UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ýx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2007~~2008

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	Registrant, State of Incorporation, Address and Telephone Number	I.R.S. Employer Identification No.

1-9052	DPL INC.	31-1163136
	(An Ohio Corporation)
	1065 Woodman Drive Dayton, Ohio 45432
	937-224-6000


1-2385		THE DAYTON POWER AND LIGHT COMPANY	31-0258470
		(An Ohio Corporation)
		1065 Woodman Drive Dayton, Ohio 45432
	~~937-224-6000~~
937-224-6000

Indicate by check mark whether each 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.

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a ~~non-accelerated filer.~~smaller reporting company. See ~~definition~~the definitions of “large accelerated filer,” “accelerated filer,” and ~~large accelerated filer”~~“smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

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

As of October ~~29, 2007,~~27, 2008, each registrant had the following shares of common stock outstanding:

Registrant	Description	Shares Outstanding

DPL Inc.	Common Stock, $0.01 par value	~~113,553,444~~115,961,880

The Dayton Power and Light Company	Common Stock, $0.01 par value	41,172,173

This combined Form 10-Q is separately filed by DPL Inc. and The Dayton Power and Light Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to a registrant other than itself.

Table of Contents

DPL Inc. and The Dayton Power and Light Company

Index

			Page No.
Part I Financial Information
		~~Page No.~~
Item 1	Financial Statements —– DPL and DP&L

	Condensed Consolidated ~~Statement~~Statements of Results of Operations —– DPL		4

	Condensed Consolidated ~~Statement~~Statements of Cash Flows —– DPL		5

	Condensed Consolidated Balance ~~Sheet —~~Sheets – DPL		6

	Condensed Consolidated ~~Statement~~Statements of Results of Operations —– DP&L		8

	Condensed Consolidated ~~Statement~~Statements of Cash Flows —– DP&L		9

	Condensed Consolidated Balance ~~Sheet —~~Sheets – DP&L		10

	Notes to Condensed Consolidated Financial Statements		12

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36	31

	~~Operating Statistics~~Electric Sales and Revenues	57	56

Item 3	Quantitative and Qualitative Disclosures about Market Risk	57	56

Item 4	Controls and Procedures	57	56

Part II Other Information

Item 1	Legal Proceedings	58	57

Item 1A1a	Risk Factors		58

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	58	59

Item 3	Defaults Upon Senior Securities		59

Item 4	Submission of Matters to a Vote of Security Holders		59

Item 5	Other Information		59

Item 6	Exhibits	59	60

Other

Signatures		60	61

Certifications

Table of Contents

DPL Inc. and The Dayton Power and Light Company file current, annual and quarterly reports, proxy statements ~~(as to~~ (DPL Inc.)only), 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 we file at the SEC’s public reference room located at 100 F Street N.E., Washington, D.C. 20549, USA. Please call the SEC at (800) SEC-0330 for further information on the public reference ~~rooms.~~room. Our SEC filings are also available to the public from the SEC’s web site at http://www.sec.gov.

Our public internet site is http://www.dplinc.com. We make available, free of charge, through our internet site, our 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 our 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 we electronically file such material with, or furnish it to, the SEC.

In addition, our public internet site includes other items related to corporate governance matters, including, among other things, our governance guidelines, charters of various committees of the Board of Directors and our 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 ~~1 —~~I – Financial Information

This report includes the combined filing of DPL Inc. (DPL) and The Dayton Power and Light Company (DP&L). DP&L is the principal subsidiary of DPL providing approximately 99% of DPL’s total consolidated revenue and approximately ~~93%~~95% of DPL’s total consolidated asset base. Throughout this report, the terms ~~we, us, our~~“we,” “us,” “our,” and ~~ours~~“ours” are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section. ~~Historically,~~ ~~DPL~~ ~~and~~ ~~DP&L~~ ~~have filed separate SEC filings.~~ ~~DPL~~ ~~and~~ ~~DP&L~~ ~~now file combined SEC reports on an interim and annual basis.~~

Table of Contents

Item 1 — – Financial Statements

DPL INC.
CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF RESULTS OF OPERATIONS

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions except per share amounts

Three Months Ended
September 30,

Nine Months Ended
September 30,

2008

2007

2008

2007

2007

2006

2007

2006

Revenues

$
422.0

$
392.4

$
1,145.6

$
1,042.5

$
414.5

$
422.0

$
1,209.4

$
1,145.6

Cost of revenues:

Fuel

95.9

99.4

250.5

262.2

62.2

95.9

192.5

250.5

Purchased power

82.1

61.1

217.5

123.4

119.8

82.1

288.9

217.5

Total cost of revenues

178.0

160.5

468.0

385.6

182.0

178.0

481.4

468.0

Gross margin

244.0

231.9

677.6

656.9

232.5

244.0

728.0

677.6

Operating expenses:

Operation and maintenance

67.3

64.4

198.1

197.4

68.2

67.3

200.4

198.1

Depreciation and amortization

33.9

39.1

102.9

114.2

35.3

33.9

102.5

102.9

General taxes

29.1

27.5

84.6

82.5

30.7

29.1

93.0

84.6

Amortization of regulatory assets

2.9

2.4

8.3

5.2

2.1

2.9

7.6

8.3

Total operating expenses

133.2

133.4

393.9

399.3

136.3

133.2

403.5

393.9

Operating income

110.8

98.5

283.7

257.6

96.2

110.8

324.5

283.7

Other income / (expense), net

Net gain on settlement of executive litigation

—

—

31.0

—

—

—

—

31.0

Investment income

1.2

3.0

9.5

13.9

0.5

1.2

3.1

9.5

Interest expense

(16.9
)
(24.9
)
(59.4
)
(77.1
)

(21.9
)
(16.9
)
(67.9
)
(59.4
)
Other income (deductions)

2.0

(0.2
)
2.6

0.1

Total other income / (expense), net

(13.7
)
(22.1
)
(16.3
)
(63.1
)
Other income/(deductions)

(0.4
)
2.0

(0.9
)
2.6

Total other income/(expense), net

(21.8
)
(13.7
)
(65.7
)
(16.3
)

Earnings from continuing operations before income tax

97.1

76.4

267.4

194.5

74.4

97.1

258.8

267.4

Income tax expense

36.4

29.0

101.9

73.2

26.4

36.4

85.9

101.9

Earnings from continuing operations

60.7

47.4

165.5

121.3

48.0

60.7

172.9

165.5

Earnings from discontinued operations, net of tax

—

3.4

10.0

11.0

—

—

—

10.0

Net income

$
60.7

$
50.8

$
175.5

$
132.3

Net Income

$
48.0

$
60.7

$
172.9

$
175.5

Average number of common shares outstanding (millions)

Basic

108.0

107.7

107.8

113.9

109.9

108.0

109.6

107.8

Diluted

115.4

117.4

118.1

123.3

115.0

115.4

116.2

118.1

Earnings per share of common stock

Basic:

Earnings from continuing operations

$
0.56

$
0.44

$
1.54

$
1.06

$
0.44

$
0.56

$
1.58

$
1.54

Earnings from discontinued operations

—

0.03

0.09

0.10

—

—

—

0.09

Total Basic

$
0.56

$
0.47

$
1.63

$
1.16

$
0.44

$
0.56

$
1.58

$
1.63

Diluted:

Earnings from continuing operations

$
0.53

$
0.40

$
1.40

$
0.98

$
0.42

$
0.53

$
1.49

$
1.40

Earnings from discontinued operations

—

0.03

0.09

0.09

—

—

—

0.09

Total Diluted

$
0.53

$
0.43

$
1.49

$
1.07

$
0.42

$
0.53

$
1.49

$
1.49

Dividends paid per share of common stock

$
0.26

$
0.25

$
0.78

$
0.75

$
0.275

$
0.260

$
0.825

$
0.780

See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.

4

Table of Contents
DPL INC.

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF CASH FLOWS

							Nine Months Ended
							September 30,
$ in millions	Nine Months Ended September 30,						2008			2007
	2007			2006
Cash flows from operating activities:
Net income	$	175.5		$	132.3		$	172.9		$	175.5
Less: Income from discontinued operations	(10.0		)	(11.0		)
Income from continuing operations	165.5			121.3
Less: Earnings from discontinued operations, net of tax							—			(10.0		)
Earnings from continuing operations							172.9			165.5

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	102.9			114.2			102.5			102.9
Gain on settlement of executive litigation	(31.0		)	—
Net gain on settlement of executive litigation							—			(31.0		)
Gain on sale of aircraft	(6.0		)	—			—			(6.0		)
Amortization of regulatory assets	8.3			5.2			7.6			8.3
Deferred income taxes	12.1			(4.7		)	32.7			12.1
Captive insurance provision	1.5			—
Gain on sale of other investments	(3.0		)	(2.2		)
Changes in certain assets and liabilities:
Accounts receivable	(39.9		)	(32.8		)	0.7			(39.9		)
Accounts payable	(0.8		)	38.4			24.3			22.4
Accrued taxes payable	5.7			(11.8		)	(66.4		)	5.7
Accrued interest payable	(11.4		)	(7.3		)	(7.6		)	(11.4		)
Prepayments	0.4			6.0			0.4			0.4
Inventories	(18.8		)	(7.6		)	(4.6		)	(18.8		)
Deferred compensation assets	6.9			1.3			(4.1		)	3.9
Deferred compensation obligations	1.1			(0.3		)	(7.4		)	1.1
Other	18.3			(7.3		)	(8.5		)	19.8
Net cash provided by operating activities	211.8			212.4			242.5			235.0

Cash flows from investing activities:
Capital expenditures	(250.1		)	(283.9		)	(173.8		)	(273.3		)
Purchases of short-term investments and securities	—			(856.0		)
Sales of short-term investments and securities	—			984.0
Purchases of short-term investments							(9.9		)	—
Proceeds from the sale of peaking units, net	151.0			—			—			151.0
Proceeds from the sale of aircraft	7.4			—			—			7.4
Net cash used for investing activities	(91.7		)	(155.9		)	(183.7		)	(114.9		)

Cash flows from financing activities:
Purchase of treasury shares	—			(400.0		)
Issuance of pollution control bonds	—			100.0
Pollution control bond proceeds held in trust	—			(100.0		)
Exercise of stock options	14.5			0.2			1.7			14.5
Excess tax impact related to exercise of stock options	0.5			—
Tax impact related to exercise of stock options							0.3			0.5
Retirement of long-term debt	(225.0		)	—			(100.0		)	(225.0		)
Withdrawal of restricted funds held in trust	10.1			23.1
Withdrawals of restricted funds held in trust, net							20.5			10.1
Dividends paid on common stock	(83.7		)	(85.7		)	(89.9		)	(83.7		)
Issuance of short-term debt, net	95.0			—
Retirement of short-term debt, net	(95.0		)	—
Repurchase of pollution control bonds							(90.0		)	—
Withdrawals from revolving credit facility							105.0			95.0
Repayment of borrowings from revolving credit facility							(15.0		)	(95.0		)
Net cash used for financing activities	(283.6		)	(462.4		)	(167.4		)	(283.6		)

Cash and cash equivalents:
Net change	(163.5		)	(405.9		)	(108.6		)	(163.5		)
Balance at beginning of period	262.2			595.8			134.9			262.2
Cash and cash equivalents at end of period	$	98.7		$	189.9		$	26.3		$	98.7

Supplemental cash flow information:
Interest paid, net of amounts capitalized	$	68.8		$	80.4		$	71.6		$	68.8
Income taxes paid	$	87.6		$	79.7
Income taxes paid, net							$	112.7		$	87.6
Non-cash financing and investing activities:
Restricted funds held in trust	$	0.5		$	75.5		$	16.5		$	0.5
Accruals for capital expenditures							$	43.3		$	45.5

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

Table of Contents

DPL INC.

CONDENSED CONSOLIDATED BALANCE ~~SHEET~~SHEETS

							At			At
							September 30,			December 31,
$ in millions	At September 30, 2007			At December 31, 2006			2008			2007

ASSETS

Current assets:
Cash and cash equivalents	$	98.7		$	262.2		$	26.3		$	134.9
Restricted funds held in trust	0.5			10.1			16.5			37.0
Accounts receivable, less provision for uncollectible accounts of $1.6 and $1.4, respectively	262.1			225.0
Short-term investments							9.9			—
Accounts receivable, less provision for uncollectible accounts of $1.6 and $1.5, respectively							235.3			241.2
Inventories, at average cost	104.2			85.4			109.6			105.0
Taxes applicable to subsequent years	11.9			48.0			13.7			48.0
Other current assets	8.4			37.7			21.5			11.8
Total current assets	485.8			668.4			432.8			577.9

Property:
Held and used:
Property, plant and equipment	4,943.6			4,718.5			5,171.8			5,011.6
Less: Accumulated depreciation and amortization	(2,208.5		)	(2,159.2		)	(2,321.4		)	(2,234.6		)
Total net property held and used	2,735.1			2,559.3

Assets held for sale:
Property, plant and equipment	—			283.5
Less: Accumulated depreciation and amortization	—			(132.3		)
Total net property held for sale	—			151.2
Total net property							2,850.4			2,777.0

Other noncurrent assets:
Regulatory assets	137.0			148.6			166.7			165.2
Other assets	54.2			84.7
Other deferred assets							50.3			46.5
Total other noncurrent assets	191.2			233.3			217.0			211.7

Total Assets	$	3,412.1		$	3,612.2		$	3,500.2		$	3,566.6

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

Table of Contents

DPL INC.

