DAYTON POWER & LIGHT CO - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-2385

THE DAYTON POWER AND LIGHT COMPANY

(Exact name of registrant as specified in its charter)

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

1065 Woodman Drive, Dayton, Ohio		45432
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 o NO ý

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

YES o NO ý

Number of shares of registrant’s common stock outstanding as of October 31, 2004, all of which were held by DPL Inc., was 41,172,173.

DOCUMENTS INCORPORATED BY REFERENCE

THE DAYTON POWER AND LIGHT COMPANY

INDEX

			Page No.
Part I.	Financial Information
	Item 1.	Financial Statements

		Consolidated Statement of Results of Operations	3

		Consolidated Statement of Cash Flows	4

		Consolidated Balance Sheet	5

		Notes to Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

		Operating Statistics	29

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

	Item 4.	Controls and Procedures	29

Part II.	Other Information
	Item 1.	Legal Proceedings	32

	Item 4.	Submission of Matters to a Vote of Security Holders	32

	Item 5.	Other Information	32

	Item 6.	Exhibits and Reports on Form 8-K	32

Other
	Signatures		33

	Certifications

Available Information:

The Dayton Power and Light Company (DP&L or the Company) files current, annual and quarterly reports and other information required by the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission (SEC). You may read and copy any document the Company files at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, DC 20549, USA. Please call the SEC at (800) SEC-0330 for further information on the public reference rooms. The Company’s SEC filings are also available to the public from the SEC’s web site at http://www.sec.gov.

The Company’s public internet site is http://www.dplinc.com. The Company makes available through its internet site, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and Forms 3, 4 and 5 filed on behalf of directors and executive officers and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after 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 corporate governance matters, including, among other things, the Company’s governance guidelines, charters of various committees of the Board of Directors and the Company’s code of business conduct and ethics applicable to all employees, officers and directors. You may obtain copies of these documents, free of charge, by sending a request, in writing, to DPL Investor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.

Part I. Financial Information

Item 1. Financial Statements

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS

($ in millions)

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
				(as restated)						(as restated)
Revenues
Electric	$	282.8		$	271.4		$	583.2		$	567.1

Operating Expenses
Fuel	60.5			50.8			123.2			106.4
Purchased power	24.7			26.5			53.2			46.5
Operation and maintenance	53.9			48.2			100.7			84.0
Depreciation and amortization	29.4			29.3			57.7			58.4
Amortization of regulatory assets, net	0.1			10.7			0.2			22.8
General taxes	24.6			25.4			51.7			53.7
Total operating expenses	193.2			190.9			386.7			371.8

Operating Income	89.6			80.5			196.5			195.3

Other income (deductions)	(1.9		)	4.1			2.3			5.1
Interest expense	(10.0		)	(12.4		)	(21.8		)	(25.2		)

Income Before Income Taxes and Cumulative Effect of Accounting Change	77.7			72.2			177.0			175.2

Income tax expense	30.7			26.8			68.0			66.0

Income Before Cumulative Effect of Accounting Change	47.0			45.4			109.0			109.2

Cumulative effect of accounting change, net of tax	—			—			—			17.0

Net Income	47.0			45.4			109.0			126.2

Preferred dividends	—			0.2			0.2			0.4

Earnings on Common Stock	$	47.0		$	45.2		$	108.8		$	125.8

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

($ in millions)

	Six Months Ended June 30,
	2004			2003
				(as restated)
Operating Activities

Net income	$	109.0		$	126.2
Adjustments:
Depreciation and amortization	57.7			58.4
Amortization of regulatory assets, net	0.2			22.8
Deferred income taxes	4.9			8.2
Cumulative effect of accounting change, net of tax	—			(17.0		)
Changes in working capital:
Accounts receivable	17.6			22.7
Accounts payable	9.8			(1.6		)
Accrued taxes payable	62.7			30.7
Prepayments	(5.0		)	(13.8		)
Inventories	(15.6		)	(1.3		)
Deferred compensation assets	8.5			29.0
Deferred compensation obligations	(4.8		)	(28.9		)
Other (Note 3)	(6.6		)	(5.4		)

Net cash provided by operating activities	238.4			230.0

Investing Activities

Capital expenditures	(45.0		)	(65.7		)

Net cash used for investing activities	(45.0		)	(65.7		)

Financing Activities

Retirement of long-term debt	(0.4		)	(0.4		)
Dividends paid on common stock	(150.0		)	(112.7		)
Dividends paid on preferred stock	(0.2		)	(0.4		)

Net cash used for financing activities	(150.6		)	(113.5		)

Cash and temporary cash investments

Net change	42.8			50.8
Balance at beginning of period	17.2			17.1
Balance at end of period	$	60.0		$	67.9

Cash Paid During the Period for:
Interest	$	18.9		$	23.0
Income taxes	$	1.7		$	29.4

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED BALANCE SHEET

($ in millions)

	At June 30, 2004			At December 31, 2003
ASSETS

Property
Property, plant and equipment	$	3,922.0		$	3,875.4
Less: Accumulated depreciation and amortization	(1,825.3		)	(1,769.1		)

Net property, plant and equipment	2,096.7			2,106.3

Current Assets
Cash and temporary cash investments (Note 3)	60.0			17.2
Accounts receivable, less provision for uncollectible accounts of $1.1 and $3.6, respectively	142.8			160.4
Inventories, at average cost (Note 3)	65.2			49.6
Prepaid taxes	23.2			46.4
Other (Note 3)	27.9			24.4

Total current assets	319.1			298.0

Other Assets
Income taxes recoverable through future revenues	41.8			43.3
Other regulatory assets	36.7			36.1
Other (Note 3)	160.3			176.4

Total other assets	238.8			255.8

Total Assets	$	2,654.6		$	2,660.1

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED BALANCE SHEET

($ in millions)

(continued)

	At June 30, 2004		At December 31, 2003
CAPITALIZATION AND LIABILITIES

Capitalization
Common shareholders’ equity
Common stock	$	0.4	$	0.4
Other paid-in capital	781.1		780.5
Accumulated other comprehensive income	34.6		38.2
Earnings reinvested in the business	280.5		321.7

Total common shareholders’ equity	1,096.6		1,140.8

Preferred stock	22.9		22.9

Long-term debt	686.6		687.3

Total capitalization	1,806.1		1,851.0

Current Liabilities
Accounts payable	99.2		88.9
Accrued taxes	105.9		66.4
Accrued interest	10.8		10.2
Other (Note 3)	21.8		24.6

Total current liabilities	237.7		190.1

Deferred Credits and Other
Deferred taxes	376.4		381.7
Unamortized investment tax credit	50.7		52.2
Other (Note 3)	183.7		185.1

Total deferred credits and other	610.8		619.0

Total Capitalization and Liabilities	$	2,654.6	$	2,660.1

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

Notes to Consolidated Financial Statements

1. Basis of Presentation

Basis of Consolidation

The Dayton Power and Light Company (DP&L or the Company) prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). The consolidated financial statements include the accounts of DP&L and its other majority-owned subsidiaries. Investments that are not majority-owned are accounted for using the equity method when DP&L’s investment allows it the ability to exert significant influence, as defined by GAAP. Undivided interests in jointly-owned generation facilities are consolidated on a pro-rata basis. All material intercompany accounts and transactions are eliminated in consolidation.

DP&L has prepared the unaudited consolidated financial statements in this report, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in DP&L’s 2003 Annual Report on Form 10-K.

Estimates, Judgments and Reclassifications

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the revenues and expenses of the period reported. Significant items subject to such estimates and judgments include the carrying value of property, plant and equipment; the valuation of derivative instruments; valuation allowance for receivables and deferred income taxes; and assets and liabilities related to employee benefits. Actual results may differ from those estimates. Reclassifications have been made in certain prior years’ amounts to conform to the current reporting presentation.

