedings.)  Notwithstanding this challengeto the validity of the purported amendments to the Plans, the Company and DPLhave accounted for the Plans as they have been administered.

 

The Company maintains a Supplemental ExecutiveRetirement Plan (the SERP).  In February2000, the Compensation Committee approved certain modifications to theSERP.  A copy of the SERP as amended isattached as Exhibit 10(e).  The Companyhas found that a restated version of the SERP exists that incorporatesamendments purportedly made in December 2002 concerning payments to be made inthe event of a change of control. However, the Company is unable to substantiate that the Board or theCompensation Committee ever authorized those purported amendments.

 

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In 2000, in anticipation of the possible acquisitionof the Company, the participation by certain officers (including Mr. Koziar andMs. Muhlenkamp) in the Company’s SERP terminated.  The present value of each officer’s accruedbenefit under the SERP as determined by DPL’s actuary ($3.5 million for Mr.Koziar and $1.4 million for Ms. Muhlenkamp) was then credited to each officer’sdeferred compensation plan account.  Thepresent value calculation for Ms. Muhlenkamp was not computed in accordancewith the SERP to the extent that the amount credited to her account reflectedincreased salary and years-of-service credits. Subsequently, in April 2003, as Mr. Koziar and Ms. Muhlenkamp hadcontinued their employment with the Company and no acquisition of the Companyhad occurred, the Compensation Committee approved discretionary payments tothese individuals.  The discretionarypayments were calculated as if Mr. Koziar and Ms. Muhlenkamp continued toparticipate in the SERP through April 30, 2003. The discretionary payments made in 2003 were $1.9 million forMr. Koziar and $3.4 million for Ms. Muhlenkamp. Thediscretionary payments made to Ms. Muhlenkamp were not calculated in accordancewith the SERP to the extent that the amount she received reflected increasedsalary and years-of-service credits.

 

In April 2003, the Compensation Committee alsoapproved a discretionary payment to Mr. Forster.  Mr. Forster elected to have this amountcredited to his deferred compensation plan account.  The discretionary payment, in the amount of$4.9 million, was calculated as if Mr. Forster continued to participate inthe SERP through April 30, 2003.  Mr.Forster’s participation in the SERP was terminated in 1997 upon his retirementfrom the Company.  The discretionarypayment made in 2003 represented the difference in the net present value of theSERP benefit Mr. Forster would have received if he had been entitled tocontinue to accrue benefits under the SERP through April 30, 2003 and theamount he was awarded in 1997 based upon his calculated benefit at that date.

 

In December 2003, a number of amendments purportedlywere made to the DCP, the MSIP and the Directors’ DCP.  The Company and DPL have not been able tosubstantiate that the amendments purportedly made to the Directors’ DCP were everapproved by the Compensation Committee of the Board.  Moreover, the Company and DPL have initiatedlegal proceedings challenging the validity of the amendments purportedly madeto the DCP, the MSIP and Directors DCP.  (See Item 3 - Legal Proceedings.) The purported amendments included thefollowing:

 

•                  The DCPpurportedly was amended to provide that if, as of December 2, 2003 and as toDCP participants who were employed by or providing ongoing consulting servicesto the Company or DPL on that date or thereafter, the amount credited to theparticipant’s deferred compensation plan account (excluding amounts deemedinvested in DPL common shares) was in excess of $500,000, the Company would payto the participant in cash the balance over $250,000.  The purported DCP amendment also provided fordistribution of the excess over $450,000 in a participant’s deferredcompensation plan account on December 31 of each year beginning in 2004, if thedeferred compensation plan account exceeded $500,000.  As of the date this purported amendment wasto have taken effect, Messrs. Forster and Koziar and Ms. Muhlenkamp were theonly eligible participants.

 

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•                  The Directors’DCP purportedly was amended to provide for similar distributions beginningDecember 31, 2004.  The Plan accounts ofall of the Directors are deemed to be invested in DPL common shares, and nodistributions will be made to the Directors as a result of the purported amendment.

 

•                  The MSIPpurportedly was amended to delete a provision, added in 2000 when DPL’s StockOption Plan was adopted, locking up until January 1, 2005 certain MSIP awardsthat previously had been granted to participants who were receiving optionsunder the new Stock Option Plan.  Inaddition, the MSIP purportedly was modified to allow conversion of SIUs toother investments at the discretion of the CEO, or in the case of the CEO’s ownSIUs, at the discretion of the Compensation Committee.

 

•                  In connectionwith the purported December 2003 DCP amendments, Messrs. Forster and Koziar andMs. Muhlenkamp exchanged letters with the Company in which they purportedlyconsented to the purported amendments. The letters also provided, with respect to their MSIP accounts, that,notwithstanding the MSIP requirement that SIUs be paid solely in DPL commonshares, each could request that his or her SIUs in excess of the sharesrequired to be held under the Company’s Executive Management Share OwnershipGuidelines be converted to cash and the cash transferred to his or her deferredcompensation plan account.  The Company’srecords do not reflect that the MSIP was ever amended to provide for requeststo convert excess shares into cash and distribute that cash to the participant’sdeferred compensation account.

 

As a result of the purported DCP and MSIP amendmentsand the letters’ provisions, as well as the discretionary payments describedabove, the following transfers were made from the MSIP to the DeferredCompensation Plan account for Mr. Koziar 11,818 SIUs at $21.15 per share; Mr.Forster 108,973 SIUs at $21.15 per share; and Ms. Muhlenkamp 336,952 SIUs at$21.15 per share.  In addition pre-tax distributions of $7.1 million, $9.7million and $16.3 million were made from their deferred compensation planaccounts to Messrs. Forster, and Koziar and Ms. Muhlenkamp, respectively, inDecember 2003.

 

Following the December 2003 purported amendments tothe DCP and MSIP and the resulting distributions made to Messrs. Forster andKoziar and Ms. Muhlenkamp, the Company and DPL began an internal investigationof those events.  As a result of thatinvestigation, the Company and DPL initiated legal proceedings challenging thevalidity of those purported amendments and the propriety of thosedistributions.  (See Item 3 - Legal Proceedings.)

 

**Consulting Contract and Employment Agreements**

 

**James V. Mahoney**

Mr. Mahoney has served as the President and ChiefExecutive Officer of the Company and DPL from May 16, 2004 pursuant to anemployment agreement dated December 14, 2004.  Prior to this promotion,Mr. Mahoney served as President of DPL Energy, Inc. from January 2003 until May16, 2004.  The term of Mr. Mahoney’scurrent employment agreement is indefinite until terminated by the Company, DPLor Mr. Mahoney, with or

 

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without cause, upon 90 days written notice providedthat the Company or DPL may terminate the agreement with cause without priornotice.  The agreement also automatically terminates upon Mr. Mahoney’sdeath or disability.

 

*Compensation*

Mr. Mahoney’s agreement provides for (i) an annualbase salary of not less than $500,000; (ii) participation in the MICP, in whichduring 2004, he had the opportunity to earn $250,000 at 100% of the targetperformance; (iii) participation in DPL’s Long Term Incentive Plan (LTIP), inwhich during 2004, he had the opportunity to earn $450,000 at 100% of targetperformance; (iv) stock options to purchase up to 20,000 shares of commonstock; and (v) such fringe benefits (including medical, life and disabilityinsurance benefits and qualified retirement benefits) as are generally madeavailable to other executive level employees.  Awards earned pursuant tothe Long Term Incentive Plan will vest in three equal installments on December31 of each year, commencing with the year in which an award is granted.

 

*Termination*

If Mr. Mahoney’s employment is terminated (a) forcause as defined in the employment agreement; or (b) due to his death ordisability; or (c) for any reason at any time, Mr. Mahoney’s employmentagreement provides for (i) a lump sum cash payment to Mr. Mahoney equal to thesum of his unpaid base salary through the date of termination; (ii) the amountof any awards, with respect to any completed period which, pursuant to the ManagementIncentive Compensation Plan (MICP) or LTIP, have been earned but not yet paidand (iii) payment of any other accrued benefits to which Mr. Mahoney isentitled through the date of termination.

 

If the Company or DPL terminates Mr. Mahoney’semployment without cause and a change of control has not occurred or is notpending, then Mr. Mahoney’s employment agreement provides for (a) the benefitsdescribed in the paragraph above; (b) the amount of any awards, with respect toany completed period which, pursuant to the MICP and LTIP, have been earned butare not vested through the date of termination and (c) continued coverage underthe health benefit plan for executive employees at the same cost and terms asin effect immediately prior to the date of notice of (A) the first anniversaryof his termination date or (B) the date an essentially equivalent benefit ismade available to Mr. Mahoney at substantially similar cost, provided that inorder to secure these payments, Mr. Mahoney executes and delivers a releasepursuant to which he fully and unconditionally releases any claims that he mayhave against the Company, DPL and its affiliates.

 

*Change of Control*

If the Company or DPL terminates Mr. Mahoney’semployment within 12 months of a change of control and (i) such termination iswithout cause or (ii) Mr. Mahoney resigns for “Good Reason” as defined in theemployment agreement (“Good Reason” is defined as (i) assignment of dutieswithout his express consent inconsistent with the written objectives of hisposition, a change in his reporting responsibilities, his removal from or anyfailure to re-elect Mr. Mahoney to his position or office; (ii) failure to havehis annual base salary raised when salary adjustments are historically made;(iii) a reduction in his base salary; (iv) failure by the Company or DPL tocontinue a benefit plan, including incentive plans; (v) the relocation of theCompany’s or DPL’s principal executive offices outside of Montgomery County,Ohio, if at the time of a change of control, Mr. Mahoney is based at theprincipal offices; (vi) being required to base more than fifty miles from thelocation he was based at the time of the change of control or the failure toreimburse for

 

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moving expenses, if Mr. Mahoney consents to moving hisbase and permanent residence; (vii) excessive travel that necessitatesovernight absences; (viii) the failure by the Company or DPL to obtain theassumption of his agreement by any successor; (ix) termination without cause orwithout being provided with a notice of termination; and (x) if the Company orDPL terminates Mr. Mahoney’s employment without cause or without notice oftermination, Mr. Mahoney’s employment agreement provides for (a) the benefitslisted in the first paragraph under “Termination” above; (b) a lump sum cashpayment equal to 200% of the sum of (A) Mr. Mahoney’s annual base salary(before deduction of employee deferrals) at the highest of (aa) the rate ineffect on the date of termination or (bb) the rate in effect at the time of thechange in control; plus (B) the average of the last three (or the number ofyears he has participated if less than three) annual award payments made to himprior to the date of termination pursuant to the MICP or LTIP, including anyportion deferred to his deferred compensation plan account; (c) the amount ofany MICP or LTIP award earned with respect to a completed period but unvestedas of termination or if the termination precedes the actual determination ofsuch incentive compensation (under the MICP or LTIP) or the completion of aperiod in which he could have earned such incentive compensation, an amountequal to the average of the award payments made to him under the MICP or LTIP(as applicable) for the three years preceding the date of termination (or forthe number of years he has participated in such plan if less than three),including any portion deferred to his deferred compensation plan account; (d)continuation of all life, medical, accident and disability insurance for Mr.Mahoney and his eligible dependents until the third anniversary of the date oftermination or the date an essentially equivalent benefit is made available toMr. Mahoney by a subsequent employer; thereafter, Mr. Mahoney shall have the right to have assigned to him atno cost any such insurance coverage on Mr. Mahoney owned by the Company or DPLand (e) a gross-up payment equal to any net amounts paid by Mr. Mahoney for anyexcise tax owed under Section 4999 of the Internal Revenue Code of 1986 forpayments made to Mr. Mahoney under this employment agreement such thatMr. Mahoney is in the same after-tax position as if no excise tax wasimposed.