CONDENSED CONSOLIDATED BALANCE ~~SHEET~~SHEETS

September 30,

December 31,

$ in millions

At
September 30, 2007

At
December 31, 2006

$ in millions

2008

2007

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion - long-term debt

100.7

225.9

Current portion - long-term debt

175.7

100.7

Accounts payable

186.0

169.4

Accounts payable

185.2

163.1

Accrued taxes

124.8

155.2

Accrued taxes

70.2

110.8

Accrued interest

24.2

35.2

Accrued interest

18.5

25.8

Revolving credit borrowings

90.0

—

Other current liabilities

27.4

38.3

Other current liabilities

27.9

27.2

Total current liabilities

463.1

624.0

Total current liabilities

567.5

427.6

Noncurrent liabilities:

Long-term debt

1,451.6

1,551.8

Long-term debt

1,276.3

1,541.5

Deferred taxes

371.1

355.2

Deferred taxes

410.2

374.9

Unamortized investment tax credit

41.4

43.6

Unamortized investment tax credit

38.7

40.7

Insurance and claims costs

23.4

21.9

Insurance and claims costs

20.1

20.0

Other deferred credits

222.6

280.7

Other deferred credits

196.7

266.3

Total noncurrent liabilites

2,110.1

2,253.2

Total noncurrent liabilities

1,942.0

2,243.4

Cumulative preferred stock not subject to mandatory redemption

22.9

22.9

Cumulative preferred stock not subject to mandatory redemption

22.9

22.9

Commitments and contingencies (Note 9)

—

Commitments and contingencies (Note 10)

Common shareholders’ equity:

Common stock, at par value of $0.01 per share:

September 2007

December 2006

September 30, 2008

December 31, 2007

Shares authorized

250,000,000

Shares issued

163,724,211

Treasury shares

50,170,767

50,705,239

Shares outstanding

113,553,444

113,018,972

1.1

1.1

115,942,280

113,558,444

1.2

1.1

Warrants

50.0

50.0

31.0

50.0

Common stock held by employee plans

(71.1

)

(69.0

)

(28.0

)

(39.7

)

Accumulated other comprehensive loss

(9.9

)

(6.5

)

(10.2

)

(9.2

)

Retained earnings

845.9

736.5

973.8

870.5

Total common shareholders’ equity

816.0

712.1

967.8

872.7

Total Liabilities and Shareholders’ Equity

3,412.1

3,612.2

3,500.2

3,566.6

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

Table of Contents

THE DAYTON POWER AND LIGHT COMPANY

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF RESULTS OF OPERATIONS

													Three Months Ended						Nine Months Ended
													September 30,						September 30,
$ in millions	Three Months Ended September 30,						Nine Months Ended September 30,						2008			2007			2008			2007
	2007			2006			2007			2006

Revenues	$	419.6		$	390.3		$	1,139.1		$	1,036.1		$	401.5		$	419.6		$	1,191.8		$	1,139.1

Cost of revenues:
Fuel	87.6			90.9			240.2			251.0			57.0			87.6			183.6			240.2
Purchased power	91.7			70.7			228.2			134.7			120.1			91.7			291.8			228.2
Total cost of revenues	179.3			161.6			468.4			385.7			177.1			179.3			475.4			468.4

Gross margin	240.3			228.7			670.7			650.4			224.4			240.3			716.4			670.7

Operating expenses:
Operation and maintenance	64.0			59.0			195.8			172.8			65.4			64.0			191.0			195.8
Depreciation and amortization	31.4			33.0			95.2			96.8			32.8			31.4			95.0			95.2
General taxes	28.8			27.2			83.8			80.3			30.6			28.8			92.4			83.8
Amortization of regulatory assets	2.9			2.4			8.3			5.2			2.1			2.9			7.6			8.3
Total operating expenses	127.1			121.6			383.1			355.1			130.9			127.1			386.0			383.1

Operating income	113.2			107.1			287.6			295.3			93.5			113.2			330.4			287.6

Other income / (expense), net
Net gain on settlement of executive litigation	—			—			35.3			—			—			—			—			35.3
Investment income	1.3			1.6			7.5			4.8			0.6			1.3			6.3			7.5
Interest expense	(3.9		)	(5.5		)	(14.1		)	(17.5		)	(8.9		)	(3.9		)	(26.7		)	(14.1		)
Other income (deductions)	2.1			(0.2		)	2.7			0.1
Total other income / (expense), net	(0.5		)	(4.1		)	31.4			(12.6		)
Other income/(deductions)													(0.4		)	2.1			(1.0		)	2.7
Total other income/(expense), net													(8.7		)	(0.5		)	(21.4		)	31.4

Earnings before income tax	112.7			103.0			319.0			282.7			84.8			112.7			309.0			319.0

Income tax expense	42.1			39.0			119.5			107.8			30.0			42.1			101.9			119.5

Net income	$	70.6		$	64.0		$	199.5		$	174.9		54.8			70.6			207.1			199.5

Preferred dividends	0.2			0.2			0.6			0.6			0.2			0.2			0.6			0.6

Earnings on common stock	$	70.4		$	63.8		$	198.9		$	174.3		$	54.6		$	70.4		$	206.5		$	198.9

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

Table of Contents

THE DAYTON POWER AND LIGHT COMPANY

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF CASH FLOWS

							Nine Months Ended
							September 30,
$ in millions	Nine Months Ended September 30,						2008			2007
	2007			2006

Cash flows from operating activities:
Net income	$	199.5		$	174.9		$	207.1		$	199.5
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization	95.2			96.8			95.0			95.2
Gain on settlement of executive litigation	(35.3		)	—
Net gain on settlement of executive litigation							—			(35.3		)
Amortization of regulatory assets	8.3			5.2			7.6			8.3
Deferred income taxes	11.0			(13.0		)	31.2			11.0
Gain on sale of other investments	(3.0		)	—
Changes in certain assets and liabilities:
Accounts receivable	(40.0		)	(25.7		)	3.2			(40.0		)
Accounts payable	(0.5		)	41.2			23.5			22.7
Net receivable / payable from / to parent	(0.5		)	(2.3		)
Accrued taxes payable	(3.1		)	1.5			(61.1		)	(3.1		)
Accrued interest payable	2.4			4.8			2.3			2.4
Prepayments	0.7			5.4			(0.1		)	0.7
Inventories	(19.8		)	(7.5		)	(4.7		)	(19.8		)
Deferred compensation assets	7.1			3.4			1.0			4.1
Deferred compensation obligations	1.1			(2.5		)	(7.4		)	1.1
Other	16.5			(11.5		)	(23.8		)	16.0
Net cash provided by operating activities	239.6			270.7			273.8			262.8

Cash flows from investing activities:
Capital expenditures	(247.8		)	(281.7		)	(173.1		)	(271.0		)
Net cash used for investing activities	(247.8		)	(281.7		)	(173.1		)	(271.0		)

Cash flows from financing activities:
Short-term loan from parent	105.0			—			—			105.0
Payment on short-term loan to parent	(15.0		)	—
Issuance of pollution control bonds	—			100.0
Pollution control bond proceeds held in trust	—			(100.0		)
Withdrawal of restricted funds held in trust	10.1			23.1
Withdrawals from revolving credit facility							105.0			95.0
Repurchase of pollution control bonds							(90.0		)	—
Repayment of borrowings from revolving credit facility							(15.0		)	(95.0		)
Withdrawals of restricted funds held in trust, net							20.5			10.1
Dividends paid on preferred stock	(0.7		)	(0.6		)	(0.6		)	(0.7		)
Dividends paid on common stock to parent	(125.0		)	—
Net cash (used for)/provided by financing activities	(25.6		)	22.5
Repayment of short-term loan from parent							(20.0		)	(15.0		)
Dividends paid on common stock held by parent							(80.0		)	(125.0		)
Net cash used for financing activities							(80.1		)	(25.6		)

Cash and cash equivalents:
Net change	(33.8		)	11.5			20.6			(33.8		)
Balance at beginning of period	46.1			46.2			13.2			46.1
Cash and cash equivalents at end of period	$	12.3		$	57.7		$	33.8		$	12.3

Supplemental cash flow information:
Interest paid, net of amounts capitalized	$	9.6		$	10.3		$	21.7		$	9.6
Income taxes paid	$	86.8		$	108.3
Income taxes paid, net							$	112.2		$	86.8
Non-cash financing and investing activities:
Restricted funds held in trust	$	0.5		$	75.5		$	16.5		$	0.5
Accruals for capital expenditures							$	43.3		$	45.5

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

Table of Contents

THE DAYTON POWER AND LIGHT COMPANY

CONDENSED CONSOLIDATED BALANCE ~~SHEET~~SHEETS

September 30,

December 31,

September 30,

December 31,

$ in millions

2007

2006

2008

2007

ASSETS

Current assets:

Cash and cash equivalents

12.3

46.1

33.8

13.2

Restricted funds held in trust

0.5

10.1

16.5

37.0

Accounts receivable, less provision for uncollectible accounts of $1.6 and $1.4, respectively

243.0

205.6

Accounts receivable, less provision for uncollectible accounts of $1.6 and $1.5, respectively

215.6

221.8

Inventories, at average cost

102.8

83.0

108.2

103.6

Taxes applicable to subsequent years

11.8

48.0

13.7

48.0

Other current assets

10.8

38.2

23.8

13.4

Total current assets

381.2

431.0

411.6

437.0

Property:

Property, plant and equipment

4,688.3

4,450.6

4,916.7

4,757.0

Less: Accumulated depreciation and amortization

(2,134.3

)

(2,079.0

)

(2,238.7

)

(2,159.1

)

Total net property

2,554.0

2,371.6

2,678.0

2,597.9

Other noncurrent assets:

Regulatory assets

137.0

148.6

166.7

165.2

Other assets

103.0

139.1

Other deferred assets

64.5

76.6

Total other noncurrent assets

240.0

287.7

231.2

241.8

Total Assets

3,175.2

3,090.3

3,320.8

3,276.7

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

Table of Contents

THE DAYTON POWER AND LIGHT COMPANY

CONDENSED CONSOLIDATED BALANCE ~~SHEET~~SHEETS

September 30,

December 31,

September 30,

December 31,

$ in millions

2007

2006

2008

2007

LIABILITIES AND SHAREHOLDER’S EQUITY

Current liabilities:

Current portion - long-term debt

0.7

0.9

0.7

0.7

Accounts payable

182.7

166.2

183.3

161.9

Accrued taxes

120.1

159.6

79.3

112.7

Accrued interest

15.3

12.6

15.5

12.9

Revolving credit borrowings

90.0

—

Short-term debt owed to parent

90.0

—

20.9

Other current liabilities

27.4

35.4

27.8

26.9

Total current liabilities

436.2

374.7

396.6

336.0

Noncurrent liabilities:

Long-term debt

784.8

785.2

784.2

874.6

Deferred taxes

367.9

360.2

396.0

367.0

Unamortized investment tax credit

41.4

43.6

38.7

40.7

Other deferred credits

222.6

272.5

196.6

266.2

Total noncurrent liabilities

1,416.7

1,461.5

1,415.5

1,548.5

Cumulative preferred stock not subject to mandatory redemption

22.9

22.9

22.9

22.9

Commitments and contingencies (Note 9)

—

Commitments and contingencies (Note 10)

Common shareholder’s equity:

Common stock, at par value of $0.01 per share

0.4

0.4

0.4

0.4

Other paid-in capital

783.4

783.7

782.9

784.8

Accumulated other comprehensive income

9.8

15.1

Accumulated other comprehensive (loss) income

(1.6

)

6.5

Retained earnings

505.8

432.0

704.1

577.6

Total common shareholder’s equity

1,299.4

1,231.2

1,485.8

1,369.3

Total Liabilities and Shareholder’s Equity

3,175.2

3,090.3

3,320.8

3,276.7

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

Table of Contents

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

Description of Business

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

DPL’s principal subsidiary is The Dayton Power and Light Company (DP&L). DP&L is a public utility incorporated in 1911 under the laws of Ohio. DP&L sells electricity to residential, commercial, industrial, and governmental customers in a 6,000 square mile area of West Central Ohio. DP&L also sells electricity to DPL Energy Resources (DPLER), an affiliate, to satisfy the electric requirements of its retail customers. Electricity for DP&L’s 24 county service area is primarily generated at eight coal-fired power plants and is distributed to more than ~~500,000~~513,000 retail customers.~~DP&L~~ ~~purchases retail peak load requirements from DPL Energy, LLC (DPLE), one of our wholly-owned subsidiaries.~~ Principal industries served include automotive, food processing, paper, plastic manufacturing, and defense.

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

DPL’s ~~other~~ significant subsidiaries (all of which are ~~wholly-owned)~~wholly owned) include ~~DPLE,~~DPL Energy LLC (DPLE), which engages in the operation of peaking generating ~~facilities; DPL Energy Resources, Inc. (DPLER),~~facilities and sells power in wholesale markets; DPLER, which sells retail electric energy under contract to major industrial and commercial customers in West Central Ohio; ~~MVE, Inc., which was primarily responsible for the management of our financial asset portfolio;~~ and Miami Valley Insurance Company (MVIC), our captive insurance company that provides insurance sources to us and our subsidiaries. DP&Lhas one significant subsidiary, DPL Finance Company, Inc., which is ~~wholly-owned~~wholly owned and provides financing to DPL, DP&L, and other affiliated companies.

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

Financial Statement Presentation

We prepare consolidated financial statements in accordance with Generally Accepted Accounting Principles (GAAP) in the United States of America. The condensed consolidated financial statements include the accounts of DPL and DP&L and their majority-owned subsidiaries. Investments that are not majority owned are accounted for using the equity method when our investment allows us the ability to exert significant influence, as defined by GAAP. Undivided interests in ~~jointly-owned~~jointly owned generation facilities are consolidated on a pro rata basis. All material intercompany accounts and transactions are eliminated in consolidation. Interim results for the three months and nine months ended September 30, ~~2007~~2008 may not be indicative of our results that will be realized for the full year ending December 31, ~~2007.~~2008.

Pursuant to the Securities and Exchange Commission (SEC) rules, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been omitted from interim reports. Therefore, ~~these~~our interim financial statements in this report should be read along with the annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2006.~~2007. In the opinion of our management, the condensed consolidated financial statements in this report contain all adjustments ~~(which are all of a normal recurring nature)~~ necessary to fairly state our financial condition as of September 30, ~~2007,~~2008; our results of operations for the three months and nine months ended September 30, ~~2007~~2008; and our cash flows for the nine months ended September 30, ~~2007~~2008 in accordance with GAAP. Certain amounts from prior periods have been reclassified to conform to the current reporting presentation.

Estimates ~~Judgments, Contingencies~~ and ~~Reclassifications~~Judgments

The preparation of financial statements in conformity with GAAP requires us 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 revenue and expenses of the ~~period~~periods reported. We record liabilities for probable estimated ~~loss~~losses in accordance with 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, we accrue 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. We evaluate the potential liability related to probable losses quarterly and may revise our estimates. Judgments and uncertainties affecting the application of these estimates may result in materially different amounts being reported under different conditions or circumstances that may affect our financial position and results of operations. Significant items subject to such estimates and judgments include: the carrying value of property, plant and equipment; unbilled revenues; the valuation

Table of Contents
of derivative instruments; the valuation of insurance and claims costs; the valuation of allowances for receivables and deferred income
12

~~Notes to Condensed Consolidated Financial Statements (continued)~~
taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; ~~contingencies~~contingencies; and assets and liabilities related to employee benefits.