Recently Issued Accounting Standards

Staff Position No. 106-1

In December 2003, the FASB issued Staff Position No. 106-1 (FSP 106-1), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act). The Act provides for drug benefits for retirees over the age of 65 under a new Medicare Part D program. For employers like DP&L, who currently provide retiree medical programs for certain former employees over the age of 65, there are subsidies available which are inherent in the Act. The Act entitles these employers to a direct tax-exempt federal subsidy. However, since the effective date of the Act was December 2003 and because most employers have not had time to consider the accounting considerations and there is no appropriate accounting guidance for the federal subsidy, the FASB issued this FSP 106-1 to allow employers a one-time election to defer recognition of the impact of the Act in the employer’s accounting until formal guidance is issued. DP&L elected to defer recognition of the provisions of this Act until further accounting guidance is issued.

Staff Position No. 106-2

In May 2004, the FASB issued FASB Staff Position No. 106-2 (FSP 106-2), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, which supersedes FSP 106-1. FSP 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) for employers that sponsor postretirement health care plans that provide prescription drug benefits. It also requires certain disclosures regarding the effect of the federal subsidy provided by the Act. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. The effect is not expected to be material to the Company’s results of operations, cash flow or financial position.

2. Restatement of Financial Statements

As part of DP&L’s Audit Committee’s response to a report prepared by Taft, Stettinius & Hollister LLP and during the 2003 year-end financial closing process, the Company identified certain adjustments to prior period financial statements. As a result, the Company has restated its consolidated financial statements for the three months and

six months ended June 30, 2003, in addition to prior periods. These adjustments increased net income by $1.1 million to $45.4 million for the second quarter of 2003, and increased net income by $0.9 million to $126.2 million for the six months ended June 30, 2003. All applicable financial information contained in this Quarterly Report on Form 10-Q gives effect to these restatements. Accordingly, the financial statements for this fiscal period described above that have been in the Company’s prior SEC filings should not be relied upon.

Certain captions in the June 30, 2003 Consolidated Balance Sheet were also adjusted due to the prior periods’ restatements. Please refer to the Company’s 2003 Annual Report on Form 10-K for a more complete description of the prior period adjustments.

The accompanying consolidated financial data set forth below presents the Company’s Consolidated Statement of Results of Operations for the three and six months ended June 30, 2003 on a comparative basis showing the amounts as originally reported and as restated.

Effects of Restatement on Net Income

The following table identifies the adjustments made to the consolidated financial statements for the three and six months ended June 30, 2003:

	Net Income Increase (Decrease)
($ in millions)	2003 Second Quarter		2003 Year To Date
Description of Adjustment
Supplemental Executive Retirement Plan (1)	1.7		1.5
Stock incentive units (2)	0.2		—
Sub-total pre-tax impact	1.9		1.5

Income taxes (3)	(0.8	)	(0.6	)
Total Net Income Impact	1.1		0.9

(1) Reflects adjustment to record a settlement of the Company’s Supplemental Executive Retirement Plan for certain executives in 1997 and 2000 which had not been previously recorded, in addition to an adjustment to record the proper treatment for Company assets previously thought to be segregated and restricted solely for purposes of funding this plan.

Consolidated Statement of Results of Operations: For the second quarter of 2003, the adjustment decreased Operation and Maintenance expense by approximately $1.4 million and increased Other Income by $0.2 million. Year-to-date 2003, the adjustment decreased Operation and Maintenance expense by $1.3 million and increased Other Income by approximately $0.2 million.

Consolidated Balance Sheet: At June 30, 2003, the adjustment increased Other Assets – Other by $1.4 million, Accrued Taxes by $0.5 million and Deferred Taxes by $0.1 million.

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

Consolidated Statement of Results of Operations: For the second quarter of 2003, the adjustment decreased Operation and Maintenance expense by $0.2 million. Year-to-date 2003, the adjustment had no impact.

Consolidated Balance Sheet: At June 30, 2003, the adjustment increased Other Paid-in Capital, net of Treasury Stock by $0.8 million, and decreased Other Deferred Credits by $0.8 million.

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

Consolidated Statement of Results of Operations: For the second quarter of 2003, the above adjustments resulted in an increase of $0.8 million to income tax expense. Year-to-date 2003, the adjustments increased income tax expense by $0.6 million.

Consolidated Balance Sheet: At June 30, 2003, the above adjustments resulted in an increase of $0.5 million to Accrued Taxes and $0.1 million to Deferred Taxes.

THE DAYTON POWER AND LIGHT COMPANY

C o n s o l i d a t e d S t a t e m e n t o f R e s u l t s o f O p e r a t i o n s

(unaudited)

$ in millions except per share amounts	Three Months Ended June 30, 2003						Six Months Ended June 30, 2003
	(as previously reported)			(as restated)			(as previously reported)			(as restated)

Revenues
Electric revenues	$	271.4		$	271.4		$	567.1		$	567.1

Operating Expenses
Fuel	50.8			50.8			106.4			106.4
Purchased power	26.5			26.5			46.5			46.5
Operation and maintenance	49.9			48.2			85.3			84.0
Depreciation and amortization	29.3			29.3			58.4			58.4
Amortization of regulatory assets, net	10.7			10.7			22.8			22.8
General taxes	25.4			25.4			53.7			53.7
Total operating expenses	192.6			190.9			373.1			371.8

Operating Income	78.8			80.5			194.0			195.3

Other income	3.9			4.1			4.9			5.1
Interest expense	(12.4		)	(12.4		)	(25.2		)	(25.2		)

Income before income taxes and cumulative effect of accounting change	70.3			72.2			173.7			175.2

Income tax expense	26.0			26.8			65.4			66.0

Income before cumulative effect of accounting change	44.3			45.4			108.3			109.2

Cumulative effect of accounting change, net of tax	—			—			17.0			17.0

Net Income	44.3			45.4			125.3			126.2

Preferred dividends	0.2			0.2			0.4			0.4

Earnings on common stock	$	44.1		$	45.2		$	124.9		$	125.8

THE DAYTON POWER AND LIGHT COMPANY

C o n s o l i d a t e d S t a t e m e n t o f C a s h F l o w s

(unaudited)

$ in millions	Six Months Ended June 30, 2003
	(as previously reported)			(as restated)

Operating Activities
Net income	$	125.3		$	126.2
Adjustments:
Depreciation and amortization	58.4			58.4
Amortization of regulatory assets, net	22.8			22.8
Deferred income taxes	8.1			8.2
Cumulative effect of accounting change, net of tax	(17.0		)	(17.0		)
Changes in working capital:
Accounts receivable	22.8			22.7
Accounts payable	(1.5		)	(1.6		)
Accrued taxes payable	30.2			30.7
Prepayments	(13.8		)	(13.8		)
Inventories	(1.3		)	(1.3		)
Deferred compensation assets	30.4			29.0
Deferred compensation obligations	(28.9		)	(28.9		)
Other	(5.5		)	(5.4		)
Net cash provided by operating activities	230.0			230.0

Investing Activities
Capital expenditures	(65.7		)	(65.7		)

Net cash used for investing activities	(65.7		)	(65.7		)

Financing Activities
Dividends paid on preferred stock	(0.4		)	(0.4		)
Retirement of long-term debt	(0.4		)	(0.4		)
Dividends paid on common stock	(112.7		)	(112.7		)

Net cash used for financing activities	(113.5		)	(113.5		)

Cash and Temporary Cash Investments
Net change	50.8			50.8
Balance at beginning of period	17.1			17.1

Balance at end of period	$	67.9		$	67.9

Cash Paid During the Year For:
Interest	$	23.0		$	23.0
Income taxes	$	29.4		$	29.4

THE DAYTON POWER AND LIGHT COMPANY

C o n s o l i d a t e d B a l a n c e S h e e t

(unaudited)

$ in millions	At June 30, 2003
	(as previously reported)			(as restated)

ASSETS

Property
Property, plant and equipment	$	3,832.5		$	3,832.5
Less: Accumulated depreciation and amortization	(1,723.2		)	(1,723.2		)
Net property	2,109.3			2,109.3

Current Assets
Cash and temporary cash investments	67.9			67.9
Accounts receivable, less provision for uncollectible accounts of $5.0 as reported and restated	136.6			136.6
Net intercompany receivables	36.1			36.4
Inventories, at average cost	55.4			55.4
Prepaid taxes	23.4			23.4
Other	28.8			28.5
Total current assets	348.2			348.2

Other Assets
Income taxes recoverable through future revenues	43.3			43.3
Other regulatory assets	59.1			59.1
Other	172.3			173.0
Total other assets	274.7			275.4

Total Assets	$	2,732.2		$	2,732.9

Note- Reflects adoption of FAS 143 in 2003.