 

Upon a change of control, Mr. Mahoney’s employmentagreement states that the Company and DPL will transfer cash or other propertyin an amount sufficient to fund all change of control benefits and payments tothe Amended and Restated Master Trust.

 

**Peter H. Forster**

Mr. Forster served as non-employee Chairman of theBoard of Directors and consultant to the Company, DPL and MVE from January 1,1997 to May 16, 2004 pursuant to a consulting contract, dated December 31,1996, as amended.  The consultingcontract automatically renewed for a one-year term on each December 31 unlesseither party gave at least 15 months’ written notice of nonrenewal.  The consulting contract would have continuedfor at least 36 months following a change of control.  The Company and DPL were also obligated torequire any successor to all or substantially all of its business or assets toassume the consulting contract.

 

Mr. Forster resigned on May 16, 2004.  In connection with Mr. Forster’s resignation,the Company and DPL reserved all rights and defenses and Mr. Forster reservedall rights and entitlements under applicable law and under any existingcontract between Mr. Forster, the Company, DPL and all of itssubsidiaries.  Mr. Forster, along withMs. Muhlenkamp, filed a lawsuit against the Company, DPL and MVE claiming thathe was wrongfully terminated and is entitled to certain rights andbenefits.  The Company, DPL and MVE havefiled a lawsuit against Mr. Forster alleging that he breached his fiduciaryduties and breached his consulting contract and claim that they no longer owe

 

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Mr. Forster any further benefits under hiscontract.  (See Item 3 - Legal Proceedings.)  In those proceedings, Mr. Forster claimedthat he is entitled to rights and benefits under purported agreements with theCompany.  The Company has confirmed thatonly certain of these purported agreements were properly approved. Thefollowing description of Mr. Forster’s consulting contract is a summary of thecontract that the Company believes was in effect at the time of hisresignation.

 

*Compensation and Indemnification*

For his service as Chairman, Mr. Forster’s contractprovided for (i) director’s and similar fees as are customarily paid to othernon-employee directors, including stock awards under DP&L’s Directors’Deferred Stock Compensation Plan; (ii) an additional opportunity for Mr.Forster to receive 35,000 of DPL’s common shares on each January 1 during theterm of the contract, subject to earning and vesting criteria; (iii)participation in DP&L’s 1991 Amended Directors’ Deferred Compensation Plan;and (iv) other compensation and benefits as are customarily provided to othernon-employee directors of the Company and DPL.

 

For his service as a consultant, Mr. Forster’scontract provided for (i) an annual base consulting fee of $650,000 for theyear ended December 31, 2003 and (ii) for calendar years 2000 and after, abonus calculated in accordance with the MVE Incentive Program.  The MVEIncentive Program provided for incentive compensation (an MVE Payment) based onthe cumulative cash distributed to DPL or attributable to each separateinvestment made by any private equity partnership in which DPL has invested atany time prior to the termination of his contract, less the amount invested,expenses, bonuses previously paid and any losses, in which losses not offsetagainst any year’s cash return are carried over and applied against cashreturned in future years.  Mr. Forster’s consulting contract stated thatfor 2003 and for each calendar year thereafter, Mr. Forster’s MVE Payment wasequal to 2.75% of such amount.

 

Mr. Forster’s contract also stated that the Companyand DPL would provide Mr. Forster with life, health, accident and disabilityinsurance benefits and would pay a death benefit of $1.0 million to Mr. Forster’sbeneficiary upon Mr. Forster’s death during the term of the contract.

 

Mr. Forster’s contract stated that the Company and DPLwould indemnify Mr. Forster against any and all losses, liabilities, damages,expenses (including attorneys’ fees), judgments and amounts paid in settlementincurred by Mr. Forster in connection with any claim, action, suit orproceeding (whether civil, criminal, administrative or investigative),including any action by or in the right of either the Company or DPL, by reasonof any act or omission to act in connection with the performance of his dutiesunder the contract to the full extent that the Company and DPL are permitted toindemnify a director, officer, employee or agent against the foregoing underOhio law, including, without limitation, Section 1701.13(E) of the Ohio RevisedCode.

 

In connection with Mr. Forster’s resignation, theCompany and DPL agreed to advance reasonable attorney’s fees incurred by Mr. Forsterin defending any claim, action, suit or proceeding, whether civil, criminal,administrative or investigative, including any action brought derivatively onbehalf of the Company and DPL, by reason of any act or omission by Mr. Forsterto act as director, trustee, officer, employee or agent to the full extentpermitted by Ohio law.  Any such advancement of expenses was subject tothe Company’s and DPL’s receipt of an undertaking by Mr. Forster to repay anysuch

 

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amounts unless it is ultimately determined that he isentitled to be indemnified by the Company and DPL as authorized by Article VIIof the Company’s Code of Regulations and Ohio law.  However, the lawsuitfiled by the Company, DPL and MVE against Mr. Forster seeks a declaration thathe is not entitled to such advancements and must repay advances already madebecause he is unable to demonstrate entitlement to such indemnification.

 

*Termination*

Mr. Forster’s contract could have been terminated uponwritten notice by (i) the Company or DPL on account of Mr. Forster’s disabilityor for “cause” or (ii) Mr. Forster for “good reason.”

 

“Cause” is defined as (i) commission of a felony, (ii)embezzlement, (iii) the illegal use of drugs or (iv) if no change of controlhas occurred (other than a change of control resulting from the commencement ofa tender offer or the Company or DPL entering into an agreement to merge orconsolidate or to sell, lease, exchange or otherwise transfer or dispose of allor substantially all of its assets), the failure by Mr. Forster tosubstantially perform his duties (other than any failure resulting from hisphysical or mental illness or other physical or mental incapacity) asdetermined by the Board of Directors.

 

“Good Reason” is defined as (i) the failure to electMr. Forster to Chairman of the Board of Directors or Chairman of the ExecutiveCommittee for any reason, other than Mr. Forster’s termination due to death ordisability, by the Company or DPL for cause, or by Mr. Forster for goodreason; (ii) the assignment of any duties inconsistent with the dutiescontemplated by the consulting contract without Mr. Forster’s consent; (iii) ifwithin 36 months after the date of a change of control (other than a change ofcontrol resulting from the commencement of a tender offer or the Company or DPLentering into an agreement to merge or consolidate or to sell, lease, exchangeor otherwise transfer or dispose of all or substantially all of its assets),Mr. Forster determines that he is unable to discharge his duties effectively;(iv) the failure of the Company or DPL to obtain the assumption of the contractby any successor; (v) the termination of the contract by the Company or DPLwithout satisfying the applicable requirements; or (vi) any other materialbreach of the contract by the Company or DPL.

 

Upon termination of the contract for any reason,including expiration of the term, the contract provided for (i) a lump sum cashpayment to Mr. Forster of the directors’ fees and base consulting fees throughthe date of termination; (ii) the continuation of Mr. Forster’s MVEPayment on an annual basis; (iii) continuation of medical benefits to Mr.Forster and his spouse for life and to any of Mr. Forster’s eligibledependents; and (iv) payment of all other accrued benefits to which Mr. Forsterwas entitled through the date of termination.  The contract also statedthat all earned and vested stock awards granted to Mr. Forster pursuant to theDirectors’ Deferred Stock Plan and all compensation deferred under theDirectors’ DCP would be payable to Mr. Forster in accordance with the terms ofsuch plan.

 

If the contract terminated prior to the expiration ofthe term by Mr. Forster for good reason or by the Company or DPL, other thanfor cause or Mr. Forster’s disability, and Mr. Forster was not entitled toreceive change of control benefits for a change of control (other than a changeof control resulting from the commencement of a tender offer or the Company orDPL entering into an agreement to merge or consolidate or to sell, lease,exchange or otherwise transfer or dispose of all or substantially all of itsassets), then, in

 

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addition to the payments and benefits described above,the consulting contract provided for (i) a lump sum cash payment equal to theamount of the annual base consulting fees that would have been payable for theremainder of the term; (ii) all unearned and/or unvested stock incentive unitsawarded under the MSIP and all unearned and/or unvested stock awards grantedunder the Directors’ Deferred Stock Plan would be deemed fully earned andvested; and (iii) continuation of all life, medical, accident and disabilityinsurance for Mr. Forster, his spouse and his eligible dependents for theremainder of the term.

 

*Change of Control*

Mr. Forster’s contract also provided for benefits andpayments after the occurrence of a “change of control” (as such term is definedin the contract).  Upon a change of control, the contract stated that theCompany and DPL would transfer cash or other property in an amount sufficientto fund all benefits and payments to the master trust.  In addition, thecontract provided a gross-up payment if any excise tax was imposed upon achange of control such that Mr. Forster was in the same after-tax positionas if no excise tax was imposed.

 

If a change of control occurred (other than a changeof control resulting from the commencement of a tender offer or the Company orDPL entering into an agreement to merge or consolidate or to sell, lease,exchange or otherwise transfer or dispose of all or substantially all of itsassets), the contract provided for (i) a lump sum cash payment to Mr. Forsterequal to the sum of (a) 200% of the annual base consulting fees; (b) 200% ofthe average annual bonus paid to Mr. Forster for the three years immediatelypreceding the date of the change of control; and (c) any gross-up paymentpayable to Mr. Forster for excise taxes; (ii) payment of one-half of the amountcalculated in clause (i) in consideration of Mr. Forster’s agreement to besubject to a non-compete covenant; (iii) all unearned and/or unvested stockincentive units awarded under the MSIP and all unearned and/or unvested stockawards granted under the Directors’ Deferred Stock Plan would be deemed fullyearned and vested; and (iv) continuation of all life, medical, accident anddisability insurance for Mr. Forster, his spouse and his eligible dependentsuntil the third anniversary of the date of the change of control.

 

If a tender offer was commenced or the Company or DPLentered into an agreement to merge or consolidate or to sell, lease, exchangeor otherwise transfer or dispose of all or substantially all of its assets,then upon any subsequent termination of Mr. Forster’s contract at any timewithin 36 months of the change of control and prior to the occurrence ofanother change of control or the consummation of such tender offer oragreement, Mr. Forster’s contract provided for the benefits and paymentsdescribed above unless the contract was terminated for cause, on account of Mr.Forster’s death or disability or by Mr. Forster without good reason. However, in the event of such a change of control, if the tender offer oragreement was abandoned or terminated, and a majority of the original directorsand/or their successors (as such terms are defined in the contract) determinedthat the tender offer or agreement would not effectuate or otherwise result ina change of control and provide written notice of such determination, then asubsequent termination would have not entitled Mr. Forster to thesebenefits.  Neither the Company nor DP&L experienced a change ofcontrol while Mr. Forster served as Chairman and consultant to the Companyand DPL.

 

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*February 2004 Letters*

Mr. Koziar executed two letters (each dated as ofFebruary 2, 2004) to Mr. Forster, both of which were agreed to and acknowledgedby Mr. Forster.  In addition, Mr. Koziar sent a letter to Mr. Forsterdated February 3, 2004.  The letters described new terms and modificationsto Mr. Forster’s consulting contract, an amended version of which was attachedto the February 2, 2004 letter.  The modifications included:

 

•                  changing Mr.Forster’s severance compensation after a change of control from 200% of theaverage annual bonus paid to Mr. Forster for the three years prior to histermination to 200% of the average of his incentive compensation for the threeof the last ten years prior to his termination, whether or not consecutive,that yielded the highest average incentive compensation;

 

•                  adding a “clarification”that a transferee of all or a portion of DPL’s interest in the financial assetportfolio will be required specifically to assume the Company’s and DPL’sobligation to pay Mr. Forster the MVE Incentive Payment pursuant to Annex A ofhis contract;

 

•                  increasing theduration of Mr. Forster’s non-compete agreement from two to three years;

 

•                  increasing Mr.Forster’s consulting fee to $750,000; and

 

•                  entitling Mr.Forster to receive gross-up payments for any excise taxes on the date oftermination rather than 15 days after such date.