~~Certain amounts~~Reclassifications
During the quarter ended December 31, 2007, we identified immaterial changes in certain accounts payable balances that had not been correctly presented in our prior period cash flow statements. Changes in accounts payable balances representing capital expenditures had previously been classified with cash flows from ~~prior periods~~operating activities and should have been classified with capital expenditures as part of investing activities. Accordingly, the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2007 has been reclassified to conform to the current ~~reporting~~ presentation. As a result of these reclassifications, cash provided by operating activities for DPL increased by $23.2 million from $211.8 million to $235.0 million for the nine months ended September 30, 2007. This same adjustment also increased cash used for capital expenditures to $273.3 million from $250.1 million for the nine months ended September 30, 2007. Cash provided by operating activities for DP&L increased by $23.2 million from $239.6 million to $262.8 million for the nine months ended September 30, 2007. This same adjustment also increased cash used for capital expenditures to $271.0 million from $247.8 million for the nine months ended September 30, 2007. The reclassifications did not impact operating income or net income, working capital, any earnings per share measures, or net change in cash and cash equivalents as previously reported.

Depreciation Expense and Study Update
Depreciation expense is calculated using the straight-line method which depreciates the cost of property over its estimated useful life. For DPL’s and DP&L’s generation, transmission, and distribution assets, straight-line depreciation is applied on an average annual composite basis using group rates. In July 2007, DPLand DP&L completed a depreciation rate study for non-regulated generation property based on ~~its~~ property, plant, and equipment balances as of December 31, 2005, with adjustments for subsequent scrubber additions. The results of the depreciation study concluded that DPL’s and DP&L’sdepreciation rates should be reduced due to asset lives being extended beyond previously estimated lives. DPL and DP&Ladjusted the depreciation rates for ~~its~~ non-regulated generation property, effective August 1, 2007, reducing depreciation expense. For the three months ended September 30, 2007, the reduction in depreciation expense increased income from continuing operations by $3.8 million, increased net income by approximately $2.4 million, and increased earnings per share (EPS) by approximately $0.02 per share. For the period from August 1, 2007 to December 31, 2007, the reduction in depreciation expense will increase income from continuing operations of approximately $9.5 million, increase net income by approximately $5.9 million and increase EPS by approximately $0.06 per share.

~~Recently Adopted Accounting Standards~~Short-term Investments

~~Accounting for Uncertainty~~Short-term investments comprise corporate bonds that are classified as held-to-maturity. Held-to-maturity securities are those securities that we have the intent and ability to hold until maturity in ~~Income Taxes~~
~~On January 1, 2007, we adopted~~accordance with the provisions of Statement of Financial Accounting Standards ~~Board (FASB) Interpretation~~ No. ~~48,~~115 (SFAS 115), “Accounting for ~~Uncertainty~~Certain Investments in ~~Income Taxes” (FIN 48). There was no significant impact~~Debt and Equity Securities.” The held-to-maturity securities are carried at amortized cost which is determined based on specific identification.
At September 30, 2008, the corporate bonds had an amortized cost of $9.9 million, a fair value of $9.2 million, and are scheduled to ~~our overall results of operations, cash flows or financial position.~~mature by February 2009. The ~~total amount of~~ unrecognized ~~tax benefits as~~losses relating to the bonds amounted to $0.7 million through September 30, 2008. The decline in fair value below the amortized cost is considered to be temporary. When the bonds mature, we expect to receive the full $10 million face value of the ~~date~~bonds and their accumulated interest.
13

Table of ~~adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest. During 2007, we recorded~~ ~~an additional $1.6 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.9 million as of September 30, 2007.~~ ~~None of the unrecognized tax benefits are due to uncertainty in the timing of deductibility.~~Contents

~~We recognize interest and penalties related to unrecognized tax benefits in income taxes.~~Deferral of Storm Costs

~~Our tax returns~~On September 14, 2008, the Midwest region was severely affected by hurricane-force winds which resulted in significant property damage and disruptions to the supply of electric energy to retail customers. Through September 30, 2008, we deferred approximately $7.4 million of the costs associated with the storm restoration. We plan to file a request for ~~calendar years 2004 through 2006 remain open~~an accounting order seeking approval to ~~examination by the jurisdictions in which we are subject to taxation.~~defer these costs.

~~Accounting for~~ Taxes Collected from Customers and Remitted to Governmental Authorities
In January 2007, we adopted Emerging Issues Task Force (EITF) No. 6-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (EITF No. 6-03). EITF No. 6-03 requires a registrant to disclose how taxes collected from customers are presented in the financial statements, i.e., gross or net. DP&L collects certain excise taxes levied by state or local governments from its customers. DP&L’s excise taxes are accounted for on a gross basis and recorded as revenues in the accompanying Condensed Consolidated ~~Statement~~Statements of Results of Operations for the three months and nine months ended September 30, 2008 and 2007, ~~and September 30, 2006~~respectively, as follows:

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2007

2006

2007

2006

State/Local excise taxes

$14.6

$14.3

$40.9

$39.5

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2008

2007

2008

2007

State/local excise taxes

$
14.0

$
14.6

$
40.1

$
41.0

Recently ~~Issued~~Adopted Accounting Standards

Accounting for Fair Value Measurements
~~In September 2006, the FASB issued~~
We adopted Statement of Financial Accounting Standards No. 157, “Fair Value ~~Measurements,”~~Measurements” (SFAS 157) ~~effective for fiscal years beginning after November 15, 2007.~~, on January 1, 2008. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those standards. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity’s own data. Under SFAS 157,
13

~~Notes to Condensed Consolidated Financial Statements (continued)~~
fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 does not expand the use of fair value in any new circumstances. ~~In February 2007, the FASB issued Statement~~SFAS 157 did not have a material effect on our overall results of operations, financial position, or cash flows. See Note 8 of Notes to Condensed Consolidated Financial ~~Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment~~Statements.
Amendment of FASB ~~Statement~~Interpretation No. ~~115” (SFAS 159) effective for fiscal years beginning after November 15, 2007. SFAS 159 permits entities~~39 “Offsetting of Amounts Related to ~~choose~~Certain Contracts”
We adopted Staff Position FIN 39-1, “Amendment of FASB Interpretation 39” (FSP FIN 39-1), on January 1, 2008. FSP FIN 39-1 amends paragraph 10 of FIN 39 to ~~measure many financial instruments and certain warranty and insurance contracts at~~“permit a reporting entity to offset fair value onamounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with that paragraph.” We do not have receivables or payables in relation to cash collateral. All collateral either posted or received is in the form of a ~~contract-by-contract basis. We are currently evaluating the impact~~letter of ~~adopting SFAS 157 and SFAS 159 and~~credit or parental guarantee. FSP FIN 39-1 did not have ~~not yet determined the significance of these new rules~~an effect on our overall results of operations, financial position, or cash flows.

~~2.     Earnings per Share~~Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards

~~Basic EPS is based~~We adopted EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11), on January 1, 2008. The FASB ratified the ~~weighted-average number of~~ ~~DPL~~ ~~common~~EITF consensus that a realized income tax benefit from dividends that are charged to retained earnings, and are paid to employees for equity classified non-vested equity shares, ~~outstanding during the year. Diluted EPS is based on the weighted-average number of~~ ~~DPL~~ ~~common~~should be recognized as an increase in additional paid-in capital and common equivalent shares outstanding during the year, except in periods where the inclusion of such common equivalent shares is anti-dilutive. Excluded from outstanding shares for this weighted-average computation are the unallocated shares held by ~~DP&L’s~~ ~~Master Trust Plan for deferred compensation and unallocated shares held by~~ ~~DP&L’s~~ ~~Employee Stock Ownership Plan (ESOP).~~
~~The following table represents common equivalent shares excluded from the calculation of diluted EPS because they were anti-dilutive. These shares may~~should be ~~dilutive in the future.~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

In millions

2007

2006

2007

2006

Common equivalent shares

0.3

0.4

0.1

0.4

As a result of the May 21, 2007 settlement of the litigation with three former executives (see Note 10 of the Notes to Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, restricted stock units (RSUs), MVE incentives, stock options and reimbursement of legal fees. There were approximately 1.3 million RSUs and 3.6 million stock options relinquished and cancelled that were included in the ~~dilutive share calculation through May 20, 2007. These RSUs and stock options are no longer included in the dilutive share calculation.~~
~~The following illustrates the reconciliation~~pool of ~~the numerators and denominators~~excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 did not have a material effect on our overall results of ~~the basic and diluted EPS computations for net income (including discontinued operations):~~

Three Months Ended September 30,

2007

2006

$ in millions except per share amounts

Net
Income

Shares

Per
Share

Net
Income

Shares

Per
Share

Basic EPS

$
60.7

108.0

$
0.56

$
50.8

107.7

$
0.47

Effect of Dilutive

Securities:

Restricted stock units

—

1.2

Warrants

7.1

7.3

Stock options, performance and restricted shares

0.3

1.2

Diluted EPS

$
60.7

115.4

$
0.53

$
50.8

117.4

$
0.43

operations, financial position, or cash flows.

14

Table of Contents
~~Notes to Condensed Consolidated Financial Statements (continued)~~Recently Issued Accounting Standards

Business Combinations
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “Business Combinations” (SFAS 141R), effective for fiscal years beginning after December 15, 2008. Under SFAS 141R, an acquiring entity in a business combination is required to recognize all assets acquired and liabilities assumed in the transaction. The revised standard also establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed. The rule requires an acquirer to disclose all of the information users may need to evaluate and understand the nature and financial effect of the business combination. We have evaluated the impact of adopting SFAS 141R and have determined it will not have a material impact on our overall results of operations, financial position, or cash flows.
Non-controlling Interests in Consolidated Financial Statements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (SFAS 160), effective for fiscal years beginning after December 15, 2008. SFAS 160 requires all entities to report non-controlling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and non-controlling interests. We have evaluated the impact of adopting SFAS 160 and have determined it will not have a material impact on our overall results of operations, financial position, or cash flows.
Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment to FASB Statement No. 133” (SFAS 161), effective for fiscal years beginning after November 15, 2008. SFAS 161 requires an entity to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. We are currently evaluating the impact of adopting SFAS 161 and do not expect these new rules to have a material impact on our overall results of operations, financial position, or cash flows.
GAAP Hierarchy
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162), effective for fiscal years beginning after December 15, 2008. SFAS 162 identifies a consistent framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. We have evaluated the impact of adopting SFAS 162 and have determined it will not have a material impact on our overall results of operations, financial position, or cash flows.
Participating Securities and Earnings per Share (EPS)
In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1), effective for fiscal years beginning after December 15, 2008. FSP EITF 03-6-1 clarifies that unvested share-based awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and must be included in the computation of EPS pursuant to the two-class method. We have evaluated the impact of adopting FSP EITF 03-6-1 and do not expect these new rules to have a material impact on our overall results of operations, financial position, or cash flows.
Meaning of “Indexed to a Company’s Own Stock”
In June 2008, the FASB approved the consensus of the Emerging Issues Task Force (EITF) on “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (EITF 07-5), effective for fiscal years beginning after December 15, 2008. EITF 07-5 gives guidance on when a financial instrument is considered to be indexed to a company’s own stock to meet the criteria for paragraph 11(a) of FASB Statement No. 133, “Accounting for Derivative and Hedging Activities” and the criteria in EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” We have evaluated the impact of adopting EITF 07-5 and do not expect these new rules to have a material impact on our overall results of operations, financial position, or cash flows.
15

Nine Months Ended September 30,

2007

2006

$ in millions except per share amounts

Net
Income

Shares

Per
Share

Net
Income

Shares

Per
Share

Basic EPS

$
175.5

107.8

$
1.63

$
132.3

113.9

$
1.16

Effect of Dilutive

Securities:

Restricted stock units

0.7

1.3

Warrants

8.7

6.9

Stock options, performance and restricted shares

0.9

1.2

Diluted EPS

$
175.5

118.1

$
1.49

$
132.3

123.3

$
1.07

Table of Contents

2.              Supplemental Financial Information
DPL Inc.

At

At

September 30,

December 31,

$ in millions

2008

2007

Accounts receivable, net:

Retail customers

$
75.6

$
71.7

Unbilled revenue

65.6

68.4

Partners in commonly-owned plants

42.6

56.7

PJM including financial transmission rights

24.1

23.2

Coal sales

16.5

1.9

Wholesale customers

8.5

12.7

Refundable franchise tax

—

5.2

Other

4.0

2.9

Provision for uncollectible accounts

(1.6
)
(1.5
)
Total accounts receivable, net

$
235.3

$
241.2

Inventories, at average cost:

Fuel and emission allowances

$
73.4

$
70.5

Plant materials and supplies

36.0

34.1

Other

0.2

0.4

Total inventories, at average cost

$
109.6

$
105.0

Other current assets:

Deposits and other advances

$
7.9

$
1.1

Prepayments

5.6

5.9

Current deferred income taxes

3.2

2.1

Other

4.8

2.7

Total other current assets

$
21.5

$
11.8

Property, plant and equipment:

Construction work in process

$
135.8

$
364.5

Property, plant and equipment

5,036.0

4,647.1

Total property, plant and equipment

$
5,171.8

$
5,011.6

Other deferred assets:

Prepaid pension

$
13.4

$
9.9

Master Trust assets

13.1

9.6

Unamortized debt expense

8.5

10.9

Investments

8.2

8.8

Commercial activities tax benefit

6.8

6.8

Other

0.3

0.5

Total other deferred assets

$
50.3

$
46.5

Accounts payable:

Trade payables

$
83.8

$
65.6

Fuel accruals

58.8

34.4

Other

42.6

63.1

Total accounts payable

$
185.2

$
163.1

Other current liabilities:

Customer security deposits

$
19.8

$
19.2

Low income service plan

3.2

2.2

Pension and retiree benefits payable

0.8

0.8

Other

4.1

5.0

Total other current liabilities

$
27.9

$
27.2

Other deferred credits:

Asset retirement obligations - regulated property

$
95.3

$
91.5

Pension and retiree benefits

37.9

40.6

SECA net revenue subject to refund

20.1

20.1

Deferred compensation obligations

15.1

20.4

Asset retirement obligations - generation property

12.7

12.5

Employee benefit reserves

4.2

4.3

Litigation and claims reserve

3.9

4.3

Customer advances in aid of construction

3.4

3.5

Taxes payable

—

65.3

Other

4.1

3.8

Total other deferred credits

$
196.7

$
266.3

16

Table of Contents
2.                                      Supplemental Financial Information (continued)
DP&L