THE DAYTON POWER AND LIGHT COMPANY

C o n s o l i d a t e d B a l a n c e S h e e t

(unaudited)

$ in millions		At June 30, 2003
		(as previously reported)			(as restated)

CAPITALIZATION AND LIABILITIES

Capitalization
Common shareholders’ equity
Common stock	$			0.4		$	0.4
Other paid-in capital	771.8					780.9
Accumulated other comprehensive income	3.6					1.3
Earnings reinvested in the business	407.5					394.9
Total common shareholders’ equity	1,183.3					1,177.5

Preferred stock	22.9					22.9

Long-term debt	664.8					664.9

Total capitalization	1,871.0					1,865.3

Current Liabilities
Accounts payable	81.3					82.4
Accrued taxes	104.5					107.5
Accrued interest	19.2					19.2
Other	19.2					19.0
Total current liabilities	224.2					228.1

Deferred Credits and Other
Deferred taxes	394.7					387.1
Unamortized investment tax credit	53.6					53.6
Other	188.7					198.8
Total deferred credits and other	637.0					639.5

Contingencies

Total Capitalization and Liabilities	$		2,732.2			$		2,732.9

Note - Reflects adoption of FAS 143 in 2003.

3. Supplemental Financial Information

$ in millions	At June 30, 2004		At December 31, 2003
Cash and temporary cash investments
Cash and cash equivalents	$	60.0	$	17.2
Short-term investments	—		—
Total cash and temporary cash investments	$	60.0	$	17.2

Inventories, at average cost
Plant materials and supplies	$	28.6	$	29.3
Fuel	34.9		19.5
Other	1.7		0.8
Total inventories, at average cost	$	65.2	$	49.6

Other current assets
Prepayments	$	17.1	$	10.8
Deposits and other advances	5.4		5.2
Current deferred income taxes	0.9		4.3
Miscellaneous work in progress	2.3		3.1
Other	2.2		1.0
Total other current assets	$	27.9	$	24.4

Other deferred assets
Trust assets	$	90.5	$	102.9
Prepaid pension	38.3		39.7
Unamortized loss on reacquired debt	24.7		26.6
Unamortized debt expense	5.8		5.9
Other	1.0		1.3
Total other deferred assets	$	160.3	$	176.4

Other current liabilities
Customer security deposits and other advances	$	14.9	$	10.6
Current deferred income taxes	4.9		—
Payroll taxes payable	—		10.1
Unearned revenues	0.7		1.2
Current portion - long-term debt	1.1		1.1
Other	0.2		1.6
Total other current liabilities	$	21.8	$	24.6

Other deferred credits
Asset retirement obligations – regulated property	$	74.8	$	72.0
Trust obligations	60.0		65.3
Retirees health and life benefits	33.0		33.7
Environmental Reserves	0.1		0.2
Legal Claims Reserves	3.1		2.1
Asset retirement obligations-generation	5.1		4.9
Other	7.6		6.9
Total other deferred credits	$	183.7	$	185.1

Cash Flows

	Six Months Ended June 30,
$ in millions	2004			2003
				(as restated)
Cash flows – Other
Payroll taxes payable	$	(12.8	)	$	(0.4	)
Customer security deposits	3.8			0.3
Unamortized loss on reacquisition of debt	1.9			1.8
Unearned revenues	(0.5		)	(2.5		)
Intercompany receivables and payables	0.3			(7.6		)
Other	0.7			3.0
Total cash flows – other	$	(6.6	)	$	(5.4	)

Results of Operations

	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions	2004			2003			2004			2003
				(as restated)						(as restated)
Comprehensive income
Net income	$	47.0		$	45.4		$	109.0		$	126.2
Net change in unrealized gains (losses) on financial instruments, net of reclassification adjustments	1.8			10.9			(3.8		)	2.8
Net change in deferred gains on cash flow hedges	(0.9		)	1.3			(1.6		)	1.0
Deferred income taxes related to unrealized gains (losses)	(0.6		)	(5.3		)	1.8			(1.7		)
Comprehensive income	$	47.3		$	52.3		$	105.4		$	128.3

4. Pension and Postretirement Benefits

DP&L sponsors a defined benefit plan for substantially all its employees. For collective bargaining employees, the defined benefits are based on a specific dollar amount per year of service. For all other employees, the defined benefit plan is based primarily on compensation and years of service. The Company funds pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA).

Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits. DP&L has funded the union-eligible health benefit using a Voluntary Employee Beneficiary Association Trust.

The net periodic benefit (income) cost of the pension and postretirement benefit plans for the three months ended June 30 were:

Net periodic benefit (income) cost

	Pension						Postretirement
$ in millions	2004			2003			2004			2003
				(as restated)
Service cost	$	1.0		$	0.9		$	—		$	—
Interest cost	4.0			4.0			0.5			0.6
Expected return on assets	(5.5		)	(6.2		)	(0.1		)	(0.1		)
Amortization of unrecognized:
Actuarial (gain) loss	0.5			—			(0.3		)	(0.3		)
Prior service cost	0.7			0.7			—			—
Transition obligation	—			—			0.1			—
Net pension benefit (income) cost	$	0.7		$	(0.6	)	$	0.2		$	0.2

The net periodic benefit (income) cost of the pension and postretirement benefit plans for the six months ended June 30 were:

Net periodic benefit (income) cost

	Pension						Postretirement
$ in millions	2004			2003			2004			2003
				(as restated)
Service cost	$	1.9		$	1.7		$	—		$	—
Interest cost	8.0			8.1			1.0			1.1
Expected return on assets	(10.9		)	(12.5		)	(0.3		)	(0.2		)
Amortization of unrecognized:
Actuarial (gain) loss	1.0			0.1			(0.5		)	(0.6		)
Prior service cost	1.3			1.4			—			—
Transition obligation	—			—			0.1			0.1
Net pension benefit (income) cost	$	1.3		$	(1.2	)	$	0.3		$	0.4

5. Stock-Based Compensation

DP&L accounts for DPL Inc. stock options granted on or after January 1, 2003 under the fair value method set forth in FASB Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This standard requires the recognition of compensation expense for stock-based awards to reflect the fair value of the award on the date of grant. DP&L follows Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related Accounting Principles Board and FASB interpretations in accounting for stock-based compensation granted before January 1, 2003. If DP&L had used the fair value method of accounting for stock options granted prior to 2003, earnings on common stock would have been reported as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions	2004			2003			2004			2003
				(as restated)						(as restated)

Earnings on common stock, as reported	$	47.0		$	45.2		$	108.8		$	125.8
Add: Total stock-based compensation expense determined under APB 25, net of related tax effects	—			—			—			—
Deduct: Total stock-based compensation expense determined under FAS 123, net of related tax effects	(0.8		)	(0.5		)	(1.5		)	(1.2		)
Pro-forma earnings on common stock	$	46.2		$	44.7		$	107.3		$	124.6

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

$ in millions	At June 30, 2004			At December 31, 2003
First Mortgage Bonds maturing: 2013 - 5.125%	$	470.0		$	470.0
Pollution control series maturing Through 2027 - 6.43% (a)	104.4			104.8
	574.4			574.8
Guarantee of Air Quality Development Obligations - 6.10% Series due 2030	110.0			110.0
Obligation for capital lease	3.9			4.3
Unamortized debt discount and premium (net)	(1.7		)	(1.8		)
Total	$	686.6		$	687.3

(a) Weighted average interest rates for 2004 and 2003.

The amounts of maturities and mandatory redemptions for First Mortgage Bonds, Guaranteed Air Quality Development Obligations and the Capital Lease are $0.3 million for the remainder of 2004, $1.1 million in 2005, $1.1 million in 2006, $9.3 million in 2007 and $0.7 million in 2008. Substantially all property of DP&L is subject to the mortgage lien securing the First Mortgage Bonds.