 

An amended contract was never signed by the Company orDPL.  In addition, neither the Board nor the Compensation Committeeapproved or authorized the modifications and new terms described above. The Company, DPL and MVE have commenced litigation seeking a declaration thatthe purported amendments described above were not effective. However, in thelitigation action brought by Mr. Forster and Ms. Muhlenkamp, in which theyalleged a breach of contract, Mr. Forster claimed that the letters governed hisrelationship with the Company and that he is entitled to the benefits containedtherein.  (See Item 3 - Legal Proceedings.)

 

**Stephen F. Koziar, Jr.**

Mr. Koziar served as the President and Chief ExecutiveOfficer of the Company and DPL from January 1, 2003 to May 16, 2004pursuant to an employment agreement dated October 17, 2002 and a letteragreement dated December 15, 2000.  Mr. Koziar also served as a directorand Secretary/Treasurer of MVE from 1998 until his retirement.  The termof Mr. Koziar’s employment agreement was through December 31, 2005, unlessterminated by the Company, DPL or Mr. Koziar at any time, with or withoutcause, upon 180 days written notice.

 

Mr. Koziar retired from the Company and DPL on May 16,2004.  In connection with his retirement, the Company and DPL reserved allrights and defenses and Mr. Koziar reserved all rights and entitlementsunder applicable law and under any existing

 

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agreement.  The Company, DPL and MVE have filed alawsuit against Mr. Koziar alleging that he breached his fiduciary duties andbreached his employment agreement and claim that they no longer owe Mr. Koziarany further benefits under his contract.  (See Item 3 - LegalProceedings.)

 

The Company and DPL have initiated legal proceedingsagainst Mr. Koziar relating to, among other things, his employment agreement(see Item 3 - Legal Proceedings.)  The Company and DPL have found that twoversions of Mr. Koziar’s employment agreement exist, the initial version and anamended version.  However, the Company and DPL have not been able toconfirm that the amended version was ever approved by the CompensationCommittee or the Board of Directors.  Therefore, the initial version isreflected in the following discussion.  The Company and DPL also havefound two versions of the December 15, 2000 letter agreement with Mr. Koziarfeaturing different averaging formulas for determining the incentivecompensation payment following a change of control.  The Company and DPLbelieve that the version that includes a three-most-recent-years averagingformula, rather than taking the highest three years of the past ten, is theoriginal version and it has not been able to substantiate that the otherversion was ever approved by the Compensation Committee or the Board ofDirectors.  The following discussion reflects what the Company and DPLbelieve were in effect at the time of Mr. Koziar’s retirement.

 

*Compensation and Indemnification*

Mr. Koziar’s employment agreement provided for (i) anannual base salary of not less than $600,000; (ii) participation in the MICP;(iii) eligibility to be granted options under DPL’s Stock Option Plan; (iv)participation in other incentive programs; and (v) such fringe benefits(including medical, life and disability insurance benefits and retirementbenefits) as are generally made available to other executive level employees.

 

Mr. Koziar’s employment agreement stated that theCompany and DPL will indemnify Mr. Koziar against any and all losses,liabilities, damages, expenses (including attorneys’ fees), judgments andamounts paid in settlement incurred by Mr. Koziar in connection with any claim,action, suit or proceeding (whether civil, criminal, administrative orinvestigative), including any action by, or in the right of, either the Companyor DP&L, by reason of any act or omission to act in connection with theperformance of his duties under the contract to the full extent that theCompany and DPL are permitted to indemnify a director, officer, employee oragent against the foregoing under Ohio law including, without limitation,Section 1701.13(E) of the Ohio Revised Code.

 

In connection with Mr. Koziar’s retirement, theCompany and DPL agreed to advance reasonable attorney’s fees incurred by Mr. Koziarin defending any claim, action, suit or proceeding, whether civil, criminal,administrative or investigative, including any action brought derivatively onbehalf of the Company or DPL, by reason of any act or omission by Mr. Koziar toact as director, trustee, officer, employee or agent to the full extentpermitted by Ohio law.  Any such advancement of expenses was subject tothe Company’s and DPL’s receipt of an undertaking by Mr. Koziar to repay anysuch amounts unless it is ultimately determined that he is entitled to beindemnified by the Company and DPL as authorized by Article VII of the Company’sCode of Regulations and Ohio law.  However, the lawsuit filed by theCompany, DPL and MVE against Mr. Koziar seeks a declaration that he is notentitled to such advancements and must repay

 

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advances already made because he is unable todemonstrate entitlement to such indemnification.

 

*Termination*

Mr. Koziar’s employment agreement was terminable bythe Company or DPL without “cause” on 180 days prior written notice, or with “cause”without prior notice; Mr. Koziar could terminate the agreement on 180 dayswritten notice.  “Cause” is defined as (i) the commission of a felony,(ii) embezzlement, (iii) the illegal use of drugs, or (iv) the failure by Mr.Koziar to substantially perform his duties under the agreement (other thanany such failure resulting from his physical or mental illness or otherphysical or mental incapacity) as determined by the Board of Directors of theCompany and DPL.

 

If Mr. Koziar’s employment was terminated for anyreason, the December 15, 2000 letter agreement provided for (i) a lump sum cashpayment to Mr. Koziar equal to the sum of his full base salary through the dateof termination and the amount of the awards earned pursuant to any incentivecompensation plan that have not been paid (other than any deferred compensationplan in which he made a contrary installment election); (ii) continuation ofmedical benefits for him and his spouse for life; and (iii) payment of anyother accrued benefits to which he was entitled through the date oftermination.

 

If Mr. Koziar’s employment was terminated prior toDecember 31, 2005 by the Company or DPL without “cause,” other than in connectionwith a change of control, or by Mr. Koziar, and at the time of termination, anyof the following executive positions are filled by more than one person:President or Chief Operating Officer of (1) DPL, (2) DP&L or (3) DPL Energy,LLC, then the employment agreement states that: (i) the Company and DPL willpay Mr. Koziar’s base salary through December 31, 2005; (ii) the Company andDPL would pay Mr. Koziar the annual bonus he would have received pursuant tothe MICP for the year during which termination occurs had he still beenemployed as of the last day of such year; and (iii) any unvested optionsgranted under DPL’s Stock Option Plan would be deemed fully vested. However, the Company and DPL would not have those obligations, if Mr. Koziar’semployment was terminated for “cause.”

 

The other version of Mr. Koziar’s agreement, which theCompany does not believe became effective, removed all provisions regarding “cause.” Under that version, the agreement was terminable by any party at any time on180 days written notice.  Any termination at a time when (a) any of thefollowing executive positions were filled by more than one person: President orChief Operating Officer of (1) DPL, (2) DP&L or (3) DPL Energy, LLC, or (4)a new CEO of DPL had been elected would have required that: (i) the Company andDPL would pay Mr. Koziar’s base salary through December 31, 2005; (ii) theCompany and DPL would pay Mr. Koziar the annual bonus he would have receivedpursuant to the MICP for the year during which termination occurs had he stillbeen employed as of the last day of such year; and (iii) any unvested optionsgranted under DPL’s Stock Option Plan would have been deemed fullyvested.  Additionally, that version of Mr. Koziar’s agreement contained aprovision under which Mr. Koziar would refrain for two years from participatingin certain forms of competition with DPL and DP&L.

 

In addition to the above, if Mr. Koziar’s employmentwas terminated due to his death, then Mr. Koziar’s estate would be entitled tohis base compensation through December 31, 2005.

 

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*Change of Control*

If a change of control occurred (other than a changeof control resulting from the commencement of a tender offer or the Company orDPL entering into an agreement to merge or consolidate or to sell, lease,exchange or otherwise transfer or dispose of all or substantially all of itsassets), Mr. Koziar’s December 15, 2000 letter agreement provided for (i) alump sum cash payment to Mr. Koziar equal to the sum of 200% of (a) theannual base salary and (b) the average of the last three annual award paymentsmade to Mr. Koziar under the MICP prior to the change of control,including any portion of the payments he elected to have credited to his deferredcompensation plan account; (ii) payment of one-half of the amount calculated inclause (i) above in consideration of Mr. Koziar’s agreement to be subject tonon-compete and confidentiality covenants; (iii) gross-up payments for excisetaxes; and (iv) any and all awarded stock incentive units pursuant to the MSIP(other than to the extent related to a completed period for which thedetermination of the number of earned stock incentive units had already beenmade; and not to exceed the number of stock incentive units comprising thetarget award under the applicable stock incentive award regardless of thepotential to earn more than such target award) being deemed earned stockincentive units which are vested, and all such earned stock incentive units shallbe payable.  Mr. Koziar’s agreement permitted Mr. Koziar to defer thepayment described in clause (ii), in which event the amount would be creditedto his deferred compensation plan account.  In addition, if Mr. Koziar’sagreement was terminated within twelve months of such change of control, hisagreement stated that Mr. Koziar would receive the benefits described belowunless such termination is for cause or due to Mr. Koziar’s death ordisability.

 

Under the December 15, 2000 letter agreement, if a tenderoffer was commenced or the Company or DPL entered into an agreement to merge orconsolidate or to sell, lease, exchange or otherwise transfer or dispose of allor substantially all of its assets, then upon any subsequent termination of Mr.Koziar’s agreement within 36 months of the change of control and prior to theoccurrence of another change of control or the consummation of such tenderoffer or agreement, Mr. Koziar’s agreement provided for (i) the paymentsdescribed in the immediately preceding paragraph; (ii) in the event that thechange of control preceded the completion of a period in which Mr. Koziar couldhave earned compensation pursuant to the MICP or any other incentive plan(other than the MSIP), a lump sum cash payment to Mr. Koziar equal to theaverage of the last three annual award payments to him under the MICP or otherincentive plan (other than the MSIP), including any portion of such paymentsthat he elected to have credited to his deferred compensation plan account (asecond version of the letter agreement calculated this average based on thethree calendar years out of the last ten consecutive years which yielded thehighest average of incentive compensation); (iii) payment of any cash or sharesof DPL’s stock awarded pursuant to the MICP or any action taken by the Board ofDirectors prior to the change of control which had been deferred; provided,however, that any deferral election that Mr. Koziar selected would remain ineffect; and (iv) continuation of all life, health, accident and disabilityinsurance until the third anniversary of the date of the change of control oruntil an essentially equivalent benefit was made available to Mr. Koziar by asubsequent employer at no cost to Mr. Koziar; provided, however, that suchbenefits and payments would not be made if the agreement was terminated by theCompany or DPL for cause, by Mr. Koziar, or on account of Mr. Koziar’s death ordisability.  In the event of such a change of control, if the tender offeror agreement was abandoned or terminated, and a majority of the originaldirectors and/or their successors determine that the tender offer or agreementwould not effectuate or otherwise result in a change of control and provide

 

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written notice of such determination, then asubsequent termination would not entitle Mr. Koziar to the benefits describedabove.

 

Upon any change of control, Mr. Koziar’s letteragreement stated that the Company and DPL would transfer cash or other propertyin an amount sufficient to fund all change of control benefits and payments tothe master trust.  In addition, the letter agreement provided a gross-uppayment if any excise tax was imposed upon a change of control such thatMr. Koziar was in the same after-tax position as if no excise tax wasimposed.  Neither the Company nor DPL experienced a change of controlwhile Mr. Koziar was employed by the Company and DPL.