At

At

September 30,

December 31,

$ in millions

2008

2007

Accounts receivable, net:

Retail customers

$
75.6

$
71.8

Unbilled revenue

58.3

60.5

Partners in commonly-owned plants

42.6

56.7

PJM including financial transmission rights

20.8

23.1

Coal sales

16.5

1.9

Wholesale customers

1.4

3.5

Refundable franchise tax

—

3.1

Other

2.0

2.7

Provision for uncollectible accounts

(1.6
)
(1.5
)
Total accounts receivable, net

$
215.6

$
221.8

Inventories, at average cost:

Fuel and emission allowances

$
73.4

$
70.5

Plant materials and supplies

34.6

32.7

Other

0.2

0.4

Total inventories, at average cost

$
108.2

$
103.6

Other current assets:

Deposits and other advances

$
7.9

$
0.9

Prepayments

7.8

7.5

Current deferred income taxes

3.2

2.1

Other

4.9

2.9

Total other current assets

$
23.8

$
13.4

Property, plant and equipment:

Construction work in process

$
135.4

$
363.8

Property, plant and equipment

4,781.3

4,393.2

Total property, plant and equipment

$
4,916.7

$
4,757.0

Other deferred assets:

Master Trust assets

$
42.6

$
56.0

Prepaid pension

13.3

9.9

Unamortized debt expense

7.6

9.6

Other

1.0

1.1

Total other deferred assets

$
64.5

$
76.6

Accounts payable:

Trade payables

$
83.8

$
64.8

Fuel accruals

57.0

34.1

Other

42.5

63.0

Total accounts payable

$
183.3

$
161.9

Other current liabilities:

Customer security deposits

$
19.8

$
19.2

Low income service plan

3.2

2.2

Pension and retiree benefits payable

0.8

0.8

Other

4.0

4.7

Total other current liabilities

$
27.8

$
26.9

Other deferred credits:

Asset retirement obligations - regulated property

$
95.3

$
91.5

Pension and retiree benefits

37.8

40.5

SECA net revenue subject to refund

20.1

20.1

Deferred compensation obligations

15.1

20.4

Asset retirement obligations - generation property

12.7

12.5

Litigation and claims reserve

3.9

4.3

Employee benefit reserves

4.2

4.3

Customer advances in aid of construction

3.4

3.5

Taxes payable

—

65.3

Other

4.1

3.8

Total other deferred credits

$
196.6

$
266.2

17

Table of Contents
2.              Supplemental Financial Information (continued)
DPL Inc.

Nine Months Ended

September 30,

$ in millions

2008

2007

Cash flows - other:

Deposits and other advances

$
(3.7
)
$
16.2

Deferred regulatory and other costs

(10.5
)

2.2

Other

5.7

1.4

Total cash flows - other

$
(8.5
)
$
19.8

Three Months Ended

Nine Months Ended

September 30,

September 30,

2008

2007

2008

2007

Comprehensive income:

Net income

$
48.0

$
60.7

$
172.9

$
175.5

Net change in unrealized gains (losses) on financial instruments

(0.2
)
0.2

(0.6
)
(1.3
)
Net change in deferred gains (losses) on cash flow hedges

2.5

(1.5
)
(2.2
)
(5.9
)
Net change in unrealized gains (losses) on pension and postretirement benefits

0.5

0.5

1.5

1.6

Deferred income taxes related to unrealized gains and (losses)

(1.1
)
0.3

0.3

2.2

Comprehensive income

$
49.7

$
60.2

$
171.9

$
172.1

DP&L

Nine Months Ended

September 30,

$ in millions

2008

2007

Cash flows - other:

Deposits and other advances

$
(3.9
)
$
15.6

Deferred regulatory and other costs

(10.5
)
2.2

Other deferred credits

(3.4
)
0.8

Other

(6.0
)
(2.6
)
Total cash flows - other

$
(23.8
)
$
16.0

Three Months Ended

Nine Months Ended

September 30,

September 30,

2008

2007

2008

2007

Comprehensive income:

Net income

$
54.8

$
70.6

$
207.1

$
199.5

Net change in unrealized gains (losses) on financial instruments

(2.2
)
(5.0
)
(12.5
)
(5.4
)
Net change in deferred gains (losses) on cash flow hedges

2.5

(1.5
)
(2.2
)
(5.9
)
Net change in unrealized gains (losses) on pension and postretirement benefits

0.5

0.6

1.5

1.7

Deferred income taxes related to unrealized gains and (losses)

(0.4
)
2.2

5.1

4.3

Comprehensive income

$
55.2

$
66.9

$
199.0

$
194.2

18

Table of Contents

3.              Discontinued Operations

Three Months Ended September 30,

Nine Months Ended September 30,

$ in millions

2007

2006

2007

2006

Investment expenses

$
—

$
(0.3
)
$
(0.4
)
$
(0.8
)
Income from discontinued operations

—

(0.3
)
(0.4
)
(0.8
)

Gain realized from sale

—

5.7

8.2

18.9

Net gain on sale

—

5.7

8.2

18.9

Gain on settlement of executive litigation

—

—

8.2

—

Earnings before income taxes

—

5.4

16.0

18.1

Income tax expense

—

(2.0
)
(6.0
)
(7.1
)
Earnings from discontinued operations, net

$
—

$
3.4

$
10.0

$
11.0

On February 13, 2005, DPL’s subsidiaries, MVE, Inc. (MVE) and MVIC, entered into an agreement to sell their respective interests in forty-six private equity funds to AlpInvest/Lexington 2005, LLC, a joint venture of AlpInvest Partners and Lexington Partners, Inc. ~~Sales proceeds~~During 2005, MVE and ~~any related gains or losses were recognized during 2005 as~~MVIC completed the sale of ~~each~~their interests in forty-three funds and a portion of ~~these funds closed.~~
another of those private equity funds. During 2005, MVE entered into alternative closing arrangements with AlpInvest/Lexington 2005, LLC for ~~the remaining~~ funds where legal title to said funds could not be transferred until a later time. Pursuant to these arrangements, MVE transferred the economic aspects of the remaining private equity funds, consisting of two funds and a portion of one fund, to AlpInvest/Lexington 2005, LLC without a change in ownership of the interests. The ~~alternative arrangements resulted~~ownership interest in ~~a 2005 deferred gain of $27.1 million.~~ ~~DPL~~ ~~recognized $18.9 million of the deferred gain~~these funds was transferred in 2006 and 2007, at which time DPL recognized previously deferred gains. During the ~~remaining portion of the gain, $8.2 million, was recognized in the first quarter~~three months ended March 31, 2007, ~~as all legal and economic considerations~~the remaining $7.9 million ($4.9 million after tax) of deferred gains (net of associated expenses) relating to ~~the alternative closing arrangements~~this transaction were ~~satisfied. Legal title to the final fund subject to the alternative arrangement was transferred~~recorded in ~~the third quarter ended September 30, 2007.~~discontinued operations.

As a result of the May 21, 2007 settlement of the litigation with three former executives (see Note 1011 of ~~the~~ Notes to Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, ~~RSUs,~~restricted stock units, MVE incentives, stock options, and reimbursement of legal fees. The reversal of accruals related to the performance of the financial asset portfolio ~~were~~was recorded in discontinued operations. Additionally, a portion of the $25 million settlement expense was allocated to discontinued operations. These transactions resulted in a ~~net~~ gain of ~~$8.2~~$8.1 million, net of associated expenses ($5.1 million after tax), on the settlement of litigation being recorded in discontinued operations ~~related to~~during the ~~settlement of the executive litigation in the second quarter ending~~three months ended June 30, 2007.

There were no discontinued operations recorded during the three months and nine months ended September 30, 2008.

1519

Table of Contents
~~Notes to Condensed Consolidated Financial Statements (continued)~~4.              Long-term Debt

~~4.     Supplemental Financial Information~~DPL Inc.
DPL Inc.
$ in millions

At
September 30, 2007

At
December 31, 2006

Accounts receivable, net:

Retail customers

$
81.8

$
65.0

Partners in commonly-owned plants

68.9

51.5

Unbilled revenue

64.8

68.7

PJM

23.1

13.1

Wholesale and subsidiary customers

10.4

15.8

Other

9.5

7.1

Refundable franchise tax

5.2

5.2

Provision for uncollectible accounts

(1.6
)
(1.4
)
Total accounts receivable, net

$
262.1

$
225.0

Inventories, at average cost:

Fuel and emission allowances

$
69.5

$
52.4

Plant materials and supplies

34.6

32.6

Other

0.1

0.4

Total inventories, at average cost

$
104.2

$
85.4

Other current assets:

Prepayments

$
4.6

$
13.3

Deposits and other advances

1.0

17.8

Other

2.8

6.6

Total other current assets

$
8.4

$
37.7

Property, plant and equipment:

Construction work in process

$
338.5

$
376.0

Property, plant and equipment (a)

4,605.1

4,626.0

Total property, plant and equipment

$
4,943.6

$
5,002.0

Other assets:

Unamortized loss on reacquired debt

$
19.2

$
20.4

Unamortized debt expense

9.8

10.6

Master Trust assets

9.1

39.4

Investments

9.0

7.0

Commercial activities tax benefit

6.8

6.8

Other

0.3

0.5

Total other assets

$
54.2

$
84.7

Accounts payable:

Trade payables

$
59.1

$
75.7

Fuel accruals

49.3

37.3

Other

77.6

56.4

Total accounts payable

$
186.0

$
169.4

Other current liabilities:

Customer security deposits

$
18.9

$
19.4

Pension and retiree benefits payable

0.8

5.8

Financial transmission rights - future proceeds

—

2.7

Low income payment plan obligation

3.1

1.9

Unearned revenue

1.1

—

Other

3.5

8.5

Total other current liabilities

$
27.4

$
38.3

Other deferred credits:

Asset retirement obligations - regulated property

$
90.7

$
86.3

Pension liabilities

34.6

37.7

Retiree health and life benefits

28.2

28.5

Trust obligations

20.6

76.2

SECA net revenue subject to refund

20.4

18.7

Asset retirement obligations - generation property

11.9

11.7

Deferred gain on sale of portfolio

—

8.2

Employee benefit reserves

4.4

4.1

Litigation and claims reserves

4.5

3.4

Customer advances in aid of construction

3.4

3.0

Environmental reserves

0.1

0.1

Other

3.8

2.8

Total other deferred credits

$
222.6

$
280.7

At

At

September 30,

December 31,

$ in millions

2008

2007

DP&L -
First mortgage bonds maturing 2013 - 5.125%

$
470.0

$
470.0

DP&L -
Pollution control series maturing 2036 - 4.80%

100.0

100.0

DP&L -
Pollution control series maturing 2040 - variable rate

—

90.0

DP&L -
Pollution control series maturing through 2034 - 4.78% (a)

214.4

214.4

784.4

874.4

DPL Inc. -
Note to Capital Trust II 8.125% due 2031

195.0

195.0

DPL Inc. -
Senior Notes 6.875% Series due 2011

297.4

297.4

DPL Inc. -
Senior Notes 8.00% Series due 2009

—

175.0

DP&L -
Obligation for capital lease

0.7

1.3

Unamortized debt discount

(1.2
)
(1.6
)
Total

$
1,276.3

$
1,541.5

(a)~~The sale of $283.5 million of assets held for sale at December 31, 2006 was completed on April 25, 2007.~~ Weighted average interest rate.

DP&L
16

At

At

September 30,

December 31,

$ in millions

2008

2007

DP&L -
First mortgage bonds maturing 2013 - 5.125%

$
470.0

$
470.0

DP&L -
Pollution control series maturing 2036 - 4.80%

100.0

100.0

DP&L -
Pollution control series maturing 2040 - variable rate

—

90.0

DP&L -
Pollution control series maturing through 2034 - 4.78% (a)

214.4

214.4

784.4

874.4

DP&L -
Obligation for capital lease

0.7

1.3

Unamortized debt discount

(0.9
)
(1.1
)
Total

$
784.2

$
874.6

(a)
Weighted average interest rate.
Note: The tables above do not include the current portion of long-term debt.
At September 30, 2008, DPL’s scheduled maturities of long-term debt, including a capital lease obligation, over the next five years are $175.7 million through September 30, 2009; $0.7 million from October 1, 2009 through September 30, 2010; and $297.4 million from October 1, 2010 through September 30, 2011. Thereafter, there are no scheduled debt payments through September 30, 2013.
20

~~Notes to Condensed Consolidated Financial Statements (continued)~~
DP&L
$ in millions

At
September 30, 2007

At
December 31, 2006

Accounts receivable, net:

Retail customers

$
81.8

$
65.0

Partners in commonly-owned plants

68.9

51.5

Unbilled revenue

56.6

61.0

PJM

23.1

13.9

Wholesale and subsidiary customers

5.3

8.3

Refundable franchise tax

3.1

3.1

Other

5.8

4.2

Provision for uncollectible accounts

(1.6
)
(1.4
)
Total accounts receivable, net

$
243.0

$
205.6

Inventories, at average cost:

Fuel and emission allowances

$
69.5

$
52.4

Plant materials and supplies

33.2

30.2

Other

0.1

0.4

Total inventories, at average cost

$
102.8

$
83.0

Other current assets:

Prepayments

$
6.8

$
15.8

Deposits and other advances

0.8

17.0

Other

3.2

5.4

Total other current assets

$
10.8

$
38.2

Property, plant and equipment:

Construction work in process

$
337.6

$
375.2

Property, plant and equipment

4,350.7

4,075.4

Total property, plant and equipment

$
4,688.3

$
4,450.6

Other assets:

Master Trust assets

$
74.5

$
109.0

Unamortized loss on reacquired debt

19.2

20.4

Unamortized debt expense

8.3

8.6

Investments

0.6

0.6

Other

0.4

0.5

Total other assets

$
103.0

$
139.1

Accounts payable:

Trade payables

$
58.7

$
74.7

Fuel accruals

46.2

36.7

Other

77.8

54.8

Total accounts payable

$
182.7

$
166.2

Other current liabilities:

Customer security deposits

$
18.9

$
19.4

Pension and retiree benefits payable

0.8

5.8

Financial transmission rights - future proceeds

—

2.7

Low income payment plan obligation

3.1

1.9

Unearned revenue

1.1

—

Other

3.5

5.6

Total other current liabilities

$
27.4

$
35.4

Other deferred credits:

Asset retirement obligations - regulated property

$
90.7

$
86.3

Pension liabilities

34.6

37.7

Retiree health and life benefits

28.2

28.5

Trust obligations

20.6

76.2

SECA net revenue subject to refund

20.4

18.7

Asset retirement obligations - generation property

11.9

11.7

Employee benefit reserves

4.4

4.1

Litigation and claims reserves

4.5

3.4

Customer advances in aid of construction

3.4

3.0

Environmental reserves

0.1

0.1

Other

3.8

2.8

Total other deferred credits

$
222.6

$
272.5

17

~~Notes to Condensed Consolidated Financial Statements (continued)~~
DPL Inc.