On September 29, 2003, DP&L issued $470 million principal amount of First Mortgage Bonds, 5.125% Series due 2013. The net proceeds from the sale of the bonds, after expenses, were used 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 plus accrued interest to the redemption date, and (ii) redeem $220 million principal amount of DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at a redemption price of 103.765% of the principal amount plus accrued interest to the redemption date. The $446 million of First Mortgage Bonds were called by DP&L on September 30, 2003, for redemption on October 30, 2003. The 5.125% Series due 2013 have not been registered under the Securities Act of 1933, but were offered and sold through a private placement in compliance with Rule 144A under the Securities Act of 1933. The bonds include step-up interest provisions requiring DP&L to pay additional interest if the securities remain unregistered after 180 days from issuance. The sale of the bonds was not registered and, as a result, the Company is required to pay additional interest of 0.50% until an exchange offer for these securities is registered with the SEC.

Issuance of additional amounts of First Mortgage Bonds by DP&L is limited by provisions of its mortgage; however, DP&L continues to have sufficient capacity to issue First Mortgage Bonds to satisfy its requirements in connection with its refinancing and construction programs through 2008. The amounts and timing of future financings will depend upon market and other conditions, rate increases, levels of sales and construction plans.

In December 2003, DP&L had $150 million available through a revolving credit agreement with a consortium 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 to support the Company’s business requirements and DP&L’s commercial paper program. The facility contained two financial covenants, including maximum debt to total capitalization and minimum earnings before interest and taxes (EBIT) to interest coverage. Fees associated with this credit facility were approximately $0.8 million per year. DP&L had no outstanding borrowings under the revolving credit facility and no outstanding commercial paper balances at June 30, 2004 and 2003.

In February 2004, DP&L entered into a $20 million Master Letter of Credit Agreement with a financial lending institution. This agreement, which expires in February 2005, supports performance assurance needs in the ordinary course of business. As of June 30, 2004, DP&L had seven outstanding letters of credit totaling $10.0 million.

In June 2004, DP&L obtained a $100 million unsecured revolving credit agreement that extended and replaced DP&L’s revolving credit agreement of $150 million. The new agreement, which expires on May 31, 2005, provides credit support for the Company’s business requirements and commercial paper program during this period and may be increased to up to $150 million. The facility contains two financial covenants including maximum debt to total capitalization, and minimum earnings before interest and taxes (EBIT) to total interest expense. These covenants are currently met. DP&L currently has no outstanding borrowings under this credit facility and no outstanding commercial paper balances. Fees associated with this credit facility are approximately $0.6 million per year. Changes in debt ratings, however, may affect the applicable interest rate for DP&L’s revolving credit agreement. DP&L’s ability to use this revolving credit agreement is subject to the PUCO’s annual approval which is set to expire on November 5, 2004. DP&L has filed an application to secure the PUCO’s continued authorization and that application is pending.

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

There are no intercompany debt collateralizations or debt guarantees between DP&L and its parent or subsidiaries. None of the debt obligations of DP&L are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries.

7. Business Segment Reporting

DP&L is a regional energy company providing electric services to over 500,000 retail customers in West Central Ohio. Assets and related costs associated with DP&L’s transmission and distribution and base load and peaking generation operations are managed and evaluated as a single operating segment captioned Electric.

	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions	2004			2003			2004				2003
				(as restated)							(as restated)
Revenues
Electric	$	282.8		$	271.4		$	583.2			$	567.1

Operating income
Electric	$	100.4		$	88.9		$	213.0			$	208.2
Other (a)	(10.8		)	(8.4		)	(16.5			)	(12.9			)
Total operating income	$	89.6		$	80.5		$	196.5			$	195.3

Depreciation and amortization
Electric	$	29.4		$	29.3		$	57.7			$	58.4

Expenditures-construction additions
Electric	$	22.1		$	31.0		$	45.0			$	51.5

Assets
Electric	$	2,592.6		$	2,602.7		$		2,592.6		$	2,602.7
Unallocated corporate assets	62.0			130.2			62.0				130.2
Total assets	$	2,654.6		$	2,732.9		$	2,654.6			$		2,732.9

(a) Includes unallocated corporate items.

8. Commitments and Contingencies

Contingencies

In the normal course of business, DP&L is subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. DP&L believes the amounts provided in its consolidated financial statements, as prescribed by GAAP, are adequate in light of the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in DP&L’s Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of June 30, 2004 cannot be reasonably determined.

Environmental Matters

DP&L and its subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and law. In the normal course of business, DP&L has investigatory and remedial activities underway at these facilities to comply, or to determine compliance, with such regulations. DP&L has been identified, either by a government agency or by a private party seeking contribution 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 probable estimated loss in accordance with FASB Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies.” To the extent a probable loss can only be estimated by reference to a range of equally probable outcomes, and no amount within 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 on the best information available at the time. DP&L evaluates the potential liability related to probable losses quarterly and may revise its estimates. Such revisions in the estimates of the potential liabilities could have a material effect on the Company’s results of operations and financial position.

Legal Matters

On July 9, 2004, Mr. Forster and Ms. Muhlenkamp filed a lawsuit against the Company, DPL and MVE, Inc. (MVE) in the Circuit Court, Fourth Judicial Circuit, in and for Duval County, Florida. The complaint asserts that the Company, DPL and MVE (i) wrongfully terminated Mr. Forster and Ms. Muhlenkamp by undermining their authority and responsibility to manage the companies and excluding them from discussions on corporate financial issues and strategic planning after the Thobe Memorandum was distributed and (ii) breached Mr. Forster’s consulting contract and Ms. Muhlenkamp’s employment agreement by denying them compensation and benefits allegedly provided by the terms of such contract and agreement upon their termination from the Company and DPL. Mr. Forster and Ms. Muhlenkamp seek damages of an undetermined amount. On August 9, 2004, the defendants removed the case 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 Florida federal court’s lack of jurisdiction over the Company, DPL and MVE, all of whom are companies based in Dayton, Ohio. In the alternative, the defendants requested that the court transfer the case to the U.S. District Court for the Southern District of Ohio, which has jurisdiction in Dayton, Ohio. On September 17, 2004, Mr. Forster and Ms. Muhlenkamp opposed these motions. The court has not yet ruled on the defendants’ motions.

On August 24, 2004, the Company, DPL and MVE filed a Complaint 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 the Valley Partners Agreements, challenging the validity of the amendments and the propriety of the distributions and alleging that Messrs. Forster and Koziar and Ms. Muhlenkamp breached their fiduciary duties and breached their consulting and employment contracts. The Company, DPL and MVE seek, among other things, damages in excess of $25,000, disgorgement of all amounts improperly withdrawn by Messrs. Forster and Koziar and Ms. Muhlenkamp from the deferred compensation plans and a court order declaring that the Company, DPL and MVE have no further obligations under the consulting and employment contracts due to those breaches. At this time, defendants Forster, Koziar and Muhlenkamp have not yet responded to the Complaint. The Company continues to evaluate all of these matters and is considering other claims against Mr. Forster, Mr. Koziar and/or Ms. Muhlenkamp that include, but are not limited to, breach of fiduciary duty or other claims relating to personal and Company investments, the calculation of benefits under the SERP and financial reporting with respect to such benefits, and, with respect to Mr. Koziar, the fulfillment of duties owed to the Company as its legal counsel.

On or about June 24, 2004, the SEC commenced a formal investigation into the issues raised by the Thobe Memorandum. The Company is cooperating with the investigation.

On April 7, 2004, the Company received notice that the staff of the PUCO is conducting an investigation into the financial condition of DP&L as a result of the issues raised by the Thobe Memorandum. On May 27, 2004, the PUCO ordered DP&L to file a plan of utility financial integrity that outlines the actions DPL Inc. has taken or will take to insulate DP&L utility operations and customers from its unregulated activities. DP&L must file this plan within 120 days of the filing of its Form 10-K with the SEC. The Company intends to comply with this order and to cooperate with the PUCO’s continuing investigation.

On May 28, 2004, the U.S. Attorney’s Office for the Southern District of Ohio, assisted by the Federal Bureau of Investigation, notified the Company and DPL that it has initiated an inquiry involving the subject matters covered by the Company’s and DPL’s internal investigation. The Company and DPL are cooperating with this investigation.