 

**Robert D. Biggs**

Mr. Biggs has served as the Chairman of the Board ofDirectors of DPL and DP&L since May 16, 2004, and he was appointedExecutive Chairman of DPL and DP&L pursuant to an employment agreement,dated July 21, 2004 and effective as of May 16, 2004.  The term of Mr.Biggs’ employment agreement is through May 16, 2006 and automatically renewsfor one-year periods unless terminated, with or without cause, by the Company,DPL or Mr. Biggs upon 90 days written notice; provided that the Company or DPLmay terminate Mr. Biggs for cause without prior notice.  The agreementalso automatically terminates upon Mr. Biggs’ death or disability.  Mr.Biggs’ agreement includes non-compete and confidentiality provisions.

 

*Compensation and Indemnification*

Mr. Biggs’ agreement provides for (i) an annual basesalary of $250,000; (ii) his eligibility to receive an annual bonus under theMICP; (iii) stock options to purchase 200,000 shares of DPL common stock at anexercise price to be determined pursuant to the DPL Inc. Stock Option Plan andthat will vest and become exercisable as to 50% of the shares on each of May16, 2005 and May 16, 2006; (iv) a tax gross-up such that if any annuity taxesor other related taxes are imposed, Mr. Biggs is in the same after-tax positionas if no taxes were imposed; (v) fringe benefits as are generally provided tonon-employee directors; and (vi) term life insurance policy with a deathbenefit of $500,000.  In addition, the Company and DPL will provide Mr.Biggs with the use of corporate aircraft in connection with his travel betweenDayton and his home in Florida and will pay a tax gross-up in respect ofsuch use.  On October 5, 2004, Mr. Biggs signed a Letter Agreement withthe Company and DPL to clarify that the effective date for the grant of stockoptions entitling Mr. Biggs to purchase 200,000 common shares pursuant tohis employment agreement was October 5, 2004 and not May 16, 2004.

 

Further, Mr. Biggs retired as a Managing Partnerof PricewaterhouseCoopers LLP (PwC) in 1999 and received retirement benefitsfrom PwC which, if continued, could have affected whether PwC qualifies as anindependent auditing firm for the Company and DPL.  PwC was the Company’sand DPL’s independent auditor until March 2003 and was required to giveits consent to the filing of the Company’s 2003 Form 10-K.  In orderfor PwC to continue to qualify as an independent auditor, Mr. Biggs hasagreed to accept his retirement benefit from PwC in the form of an annuitywhich provides an annual retirement benefit that is $71,000 less than theamount he previously received from PwC directly.  To compensate Mr. Biggs for theresulting reduction in his PwC retirement benefits, the Company and DPLpurchased an annuity that pays Mr. Biggs $71,000 per year for life in additionto the compensation described above.  TheCompany and DPL will also provide Mr. Biggs with gross-up payments for anyincome taxes incurred by him in connection with the annuity such thatMr. Biggs is in the same after-tax position as if

 

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no income taxes had been imposed.   Upon Mr. Biggs’ death, Mr. Biggs’spouse will receive an annual amount equal to 30% of the total annuity payableto Mr. Biggs for life.   Thisarrangement will continue to be binding even if Mr. Biggs no longer servesas Executive Chairman.

 

Mr. Biggs’ agreement states that the Company and DPLwill indemnify him against any and all losses, liabilities, damages, expenses(including attorney’s fees), judgments and amounts paid in settlement incurredby Mr. Biggs in connection with any claim, action, suit or proceeding (whethercivil, criminal, administrative or investigative), including any action by orin the right of either the Company or DPL, by reason of any act or omission toact in connection with the performance of his duties under the agreement to thefull extent that the Company and DPL are permitted to indemnify a director,officer, employee or agent against the foregoing under the respective Codes ofRegulations of the Company and DPL and Ohio law including, without limitation,Section 1701.13(E) of the Ohio Revised Code.

 

*Termination*

If Mr. Biggs’ employment is terminated for any reason,Mr. Biggs’ agreement provides for (i) his annual base salary through the dateof his termination and (ii) any accrued benefits under the Company’s and DPL’scompensation or benefit plans or arrangements in accordance with their terms,including any unpaid bonuses payable in respect of a completed fiscal year.

 

If Mr. Biggs’ employment is terminated without causeprior to a change of control, then in addition to the payments and benefitsdescribed above, Mr. Biggs’ agreement provides for (i) a lump sum cash paymentequal to the aggregate amount of his annual base salary during the remainder ofhis term; (ii) continued benefits during the remainder of the term; and (iii)the vesting of all awarded stock options; provided that Mr. Biggs executes anddelivers a release pursuant to which he fully and unconditionally releases anyclaims that he may have against the Company or DPL.

 

*Change of Control*

If within one year of a change of control Mr. Biggs’employment either is not extended by the Company or DPL or is terminatedwithout cause, Mr. Biggs’ agreement provides for (i) a lump sum cash paymentequal to the sum of (a) 200% of the annual base salary; (b) 200% of the annualbonus paid or payable to Mr. Biggs for the calendar year immediately precedingthe year of his termination (if Mr. Biggs has not had the opportunity to earnan annual bonus prior to his termination, then the annual bonus shall be deemedto be $250,000); and (c) a gross-up payment if any excise tax is imposed upon achange of control such that Mr. Biggs is in the same after-tax position as ifno excise tax was imposed; (ii) the continuation of his benefits for two yearsfollowing his termination; and (iii) the vesting of all of his awarded stockoptions; provided that Mr. Biggs executes and delivers a release pursuant towhich he fully and unconditionally releases any claims that he may have againstthe Company or DPL.  If the change of control that occurred was only thecommencement of a tender offer, the tender offer is abandoned or terminated anda majority of the original directors and/or their successors determine that thetender offer will not effectuate or otherwise result in a change of control andprovide written notice of such determination, then a subsequent terminationwill not entitle Mr. Biggs to the benefits described above.

 

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**W. Steven Wolff**

Mr. Wolff has served as an executive employee of theCompany and DPL since September 17, 2003 pursuant to an employment agreementdated September 17, 2003 and a letter agreement dated November 1, 2002. The term of Mr. Wolff’s employment agreement is indefinite until terminated bythe Company or DPL, with or without cause, upon 30 days’ notice or by Mr. Wolffupon 180 days’ written notice; provided that the Company or DPL may terminatethe agreement with cause without prior notice.  The agreement alsoterminates automatically upon Mr. Wolff’s death or disability.

 

*Compensation*

Mr. Wolff’s agreement provides for (i) an annual basesalary of not less than $250,000; (ii) participation in such short-term andlong-term bonus, incentive compensation, deferred compensation and similarplans as the Company or DPL or the Compensation Committee may determine; and(iii) such fringe benefits as are generally made available to all otheremployees, the Executive Medical Plan, the annual physical program andfinancial planning services in effect from time to time.

 

*Termination*

If Mr. Wolff’s employment is terminated without “cause”and he is not entitled to receive the benefits described below, then theagreement provides for payment of his annual base salary in installments overthe one-year period after the date of termination; provided that Mr. Wolffexecutes and delivers a release pursuant to which he fully and unconditionallyreleases any claims that he may have against the Company, DPL and itsaffiliates.

 

“Cause” for purposes of Mr. Wolff’s employmentagreement is defined as (i) commission of a felony, (ii) embezzlement, (iii)the illegal use of drugs, or (iv) the failure by Mr. Wolff to substantiallyperform his duties hereunder (other than any such failure resulting from hisphysical or mental illness or other physical or mental incapacity) asreasonably determined by the Company or DPL.

 

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

 

For a period of one year after termination of Mr.Wolff’s employment, Mr. Wolff’s employment agreement states that Mr. Wolff isrequired to provide assistance as may be necessary to facilitate a smooth andorderly transition of duties.

 

*Change of Control*

If Mr. Wolff’s employment is terminated in connectionwith a change of control, his letter agreement provides for payments andbenefits similar to those described for Mr. Mahoney except that Mr. Wolff’snon-compete provisions are effective for two years after termination whereasMr. Mahoney’s non-compete provisions are effective for three years aftertermination.

 

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**Patricia K. Swanke**

Ms. Swanke has served as an executive employee sinceSeptember 17, 2003, pursuant to an employment agreement dated September 17,2003 and a letter agreement dated July 1, 2004.  The term of Ms. Swanke’semployment agreement is indefinite until terminated by the Company or DPL, withor without cause, upon 30 days’ notice or by Ms. Swanke upon 180 days writtennotice; provided that the Company or DPL may terminate the agreement with causewithout prior notice.  The agreement also terminates automatically uponMs. Swanke’s death or disability.  Ms. Swanke’s letter agreementincludes non-compete and confidentiality provisions.

 

*Compensation*

Ms. Swanke’s employment agreement provides for (i) anannual base salary of not less than $230,000; (ii) participation in suchshort-term and long-term bonus, incentive compensation, deferred compensationand similar plans as the Company, DPL or the Compensation Committee maydetermine; and (iii) such fringe benefits as are generally made available toall other employees, the Executive Medical Plan, the annual physical programand financial planning services in effect from time to time.

 

*Termination*

If Ms. Swanke’s employment is terminated without causeand she is not entitled to receive the benefits described below, then theagreement provides for payment of her annual base salary in installments overthe one-year period after the date of termination; provided that Ms. Swankeexecutes and delivers a release pursuant to which she fully and unconditionallyreleases any claims that she may have against the Company, DPL and itsaffiliates.  The definition of “cause” is identical to the definitionprovided in Mr. Wolff’s summary.

 

If Ms. Swanke’ s employment is terminated for anyreason at any time, her letter agreement provides for (i) a lump sum cashpayment equal to her full base salary through the date of termination; (ii) theamount of the awards, with respect to any completed period which, pursuant tothe MICP or any other incentive plan (other than any deferred compensation planin which she made a contrary installment election) that have been earned butnot paid; and (iii) payment of any other accrued benefits to which she wasentitled through the date of termination.

 

For a period of one year after termination of Ms.Swanke’s employment, Ms. Swanke’s employment agreements states that Ms. Swankeis required to provide assistance as may be necessary to facilitate a smoothand orderly transition of duties.

 

*Change of Control*

If Ms. Swanke’s employment is terminated in connectionwith a change of control, her agreement dated July 1, 2004 provides forpayments and benefits similar to those described for Mr. Mahoney.

 

**Miggie E. Cramblit**

Ms. Cramblit has served as an executive employee sinceJune 9, 2003, pursuant to an employment agreement dated June 9, 2003.  Theterm of Ms. Cramblit’s employment agreement and letter agreement is indefiniteuntil terminated by the Company or DPL, with or without cause, upon 30 days’notice or by Ms. Cramblit upon 180 days written notice; provided that theCompany or DPL may terminate the agreement with cause without priornotice.  The agreement also terminates automatically upon Ms. Cramblit’s

 

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death or disability.  Ms. Cramblit’s letteragreement includes non-compete and confidentiality provisions.

 

*Compensation*

Ms. Cramblit’s employment agreement provides for (i)an annual base salary of not less than $210,000; (ii) participation in suchshort-term and long-term bonus, incentive compensation, deferred compensationand similar plans as the Company, DPL or the Compensation Committee maydetermine; and (iii) such fringe benefits as are generally made available toall other employees, the Executive Medical Plan, the annual physical programand financial planning services in effect from time to time.