Nine Months Ended September 30,

$ in millions

2007

2006

Cash flows - other:

Payroll taxes payable

$
—

$
(1.7
)
Employee/director stock plan

3.7

3.8

Lump sum retirement payment

(4.9
)
—

Deposits and other advances

16.2

(7.9
)
Other

3.3

(1.5
)
Total cash flows - other

$
18.3

$
(7.3
)

Three Months Ended September 30,

Nine Months Ended September 30,

2007

2006

2007

2006

Comprehensive income:

Net income

$
60.7

$
50.8

$
175.5

$
132.3

Net change in unrealized gains (losses) on financial instruments

0.2

0.3

(1.3
)
1.1

Net change in deferred (losses) gains on cash flow hedges

(1.5
)
0.1

(5.9
)
2.9

Net change in unrealized gains (losses) on pensions and postretirement benefits

0.5

—

1.6

—

Deferred income taxes related to unrealized gains (losses)

0.3

(0.4
)
2.2

(3.5
)
Comprehensive income

$
60.2

$
50.8

$
172.1

$
132.8

DP&L

Nine Months Ended September 30,

$ in millions

2007

2006

Cash flows - other:

Payroll taxes payable

$
—

$
(2.0
)
Deposits and other advances

15.6

(10.5
)
Lump sum retirement payment

(4.9
)
—

Other

5.8

1.0

Total cash flows - other

$
16.5

$
(11.5
)

Three Months Ended September 30,

Nine Months Ended September 30,

2007

2006

2007

2006

Comprehensive income:

Net income

$
70.6

$
64.0

$
199.5

$
174.9

Net change in unrealized (losses) gains on financial instruments

(5.0
)
1.2

(5.4
)
1.8

Net change in deferred (losses) gains on cash flow hedges

(1.5
)
0.1

(5.9
)
2.9

Net change in unrealized gains (losses) on pensions and postretirement benefits

0.6

—

1.7

—

Deferred income taxes related to unrealized gains (losses)

2.2

(0.8
)
4.3

(3.2
)
Comprehensive income

$
66.9

$
64.5

$
194.2

$
176.4

18

~~Notes to the Condensed Consolidated Financial Statements (continued)~~
5.     ~~Asset~~ ~~Sales~~
~~Sale~~Table of ~~Corporate Aircraft~~
~~On June 7, 2007, Miami Valley CTC, Inc. (indirect, wholly-owned subsidiary of~~ ~~DPL~~), sold its corporate aircraft and associated inventory and parts for $7.4 million. The net book value of the assets sold was approximately $1.0 million and severance and other costs of approximately $0.4 million were accrued. Miami Valley CTC, Inc. recorded a net gain on the sale of approximately $6.0 million during the second quarter ending June 30, 2007, which is included in ~~DPL’s~~ ~~operation and maintenance expense.~~Contents

At September 30, 2008, ~~Sale~~DP&L’s scheduled maturities of ~~Peaking Units~~
~~During~~long-term debt, including a capital lease obligation, over the ~~fourth quarter~~next five years are $0.7 million through September 30, 2009 and $0.7 million from October 1, 2009 through September 30, 2010. Thereafter, there are no scheduled debt payments through September 30, 2013. Substantially all property of ~~2006,~~ ~~DPL~~DP&L recorded a $71.0 million impairment charge that included the fair market value write-down of the peaking unit assets, accrued legal fees and other costs associated with the sale. There were no material costs or adjustmentsis subject to the ~~$71.0~~mortgage lien securing the first mortgage bonds.
At September 30, 2008, the $175 million ~~impairment charge upon consummation~~8.00% Senior Notes due March 31, 2009 are reflected within the current portion of ~~the sale~~long-term debt in ~~2007.~~DPL’s Condensed Consolidated Balance Sheet.

On March 1, 2007, pursuant to our strategy of reducing long-term debt, DPL redeemed the $225 million 8.25% Senior Notes when they became due. On May 15, 2008, DPL redeemed the $100 million 6.25% Senior Notes when they became due.
During the three months ended March 31, 2006, the Ohio Department of Development (ODOD) awarded DP&L the ability to issue, over the next three years, up to $200 million of qualified tax-exempt financing from the ODOD’s 2005 volume cap carryforward. The financing is to be used to partially fund ongoing flue gas desulfurization (FGD) capital projects. The PUCO approved DP&L’s application for this additional financing on July 26, 2006.
On September 13, 2006, the Ohio Air Quality Development Authority (OAQDA) issued $100 million of 4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series A due September 1, 2036. In turn, DP&L borrowed these funds from the OAQDA. The payment of principal and interest on the bonds, when due, is insured by an insurance policy issued by Financial Guaranty Insurance Company. DP&L used the proceeds from these borrowings to assist in financing its portion of the costs of acquiring, constructing, and installing certain solid waste disposal and air quality facilities at Miami Fort, Killen, and Stuart generating stations.
On November 15, 2007, the OAQDA issued $90 million of insured, collateralized, variable rate OAQDA Revenue bonds due November 1, 2040. In turn, DP&L borrowed these funds from the OAQDA. The variable interest rate on these bonds had been determined via a Dutch-auction that was reset every 35 days. On April ~~25, 2007, DPLE completed~~4, 2008, these OAQDA Revenue bonds were converted from 35-day auction rate securities to 7-day variable rate demand notes (VRDNs). At that time, the trustee, on behalf of DP&L, purchased all of the issued and outstanding bonds from the bondholders at par value and placed them in a custody account. These bonds have not been legally cancelled and can be re-issued at the discretion of DP&L at any time. These VRDNs were purchased using funds provided by DP&L’s revolving line of credit at a borrowing rate of LIBOR plus 0.23% and will be held in trust while we continue to evaluate market conditions and explore suitable long-term financing alternatives. Accordingly, at September 30, 2008, the $90 million variable rate OAQDA Revenue bonds are not treated as being outstanding in the Condensed Consolidated Balance Sheets for both DPL and DP&L.
On November 21, 2006, DP&L entered into a $220 million unsecured revolving credit agreement replacing its $100 million facility. This agreement has a five-year term that expires November 21, 2011 and provides DP&L with the ability to increase the size of the facility by an additional $50 million at any time. The facility contains one financial covenant: DP&L’s total debt to total capitalization ratio is not to exceed 0.65 to 1.00. This covenant is currently met. Fees associated with this credit facility are approximately $0.2 million per year. Changes in credit ratings, however, may affect fees and the applicable interest rate. This revolving credit agreement also contains a $50 million letter of credit sub-limit. DP&L has certain contractual agreements for the sale and purchase of ~~its Darby~~power, fuel, and ~~Greenville electric peaking generation facilities providing~~related energy services that contain credit rating related clauses allowing the counterparties to seek additional surety under certain conditions. As of September 30, 2008, ~~DPL~~ DP&L~~with approximately $151.0 million. Darby Station was sold~~ had no outstanding letters of credit against the facility. As of September 30, 2008,the outstanding borrowings under this credit facility amounted to Columbus Southern Power Company, a utility subsidiary of American Electric Power Company (AEP), for approximately $102.0 million. Greenville Station was sold to Buckeye Power, Inc. for approximately $49.0$90 million.

During the second quarter ended June 30, 2007, DPL provided a short-term loan to DP&L for $105 million. DP&L paid down $15 million of this loan during the third quarter ended September 30, 2007, an additional $70 million during the fourth quarter ended December 31, 2007, and the final $20 million during the first quarter ended March 31, 2008. This short-term loan did not violate any covenants in our other debt instruments. There are no other intercompany debt collateralizations or debt guarantees between DPL, DP&L, and their affiliates. None of the debt obligations of DPL or DP&L are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries.
21

Table of Contents
5.              Income Taxes
On June 27, 2008, we entered into a $42.0 million settlement agreement with the Ohio Department of Taxation (ODT) resolving all outstanding audit issues and appeals, including uncertain tax positions for tax years 1998 through 2006. The $42.0 million payment was made to the ODT in July 2008. Due to this settlement agreement, the balance of our unrecognized state tax liabilities recorded at March 31, 2008, in the amount of $56.3 million, was reversed resulting in an income tax benefit of $8.5 million, net of federal tax impact, being recorded during the three months ended June 30, 2008.
DPL’s effective income tax rate for the nine months ended September 30, 2008 was 33.2% as compared to 38.1% for the nine months ended September 30, 2007.
DP&L’s effective income tax rate for the nine months ended September 30, 2008 was 33.0% as compared to 37.5% for the nine months ended September 30, 2007.
The decreases in the effective tax rates for DPL and DP&L was primarily the result of the $8.5 million income tax benefit discussed above. This income tax benefit had no impact on the effective income tax rates for the three months ended September 30, 2008 and 2007.
We currently have no uncertain tax positions but will continue to examine tax positions taken in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”
We recognize interest and penalties related to unrecognized tax positions in income taxes. As of September 30, 2008, we do not have any interest accrued related to uncertain tax positions.
6.              Pension and Postretirement Benefits

We sponsor a defined benefit plan for substantially all ~~full-time~~ 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. We fund pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ~~as amended~~ (ERISA). In addition, we have a Supplemental Executive Retirement Plan (SERP) for certain active and retired key executives. ~~Benefits under this SERP have been frozen and no additional benefits can be earned.~~ We also have unfunded liabilities ~~pertaining~~related to retirement benefits for certain active, terminated, and retired key ~~executives that include The DPL Inc. Supplemental Executive Defined Contribution Retirement Plan (SEDCRP).~~executives. These liabilities totaled approximately ~~$0.9 million and $0.5~~$1.1 million at September 30, ~~2007~~2008 and ~~2006, respectively.~~$0.9 million at December 31, 2007.

Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits, while qualified employees who retired after 1987 are eligible for life insurance benefits. We have funded the union-eligible health benefit using a Voluntary Employee Beneficiary Association Trust.

1922

~~Notes to the Condensed Consolidated Financial Statements (continued)~~Table of Contents

The net periodic benefit ~~costs~~cost of the pension and postretirement benefit plans for the three months ended September 30, 2008 and 2007 ~~and 2006 were:~~was:

Net periodic benefit cost

Pension

Postretirement

$ in millions

Pension

Postretirement

2008

2007

2008

2007

2007

2006

2007

2006

Service cost

$
0.2

$
1.0

$
—

$
—

$
0.8

$
0.2

$
—

$
—

Interest cost

4.0

4.3

0.4

0.5

4.1

4.0

0.4

0.4

Expected return on assets (a)

(5.5
)
(5.5
)
(0.1
)
(0.2
)

(6.0
)
(5.5
)
(0.1
)
(0.1
)

Amortization of unrecognized:

Actuarial (gain) loss

0.8

0.9

(0.2
)
(0.2
)

0.7

0.8

(0.2
)
(0.2
)
Prior service cost

0.6

0.7

—

—

0.6

0.6

—

—

Transition obligation

—

—

—

0.1

—

—

—

—

Net periodic benefit cost

0.1

1.4

0.1

0.2

$
0.2

$
0.1

$
0.1

$
0.1

Settlement cost (b)

—

2.6

—

—

Net periodic benefit cost after adjustments

$
0.1

$
4.0

$
0.1

$
0.2

(a)
The market-related value of assets is equal to the fair value of assets at implementation with subsequent asset gains and losses recognized in the market-value systematically over a three-year period.
~~(b)~~
The settlement cost pertains to a former officer (not related to our litigation settlement with three former executives) who elected to receive a lump sum distribution in January 2007 from the Supplemental Executive Retirement Plan.

The net periodic benefit ~~costs~~cost of the pension and postretirement benefit plans for the nine months ended September 30, 2008 and 2007 ~~and 2006 were:~~was:
Net periodic benefit cost

Pension

Postretirement

$ in millions

Pension

Postretirement

2008

2007

2008

2007

2007

2006

2007

2006

Service cost

$
2.4

$
3.2

$
—

$
—

$
2.4

$
2.4

$
—

$
—

Interest cost

12.2

12.5

1.1

1.3

12.3

12.2

1.2

1.1

Expected return on assets (a)

(16.4
)
(16.3
)
(0.3
)
(0.4
)

(18.0
)
(16.4
)
(0.3
)
(0.3
)

Amortization of unrecognized:

Actuarial (gain) loss

2.6

2.9

(0.7
)
(0.6
)

2.1

2.6

(0.6
)
(0.7
)
Prior service cost

1.8

1.9

—

—

1.8

1.8

—

—

Transition obligation

—

—

0.1

0.2

—

—

—

0.1

Net periodic benefit cost before adjustment

2.6

4.2

0.2

0.5

Settlement cost (b)

—

2.6

—

—

Special termination benefit cost (c)

—

0.3

—

—

Net periodic benefit cost after adjustment

$
2.6

$
7.1

$
0.2

$
0.5

Net periodic benefit cost

$
0.6

$
2.6

$
0.3

$
0.2

(a)
The market-related value of assets is equal to the fair value of assets at implementation with subsequent asset gains and losses recognized in the market-value systematically over a three-year period.
~~(b)~~
The settlement cost pertains to a former officer (not related to our litigation settlement with three former executives) who elected to receive a lump sum distribution in January 2007 from the Supplemental Executive Retirement Plan.
~~(c)~~
In 2006, a special termination benefit cost was recognized as a result of 16 employees who participated in a voluntary early retirement program and retired at various dates during 2006; this program was completed as of April 1, 2006.
20

~~Notes to the Condensed Consolidated Financial Statements (continued)~~

The following estimated benefit payments, which reflect future service, are expected to be paid as follows:
Estimated Future Benefit ~~Payments~~Payments:

$ in millions

Pension

Postretirement

Pension

Postretirement

2007

$
4.8

$
0.7

2008

$
19.8

$
2.6

$
4.9

$
0.7

2009

$
20.2

$
2.6

$
20.0

$
2.6

2010

$
20.7

$
2.5

$
20.3

$
2.6

2011

$
20.9

$
2.4

$
20.5

$
2.5

2012 — 2016

$
111.9

$
10.0

2012

$
21.0

$
2.4

2013 – 2017

$
110.6

$
9.8

23

Table of Contents

7.              Share-Based Compensation
As a result of the May 21, 2007 settlement of the litigation with three former executives (see Note 10 of the Notes to the Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, RSUs, MVE incentives, stock options and reimbursement of legal fees. A portion of this settlement included the forfeitures and cancellations of RSUs and stock options of 1.3 million and 3.6 million, respectively.