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

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

In June 2002, a contractor’s employee received a verdict against DP&L for injuries he sustained while working at a DP&L power station. The Court 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 upheld this verdict except the award for prejudgment interest. On September 1, 2004, the Ohio Supreme Court refused to hear the case, so the matter has been remanded to the trial court for a re-determination of whether prejudgment interest should be awarded. The trial court heard this matter on October 15, 2004 and the decision is pending.

Long-Term Obligations and Commercial Commitments

DP&L enters into various contractual and other long-term obligations that may affect the liquidity of its operations. The following table outlines DP&L’s obligations at June 30, 2004:

	Payment Year
Long-term Obligations ($ in millions)	2004		2005 & 2006		2007 & 2008		Thereafter		Total

Long-term debt	$	—	$	0.8	$	8.6	$	673.7	$	683.1
Capital lease	0.3		1.4		1.4		1.5		4.6
Operating leases	0.8		0.4		—		—		1.2
Coal contracts	318.9		359.4		136.5		127.7		942.5
Other long-term obligations	9.9		14.8		1.0		—		25.7
Total long-term Obligations	$	329.9	$	376.8	$	147.5	$	802.9	$	1,657.1

Long-term debt:

Long-term debt as of June 30, 2004 consists of first mortgage bonds and guaranteed air quality development obligations, including current maturities.

Capital lease:

As of June 30, 2004, the Company had one capital lease that expires September 2010.

Operating leases:

As of June 30, 2004, the Company had several operating leases with various terms and expiration dates.

Coal contracts:

DP&L has entered into various long-term coal contracts to supply portions of its coal requirements for its generating plants. Contract prices are subject to adjustment in accordance with various indices, and have features that will limit price escalation in any given year.

Other long-term obligations:

As of June 30, 2004, DP&L had various other long-term obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.

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

	Expiring Year
Commercial Commitments ($ in millions)	2004		2005 & 2006		2007 & 2008		Thereafter		Total
Credit facilities	$	—	$	100.0	$	—	$	—	$	100.0
Guarantees	—		17.8		—		—		17.8
Total commercial commitments	$	—	$	117.8	$	—	$	—	$	117.8

Credit facilities:

DP&L had $150 million available through a revolving credit agreement with a consortium of banks that was scheduled to expire on December 10, 2004. In June 2004, the Company replaced this facility with a $100 million, 364 day unsecured credit facility that expires on May 31, 2005. At June 30, 2004, there were no borrowings outstanding under this credit agreement. The new facility may be increased to up to $150 million.

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electric generation company. As of June 30, 2004, DP&L could be responsible for the repayment of 4.9%, or $14.9 million, of a $305 million debt obligation and also 4.9%, or $2.9 million, of a separate $60.0 million debt obligation. Both obligations mature in 2006.

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

Certain statements contained in this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Matters discussed in this report which relate to events or developments that are expected to occur in the future, including management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters 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 of historical fact. Such forward-looking statements are subject to risks and uncertainties and investors are cautioned that outcomes and results may vary materially from those projected due to various factors beyond the control of The Dayton Power and Light Company (DP&L or the Company), including but not limited to: abnormal or severe weather; unusual maintenance or repair requirements; changes in fuel costs; changes in electricity, coal, environmental emissions, gas and other commodity prices;

increased competition; regulatory changes and decisions; changes in accounting rules; financial market conditions; and general economic conditions.

Forward-looking statements speak only as of the date of the document in which they are made. The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement 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.)

OVERVIEW AND FUTURE EXPECTATIONS

In the second quarter of 2004, DP&L’s operating income increased $9.1 million over the second quarter of 2003. Electric revenues of $282.8 million exceeded the prior year by $11.4 million primarily resulting from increased wholesale revenues. Operating expenses of $193.2 million in the second quarter of 2004 exceeded the second quarter of 2003 by $2.3 million or 1%. DP&L’s earnings on common stock of $47.0 million in the second quarter of 2004 increased $1.8 million over the second quarter of 2003.

For the six months ended June 30, 2004, DP&L’s operating income of $196.5 million increased $1.2 million over the same period of the prior year. Electric revenues of $583.2 million exceeded the same period of the prior year by $16.1 million primarily resulting from an increase in wholesale revenues. Operating expenses of $386.7 million for the six months ended June 30, 2004 were greater than the six months ended June 30, 2003 by $14.9 million or 4% primarily relating to increases in fuel and purchased power costs and corporate expenses. DP&L’s reported earnings on common stock of $108.8 million for the six months ended June 30, 2004 decreased $17 million from the six months ended June 30, 2003.

The increases in fuel and purchase power costs and corporate expenses will continue to have a negative impact on operating income for the balance of 2004.

RESULTS OF OPERATIONS

Income Statement Highlights

	Three Months Ended June 30,				Six Months Ended June 30,
$ in millions	2004		2003		2004		2003
			(as restated)				(as restated)

Electric revenues	$	282.8	$	271.4	$	583.2	$	567.1
Less:
Fuel	60.5		50.8		123.2		106.4
Purchased power	24.7		26.5		53.2		46.5
Net electric margin	$	197.6	$	194.1	$	406.8	$	414.2

Operating income	$	89.6	$	80.5	$	196.5	$	195.3

(a) For purposes of discussing operating results DP&L presents and discusses net electric margin. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding the Company’s financial performance.

Revenues

Electric revenues increased $11.4 million or 4% to $282.8 million in the second quarter of 2004 compared to $271.4 million for the second quarter of 2003 primarily reflecting higher wholesale revenues. Wholesale revenues increased $9.1 million or 16% reflecting higher average market rates for wholesale sales despite a 12% decline in sales volume. Retail revenues increased $2.3 million in the second quarter of 2004 over the same period of the prior year primarily resulting from higher residential sales volume resulting from warmer weather that was partially offset by lower industrial revenues reflecting customers moving to a power supplier who is a subsidiary of DPL Inc. Cooling degree-days were up 89% to 280 for the second quarter of 2004 compared to 148 for the same period in 2003.

For the six months ended June 30, 2004, electric revenues increased $16.1 million or 3% to $583.2 million compared to $567.1 million for the same period of the prior year. Wholesale revenues increased $27.3 million for the six months ended June 30, 2004 over the same period in 2003 resulting from higher average market rates for wholesale sales and a 1% increase in wholesale sales volume. Retail revenues declined $11.2 million or 2% reflecting industrial and commercial customers moving to a power supplier who is a subsidiary of DPL Inc. Retail sales volumes increased 3% as a result of warmer weather as cooling degree-days were up 89% to 280 for the six months ended June 30, 2004 compared to 148 for the same period in 2003.

Operating Expenses

Net electric margin of $197.6 million in the second quarter of 2004 increased by $3.5 million from $194.1 million in the second quarter of 2003. As a percentage of total electric revenues, net electric margin decreased by 1.6 percentage points to 69.9% from 71.5%. This decline is primarily the result of increased fuel costs partially offset by decreased purchased power costs. Fuel costs increased by $9.7 million or 19% in the three months ended June 30, 2004 compared to the same period in 2003 primarily resulting from higher average fuel costs for both retail and wholesale sales. Purchased power costs decreased by $1.8 million or 7% in the second quarter of 2004 compared to the same period in 2003 primarily resulting from a lower volume of purchased power, which was partially offset by higher average market prices for purchased power.

For the six months ended June 30, 2004, net electric margins of $406.8 million decreased by $7.4 million or 2% from $414.2 million for the six months ended June 30, 2003. As a percentage of total electric revenues, net electric margins decreased by 3.2 percentage points to 69.8% from 73.0%. This decline is primarily the result of increased fuel and purchased power costs. Fuel costs increased by $16.8 million or 16% for the six months ended June 30, 2004 compared to the same period in 2003 primarily resulting from higher average fuel costs for both retail and wholesale sales. Purchased power costs increased by $6.7 million or 14% for the six months ended June 30, 2004 compared to the same period in 2003 primarily resulting from a higher volume of purchased power and higher average market prices.