 

*Termination*

If Ms. Cramblit’s employment is terminated withoutcause and she is not entitled to receive the benefits described below, then theagreement provides for payment of her annual base salary in installments overthe one-year period after the date of termination; provided that Ms. Cramblitexecutes and delivers a release pursuant to which she fully and unconditionallyreleases any claims that she may have against the Company, DPL and itsaffiliates.  The definition of “cause” is similar to the definitionprovided in Mr. Wolff’s summary.

 

If Ms. Cramblit’ s employment is terminated for anyreason at any time, her letter agreement provides for (i) a lump sum cashpayment equal to her full base salary through the date of termination; (ii) theamount of the awards, with respect to any completed period which, pursuant tothe Management Incentive Compensation Plan or any other incentive plan (otherthan any deferred compensation plan in which she made a contrary installmentelection) that have been earned but not paid; and (iii) payment of any otheraccrued benefits to which she was entitled through the date of termination.

 

For a period of one year after termination of Ms.Cramblit’s employment, Ms. Cramblit’s employment agreements states that Ms. Swankeis required to provide assistance as may be necessary to facilitate a smoothand orderly transition of duties.

 

*Change of Control*

If Ms. Cramblit’s employment is terminated inconnection with a change of control, her letter agreement dated June 9, 2003provides for payments and benefits similar to those described for Mr. Mahoney.

 

**Compensation of Directors**

In 2004, director compensation for each non-employeedirector consisted of an annual retainer of $55,000, covering both the Companyand DPL, Board meeting fees of $5,000 per meeting, committee meeting fees of$4,000 per meeting and a special meeting fee of $3,000 per meeting.  Whiledirector compensation was the same in 2003 as in 2004, in 2002 non-employeedirectors received 1,500 common share units annually for services as adirector.

 

DPL maintains a Director Deferred Compensation Plan inwhich payment of directors’ fees may be deferred.  The director fees ofthose directors who have designated their director fees to be deferred areinvested in DPL common share units.  Under the Director DeferredCompensation Plan, directors are entitled to receive a lump sum payment orpayments in installments over a period up to 20 years upon their retirement orresignation from the Board.

 

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**Compensation Committee**

DPL’s Compensation Committee makes all compensationdecisions for the Company.  TheCompensation Committee sets compensation levels for executive officers,approves equity incentive and other benefit plans, and negotiates and approvesexecutive level employment and consulting contracts.  DPL’s revised Charter of CompensationCommittee, which describes all of the Compensation Committee’s responsibilities,is posted on DPL’s website.

 

The Compensation Committee is currently comprised ofthe following independent directors: Jane G. Haley, Chair; Paul Bishop, Vice Chair; James F. Dicke, II, GlennE. Harder and W August Hillenbrand.  Nomember of the Compensation Committee serves, or has served, as an officer oremployee of the Company or DPL.  Inaddition, no interlocking relationship exists between the Company’s or DPL’sBoard or Compensation Committee and the board of directors or compensation committeeof any other company, nor has any such interlocking relationship existed in thepast.

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

 

**Equity Compensation Plan Information**

The following table sets forth certain information asof December 31, 2004, with respect to the Company’s or DPL’s equitycompensation plans under which shares of DPL’s equity securities may be issued.

** **
| **Plan category**                                            | ** ** | **Number of securities to  be issued upon  exercise of outstanding  options, warrants and  rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                         |       |                                                                                                |       |                                                                               |       |                                                                                                                                                  |       |
| Equity compensation plans approved by  security holders:     |       |                                                                                                |       |                                                                               |       |                                                                                                                                                  |       |
|                                                         |       |                                                                                                |       |                                                                               |       |                                                                                                                                                  |       |
| DPL Inc. Stock Option Plan *(1)*                             |       | 7,210,168                                                                                           |       | $                                                                                  | 20.85      |                                                                                                                                                  | 789,832    |   |
|                                                         |       |                                                                                                |       |                                                                               |       |                                                                                                                                                  |       |
| Equity compensation plans not approved by  security holders: |       |                                                                                                |       |                                                                               |       |                                                                                                                                                  |       |
|                                                         |       |                                                                                                |       |                                                                               |       |                                                                                                                                                  |       |
| Directors’ Deferred Stock Compensation Plan  *(2)*      |       | 279,939                                                                                             |       | N/A                                                                                |       | See Notes 2 and 4                                                                                                                                     |       |
|                                                         |       |                                                                                                |       |                                                                               |       |                                                                                                                                                  |       |
| Management Stock Incentive Plan *(3)*                        |       | 1,103,308                                                                                           |       | N/A                                                                                |       | See Notes 3 and 4                                                                                                                                     |       |
|                                                         |       |                                                                                                |       |                                                                               |       |                                                                                                                                                  |       |
| Total                                                        |       | 8,593,415                                                                                           |       |                                                                               |       |                                                                                                                                                  |       |
|                                                              |            |                                                                                                     |            |                                                                                    |            |                                                                                                                                                       |            |  |

 

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*(1)**       The DPL Inc. Stock OptionPlan provides that “no single Participant shall receive Options with respect tomore than 2,500,000 shares.”  TheSeptember 24, 2002 grant of 300,000 options to Mr. Forster brought his totaloptions to 2.7 million.  Under Mr.Forster’s Option Agreement, the DPL Inc.*

 

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*Stock Option Plan document controls.  Therefore, this table reflects a conformingtotal of 2.5 million options.*

 

*(2)**       The Directors’ DeferredStock Compensation Plan (the “Directors’ Stock Plan”) provided for the annualaward of DPL common shares to non-employee directors for services as adirector.  All shares awarded under theDirectors’ Stock Plan are transferred to the Master Trust.  There was no stated maximum number of sharesthat may have been awarded under the Directors’ Stock Plan.*

 

*(3)**       The Management StockIncentive Plan provides for the award of SIUs to executives.  Earning of SIUs is dependent on theachievement of long-term incentives, including the performance of DPL overvarious performance periods.  For eachSIU that is earned and vests, a participant receives the equivalent of one DPLcommon share plus dividend equivalents from the date of award.*

* *

*(4)**       DPL has secured itsobligations under the Director’s Deferred Stock Compensation Plan and theManagement Stock Incentive Plan by market purchases of DPL common shares by theMaster Trust.  Accordingly, issuance ofshares to directors or executives under these plans will not increase thenumber of DPL common shares issued.*

 

**Security Ownership of Management**

Set forth below is information concerning thebeneficial ownership of common shares of DPL by each director, each personnamed in the Summary Compensation Table under “Executive Compensation” belowand of all directors and executive officers of the Company as a group as ofMarch 2,  2005.

 
| **Name**                                                                    | ** ** | **Amount and Nature of Beneficial  Ownership** | ** ** | **Percent of Class (1) (2) (3)** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------|------------|
|                                                                        |       |                                           |       |                             |       |
| Robert D. Biggs                                                             |       | 2,471                                          |       | <1                            | %          |
| Paul R. Bishop                                                              |       | 27,981                                         |       | <1                            | %          |
| James F. Dicke, II                                                          |       | 294,026                                        |       | <1                            | %          |
| Peter H. Forster*(4) (7)*                                                   |       | 2,924,329                                      |       | <2.3                          | %          |
| Ernie Green                                                                 |       | 178,511                                        |       | <1                            | %          |
| Jane G. Haley                                                               |       | 215,308                                        |       | <1                            | %          |
| Glenn E. Harder                                                             |       | 444                                            |       | 0                                | %          |
| W August Hillenbrand                                                        |       | 184,382                                        |       | <1                            | %          |
| Stephen F. Koziar, Jr. *(5) (7)*                                            |       | 603,345                                        |       | <1                            | %          |
| Lester L. Lyles                                                             |       | 0                                              |       | 0                                | %          |
| James V. Mahoney                                                            |       | 40,116                                         |       | <1                            | %          |
| Arthur G. Meyer                                                             |       | 4,041                                          |       | <1                            | %          |
| Ned J. Sifferlen, PhD                                                       |       | 5,529                                          |       | <1                            | %          |
| Patricia K. Swanke                                                          |       | 4,875                                          |       | <1                            | %          |
| W. Steven Wolff                                                             |       | 1,522                                          |       | <1                            | %          |
| All current directors and executive  officers as a group (18 persons) *(6)* |       | 966,435                                        |       | <1                            | %          |

 

----

*(1)**           **Ownership percentages are basedon 126,501,404 common shares outstanding as of March 2, 2005.*

*(2)**            Exceptfor shares shown for Mr. Forster, the number of shares shown represents in eachinstance less than 1% of the outstanding common shares of DPL.  There were 966,435 common shares and commonshare units, or <1% of the total number of common shares, beneficially ownedby all directors and officers of DPL and DP&L as a group at March 2,2005.  The number of shares shownincludes (i) 150,746 common shares transferred to the Master Trust for non-employeedirectors pursuant to the Directors’ Deferred Stock Compensation Plan, (ii)200,000 common shares subject to presently exercisable options for currentnon-employee directors and (iii) 354,075 share units with no voting rights heldby non-employee directors under the Directors’ Deferred Compensation Plan asfollows: Mr. Biggs – 2,471 units; Mr. Bishop –27,981 units; Mr. Dicke – 82,862 units; Mr. Green –77,940 units; Mrs. Haley – 85,682 units; Mr. Harder – 444 units; Mr.Hillenbrand – 74,466 units, and Dr. Sifferlen – 2,229 units.*

*(3)**            Thenumber of shares shown includes common shares, restricted share units with novoting rights, and stock options that are exercisable.*

 

96

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*(4)**            Mr.Forster resigned on May 16, 2004.*

*(5)**            Mr.Koziar retired on May 16, 2004.*

*(6)**            These18 persons include all current directors and executive officers listed underItem 10 – Directors and Executive Officers of the Registrant.*

*(7)**            Messrs.Forster and Koziar may have beneficial ownership of additional shares held instreet name, which the Company and DPL did not confirm due to pendinglitigation with these individuals.*

 
| **Item 13 - Certain Relationships and Related Transactions** |
|--------------------------------------------------------------|

 

In 1996, the Company and DPL entered into a consultingcontract pursuant to which Peter H. Forster agreed to (i) serve, in anon-employee capacity, as Chairman of the Board of Directors of the Company,DPL and MVE, and as Chairman of the Executive Committee of the Board ofDirectors of the Company and DPL and (ii) provide advisory and strategicplanning consulting services.  The terms and conditions of such consultingcontract are described in Item 11-Executive Compensation, “Consulting Contractand Employment Agreements,” in this Form 10-K.

 

Mr. Forster resigned on May 16, 2004.  Inconnection with Mr. Forster’s resignation, the Company and DPL reserved allrights and defenses and Mr. Forster reserved all rights and entitlements underapplicable law and under any existing agreement between Mr. Forster, theCompany, DPL and all of their subsidiaries.  Mr. Forster filed a lawsuitagainst the Company, DPL and MVE alleging claims against the Company, DPL andMVE for breach of contract, conversion, promissory estoppel and declaratoryjudgment relating to his consulting agreement.  That lawsuit, filed inFlorida, was dismissed in November 2004 for lack of jurisdiction.  The Company, DPL and MVE have filed a lawsuitagainst Mr. Forster alleging that he breached his fiduciary duties and breachedhis consulting contract and claim that they no longer owe Mr. Forster anyfurther benefits under his contract.  (See Item 3 - Legal Proceedings.)

 

In October 2001, the Company and DPL entered into anAdministrative Services Agreement (the ASA) with Valley Partners, Inc.(Valley), a Florida corporation, and the individual trustees of certain mastertrusts which hold the assets of various executive and director compensationplans.  The ASA engaged Valley to provideadministrative and recordkeeping functions on behalf of the master trusts upona change of control of the Company or DPL in exchange for a 1.25%administration fee based on the market value of all assets of the mastertrusts.  The ASA also called for Valley to provide investment advice asrequested by the trustees.  The 1.25% fee payable to Valley under the ASAwas in addition to the annual management fee payable to Valley.