The following table summarizes share-based compensation expense:

Three Months Ended

Nine Months Ended

$ in millions

September 30,

September 30,

2007

2006

2007

2006

Stock options

$
—

$
—

$
—

$
1.2

Restricted stock units

(0.2
)
0.7

—

1.8

Performance shares

0.5

0.5

1.3

1.3

Restricted shares

0.1

—

0.2

—

Non-employee directors’ RSUs

0.1

—

0.2

—

Share-based compensation included in operations and maintenance expense

0.5

1.2

1.7

4.3

Income tax expense

(0.2
)
(0.5
)
(0.7
)
(1.7
)
Total share-based compensation, net of tax

$
0.3

$
0.7

$
1.0

$
2.6

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2008

2007

2008

2007

Stock options

$
—

$
—

$
—

$
—

Restricted stock units (RSUs)

—

(0.2
)
(0.1
)
—

Performance shares

0.4

0.5

1.0

1.3

Restricted shares

0.2

0.1

0.4

0.2

Non-employee directors’ RSUs

0.1

0.1

0.3

0.2

Management performance shares

0.1

—

0.2

—

Share-based compensation included in operation and maintenance expense

$
0.8

$
0.5

$
1.8

$
1.7

Income tax benefit

(0.3
)
(0.2
)
(0.7
)
(0.7
)
Total share-based compensation, net of tax

$
0.5

$
0.3

$
1.1

$
1.0

Share-based awards issued in DPL’s common stock will be distributed from treasury stock. DPL believes it has sufficient treasury stock to satisfy all outstanding share-based awards.

~~Determining Fair Value~~
~~Valuation and Amortization Method —~~ We estimate the fair value of stock options and RSUs using a Black-Scholes-Merton model; performance shares are valued using a Monte Carlo simulation; restricted shares are valued at the market price on the day of grant and the Directors’ RSUs are valued at the market price on the day prior to the grant date. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.
~~Expected Volatility —~~ ~~Our expected volatility assumptions are based on the historical volatility of~~ ~~DPL~~ ~~stock. The volatility range captures the high and low volatility values for each award granted based on its specific terms.~~
~~Expected Life —~~ ~~The expected life assumption represents the estimated period of time from grant until exercise and reflects historical employee exercise patterns.~~
~~Risk-Free Interest Rate —~~ The risk-free interest rate for the expected term of the award is based on the corresponding yield curve in effect at the time of the valuation for U.S. Treasury bonds having the same term as the expected life of the award, i.e., a five year bond rate is used for valuing an award with a five year expected life.
~~Expected Dividend Yield —~~ ~~The expected dividend yield is based on~~ ~~DPL’s~~ ~~current dividend rate, adjusted as necessary to capture anticipated dividend changes and the 12 month average~~ ~~DPL~~ ~~stock price.~~
21

~~Notes to the Condensed Consolidated Financial Statements (continued)~~
~~Expected Forfeitures —~~ ~~The forfeiture rate used to calculate~~Summarized share-based compensation ~~expense is based on~~ ~~DPL’s~~ ~~historical experience, adjusted as necessary to reflect special circumstances.~~
~~Stock Options~~
~~In 2000,~~ ~~DPL’s~~ ~~Board of Directors adopted, and~~ ~~DPL’s~~ ~~shareholders approved, The DPL Inc. Stock Option Plan. On April 26, 2006,~~ ~~DPL’s~~ shareholders approved The DPL Inc. 2006 Equity and Performance Incentive Plan (EPIP). With the approval of the EPIP, no new awards will be granted under The DPL Inc. Stock Option Plan, but shares relating to awards that are forfeited or terminated under The DPL Inc. Stock Option Plan may be granted. There are currently 10,000 unvested stock options outstanding under The DPL Inc. Stock Option Plan that will vest as of December 21, 2007.
~~The schedule of option~~ activity for the nine months ended September 30, 2008 and 2007 was as follows:

Weighted-Average

Number of

Grant Date

$ in millions (except share amounts)

Options

Fair Value

Non-vested at January 1, 2007

10,000

$
0.05

Granted in first nine months 2007

—

—

Vested in first nine months 2007

—

—

Forfeited in first nine months 2007

—

—

Non-vested at September 30, 2007

10,000

$
0.05

Options

RSUs

Performance Shares

2008

2007

2008

2007

2008

2007

Outstanding at beginning of year

946,500

5,091,500

22,976

1,334,339

142,108

154,768

Granted

—

—

—

—

93,298

78,559

Dividends

—

—

—

11,656

—

—

Exercised

(90,400
)
(520,000
)
(11,253
)
(20,097
)
—

(22,462
)
Expired

—

—

—

—

(37,426
)
(21,583
)
Forfeited

—

(3,620,000
)
(1,603
)
(1,302,922
)
(7,253
)
(34,243
)
Outstanding at period end

856,100

951,500

10,120

22,976

190,727

155,039

Exercisable at period end

856,100

941,500

—

—

—

—

~~Summarized stock option activity was as follows:~~

Nine Months Ended

September 30

2007

2006

Options:

Outstanding at beginning of year

5,091,500

5,486,500

Granted

—

—

Exercised

(520,000
)
(10,000
)
Forfeited (a)

(3,620,000
)
(40,000
)
Outstanding at period-end

951,500

5,436,500

Exercisable at period-end

941,500

5,416,000

Weighted-average option prices per share:

Outstanding at beginning of year

$
21.95

$
21.86

Granted

$
—

$
—

Exercised

$
26.83

$
21.00

Forfeited

$
20.38

$
15.88

Outstanding at period-end

$
24.08

$
22.02

Exercisable at period-end

$
24.07

$
20.98

~~(a)~~
As a result of the settlement of the former executive litigation on May 21, 2007, 3.6 million outstanding options shown above were forfeited in the second quarter of 2007 and another approximately one million disputed options not shown above were also forfeited.
22

~~Notes to the Condensed Consolidated Financial Statements (continued)~~
~~The following table reflects information about stock options outstanding at September 30, 2007:~~

Options Outstanding

Options Exercisable

Weighted-

Weighted-

Weighted-

Average

Average

Average

Range of Exercise

Contractual

Exercise

Exercise

Prices

Outstanding

Life

Price

Exercisable

Price

$
14.95 - $21.00

625,000

3.3 years

$
20.60

625,000

$
20.60

$
21.01 - $29.63

326,500

4.0 years

$
28.83

316,500

$
28.93

~~The following table reflects information about stock option activity during the period:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2007

2006

2007

2006

Weighted-average grant date fair value of options granted during the period

$
—

$
—

$
—

$
—

Intrinsic value of options exercised during the period

$
—

$
—

$
2.3

$
0.1

Proceeds from stock options exercised during the period

$
—

$
—

$
14.5

$
0.2

Excess tax benefit from proceeds of stock options exercised

$
—

$
—

$
0.5

$
—

Fair value of shares that vested during the period

$
—

$
—

$
—

$
1.0

Unrecognized compensation expense

$
—

$
0.1

$
—

$
0.1

Weighted-average period to recognize compensation expense (in years)

0.3

1.3

0.3

1.3

~~The following table shows the assumptions used in the Black-Scholes-Merton model to calculate the fair value of the non-vested stock options at the time of grant:~~
~~Number of non-vested shares~~
~~10,000~~
~~Date of grant~~
~~December 29, 2004~~
~~Expected volatility~~
~~26.1~~
%
~~Weighted-average expected volatility~~
~~26.1~~
%
~~Expected life (in years)~~
~~9.9~~
~~Expected dividends~~
~~4.7~~
%
~~Weighted-average expected dividends~~
~~4.7~~
%
~~Risk-free interest rate~~
~~4.3~~
%
~~No options were granted during 2006 and 2007.~~
~~Restricted Stock Units (RSUs)~~
RSUs were granted to certain key employees prior to 2001. As a result of the settlement of the former executive litigation, all disputed RSUs were forfeited by the three former executives. There were 22,976 RSUs outstanding as of September 30, 2007, none of which has vested. The non-vested RSUs will be paid in cash upon vesting and will vest as follows: 11,253 in 2008; 7,878 in 2009 and 3,845 in 2010. Non-vested RSUs are valued quarterly at fair value using the Black-Scholes-Merton model to determine the amount of compensation expense to be recognized. Non-vested RSUs do not earn dividends.

Weighted-Average

Number of

Grant Date

$ in millions (except share amounts)

RSUs

Fair Value

Non-vested at January 1, 2007

49,998

$
1.2

Granted in first nine months 2007

—

—

Vested in first nine months 2007

(20,097
)
(0.4
)
Forfeited in first nine months 2007

(6,925
)
(0.2
)
Non-vested at September 30, 2007

22,976

$
0.6

23

~~Notes to the Condensed Consolidated Financial Statements (continued)~~
~~Summarized RSU activity was as follows:~~

Nine Months Ended

Restricted Shares

Director RSUs

Mgt. Performance Shares

September 30,

2008

2007

2008

2007

2008

2007

2007

2006

RSUs:

Outstanding at beginning of year

1,334,339

1,319,399

42,200

19,000

13,573

—

—

—

Granted

—

—

39,347

23,200

15,752

14,920

39,144

—

Dividends

11,656

35,030

—

—

630

231

—

—

Exercised

(20,097
)
(22,516
)

(1,000
)
—

(13,721
)
(142
)
—

—

Expired

—

—

—

—

—

—

Forfeited

(1,302,922
)
(8,978
)

—

—

(1,149
)
(1,553
)
—

—

Outstanding at period-end

22,976

1,322,935

Exercisable at period-end

—

—

Outstanding at period end

80,547

42,200

15,085

13,456

39,144

—

Exercisable at period end

—

—

—

—

—

—

~~Compensation expense is recognized each quarter based on the change in the market price of~~ ~~DPL~~ ~~common shares.~~
As of September 30, 2007 and 2006, liabilities recorded for outstanding RSUs were $0.6 million and $35.7 million, respectively, which are included in “Other deferred credits” on the Condensed Consolidated Balance Sheet. The decrease in the liability is due to the executive litigation settlement and the forfeiture of 1.3 million RSUs (see Note 10 of the Notes to Condensed Consolidated Financial Statements).
~~The following table shows the assumptions used in the Black-Scholes-Merton model to calculate the fair value of the non-vested RSUs during the respective periods:~~

Three Months Ending

Nine Months Ending

September 30,

September 30,

2007

2006

2007

2006

Expected volatility

13.4-16.7%

10.3-20.3%

10.6-43.5%

7.3-28.6%

Weighted-average expected volatility

14.4%

17.1%

16.2%

22.0%

Expected life (in years)

1.0-3.0

1.0-4.0

1.0-3.0

1.0-4.0

Expected dividends

3.6%

3.7-3.8%

3.5-3.6%

3.7-3.8%

Weighted-average expected dividends

3.6%

3.8%

3.5%

3.8%

Risk-free interest rate

4.0-4.1%

4.6-4.9%

4.0-5.0%

4.7-5.2%

~~Performance Shares~~
~~Under the EPIP,~~On May 28, 2008, the Board ~~adopted a Long-Term Incentive Plan (LTIP) under which~~ ~~DPL~~ ~~will award a targeted number~~ of Directors granted compensation awards for select management employees. A total of 39,144 management performance shares of common stock to executives. Awards under the LTIP will be awarded based on a Total Shareholder Return Relative to Peers performance. No performance shares will be earned in a performance period if the three-year Total Shareholder Return Relative to Peers is below the threshold of the 40^th ~~percentile. Further, the LTIP awards will be capped at 200% of the target number of performance shares, if the Total Shareholder Return Relative to Peers is at or above the threshold of the 90~~^th ~~percentile.~~was granted. The ~~Total Shareholder Return Relative to Peers is considered a market condition under FAS 123R. There is~~grants have a three year requisite service period ~~for each tranche of~~from January 1, 2008 to December 31, 2010 and certain performance conditions during the performance period. The management performance shares can only be awarded in DPL common shares.

24

~~Notes to the Condensed Consolidated Financial Statements (continued)~~
~~The schedule of non-vested performance share activity for the nine months ended September 30, 2007 follows:~~

Number of

Weighted-Average

Performance

Grant Date

$ in millions (except share amounts)

Shares

Fair Value

Non-vested at January 1, 2007

110,723

$
2.7

Granted in first nine months 2007

78,559

2.6

Vested in first nine months 2007

—

—

Forfeited in first nine months 2007

(34,243
)
(0.9
)
Non-vested at September 30, 2007

155,039

$
4.4

Nine Months Ended

September 30,

2007

2006

Performance Shares:

Outstanding at beginning of year

154,768

—

Granted

78,559

223,289

Exercised

(22,462
)
—

Expired

(21,583
)
—

Forfeited

(34,243
)
(89,655
)
Outstanding at period-end

155,039

133,634

Exercisable at period-end

—

—

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2007

2006

2007

2006

Weighted-average grant date fair value of performance shares granted during the period

$
0.1

$
—

$
2.6

$
5.9

Intrinsic value of performance shares exercised during the period

$
—

$
—

$
—

$
—

Proceeds from performance shares exercised during the period

$
—

$
—

$
—

$
—

Tax benefit from proceeds of performance shares exercised

$
—

$
—

$
—

$
—

Fair value of performance shares that vested during the period

$
—

$
—

$
—

$
—

Unrecognized compensation expense

$
2.3

$
1.6

$
2.3

$
1.6

Weighted-average period to recognize compensation expense (in years)

1.3

1.0

1.3

1.0

~~The following table shows the assumptions used in the Monte Carlo Simulation to calculate the fair value of the performance shares granted during the period:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2007

2006

2007

2006

Expected volatility

15.8%

0.0%

15.8-17.3%

20.3%

Weighted-average expected volatility

15.8%

0.0%

16.4%

20.3%

Expected life (in years)

3.0

0.0

3.0

3.0

Expected dividends

3.9%

0.0%

3.3-3.9%

3.7%

Weighted-average expected dividends

3.9%

0.0%

3.3%

3.7%

Risk-free interest rate

4.5-4.6%

0.0%

4.5-4.9%

4.7%

25

~~Notes to the Condensed Consolidated Financial Statements (continued)~~
~~Restricted Shares~~
~~Under the EPIP,~~On July 23, 2008, the Board of Directors granted compensation awards to a select group of management employees. A total of 10,347 restricted shares of ~~DPL~~ ~~Restricted Shares~~was granted. The management restricted stock awards have a three year requisite service period from July 23, 2008 to ~~various executives. The Restricted Shares are to be registered in the executive’s name,~~July 23, 2011, carry full voting privileges and receive dividends as declared and paid on all DPL common stock. The management restricted stock ~~and will vest after a specified service period.~~can only be awarded in DPL common shares.