Operation and maintenance expense increased $5.7 million or 12% to $53.9 million for the three months ended June 30, 2004 compared to $48.2 million for the same period in 2003 as a result of higher corporate costs and increased electric production expenses. Corporate costs increased reflecting $1.3 million in pension expense, $1.0 million in Sarbanes-Oxley project costs, and $0.9 million in Directors and Officers’ liability insurance premiums. Power production expenses were $1.9 million higher primarily for scheduled outages and ash disposal. These increases were offset by $1.3 million of lower deferred compensation expense.

For the six months ended June 30, 2004, operation and maintenance expenses increased $16.7 million or 20% to $100.7 million compared to $84.0 million for the same period in 2003 as a result of higher corporate costs and increased electric production costs. Corporate costs increased primarily resulting from higher insurance premiums for Directors and Officers’ liability insurance of $4.4 million, the settlement of an outstanding jointly-held facility receivable in 2003 of $3.8 million, pension expense of $2.5 million, and Sarbanes-Oxley project costs of $1.5 million. Electric production expenses increased $4.9 million for the six months ended June 30, 2004 over the same period in the prior year primarily related to maintenance and repair expenses incurred for scheduled outages and ash disposal. These increases were partially offset by lower deferred compensation expenses of $1.4 million for the six months ended June 30, 2004 compared to the same period of the prior year.

Amortization of regulatory assets decreased $10.6 million in the second quarter of 2004 and decreased $22.6 million for the six months ended June 30, 2004 compared to the second quarter of 2003 and the six months ended June 30, 2003 reflecting the conclusion of the three-year transition period for cost recovery related to deregulation granted by the Public Utilities Commission of Ohio in 2000 and ended December 31, 2003.

For the six months ended June 30, 2004, general taxes decreased $2.0 million compared to the same period of the prior year primarily resulting from a 2003 excise tax expense of $2.7 million that did not occur in 2004.

Other income (deductions)

Other income (deductions) decreased in the second quarter of 2004 by $6.0 million compared to the second quarter of 2003 primarily as a result of $1.6 million of non-operating income received in 2003, $1.4 million of deferred compensation expense incurred in 2004, and $0.9 million of 2004 revolving credit facility fees. For the six months ended June 30, 2004, other income (deductions) decreased $2.8 million primarily resulting from $3.4 million of deferred compensation expense in 2004, $1.6 million of non-operating income received in 2003, and $1.4 million of 2004 revolving credit facility fees offset by $5.1 million of gains realized from the disposition of pollution control emission allowances.

Interest Expense

Interest expense decreased by $2.4 million or 19% in the second quarter of 2004 compared to the same period in 2003 primarily resulting from lower interest of $2.9 million related to the issuance of the $470 million First Mortgage Bonds 5.125% Series due 2013 that have a lower interest rate than the retired debt. This decrease was offset by lower capitalized interest of $1.3 million reflecting the completion of capital projects in 2003.

For the six months ended June 30, 2004, interest expense declined $3.4 million or 13% compared to the six months ended June 30, 2003, primarily reflecting lower interest of $6.2 million related to the $470 million First Mortgage Bonds issuance. This decrease was offset by $3.7 million of lower capitalized interest expense as a result of capital projects completed in 2003.

Income Tax Expense

Income tax expense increased $3.9 million or 15% in the second quarter of 2004 and increased $2.0 million or 3% for the six months ended June 30, 2004 compared to the second quarter of 2003 and the six months ended June 30, 2003 primarily resulting from higher income experienced in each of the respective periods.

Cumulative Effect of Accounting Change

The cumulative effect of accounting change of $17.0 million for the six months ended June 30, 2003 reflects the adoption of the provisions of FASB Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143).

LIQUIDITY, CAPITAL RESOURCES AND REQUIREMENTS

DP&L’s cash and temporary cash investments totaled $60.0 million at June 30, 2004 compared to $67.9 million at June 30, 2003. DP&L’s cash and temporary cash investments totaled $17.2 million at December 31, 2003.

The Company generated net cash from operating activities of $238.4 million for the six months ended June 30, 2004 compared to $230.0 million for the six months ended June 30, 2003. The net cash from operating activities for the six months ended June 30, 2004 was primarily the result of operating profitability and cash generated from working capital, specifically related to cash generated from receivables and the timing of tax payments. This increase in working capital was partially offset by cash used to purchase coal inventory. Operating profitability and increases in working capital, specifically related to cash generated from receivables and the timing of tax payments, primarily drove net cash provided from operating activities for the six months ended June 30, 2003. The tariff-based revenue continues to be the principal source of cash from operating activities. Management believes that the diversified retail customer mix of residential, commercial, and industrial classes provides DP&L with a reasonably predictable gross cash flow.

Net cash flows used for investing activities were $45.0 million for the six months ended June 30, 2004 and $65.7 million for the same period of the prior year. The net cash used in both periods was for capital expenditures.

Net cash flows used for financing activities were $150.6 million for the six months ended June 30, 2004 compared to net cash flows used for financing activities of $113.5 million for the six months ended June 30, 2003. Net cash flows used for financing activities for the six months ended June 30, 2004 and 2003 related to the payment of dividends on common stock, retirement of long-term debt, and dividends paid on preferred stock.

Capital Requirements

Construction additions were $45.0 million for the six months ended June 30, 2004 and are expected to approximate $88 million for the year compared to $51.5 million for the six months ended June 30, 2003 and $98 million for the year ended 2003. Planned construction additions for 2004 relate to DP&L’s environmental compliance program, power plant equipment, its transmission and distribution system, and information systems.

Capital projects are subject to continuing review and are revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental standards, among other factors. Over the next four years, DP&L is projecting to spend $800 million in capital projects, approximately half of which is to meet changing environmental standards. DP&L’s ability to complete its capital projects and the reliability of future service will be affected by its financial condition, the availability of internal and external funds at reasonable cost, and adequate and timely return on these capital investments. DP&L expects to finance its construction additions over the next few years with internally generated funds.

Debt Obligations and Maturities

The Company’s scheduled maturities and mandatory redemptions for First Mortgage Bonds, Guaranteed Air Quality Development Obligations, and the Capital Lease are $0.3 million for the remainder of 2004, $1.1 million in 2005, $1.1 million in 2006, $9.3 million in 2007 and $0.7 million in 2008. Substantially all property of DP&L is subject to the mortgage lien securing the First Mortgage Bonds.

In December 2003, DP&L had $150 million available through a revolving credit agreement with a consortium 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 to support the Company’s business requirements and DP&L’s commercial paper program. The facility contained two financial covenants, including maximum debt to total capitalization and minimum earnings before interest and taxes (EBIT) to interest coverage. Fees associated with this credit facility were approximately $0.8 million per year, but a two-step increase in DP&L’s credit rating would have reduced the facility’s interest rate by 0.38%. A lower credit rating would not have increased the applicable interest rate. DP&L had no outstanding borrowings under the revolving credit facility and no outstanding commercial paper balances at June 30, 2004 and 2003.

In February 2004, DP&L entered into a $20 million Master Letter of Credit Agreement with a financial lending institution. This agreement, which expires in February 2005, supports performance assurance needs in the ordinary course of business. DP&L has certain contractual agreements for the sale and purchase of power, fuel and related energy services that contain credit rating clauses allowing the counterparties to seek additional surety under certain conditions. As of June 30, 2004, DP&L had seven outstanding letters of credit totaling $10.0 million.

In June 2004, DP&L obtained a $100 million unsecured revolving credit agreement that extended and replaced DP&L’s revolving credit agreement of $150 million. The new agreement, which expires on May 31, 2005, provides credit support for the Company’s business requirements and commercial paper program during this period and may be increased to up to $150 million. The facility contains two financial covenants including maximum debt to total capitalization, and minimum earnings before interest and taxes (EBIT) to total interest expense. These covenants are currently met. DP&L currently has no outstanding borrowings under this credit facility and no outstanding commercial paper balances. Fees associated with this credit facility are approximately $0.6 million per year. Changes in debt ratings, however, may affect the applicable interest rate for DP&L’s revolving credit agreement. A one-step increase in DP&L’s credit rating reduces the facility’s interest rate by 0.38% and a one-step decrease in credit rating increases the facility’s interest rate by 0.38%. DP&L’s ability to use this revolving credit agreement is subject to the PUCO’s annual approval which is set to expire on November 5, 2004. DP&L has filed an application to secure the PUCO’s continued authorization and that application is pending.