 

In October 2001, the Company and DPL also entered intoa Trustee Fee Agreement (the TFA) with Richard Chernesky, Richard Broock andFrederick Caspar, attorneys at Chernesky, Heyman & Kress P.L.L., a law firmthat represented the Company and DPL.  Upon a change of control of theCompany or DPL, Messrs. Chernesky, Broock and Caspar would become the soletrustees of the master trusts and would succeed to all of the duties of DPL’sCompensation Committee under the compensation plans funded through the mastertrusts in exchange for an annual fee of $500,000.  This fee would not bereduced by payments made to Valley under the ASA.

 

The MSAs, ASA and TFA (the Valley Partners Agreements)were terminated by an agreement executed in January 2004, but effective as ofDecember 15, 2003.  The financial assets were not sold or transferredprior to such termination and therefore the

 

97

----

 

agreements never became effective and no compensationwas ever paid under them.  Mr. Forster’s and Ms. Muhlenkamp’sconsulting and compensation arrangements were governed by the terms of theconsulting contract between the Company, DPL and Mr. Forster and theemployment agreement between the Company, DPL and Ms. Muhlenkamp,respectively.

 

On February 2 and 3, 2004, Mr. Koziar sent letters toMr. Forster and Ms. Muhlenkamp purporting to amend their consulting andemployment agreements to provide change of control protections regarding theirMVE payments.  In addition, on February 2, 2004, Mr. Koziar sent Mr.Forster a letter purporting to amend his consulting agreement to provideadditional terms and to increase his compensation.  However, none of thosepurported amendments had been approved by the Compensation Committee.  (See “Executive Compensation – ConsultingContract and Employment Agreements.”)

 

On April 26, 2004, the Company and DPL entered into anew Trustee Fee Agreement (New TFA) with Messrs. Chernesky, Broock and Casparthat would have become effective upon a change of control of the Company orDPL.  If the New TFA became effective, it provided that Messrs. Chernesky,Broock and Caspar would serve as the sole trustees of the master trusts inexchange for an annual fee of $250,000 during the New TFA’s term.  OnOctober 14, 2004, at the request of the Company and DPL, Messrs. Chernesky,Broock and Caspar submitted their resignations to the Company and DPL.

 

The Company and DPL have reviewed the termination ofthe Valley Partners Agreements, and the purported amendments and agreementssent to Mr. Forster and Ms. Muhlenkamp on February 2, 2004, and has initiatedlegal proceedings asserting breach of fiduciary duty by Messrs. Forster andKoziar and Ms. Muhlenkamp, and challenging the propriety and/or validity ofthose terminations, purported amendments and agreements.  (See Item 3 -Legal Proceedings.)

 
| **Item 14 – Principal Accountant Fees and Services** |
|-----------------------------------------------------------|

 

The following table presents the aggregate fees billedfor professional services rendered to the Company and DPL by KPMG LLP andPricewaterhouseCoopers LLP for 2004 and 2003. Other than as set forth below, no professional services were rendered orfees billed by KPMG LLP or PricewaterhouseCoopers LLP during 2004 and 2003.

 
| **KPMG LLP**                | ** ** | **Fees Paid 2004** | ** ** | **Fees Paid 2003** | ** ** |
|-----------------------------|------------|--------------------|------------|--------------------|------------|
|                        |       |               |       |               |       |
| Audit Services*(1)*         |       | $                  | 2,498,189  |               | $          | 343,333 |   |
| Audit-Related Services*(2)* |       | 147,136            |       | 94,000             |       |
| Tax Services*(3)*           |       | 62,966             |       | —             |       |
| All Other Services*(4)*     |       | —             |       | —             |       |
| Total                       |       | $                  | 2,708,291  |               | $          | 437,333 |   |

 
| **PricewaterhouseCoopers LLP** | ** ** | **Fees Paid 2004** | ** ** | **Fees Paid 2003** | ** ** |
|--------------------------------|------------|--------------------|------------|--------------------|------------|
| Audit Services*(1)*            |       | $                  | 770,074    |               | $          | 303,900 |   |
| Audit-Related Services*(2)*    |       | —             |       | 140,000            |       |
| Tax Services*(3)*              |       | —             |       | 62,400             |       |
| All Other Services*(4)*        |       | —             |       | —             |       |
| Total                          |       | $                  | 770,074    |               | $          | 506,300 |   |

 

98

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----

*(1)**           **Audit services consist ofprofessional services rendered for the audit of the Company’s and DPL’s annualfinancial statements and the reviews of the quarterly financial statements.*

*(2)**           **Audit-related services are thoserendered to the Company and DPL for assurance and related services.*

*(3)**           **Tax services are those renderedto the Company and DPL for tax compliance, tax planning and advice.*

*(4)**           **Other services performed includecertain advisory services in connection with accounting research and do notinclude any fees for financial information systems design and implementation.*

 

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

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

 

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

 

99

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**PART IV**

 

**Item 15 - Exhibits, Financial StatementSchedule and Reports on Form 8-K**

 
| ** **                                                                                                                         | **Page Nos.** |
|------------------------------------------------------------------------------------------------------------------------------------|---------------|
| (a)           The following documents are filed  as part of this report:         |          |
|                                                                                                                               |          |
| **1.             Financial  Statements**                               | ** **    |
|                                                                                                                               |          |
| Consolidated  Statements of Results of Operations for each of the three years in the period  ended December 31, 2004               | 31            |
| Consolidated  Statements of Cash Flows for each of the three years in the period ended  December 31, 2004                          | 32            |
| Consolidated  Balance Sheets at December 31, 2004 and 2003                                                                         | 33            |
| Consolidated  Statement of Changes to Shareholders’ Equity for each of the three years in  the period ended December 31, 2004 | 35            |
| Notes to  Consolidated Financial Statements                                                                                        | 36            |
| Report of Independent Registered Public Accounting Firm - KPMG                                                                     | 64            |
| Report of Independent Registered Public Accounting Firm on Internal  Controls - KPMG                                               | 65            |
| Report of  Independent Registered Public Accounting Firm - PwC                                                                     | 67            |
|                                                                                                                               |          |
|                                                                                                                               |          |
| **2.             Financial Statement Schedule**                        | ** **    |
|                                                                                                                               |          |
| For each of  the three years in the period ended December 31, 2004:                                                                |          |
|                                                                                                                               |          |
| Schedule II — Valuation  and Qualifying Accounts                                                                              | 105           |

 

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

 

 

3.**                                       Exhibits**

 
| **The exhibits filed as a part of  this Annual Report on Form 10-K are:** | ** **                                                                                                                                           | **Incorporated  Herein by  Reference as Filed With** |
|---------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|
|                                                                      |                                                                                                                                                 |                                                 |   |
|                                                                      |                                                                                                                                                 |                                                 |   |
| 2(a)                                                                      | Copy of the Agreement of Merger among DPL Inc., Holding Sub Inc. and  DP&L dated January 6, 1986                                            |                                                 | Exhibit A to the 1986 Proxy Statement (File No. 1-2385) |
|                                                                      |                                                                                                                                                 |                                                 |   |
| 2(b)                                                                      | Copy of Asset Purchase Agreement, dated December 14, 1999, between  The Dayton Power and Light Company, Indiana Energy, Inc., and Number-3CHK,  Inc. |                                                 | Exhibit 2 to Report on Form 10-Q for the quarter ended September 30,  2000

(File No. 1-9052) |
|                                                                      |                                                                                                                                                 |                                                 |   |
| 3(a)                                                                      | Copy of Amended Articles of Incorporation of DPL Inc. dated September  25, 2001                                                                      |                                                 | Exhibit 3 to Report on Form 10-K/A for the year ended December 31,  2001

(File No. 1-2385) |
|                                                                      |                                                                                                                                                 |                                                 |   |
| 3(b)                                                                      | Code of Regulations of DPL Inc.                                                                                                                      |                                                 | Exhibit 3(b) to Form 8-K filed on May 3, 2004 (File No. 1-9052) |

 

100

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| 4(a)   | Copy of Composite Indenture dated as of October 1, 1935, between  DP&L and The Bank of New York, Trustee with all amendments through the  Twenty-Ninth Supplemental Indenture |   | Exhibit 4(a) to Report on Form 10-K for the year ended  December 31, 1985 (File No. 1-2385)      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(b)   | Copy of the Thirtieth Supplemental Indenture dated as of  March 1, 1982, between DP&L and The Bank of New York, Trustee                                                       |   | Exhibit 4(h) to Registration Statement No. 33-53906                                                   |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(c)   | Copy of the Thirty-First Supplemental Indenture dated as of  November 1, 1982, between DP&L and The Bank of New York, Trustee                                                 |   | Exhibit 4(h) to Registration Statement No. 33-56162                                                   |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(d)   | Copy of the Thirty-Second Supplemental Indenture dated as of  November 1, 1982, between DP&L and The Bank of New York, Trustee                                                |   | Exhibit 4(i) to Registration Statement No. 33-56162                                                   |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(e)   | Copy of the Thirty-Third Supplemental Indenture dated as of  December 1, 1985, between DP&L and The Bank of New York, Trustee                                                 |   | Exhibit 4(e) to Report on Form 10-K for the year ended  December 31, 1985 (File No. 1-2385)      |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(f)   | Copy of the Thirty-Fourth Supplemental Indenture dated as of April 1,  1986, between DP&L and The Bank of New York, Trustee                                                        |   | Exhibit 4 to Report on Form 10-Q for the quarter ended June 30,  1986  (File No. 1-2385)         |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(g)   | Copy of the Thirty-Fifth Supplemental Indenture dated as of December  1, 1986, between DP&L and The Bank of New York, Trustee                                                      |   | Exhibit 4(h) to Report on Form 10-K for the year ended December 31,  1986 (File No. 1-9052)           |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(h)   | Copy of the Thirty-Sixth Supplemental Indenture dated as of  August 15, 1992, between DP&L and The Bank of New York, Trustee                                                  |   | Exhibit 4(i) to Registration Statement No. 33-53906                                              |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(i)   | Copy of the Thirty-Seventh Supplemental Indenture dated as of  November 15, 1992, between DP&L and The Bank of New York, Trustee                                              |   | Exhibit 4(j) to Registration Statement No. 33-56162                                              |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(j)   | Copy of the Thirty-Eighth Supplemental Indenture dated as of November 15,  1992, between DP&L and The Bank of New York, Trustee                                               |   | Exhibit 4(k) to Registration Statement No. 33-56162                                              |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(k)   | Copy of the Thirty-Ninth Supplemental Indenture dated as of January  15, 1993, between DP&L and The Bank of New York, Trustee                                                      |   | Exhibit 4(k) to Registration Statement No. 33-57928                                                   |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(l)   | Copy of the Fortieth Supplemental Indenture dated as of  February 15, 1993, between DP&L and The Bank of New York, Trustee                                                    |   | Exhibit 4(m) to Report on Form 10-K for the year ended  December 31, 1992 (File No. 1-2385) |
|   |                                                                                                                                                                                   |   |                                                                                                  |
| 4(m)   | Copy of Forty-First Supplemental Indenture dated as of  February 1, 1999, between DP&L and The Bank of New York, Trustee                                                      |   | Exhibit 4(m) to Report on Form 10-K for the year ended December 31,  1998  (File No. 1-2385)          |

 