24

Table of Contents
8.              Fair Value Measurements
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (SFAS 157), which provides a framework for measuring fair value under GAAP. SFAS 157 requires that the impact of this change in accounting for fair valued assets and liabilities be recorded as an adjustment to beginning retained earnings in the period of adoption. We did not have any adjustments to beginning retained earnings at adoption.
FSP SFAS 157-2 allows for a deferral from the SFAS 157 disclosures for non-financial assets or liabilities until fiscal years beginning after November 15, 2008. We did not elect this deferral and have disclosed an additional layer to an asset retirement obligation.
SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
Level 1 inputs are defined as quoted prices in active markets for identical assets or liabilities. Our Level 1 assets and liabilities include equity securities held in various deferred compensation trusts and futures contracts that are traded in an active exchange market.
Level 2
Level 2 inputs are observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets and liabilities include open-ended investment funds and forward contracts with quoted prices from over-the-counter (OTC) markets or direct broker quotes that are traded less frequently than exchange-traded instruments.
Level 3
Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Our Level 3 assets and liabilities include asset retirement obligations that are initially recognized at fair value.
Valuations of assets and liabilities reflect the value of the instrument including the values associated with counterparty risk and performance risk. With the issuance of SFAS 157, the accounting industry clarified that these values must also take into account our own credit standing.
25

Table of Contents
The fair value of assets and liabilities measured on a recurring basis was determined as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Level 1

Level 2

Level 3

Based on Quoted

Based on

Fair Value at

Prices in Active

Other Observable

Unobservable

September 30, 2008

Market

Inputs

Inputs

$ in millions

DPL

DP&L (a)

DPL

DP&L (a)

DPL

DP&L

DPL

DP&L

Assets

Master Trust Assets

$
13.0

$
42.4

$
—

$
29.4

$
13.0

$
13.0

$
—

$
—

Derivative Assets

0.1

0.1

—

—

0.1

0.1

—

—

Total

$
13.1

$
42.5

$
—

$
29.4

$
13.1

$
13.1

$
—

$
—

Liabilities

Derivative Liabilities

$
2.1

$
2.1

$
—

$
—

$
2.1

$
2.1

$
—

$
—

Total

$
2.1

$
2.1

$
—

$
—

$
2.1

$
2.1

$
—

$
—

(a)DP&L holds DPL stock in the Master Trust that is eliminated in consolidation.
Generally, for financial assets held by the Master Trust and for heating oil futures, fair value is determined by reference to quoted market prices and other relevant information generated by market transactions. Level 2 inputs are used to value derivatives such as financial transmission rights where the quoted prices are from a relatively inactive market; forward power contracts which are valued using prices on the New York Mercantile Exchange (NYMEX) for similar contracts on the OTC market; and open-ended funds that are valued using the end of day Net Asset Value (NAV).
The fair value of assets and liabilities measured on a non-recurring basis was determined as follows:

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Level 1

Level 2

Level 3

Based on Quoted

Based on

Fair Value at

Prices in Active

Other Observable

Unobservable

September 30, 2008

Market

Inputs

Inputs

$ in millions

DPL

DP&L

DPL

DP&L

DPL

DP&L

DPL

DP&L

Asset retirement obligations recorded during period

$
0.2

$
0.2

$
—

$
—

$
—

$
—

$
0.2

$
0.2

The fair value of an asset retirement obligation (ARO) is estimated by discounting expected cash outflows to their present value. Cash outflows are based on the approximate future disposal cost as determined by market information, historical information, or management judgment. During the three months ended September 30, ~~2007, 6,800 restricted shares were awarded.~~2008, DP&L added an additional layer to the asbestos removal ARO in the amount of $0.2 million due to the acceleration of the removal of some asbestos.

Number of

Weighted-Average

Restricted

Grant Date

$ in millions (except share amounts)

Shares

Fair Value

Non-vested at January 1, 2007

19,000

$
0.5

Granted in first nine months 2007

23,200

0.7

Vested in first nine months 2007

—

—

Forfeited in first nine months 2007

—

—

Non-vested at September 30, 2007

42,200

$
1.2

Nine Months Ended

September 30,

2007

2006

Restricted Shares:

Outstanding at beginning of year

19,000

—

Granted

23,200

—

Exercised

—

—

Forfeited

—

—

Outstanding at period-end

42,200

—

Exercisable at period-end

—

—

~~The following table reflects information about restricted share activity during the period:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2007

2006

2007

2006

Weighted-average grant date fair value of restricted shares granted during the period

$
0.2

$
—

$
0.7

$
—

Intrinsic value of restricted shares exercised during the period

$
—

$
—

$
—

$
—

Proceeds from restricted shares exercised during the period

$
—

$
—

$
—

$
—

Tax benefit from proceeds of restricted shares exercised

$
—

$
—

$
—

$
—

Fair value of restricted shares that vested during the period

$
—

$
—

$
—

$
—

Unrecognized compensation expense

$
1.0

$
—

$
1.0

$
—

Weighted-average period to recognize compensation expense (in years)

2.6

—

2.6

—

~~Non-Employee Director Restricted Stock Units~~
~~Under the EPIP, as part of their annual compensation for service to~~At September 30, 2008, DPL had no investments in money market mutual funds classified as cash and ~~DP&L~~~~, each non-employee Director received a $54,000 retainer~~cash equivalents in RSUs on the date of the annual meeting. The RSUs will become non-forfeitable on April 15 of the following year; but if the Director resigns, dies or retires prior to the April 15 vesting date, the vested shares will be distributed on a pro rata basis. The RSUs accrue quarterly dividends in the form of additional RSUs. Upon vesting, the RSUs will become exercisable and will be distributed in ~~DPL~~ common shares, unless the Director chooses to defer receipt of the shares until a later date. The RSUs are valued at the closing stock price on the day prior to the grant and the compensation expense is recognized evenly over the vesting period.its Condensed Consolidated Balance Sheet.

26

Table of Contents
~~Notes to the Condensed Consolidated Financial Statements (continued)~~9.              Earnings per Share

Number of

Weighted-Average

Director

Grant Date

$ in millions (except for share amounts)

RSUs

Fair Value

Non-vested at January 1, 2007

—

$
—

Granted in first nine months 2007

14,920

0.5

Dividends accrued in the first nine months 2007

231

—

Vested in first nine months 2007

(6,643
)
(0.2
)
Forfeited in first nine months 2007

(1,553
)
—

Non-vested at September 30, 2007

6,955

$
0.3

Basic earnings per share (EPS) is based on the weighted-average number of DPL common shares outstanding during the year. Diluted EPS is based on the weighted-average number of DPL common and common- equivalent shares outstanding during the year, except in periods where the inclusion of such common-equivalent shares is anti-dilutive. Excluded from outstanding shares for these weighted-average computations are shares held by DP&L’s Master Trust Plan for deferred compensation and unreleased shares held by DP&L’s Employee Stock Ownership Plan (ESOP).

Nine Months Ended

September 30,

2007

2006

Restricted Stock Units:

Outstanding at beginning of year

—

—

Granted

14,920

—

Dividends accrued

231

—

Exercised

(142
)
—

Forfeited

(1,553
)
—

Outstanding at period-end

13,456

—

Exercisable at period-end

—

—

The following table ~~reflects information about non-employee director RSU activity during~~represents common-equivalent shares excluded from the ~~period:~~calculation of diluted EPS because they were anti-dilutive. These shares may be dilutive in the future.

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2007

2006

2007

2006

Weighted-average grant date fair value of non-employee director RSUs granted during the period

$
—

$
—

$
0.5

$
—

Intrinsic value of non-employee director RSUs exercised during the period

$
—

$
—

$
—

$
—

Proceeds from non-employee director RSUs exercised during the period

$
—

$
—

$
—

$
—

Tax benefit from proceeds of non-employee director RSUs exercised

$
—

$
—

$
—

$
—

Fair value of non-employee director RSUs that vested during the period

$
(0.1
)
$
—

$
(0.2
)
$
—

Unrecognized compensation expense

$
0.2

$
—

$
0.2

$
—

Weighted-average period to recognize compensation expense (in years)

0.5

—

0.5

—

Three Months Ended

Nine Months Ended

September 30,

September 30,

In millions

2008

2007

2008

2007

Common equivalent shares

0.3

0.3

0.3

0.1

27

~~Notes to~~The following illustrates the ~~Condensed Consolidated Financial Statements (continued)~~reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for income after discontinued operations:

~~8.     Long-Term Debt and Notes Payable~~

Three Months Ended September 30,

2008

2007

$ in millions except per

Net

Per

Net

Per

share amounts

Income

Shares

Share

Income

Shares

Share

Basic EPS

$
48.0

109.9

$
0.44

$
60.7

108.0

$
0.56

Effect of Dilutive Securities:

Restricted stock units

—

—

Warrants (a)

4.9

7.1

Stock options, performance and restricted shares

0.2

0.3

Diluted EPS

$
48.0

115.0

$
0.42

$
60.7

115.4

$
0.53

DPL

At

At

September 30,

December 31,

$ in millions

2007

2006

DP&L - First mortgage bonds maturing 2013 - 5.125%

$
470.0

$
470.0

DP&L - Pollution control series maturing 2036 - 4.80%

100.0

100.0

DP&L - Pollution control series maturing 2034 - 4.80%

137.8

137.8

DP&L - Pollution control series maturing 2034 - 4.80%

41.3

41.3

DP&L - Pollution control series maturing 2028 - 4.70%

35.3

35.3

784.4

784.4

DPL Inc. - Note to Capital Trust II 8.125% due 2031

195.0

195.0

DPL Inc. - Senior Notes 6.875% Series due 2011

297.4

297.4

DPL Inc. - Senior Notes 8.00% Series due 2009

175.0

175.0

DPL Inc. - Senior Notes 6.25% Series due 2008

—

100.0

DP&L - Obligations for capital leases

1.5

2.0

Unamortized debt discount (a)

(1.7
)
(2.0
)
Total

$
1,451.6

$
1,551.8

Nine Months Ended September 30,

2008

2007

$ in millions except per

Net

Per

Net

Per

share amounts

Income

Shares

Share

Income

Shares

Share

Basic EPS

$
172.9

109.6

$
1.58

$
175.5

107.8

$
1.63

Effect of Dilutive Securities:

Restricted stock units

—

0.7

Warrants (a)

6.4

8.7

Stock options, performance and restricted shares

0.2

0.9

Diluted EPS

$
172.9

116.2

$
1.49

$
175.5

118.1

$
1.49

(a)
~~DP&L’s unamortized debt discount was $(1.1)~~On September 18, 2008, Lehman Brothers Inc. exercised 12 million ~~and $(1.2)~~warrants under a cashless exercise transaction resulting in the issuance by DPL of 2.3 million ~~for September 30, 2007 and December 31, 2006, respectively.~~shares of common stock. See Note 12 of Notes to Condensed Consolidated Financial Statements.

DP&L

At

At

September 30,

December 31,

$ in millions

2007

2006

DP&L - First mortgage bonds maturing
2013 - 5.125%

$
470.0

$
470.0

DP&L - Pollution control series maturing
2036 - 4.80%

100.0

100.0

DP&L - Pollution control series maturing
2034 - 4.80%

137.8

137.8

DP&L - Pollution control series maturing
2034 - 4.80%

41.3

41.3

DP&L - Pollution control series maturing
2028 - 4.70%

35.3

35.3

784.4

784.4

DP&L - Obligations for capital leases

1.5

2.0

Unamortized debt discount

(1.1
)
(1.2
)
Total

$
784.8

$
785.2

~~At September 30, 2007,~~ ~~DPL’s~~ scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $0.2 million for the remainder of 2007, $100.7 million in 2008, $175.8 million in 2009, $0.6 million in 2010 and $297.4 million in 2011.
~~At September 30, 2007,~~ ~~DP&L’s~~ scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $0.2 million for the remainder of 2007, $0.7 million in 2008, $0.8 million in 2009, $0.6 million in 2010 and none in 2011. Substantially all property of ~~DP&L~~ ~~is subject to the mortgage lien securing the first mortgage bonds.~~
~~During the first quarter of 2006, the Ohio Department of Development (ODOD) awarded~~ ~~DP&L~~ the ability to issue over the next three years up to $200 million of qualified tax-exempt financing from the ODOD’s 2005 volume cap carryforward. The financing is to be used to partially fund the ongoing flue gas desulfurization (FGD) capital projects. On September 13, 2006, the Ohio Air Quality
2827

~~Notes to the Condensed Consolidated Financial Statements (continued)~~
~~Development Authority (OAQDA) issued $100 million~~Table of ~~4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series A due September 1, 2036. In turn,~~ ~~DP&L~~ ~~borrowed these funds from the OAQDA. These funds were placed in escrow with a trustee and, as of April 3, 2007,~~ ~~DP&L~~ ~~has drawn out the entirety of the funds.~~ ~~DP&L~~ is considering issuing in conjunction with the OAQDA another series of tax-exempt bonds to finance additional qualifying solid waste disposal facility costs at Miami Fort, Killen, Stuart and Conesville generating stations.Contents
~~On November 21, 2006,~~ ~~DP&L~~ ~~entered into a new $220 million unsecured revolving credit agreement replacing its $100 million facility. This new agreement has a five-year term that expires November 21, 2011 and provides~~ ~~DP&L~~ ~~with the ability to increase the size of the facility by an additional $50 million at any time. The facility contains one financial covenant:~~ ~~DP&L’s~~ ~~total debt to total capitalization ratio is not to exceed 0.65 to 1.00. This covenant is currently met. As of September 30, 2007,~~ ~~DP&L~~ had no borrowings outstanding under this facility. Fees associated with this credit facility are approximately $0.2 million per year. Changes in credit ratings, however, may affect fees and the applicable interest rate. This revolving credit agreement also contains a $50 million letter of credit sublimit. ~~DP&L~~ has certain contractual agreements for the sale and purchase of power, fuel and related energy services that contain credit rating related clauses allowing the counter parties to seek additional surety under certain conditions. As of September 30, 2007, ~~DP&L~~ ~~had no outstanding letters of credit against the facility.~~
~~During the second quarter ending June 30, 2007,~~ ~~DPL~~ ~~entered into a short-term loan to~~ ~~DP&L~~ ~~for $105 million.~~ ~~DP&L~~ paid down $15 million of this loan during the third quarter ending September 30, 2007, leaving a current outstanding loan balance of $90 million. This short-term loan does not affect our debt covenants. There are no other inter-company debt collateralizations or debt guarantees between ~~DPL~~, ~~DP&L~~ ~~and their subsidiaries. None of the debt obligations of~~ ~~DPL~~ or ~~DP&L~~ ~~are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries.~~
29