The Company has received multiple credit rating downgrades since December 31, 2003. Currently, DP&L’s senior secured debt credit ratings are as follows:

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

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

Off-Balance Sheet Arrangements

DP&L does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on DP&L’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Long-Term Obligations and Commercial Commitments

DP&L enters into various contractual and other long-term obligations that may affect the liquidity of its operations. The following table outlines DP&L’s obligations at June 30, 2004:

	Payment Year
Long-term Obligations ($ in millions)	2004		2005 & 2006			2007 & 2008			Thereafter		Total
Long-term debt	$	—	$		0.8	$	8.6		$	673.7	$	683.1
Capital lease	0.3		1.4			1.4			1.5		4.6
Operating leases	0.8		0.4			—			—		1.2
Coal contracts	318.9		359.4			136.5			127.7		942.5
Other long-term obligations	9.9		14.8			1.0			—		25.7
Total long-term Obligations	$	329.9	$	376.8		$		147.5	$	802.9	$	1,657.1

Long-term debt:

Long-term debt as of June 30, 2004 consists of first mortgage bonds and guaranteed air quality development obligations, including current maturities.

Capital lease:

As of June 30, 2004, the Company had one capital lease that expires September 2010.

Operating leases:

As of June 30, 2004, the Company had several operating leases with various terms and expiration dates.

Coal contracts:

Other long-term obligations:

As of June 30, 2004, DP&L had various other long-term obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.

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

	Expiring Year
Commercial Commitments ($ in millions)	2004		2005 & 2006		2007 & 2008		Thereafter		Total
Credit facilities	$	—	$	100.0	$	—	$	—	$	100.0
Guarantees	—		17.8		—		—		17.8
Total commercial commitments	$	—	$	117.8	$	—	$	—	$	117.8

Credit facilities:

Guarantees:

MARKET RISK

DP&L’s financial results are subject to certain market risks, including changes in electricity, coal, environmental emissions, gas and other commodity prices; the effect of weather, increased competition and economic conditions in the sales area on retail sales volume; and adverse economic conditions.

Approximately 24 percent of DP&L’s second quarter 2004 revenues were from sales of energy and capacity in the wholesale market. Energy and capacity in excess of the needs of existing retail customers is sold in the wholesale market when DP&L can identify opportunities with positive margins. In the second quarter of 2004, sales of excess wholesale energy and capacity contributed $6.6 million in net electric margins. This compares to net electric margins from wholesale energy and capacity sales of $7.0 million in 2003. This decrease in net electric margins resulted from lower average market prices for wholesale sales and increased average market prices for fuel and purchased power. Wholesale sales per megawatt hour in the second quarter of 2004 and 2003 were $34.62 and $28.73, respectively. Wholesale fuel costs per megawatt hour for the second quarter of 2004 and 2003 were $18.30 and $13.45, respectively and wholesale purchased power costs per megawatt hour for the second quarter of 2004 and 2003 were $40.10 and $30.25, respectively.

For the six months ended June 30, 2004, approximately 22 percent of DP&L’s revenues were from sales of energy and capacity in the wholesale market. Energy and capacity in excess of the needs of existing retail customers is sold in the wholesale market when DP&L can identify opportunities with positive margins. For the six months ended June 30, 2004, sales of excess wholesale energy and capacity contributed $12.4 million in net electric margin. This compares to net electric margins from wholesale energy and capacity sales of $17.1 million in 2003. This decrease in net electric margin resulted from increased average market prices for fuel and purchased power. Wholesale fuel costs per megawatt hour year-to-date 2004 and 2003 were $17.11 and $12.93, respectively and wholesale purchased power costs per megawatt hour year-to-date 2004 and 2003 were $36.32 and $31.06, respectively.

Fuel and purchased power costs represented 44% and 46% of total operating costs in the first quarter of 2004 and for the six months ended June 30, 2004, respectively. DP&L has contracted for all of its projected coal needs for 2004, at an estimated cost per Btu increase of approximately 15% over average 2003 levels. Purchased power costs depend, in part, upon the timing and extent of planned and unplanned outages of its generating capacity. DP&L will purchase power on a discretionary basis when wholesale market conditions provide opportunities to obtain power at a cost below the Company’s internal production costs.

The carrying value of DP&L’s debt was $687.7 million at June 30, 2004, consisting of DP&L’s First Mortgage Bonds, Guaranteed Air Quality Development Obligations and the Capital Lease. The fair value of this debt was $647.1 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The principal cash repayments and related weighted average interest rates by maturity date for long-term, fixed rate debt at June 30, 2004 are as follows:

Expected Maturity	Long-term Debt
Date	Amount		Average Rate
	($ in millions)
2004	$	0.3	2.9	%
2005	1.1		4.1	%
2006	1.1		4.1	%
2007	9.3		6.1	%
2008	0.7		2.9	%
Thereafter	675.2		5.8	%
Total	$	687.7	5.8	%

Fair Value	$	647.1

The fair value of financial instruments held was $91.2 million and $103.5 million at June 30, 2004 and December 31, 2003 respectively. The market risk related to these financial instruments were estimated as the potential increase/decrease in fair value of approximately $9 million at June 30, 2004, resulting from a hypothetical 10% increase/decrease in the value of the underlying securities.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Regulation/Competition

DP&L operates in a rapidly changing industry with evolving industry standards and regulations. In recent years a number of federal and state developments aimed at promoting competition triggered industry restructuring. Regulatory factors, such as changes in the policies or procedures that set rates; changes in tax laws, tax rates, and environmental laws and regulations; changes in DP&L’s ability to recover expenditures for environmental compliance, fuel costs, purchased power costs and investments made under traditional regulation through rates; and changes to the frequency and timing of rate increases, can affect the Company’s results of operations and financial condition. Additionally, financial or regulatory accounting principles or policies imposed by governing bodies can increase DP&L’s operational and monitoring costs affecting its results of operations and financial condition.

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

Economic Conditions

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

Reliance on Third Parties

DP&L relies on many suppliers for the purchase and delivery of inventory and components to operate its energy production, transmission and distribution functions. Unanticipated changes in DP&L’s purchase processes may affect the Company’s business and operating results. In addition, the Company relies on others to provide professional services, such as, but not limited to investment management, actuarial calculations, internal audit services, payroll processing and various consulting services.

Operating Results Fluctuations

Future operating results could be affected and are subject to fluctuations based on a variety of factors, including but not limited to: unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages; unusual maintenance or repairs; changes in coal costs, gas supply costs, or availability constraints; environmental compliance, including costs of compliance with existing and future environmental requirements; and electric transmission system constraints.

Employees

A majority of the Company’s employees are under a collective bargaining agreement. If the Company is unable to negotiate future collective bargaining agreements, the Company could experience work stoppages, which may affect its business and operating results.

Regulatory Uncertainties and Litigation

In the normal course of business, the Company is subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. Additionally, the Company is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting and taxation, which are rapidly changing and subject to changes in the future. As described under Item 3 – Legal Proceedings, in the Company’s Form 10-K for the year ended December 31, 2003, the Company is also currently involved in various litigation in which the outcome is uncertain. Compliance with these rapid changes may substantially increase costs to DP&L’s organizations and could affect its future operating results.

Internal Controls

As described under Item 1 – Business - Recent Developments, in the Company’s Form 10-K for the year ended December 31, 2003, a review by independent counsel to DP&L’s Audit Committee of the Board of Directors of the Company has identified recommendations for improvement relating to some of the concerns raised by the Company’s Controller including, among other things, internal controls. In addition, as further described under Item 9A - Controls and Procedures, during their year-end review, the Company’s independent auditors identified and reported to management and the Audit Committee of the Board of Directors two material weaknesses and certain other matters involving internal control deficiencies considered to be reportable conditions under standards established by the Public Company Accounting Oversight Board (PCAOB). The material weaknesses include conditions related to (1) the Company’s process for recognizing an adjustment to the Company’s income tax provision to reflect a deductibility limitation under Section 162(m) with respect to executive deferred compensation distributions made during 2003 and (2) lack of effective communication in internal reporting of certain investment income that may lead to improper accounting of such transactions in accordance with generally accepted accounting principles.