101

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| 4(n)   | Copy of Forty-Second Supplemental Indenture dated as of  September 1, 2003, between DP&L and The Bank of New York, Trustee                                                                                                        |   | Exhibit 4(r) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-2385)  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(o)   | Copy of the Revolving Credit Agreement dated as of December 18, 2002,  between DPL Inc., KeyBank National Association (as agent), Bank One, NA (as  agent), and the banks named therein                                                    |   | Exhibit 4(n) to Report on Form 10-K for the year ended December 31,  2002 (File No. 1-9052)  |
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(p)   | Copy of the Note Purchase Agreement dated as of April 6, 1999, for  $500.0 million of 6.32% Senior Notes due 2004                                                                                                                          |   | Exhibit 4 to Report on Form 10-Q dated June 30, 1999 (File No.  1-9052)                 |
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(q)   | Copy of Rights Agreement between DPL Inc. and Equiserve Trust  Company, N.A.                                                                                                                                                               |   | Exhibit 4 to Report on Form 8-K dated September 25, 2001  (File No. 1-9052)             |
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(r)   | Copy of 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 dated February 4, 2000 (File No.  1-9052)                |
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(s)   | Copy of Revolving Credit Agreement dated as of December 12,  2003, between Dayton Power & Light Company, Harris Nesbitt Corp. (as  agent), KeyBank National Association (as agent and lead arranger) and the  banks named therein |   | Exhibit 4(s) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-2385)  |
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(t)   | Copy of Revolving Credit Agreement dated as of June 1, 2004, between  the Dayton Power and Light Company, KeyBank National Association (as agent  and arranger) and LaSalle Bank National Association                                      |   | Exhibit 4(ee) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-2385) |
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(u)   | Officer’s Certificate of DPL Inc. establishing $175 million Senior  Note due 2009, dated March 25, 2004                                                                                                                          |   | Exhibit 4.1 to Form 8-K, filed on March 29, 2004 (File No.  1-9052)                     |
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(v)   | Exchange and Registration Rights Agreement dated March 25, 2004,  between DPL Inc. and the purchasers                                                                                                                                 |   | Exhibit 4.2 to Form 8-K, filed on March 29, 2004 (File No.  1-9052)                     |
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(w)   | 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                                         |
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(x)   | Officer’s Certificate of DPL Inc. establishing exchange notes, dated  March 1, 2000                                                                                                                                              |   | Exhibit 4(c) to Registration Statement No. 333-37972                                         |
|   |                                                                                                                                                                                                                                       |   |                                                                                         |
| 4(y)   | 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                                         |

 

102

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| 4(z)   | Officer’s Certificate of DPL Inc. establishing exchange notes, dated  August 31, 2001                                                                                                                                                                                                                                                                                                                                                                                   |   | Exhibit 4(c) to Registration Statement No. 333-74568                                          |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                          |
| 4(aa)  | 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                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                          |
| 4(bb)  | First Supplemental Indenture dated as of August 31, 2001, relating to  the subordinated debentures between DPL Inc. and The Bank of New York                                                                                                                                                                                                                                                                                                                                      |   | Exhibit 4(b) to Registration Statement No. 333-74630                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                          |
| 4(cc)  | Amended and Restated Trust Agreement dated as of August 31, 2001,  relating to DPL Capital Trust II, the Capital Securities and the Common  Securities among DPL Inc., the depositor, The Bank of New York, as property  trustee, The Bank of New York (Delaware), as Delaware trustee, and  Allen M. Hill and Stephen F. Koziar, Jr., as administrative  trustees, and the holders, from time to time, of undivided beneficial  interests in DPL Capital Trust II |   | Exhibit 4(c) to Registration Statement No. 333-74630                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                          |
| 4(dd)  | 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                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                          |
| 10(a)* | Copy of Directors’ Deferred Stock Compensation Plan amended December  31, 2000                                                                                                                                                                                                                                                                                                                                                                                               |   | Exhibit 10(a) to Report on Form 10-K for the year ended December 31,  2000  (File No. 1-9052) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                          |
| 10(b)* | Copy of Directors’ Deferred Compensation Plan amended December 31,  2000                                                                                                                                                                                                                                                                                                                                                                                                     |   | Exhibit 10(b) to Report on Form 10-K for the year ended December 31,  2000  (File No. 1-9052) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                          |
| 10(c)* | Copy of Management Stock Incentive Plan amended December 31, 2000                                                                                                                                                                                                                                                                                                                                                                                                                 |   | Exhibit 10(c) to Report on Form 10-K for the year ended December 31,  2000  (File No. 1-9052) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                          |
| 10(d)* | Copy of Key Employees Deferred Compensation Plan amended December 31,  2000                                                                                                                                                                                                                                                                                                                                                                                                       |   | Exhibit 10(d) to Report on Form 10-K for the year ended December 31,  2000  (File No. 1-9052) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                          |
| 10(e)* | Copy of Supplemental Executive Retirement Plan amended February 1,  2000                                                                                                                                                                                                                                                                                                                                                                                                          |   | Exhibit 10(e) to Report on Form 10-K for the year ended December 31,  2003  (File No. 1-2385) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                          |
| 10(f)* | Copy of Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | Exhibit 10(f) to Report on Form 10-K for the year ended December 31,  2000  (File No. 1-9052) |

 

103

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| 10(g)*         | Consulting contract dated as of December 31, 1996, between DPL Inc.,  The Dayton Power and Light Company and Peter H. Forster                                                                                                                                                    |   | Exhibit 10(g) to Report on Form 10-K for the year ended December 31,  2002 (File No. 1-9052) |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                             |   |                                                                                         |
| 10(h)*         | Employment agreement dated as of March 21, 2000, between DPL Inc. and  Elizabeth M. McCarthy                                                                                                                                                                                     |   | Exhibit 10(h) to Report on Form 10-K for the year ended December 31,  2002 (File No. 1-9052) |
|           |                                                                                                                                                                                                                                                                             |   |                                                                                         |
| 10(i)*

  | Employment agreement dated as of July 21, 2004, effective as of May  16, 2004 between DPL Inc., The Dayton Power and Light Company and Robert D.  Biggs; Letter Agreement and Stock Option Agreement, as amended, dated as of  October 5, 2004, and effective as of May 16, 2004 |   | Exhibit 10.1,10.2 and 10.3 to Report on Form 8-K filed on October 8,  2004 (File No. 1-9052) |
|           |                                                                                                                                                                                                                                                                             |   |                                                                                         |
| 10(j)*

  | Employment agreement dated as of December 28, 2004, between DPL Inc.,  The Dayton Power and Light Company and John J. Gillen; Letter Agreement and  Stock Option Agreement dated as of December 28, 2004                                                                         |   | Exhibit 10.2 to Report on Form 8-K filed on December 28, 2004. (File  No. 1-9052)            |
|           |                                                                                                                                                                                                                                                                             |   |                                                                                         |
| 10(k)*         | Employment agreement dated as of October 17, 2002 between DPL Inc.,  The Dayton Power and Light Company and Stephen F. Koziar, Jr.                                                                                                                                               |   | Exhibit 10(i) to Report on Form 10-K for the year ended December 31,  2002 (File No. 1-9052) |
|           |                                                                                                                                                                                                                                                                             |   |                                                                                         |
| 10(l)*         | Employment agreement dated as of January 3, 2003, between DPL Inc.  and James V. Mahoney                                                                                                                                                                                         |   | Exhibit 10(j) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052) |
|           |                                                                                                                                                                                                                                                                             |   |                                                                                         |
| 10(m)*         | Employment agreement dated as of September 17, 2003, between DPL Inc.  and W. Steven Wolff                                                                                                                                                                                       |   | Exhibit 10(k) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052) |
|           |                                                                                                                                                                                                                                                                             |   |                                                                                         |
| 10(n)*         | Employment agreement dated as of September 17, 2003, between DPL Inc.  and Patricia K. Swanke                                                                                                                                                                                    |   | Exhibit 10(l) to Report on Form 10-K for the year ended December 31,  2003 (File No.1-9052)  |
|           |                                                                                                                                                                                                                                                                             |   |                                                                                         |
| 10(o)*         | Change of Control Agreement dated as of December 15, 2000, between  DPL Inc., The Dayton Power and Light Company and Stephen F. Koziar, Jr. and  Management Stock Option Agreement dated February 1, 2000, and September 24,  2002 between DPL Inc. and Stephen F. Koziar, Jr.   |   | Exhibit 10(n) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052) |
|           |                                                                                                                                                                                                                                                                             |   |                                                                                         |
| 10(p)*         | Change of Control Agreement dated as of January 3, 2003, between DPL  Inc., The Dayton Power and Light Company and James V. Mahoney and Management  Stock Option Agreement dated as of January 3, 2003, between DPL Inc. and  James V. Mahoney                                   |   | Exhibit 10(o) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052) |
|           |                                                                                                                                                                                                                                                                             |   |                                                                                         |
| 10(q)*         | Change of Control Agreement as amended dated as of September 10,  2004, between DPL Inc., The Dayton Power and Light Company and W. Steven  Wolff                                                                                                                                |   | Exhibit 10(dd) to Report on Form 8-K filed September 23, 2004 (File  No. 1-9052)             |

 

104

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| 10(r)* | Change of Control Agreement dated as of July 1, 2004, between DPL  Inc., The Dayton Power and Light Company and Patricia K. Swanke and Management  Stock Option Agreement dated as of January 1, 2001, between DPL Inc. and  Patricia K. Swanke                                                                                                                                                              |   | Exhibit 10(s) to Report on Form 10-K for the year ended December 31,  2004 (File No. 1-9052)  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                          |
| 10(s)* | Management Services Agreement dated June 20, 2001, between Valley  Partners, Inc. and each of MVE, Inc., Miami Valley Development Company and  Miami Valley Insurance Company                                                                                                                                                                                                                                |   | Exhibit 10(s) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052)  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                          |
| 10(t)* | Administrative Services Agreement dated October 4, 2001, among Valley  Partners, Inc., DPL Inc., The Dayton Power and Light Company and the Trustees  named therein                                                                                                                                                                                                                                          |   | Exhibit 10(t) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052)  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                          |
| 10(u)* | Letter agreement dated December 15, 2003, terminating Management  Services Agreement dated June 20, 2001, between Valley Partners, Inc. and  each of MVE, Inc., Miami Valley Development Company and Miami Valley  Insurance Company and Administrative Services Agreement dated October 4,  2001, among Valley Partners, Inc., DPL Inc., The Dayton Power and Light  Company and the Trustees named therein |   | Exhibit 10(u) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052)  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                          |
| 10(v)* | Amended and Restated Master Trust Agreement, dated as of  January 1, 2001, by and among The Dayton Power and Light Company, the  grantor, DPL Inc., and Bank of America, N.A., Richard J. Chernesky, Richard  A. Broock, and Frederick J. Caspar                                                                                                                                                        |   | Exhibit 10(v) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052)  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                          |
| 10(w)* | Second Amended and Restated Master Trust Agreement, dated as of  January 1, 2001, by and among The Dayton Power and Light Company, the  grantor, DPL Inc., Bank One Trust Company, N.A., Richard J. Chernesky,  Richard A. Broock, and Frederick J. Caspar                                                                                                                                              |   | Exhibit 10(w) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052)  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                          |
| 10(x)* | Trustee Fee Agreement dated as of April 26, 2004, by and among  Richard J. Chernesky, Richard A. Broock and Frederick J. Caspar, solely in  their capacities as trustees of the Master Trusts and not individually and  DPL Inc., and The Dayton Power and Light Company                                                                                                                                |   | Exhibit 10(x) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052)  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                          |
| 10(y)* | Long Term Incentive Plan of DPL Inc. dated as of January 20, 2003                                                                                                                                                                                                                                                                                                                                            |   | Exhibit 10(aa) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                          |
| 10(z)* | Employment Agreement and Change of Control Agreement as of September  10, 2004, between DPL Inc. and Gary Stephenson                                                                                                                                                                                                                                                                                         |   | Exhibit 10(ee) to Report on Form 8-K filed on September 10, 2004  (File No. 1-9052)           |