The reportable conditions that are not believed to be a material weakness include conditions related to payroll processing, the quality and change control process for the preparation of SEC filings, management’s assessment of the Company’s internal controls, executive travel and entertainment expense reporting, the lack of a comprehensive controller function and segregation of duties for certain accounting transactions and activities.

The Company’s failure to timely improve any deficiencies in its internal controls and procedures could result in errors in its consolidated financial statements, adversely affect its ability to operate its business and hamper management’s ability to report on the effectiveness of its internal controls. The Company has taken steps to correct the internal control deficiencies identified and will further develop and enhance the Company’s internal control policies, procedures, systems and staff to allow it to mitigate the risk that material accounting errors might go undetected and be included in its consolidated financial statements. The Company cannot assure that any new policies or procedures that the Company implements to remedy the material weaknesses and/or reportable conditions will be successful in the near term.

The Company is currently undertaking a thorough review of its internal controls as part of the Company’s preparation for compliance with the requirements under Section 404 of the Sarbanes-Oxley Act of 2002 and the Company is using this review to further assist in identifying and correcting any control deficiencies. As expected, this review has revealed some control weaknesses, which the Company has reported to the Audit Committee. The Company has since taken steps to strengthen its internal controls in these areas, including increasing segregation of duties, writing policies where necessary, adding checks at key decision points and increasing supervisor review of transactions. These actions have been successful in eliminating a large percentage of the deficiencies noted, but additional remediation activities continue. Corrected control deficiencies are being retested by management to assure that remediation efforts were successful, and the Company’s auditors will perform independent testing of the Company’s internal controls as part of their year-end review. At this time, the Company has not completed its review of the existing controls and their effectiveness. Unless the material weaknesses described above, or any identified during this review, are remedied, there can be no assurances that the Company will be able to assert that its internal control over financial reporting is effective, pursuant to the rules adopted by the SEC under Section 404, when those rules take effect.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

DP&L’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). In connection with the preparation of these financial statements, DP&L’s management

THE DAYTON POWER AND LIGHT COMPANY

OPERATING STATISTICS

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Electric

Sales (millions of kWh)
Residential	1,090		949		2,621		2,495
Commercial	936		902		1,840		1,788
Industrial	1,139		1,118		2,177		2,141
Other retail	357		354		690		687
Total retail	3,522		3,323		7,328		7,111
Wholesale	1,039		1,178		2,021		2,010

Total	4,561		4,501		9,349		9,121

Revenues ($ in thousands)
Residential	$	98,587	$	88,027	$	224,579	$	214,220
Commercial	59,666		60,061		117,263		120,191
Industrial	32,886		42,284		63,716		83,903
Other retail	24,856		23,313		47,664		46,183
Total retail	215,995		213,685		453,222		464,497
Wholesale	66,786		57,769		129,960		102,622

Total	$	282,781	$	271,454	$	583,182	$	567,119

Electric customers at end of period	507,395		505,198		507,395		505,198

Item 3. Quantitative and Qualitative Disclosures about Market Risk

See the “Market Risk” section of Item 2.

Item 4. Controls and Procedures

For the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and interim Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the interim Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Attached as Exhibits 31.1 and 31.2 to this quarterly report are certifications of the Chief Executive Officer and the interim Chief Financial Officer required in accordance with Rule 13a-14 of the Exchange Act. This portion of the Company’s quarterly report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.

There were no changes in the Company’s internal control over financial reporting that occurred during the last quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, during their year-end review, KPMG LLP (KPMG), the Company’s independent accountants, identified and reported to management and the Audit Committee of DPL’s Board of Directors two material weaknesses and certain other matters involving internal control deficiencies considered to be reportable conditions under standards established by the Public Company Accounting Oversight Board (PCAOB). Reportable conditions are matters coming to the attention of the auditors that, in their judgment, relate to significant deficiencies in the design or operation of internal control and could adversely affect the organization’s ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. A

material weakness is a reportable condition in which the design or operation of one or more internal control components does not reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.

The two material weaknesses identified are:

(1) An ineffective process for recognizing an adjustment to the Company’s income tax provision to reflect a deductibility limitation under Section 162(m) for executive deferred compensation distributions made during 2003, including, without limitation, insufficient supporting documentation submitted to the Company’s tax department for purposes of calculating the income tax provision and the lack of effective communication between and among senior management, counsel and the Company’s tax and compensation experts. Absent review of specific deferred compensation records by the Company’s outside auditors, income tax balances for 2003 may have been improperly stated at December 31, 2003. Management concurred with KPMG’s observations relating to income tax reporting of executive compensation. The Company further evaluated its internal processes relating to executive compensation and has implemented internal control improvements in this area; and

(2) A complex and manual process for accounting and reporting transactions in DPL’s financial asset portfolio, including, (i) separate reporting structures for MVE accounting and corporate accounting that do not allow for a review of the entire process, (ii) the lack of a complete accounting manual for financial asset portfolio accounting that contemplates all investment transactions that occur on a regular basis and (iii) ineffective communication between the MVE and corporate accounting groups that does not ensure that all investment portfolio transactions are identified, accumulated and reported in accordance with generally accepted accounting principles. Specifically, in 2003 private equity fund distributions in the form of stock of underlying investments were initially accounted for by management entirely as return of capital transactions. A large element of each distribution should have been accounted for as income rather than a return of capital. As a result, results for the third quarter 2003 were required to be revised. Similar transactions in prior years were also accounted for inappropriately and were revised. Management concurred with KPMG’s observations relating to investment portfolio accounting and acknowledged the need for improvement. DPL further evaluated its accounting processes relating to its investment portfolio and has implemented internal control improvements in this area.

The reportable conditions that are not believed to be material weaknesses are conditions related to: (i) payroll processing and the fact that the Company has two separate payroll processes, one for the majority of personnel and one for the Company’s senior executives, (ii) the lack of a quality and change control process for the preparation and submission of SEC filings on Form 10-K and Form 10-Q, (iii) the lack of significant progress made by management in assessing the Company’s internal controls in preparation for Sarbanes-Oxley Section 404 implementation and KMPG’s belief that the Company will identify control weaknesses requiring remediation, (iv) the Company’s process for executive travel and entertainment expense reporting and reimbursement and the lack of sufficient supporting documentation for reported business expenses of certain executives to support deductibility for tax purposes, (v) the lack of a comprehensive controller function to monitor the accounting function in the Company and (vi) inadequate segregation of duties for certain accounting transactions and activities processed at the executive level, including payroll, benefit plans, other compensation plans, time and expense reporting by senior management and preparation and submission of SEC filings.

The material weaknesses and reportable conditions identified above, if unaddressed, could result in errors in the Company’s consolidated financial statements.

Management concurred with KPMG’s observations relating to payroll processing (particularly those relating to executive compensation), external reporting processes, and executive travel and entertainment expense reporting. The Company further evaluated these areas and implemented appropriate internal control improvements.

Management acknowledged KPMG’s observations relating to Sarbanes-Oxley Section 404 implementation and increased resources dedicated to this effort. Additionally, the Company has improved its communications both within the organization and with KPMG regarding the status of the implementation process, project scope, preliminary results and remediation efforts. Management also acknowledged the need for a more comprehensive controller function. The Company reviewed the accounting processes performed outside the corporate controller’s area and reassigned responsibility for these processes as deemed appropriate for improved internal controls. Finally, management concurred with KPMG’s observations regarding segregation of duties related to specific activities performed by the prior interim chief financial officer and acknowledged that improvements were needed in

		THE DAYTON POWER AND LIGHT COMPANY
		(Registrant)


Date:	November 5, 2004	/s/ James V. Mahoney
		James V. Mahoney President and Chief Executive Officer (principal executive officer)


	November 5, 2004	/s/ Pamela Holdren
		Pamela Holdren Treasurer and Interim Chief Financial Officer (principal financial and principal accounting officer)


	November 5, 2004		/s/ Daniel L. Thobe
		Daniel L. Thobe Corporate Controller