 

105

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| 10(aa) * | MVE Incentive Program – Annex A and Letter to Peter H. Forster as of  February 16, 2000, and Management Stock Option Agreements dated as of  February 1, 2000 and September 24, 2002, between DPL Inc. and Peter H.  Forster |   | Exhibit 10(ff) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052)  |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                              |   |                                                                                           |
| 10(bb) * | Employment agreement dated as of June 9, 2003, as amended by attached  letter dated October 18, 2004, between DPL Inc., The Dayton Power and Light  Company and Miggie E. Cramblit                                                |   | Exhibit 10(gg) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052)  |
|     |                                                                                                                                                                                                                              |   |                                                                                           |
| 10(cc)*  | Employment agreement and Change of Control Agreement dated as of July  21, 2003, between DPL Inc. and Daniel L. Thobe                                                                                                             |   | Exhibit 10(hh) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052)  |
|     |                                                                                                                                                                                                                              |   |                                                                                           |
| 10(dd)*  | Employment agreement dated as of December 21, 2004, between DPL Inc.,  The Dayton Power and Light Company and James V. Mahoney                                                                                                    |   | Exhibit 10.1 to Form 8-K filed on December 28, 2004 (File No. 1-9052)                          |
|     |                                                                                                                                                                                                                              |   |                                                                                           |
| 10(ee)   | Construction Agreement dated as of November 19, 2004, between The  Dayton Power and Light Company and Pullman Power, LLC                                                                                                          |   | Filed herewith as Exhibit 10(ee)                                                               |
|     |                                                                                                                                                                                                                              |   |                                                                                           |
| 10(ff)   | Construction Agreement dated as of January 12, 2005, between The  Dayton Power and Light Company and Ershigs, Inc.                                                                                                                |   | Filed herewith as Exhibit 10(ff)                                                               |
|     |                                                                                                                                                                                                                              |   |                                                                                           |
| 16       | Letter regarding Change in Certifying Accountant                                                                                                                                                                                  |   | Exhibit 16(a) to Form 8-K, filed on March 13, 2003 (File  No. 1-9052)                |
|     |                                                                                                                                                                                                                              |   |                                                                                           |
| 18       | Copy of preferability letter relating to change in accounting for  unbilled revenues from Price Waterhouse LLP                                                                                                               |   | Exhibit 18 to Report on Form 10-K for the year ended  December 31, 1987 (File No. 1-9052) |
|     |                                                                                                                                                                                                                              |   |                                                                                           |
| 21       | List of Subsidiaries of The Dayton Power and Light Company                                                                                                                                                                        |   | Filed herewith as Exhibit 21                                                                   |

 

106

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| 31(a)  | Certification of Chief Executive Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                                                                                                   |   | Filed herewith as Exhibit 31(a)                                                              |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                  |   |                                                                                         |
| 31(b)  | Certification of Chief Financial Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                                                                                                   |   | Filed herewith as Exhibit 31(b)                                                              |
|   |                                                                                                                                                                                                                                  |   |                                                                                         |
| 32(a)  | Certification of Chief Executive Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                   |   | Filed herewith as Exhibit 32(a)                                                              |
|   |                                                                                                                                                                                                                                  |   |                                                                                         |
| 32(b)  | Certification of Chief Financial Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                   |   | Filed herewith as Exhibit 32(b)                                                              |
|   |                                                                                                                                                                                                                                  |   |                                                                                         |
| 99(a)  | Report of Taft, Stettinius & Hollister LLP, dated April 26,  2004                                                                                                                                                            |   | Exhibit 99(a) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052) |
|   |                                                                                                                                                                                                                                  |   |                                                                                         |
| 99(b)  | Supplement to the April 26, 2004, Report of Taft, Stettinius  & Hollister LLP, dated May 15, 2004                                                                                                                       |   | Exhibit 99(b) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052) |
|   |                                                                                                                                                                                                                                  |   |                                                                                         |
| 99(c)  | Complaint filed in the Circuit Court, Fourth Judicial Circuit, in and  for Duval County, Florida — Peter H. Forster and Caroline E. Muhlenkamp v.  DPL Inc., The Dayton Power and Light Company and MVE, Inc.                    |   | Exhibit 99(c) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052) |
|   |                                                                                                                                                                                                                                  |   |                                                                                         |
| 99(d)  | Complaint filed in Montgomery County Court of Common Pleas,  Montgomery County, Ohio — DPL Inc.,   The Dayton Power and Light Company and MVE, Inc. v. Peter H. Forster,  Caroline E. Muhlenkamp and Stephen F. Koziar, Jr. |   | Exhibit 99(d) to Report on Form 10-K for the year ended December 31,  2003 (File No. 1-9052) |

----

*Managementcontract or compensatory plan.

 

 

Pursuantto paragraph (b) (4) (iii) (A) of Item 601 of Regulation S-K, DPL Inc. hasnot filed as an exhibit to this Form 10-K certain instruments with respect tolong-term debt if the total amount of securities authorized thereunder does notexceed 10% of the total assets of DPL Inc. and its subsidiaries on aconsolidated basis, but hereby agrees to furnish to the SEC on request any suchinstruments.

 

                    (b)  Reports on Form 8-K

 

On November 3,2004, The Dayton Power and Light Company filed a Form 8-K reporting under Item4.02, that as a result of The Dayton Power and Light Company’s review of its2003 and previous years financial statements, The Dayton Power and LightCompany could no longer rely on 2002 and 2001 annual financial statements,including quarterly financial statements from March 31 2002 through September30, 2003 and that such previously filed financial statements would need to berestated.

 

On November24, 2004, DP&L filed a Form 8-K reporting under Item 1.01, that DP&Lhad entered into a $31 million agreement with Pullman Power LLC for thematerials and construction of a 780 foot concrete chimney at its J. M. StuartGenerating Station as a part of its flue gas desulfurization project.

 

107

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**SIGNATURES**

 

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|            |            | The Dayton Power  & Light Company                                                                                      |
|-----------------|-----------------|----------------------------------------------------------------------------------------------------------------------------|
|            |            |                                                                                                                       |
|            |            |                                                                                                                       |
|            |            |                                                                                                                       |
|            |            |                                                                                                                       |
| March 14,  2005 | By:   | /s/ James V.  Mahoney                                                                                                      |
|            |            | James V.  Mahoney  President and Chief Executive Officer  (principal executive officer)                                    |
|            |            |                                                                                                                       |
| March 14,  2005 |            | /s/ John J.  Gillen                                                                                                        |
|            |            | John J.  Gillen  Senior Vice President and Chief Financial  Officer (principal financial and principal accounting officer) |
|            |            |                                                                                                                       |
| March 14,  2005 |            | /s/ Daniel  L. Thobe                                                                                                       |
|            |            | Daniel L.  Thobe  Corporate Controller                                                                                     |

 

108

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

 
|                  |   |                                                                            |           |
|-----------------------|--------|---------------------------------------------------------------------------------|----------------|
| /s/ R. D. Biggs       |   | Director and  Executive Chairman                                                | March 11, 2005 |
| (R. D. Biggs)         |   |                                                                            |           |
|                  |   |                                                                            |           |
|                  |   |                                                                            |           |
| /s/ P. R. Bishop      |   | Director                                                                        | March 11, 2005 |
| (P. R. Bishop)        |   |                                                                            |           |
|                  |   |                                                                            |           |
|                  |   |                                                                            |           |
| /s/ J. F. Dicke, II   |   | Director                                                                        | March 11, 2005 |
| (J. F. Dicke, II)     |   |                                                                            |           |
|                  |   |                                                                            |           |
|                  |   |                                                                            |           |
| /s/ E. Green          |   | Director                                                                        | March 11, 2005 |
| (E. Green)            |   |                                                                            |           |
|                  |   |                                                                            |           |
|                  |   |                                                                            |           |
| /s/ J. G. Haley       |   | Director                                                                        | March 11, 2005 |
| (J. G. Haley)         |   |                                                                            |           |
|                  |   |                                                                            |           |
|                  |   |                                                                            |           |
| /s/ G.E. Harder       |   | Director                                                                        | March 11, 2005 |
| (G. E. Harder)        |   |                                                                            |           |
|                  |   |                                                                            |           |
|                  |   |                                                                            |           |
| /s/ W. A. Hillenbrand |   | Director and  Vice-Chairman                                                     | March 11, 2005 |
| (W. A. Hillenbrand)   |   |                                                                            |           |
|                  |   |                                                                            |           |
| /s/ L.L. Lyles        |   |                                                                            |           |
| (L. L. Lyles)         |   | Director                                                                        | March 11, 2005 |
|                  |   |                                                                            |           |
|                  |   |                                                                            |           |
| /s/ J. V. Mahoney     |   | Director,  President and Chief                                                  | March 11, 2005 |
| (J. V. Mahoney)       |   | Executive  Officer (principal executive officer)                                |           |
|                  |   |                                                                            |           |
| /s/ N. J. Sifferlen   |   |                                                                            |           |
| (N. J. Sifferlen)     |   | Director                                                                        | March 11, 2005 |
|                  |   |                                                                            |           |
|                  |   |                                                                            |           |
| /s/ J. J. Gillen      |   | Senior Vice  President and                                                      | March 11, 2005 |
| (J. J. Gillen)        |   | Chief  Financial Officer (principal financial and principal accounting officer) |           |
|                  |   |                                                                            |           |
|                  |   |                                                                            |           |
| /s/ D. L. Thobe       |   | Corporate  Controller                                                           | March 11, 2005 |
| (D. L. Thobe)         |   |                                                                            |           |

 

109

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**ScheduleII**

 

 

 

The Dayton Power and Light Company

VALUATION AND QUALIFYING ACCOUNTS

 

For the years ended December 31,

 
| **$ in thousands**                 | ** ** |
|-----------------------------------------|------------|
| **Description**                         | ** ** | **Balance at Beginning of Period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at End of Period** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ***(1)*** | ** ** | ** ** | ** ** |
|                                    |       |   |   |   |   |   |   |   |   |
| **2004:**                               |       |   |   |   |   |   |   |   |   |
| Deducted from accounts receivable— |       |   |   |   |   |   |   |   |   |
|                                    |       |   |   |   |   |   |   |   |   |
| Provision for uncollectible accounts    | ** ** | **$** | **3,617** | ** ** | **$** | **885** | ** ** | **$** | **3,417** | ** ** | **$** | **1,085** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2003:                                   |       |   |   |   |   |   |   |   |   |
| Deducted from accounts receivable— |       |   |   |   |   |   |   |   |   |
|                                    |       |   |   |   |   |   |   |   |   |
| Provision for uncollectible accounts    |       | $ | 10,873 |   | $ | 4,463 |   | $ | 11,719 |   | $ | 3,617 |   |
|                                    |       |   |   |   |   |   |   |   |   |
| 2002:                                   |       |   |   |   |   |   |   |   |   |
| Deducted from accounts receivable— |       |   |   |   |   |   |   |   |   |
|                                    |       |   |   |   |   |   |   |   |   |
| Provision for uncollectible accounts    |       | $ | 12,445 |   | $ | 3,008 |   | $ | 4,580 |   | $ | 10,873 |   |

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

 

110

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