~~Notes to the Condensed Consolidated Financial Statements (continued)~~

9.10.       Commitments and Contingencies

Contractual Obligations ~~and Commercial Commitments~~
We ~~enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations. At September 30, 2007, these include:~~

Payment Year

$ in millions

Total

2007

2008-2009

2010-2011

Thereafter

DPL

Long-term debt

$
1,550.0

$
—

$
275.0

$
297.4

$
977.6

Interest payments

1,026.4

23.9

170.7

144.0

687.8

Pension and postretirement payments

219.1

5.5

45.2

46.5

121.9

Capital lease

2.3

0.2

1.5

0.6

—

Operating leases

0.8

0.4

0.3

0.1

—

Coal contracts (a)

925.8

104.6

578.8

242.4

—

Limestone contracts (a)

57.7

0.6

9.5

10.9

36.7

Reserve for uncertain tax provisions

41.9

41.9

—

—

—

Other contractual obligations

337.2

232.8

86.5

14.5

3.4

Total contractual obligations

$
4,161.2

$
409.9

$
1,167.5

$
756.4

$
1,827.4

DP&L

Long-term debt

$
783.2

$
—

$
—

$
—

$
783.2

Interest payments

542.6

9.8

78.3

78.3

376.2

Pension and postretirement payments

219.1

5.5

45.2

46.5

121.9

Capital lease

2.3

0.2

1.5

0.6

—

Operating leases

0.8

0.4

0.3

0.1

—

Coal contracts (a)

925.8

104.6

578.8

242.4

—

Limestone contracts (a)

57.7

0.6

9.5

10.9

36.7

Reserve for uncertain tax provisions

41.9

41.9

—

—

—

Other contractual obligations

337.2

232.8

86.5

14.5

3.4

Total contractual obligations

$
2,910.6

$
395.8

$
800.1

$
393.3

$
1,321.4

~~(a)~~
~~DP&L~~~~-operated units~~
~~Long-term debt:~~
~~DPL’s~~ ~~long-term debt as of September 30, 2007 consists of~~ ~~DP&L’s~~ ~~first mortgage bonds and tax-exempt pollution control bonds,~~ ~~DPL~~ ~~unsecured notes and includes current maturities and unamortized debt discounts.~~

~~DP&L’s~~ ~~long-term debt as~~There have been no material changes, outside the ordinary course of ~~September 30,~~business, to the information disclosed in the contractual obligations table in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 ~~consists of first mortgage bonds, tax-exempt pollution control bonds and includes an unamortized debt discount.~~except those relating to the following transactions:

~~See~~·                  On April 4, 2008, DP&L repurchased all of the issued and outstanding $90 million variable rate OAQDA Revenue bonds from the bondholders and placed them in a custody account. This transaction is further discussed in Note 84 of Notes to Condensed Consolidated Financial Statements.

~~Interest payments:~~·
~~Interest payments associated~~                  On June 27, 2008, DPL entered into a $42 million settlement agreement with the ~~long-term debt described above.~~
~~Pension~~ODT resolving all outstanding audit issues and ~~postretirement payments:~~
~~As of September 30, 2007,~~ ~~DP&L~~ ~~had estimated future benefit payments as outlined~~appeals, including uncertain tax positions for tax years 1998 through 2006. The $42 million payment was made to the ODT in July 2008. This transaction is further discussed in Note 65 of Notes to Condensed Consolidated Financial Statements. ~~These estimated future benefit payments are projected through 2016.~~

~~Capital lease:~~·
~~As of September 30,~~                  At December 31, 2007, DP&L had ~~a capital lease~~contractual obligations relating to the installation of FGD equipment in the amount of $144 million. During the three months ended September 30, 2008, test operations of FGD equipment on Stuart station units 1 and 2 were completed. The open contractual obligations relating to the installation of FGD equipment was therefore reduced to $8.8 million at September 30, 2008. It is expected that ~~expires in September 2010.~~these open contractual obligations will be satisfied within the next twelve months.

30

~~Notes to the Condensed Consolidated Financial Statements (continued)~~Commercial Commitments

~~Operating leases:~~
AsWith the exception of ~~September 30, 2007,~~ ~~DPL~~ ~~and~~ ~~DP&L~~ ~~had several operating leases with various terms and expiration dates. Not included~~the transactions discussed in ~~this total is approximately $88,000 per year related to right-of-way agreements that are assumed to~~the preceding paragraph, there have been no ~~definite expiration dates.~~
~~Coal contracts:~~
~~DP&L~~ ~~has entered into various long-term coal contracts to supply portions~~other material changes, outside the ordinary course of ~~its coal requirements for its generating plants. Contract prices are subject to periodic adjustment and have features that limit price escalation in any given year.~~
~~Limestone contract:~~
~~DP&L~~ ~~has entered into a contract to supply limestone for its generating facilities.~~
~~Reserve for uncertain tax positions:~~
~~On January 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). There was no significant impact~~business, to our overall results of operations, cash flows or financial position. The total amount of unrecognized tax benefits as of the date of adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest. During 2007, we recorded an additional $1.6 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.9 million as of September 30, 2007. None of the amount of unrecognized tax benefits is due to uncertainty in the timing of deductibility.
~~Other contractual obligations:~~
~~As of September 30, 2007,~~ ~~DPL~~ ~~and~~ ~~DP&L~~ ~~had various other contractual obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.~~
We ~~enter into various~~ commercial commitments ~~which may affect the liquidity of~~as disclosed in our ~~operations. At September 30, 2007, these include:~~
~~Credit facilities:~~
~~In November 2006,~~ ~~DP&L~~ ~~replaced its previous $100 million revolving credit agreement with a $220 million five-year facility that expires~~Annual Report on ~~November 21, 2011.~~ ~~DP&L~~ ~~has the ability to increase the size of the facility by an additional $50 million at any time. At September 30, 2007, there were no outstanding borrowings under this facility.~~
~~Guarantees:~~
~~DP&L~~ ~~owns a 4.9% equity ownership interest in an electric generation company. As of September 30, 2007,~~ ~~DP&L~~ ~~could be responsible~~Form 10-K for the ~~repayment of 4.9%, or $34.1 million, of a $695 million debt obligation that matures in 2026.~~
~~In two separate transactions in November and~~fiscal year ended December ~~2006,~~ ~~DPL~~ agreed to be a guarantor of the obligations of its wholly-owned subsidiary, DPLE regarding the sale of the Darby Electric Peaking Station to American Electric Power and the sale of the Greenville Electric Peaking Station to Buckeye Electric Power, Inc. In both cases, ~~DPL~~ ~~has agreed to guarantee the obligations of DPLE over a multiple year period as follows:~~
$ in millions

2007

2008

2009

2010

Darby

$
30.6

$
23.0

$
15.3

$
7.7

Greenville

$
14.8

$
11.1

$
7.4

$
3.7

31,

~~Notes to the Condensed Consolidated Financial Statements (continued)~~ 2007.

Contingencies
In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. We believe the amounts provided in our ~~Condensed Consolidated Financial Statements,~~condensed 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, tax examinations, and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our ~~Condensed Consolidated Financial Statements.~~condensed consolidated financial statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of September 30, ~~2007,~~2008, cannot be reasonably determined.

~~Employees~~Coal Supply Agreement
~~Approximately 53% of our employees are under a collective bargaining agreement.~~

In February 2007, we filed a lawsuit against a coal supplier seeking damages incurred due to the supplier’s failure to supply approximately 1.5 million tons of coal to two jointly owned plants under a coal supply agreement, of which approximately 570 thousand tons is our share. The supplier has denied liability and trial is scheduled for April 2009. We are unable to determine the ultimate resolution of this matter at this time. In accordance with accounting for gain contingencies, we will not record an amount for this matter until it is resolved.
Environmental Matters
DPL, DP&L and our subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and ~~law.~~laws. In the normal course of business, we have investigatory and remedial activities underway at these facilities to comply, or to determine compliance, with such regulations. We have 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 two sites pursuant to state and federal laws. We record liabilities for probable estimated loss in accordance with ~~Statement of Financial Accounting Standards No.~~SFAS 5 ~~(SFAS 5), “Accounting for Contingencies”~~ as discussed in Note 1 of ~~the~~ Notes to Condensed Consolidated Financial Statements. We evaluate the potential liability related to probable losses quarterly and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material effect on our results of operations and financial position.
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On November 18, 2004, the State of New York and seven other states (the States) filed suit against the American Electric Power Corporation (AEP) and its various subsidiaries, alleging various Clean Air Act (CAA) violations at a number of AEP electric generating facilities, including Conesville Unit 4 (co-owned by AEP’s subsidiary Columbus Southern, Duke Energy’s subsidiary Cincinnati Gas & Electric, and us). The case was subsequently consolidated with similar cases brought by the federal EPA and other plaintiffs dating back to 1999, which cases also involved AEP electric generating facilities. On October 9, 2007, AEP filed before the federal district court in Ohio a consent decree executed by AEP, the EPA, the States and the other plaintiffs. The consent decree is a comprehensive and complex settlement of issues presented in the case. It affects us only with respect to Conesville Unit 4, which is made subject to requirements to install Selective Catalytic Reduction (SCR) units and Flue Gas Desulfurization (FGD) units by December 31, 2010. Because the co-owners had previously budgeted for such installation, this portion of the settlement does not materially change projected costs. AEP will also be required to operate its power plants, including Conesville Unit 4, to meet specified annual caps across all of the power plants covered by the consent decree. It is expected that AEP will be able to meet those annual cap requirements without materially affecting Conesville Unit 4’s operations beyond the requirements to install and operate SCR and FGD equipment. The consent decree also requires the payment by AEP of a $15 million civil penalty and to incur costs of $60 million in environmental damage mitigation projects. The share of such costs that may ultimately be assigned to Conesville Unit 4 and any further share assigned to us as a co-owner has not been determined but is not expected to be material. The court will provide an opportunity for public comment on the proposed consent decree. After public comment is received, the court will review the proposed consent decree and has the power to accept or reject it. ~~DPL~~Sierra Club ~~cannot predict when the court will issue a ruling or what that ruling may be.~~

In September 2004, the Sierra Club filed a lawsuit against DP&L and the other owners of the Stuart ~~Generating Station~~generating station in the United States District Court for the Southern District of Ohio for alleged violations of the ~~CAA~~Clean Air Act (CAA) and the ~~Station’s~~station’s operating permit. On August 7, 2008, a consent decree was filed in the United States District Court in full settlement of these CAA claims. Under the terms of the consent decree, DP&L and the other co-owners of the Stuart generating station agreed to (i) certain emission targets related to nitrogen oxides (NOx), sulfur dioxide (SO2) and particulate matter; (ii) make energy efficiency and renewable energy commitments that are conditioned on ~~behalf~~receiving Public Utilities Commission of ~~all co-owners,~~Ohio approval for the recovery of costs; (iii) forfeit 5,500 sulfur dioxide allowances; and (iv) provide funding to a third party non-profit organization to establish a solar water heater rebate program. DP&L and the other owners of the station also entered into an attorneys’ fee agreement to pay a portion of the Sierra Club’s attorney and expert witness fees. The parties to the lawsuit filed a joint motion on October 22, 2008, seeking an order by the United States District Court approving the consent decree with funding for the third party non-profit organization set at $300,000. On October 23, 2008, the United States District Court approved the consent decree. We have determined that the terms of the consent decree will not have a material impact on our overall results of operations, financial position, or cash flows.
Notices of Violation Involving Wholly-Owned Plants
In 2007, the Ohio EPA and the United States Environmental Protection Agency (USEPA) issued Notices of Violation (NOVs) to DP&L for alleged violations of the CAA at the O.H. Hutchings station. The NOVs alleged deficiencies relate to stack opacity and particulate emissions. DP&L has provided data regarding DP&L’s maintenance expenses and operating results to the Ohio EPA and the USEPA and to the DOJ, which is ~~leading~~providing legal support to the ~~defense~~USEPA. Discussions, monitored by Ohio EPA, are on-going between DP&L and the DOJ and USEPA regarding a possible resolution of this matter. A ~~sizable amount~~settlement of ~~discovery has taken place, expert reports have been filed~~this matter could include a combination of future commitments for compliance and civil penalties of an unspecified amount. At this time, DP&L is unable to determine the timing, costs, or method by ~~both parties~~which the issues may be resolved.
Notices of Violation Involving Co-Owned Plants
On March 13, 2008, Duke Energy Ohio Inc., the operator of the Zimmer generating station, received a NOV and ~~depositions~~a Finding of ~~experts are~~Violation from the USEPA alleging violations of the CAA, the Ohio State Implementation Program (SIP) and permits for the Station in areas including SO2, opacity, and increased heat input. DP&L is a co-owner of the Zimmer generating station and could be affected by the eventual resolution of this matter. Duke Energy Ohio Inc. is expected to ~~occur in~~act on behalf of itself and the ~~fourth quarter~~co-owners with respect to this matter. At this time, DP&L is unable to determine whether any additional actions will take place with respect to this matter.
Environmental Regulation and Litigation Related to Air Quality
On February 8, 2008, a three-judge panel of ~~2007. Dispositive motions are~~the Court of Appeals, D.C. Circuit, struck down the USEPA regulations that were designed to beestablish a trading program for mercury emissions, finding that the USEPA had not complied with statutory requirements applicable to “de-listing” mercury as a hazardous air pollutant and that a cap-and-trade approach was not authorized by law for “listed” hazardous air pollutants. The USEPA and a group representing utilities filed ~~in January~~a request for rehearing en banc (i.e., a rehearing before all the D.C. Circuit judges). That request was denied on May 20, 2008. ~~No trial date has been set.~~A petition for a writ of certiorari was filed with the U.S. Supreme Court on September 17, 2008. If the petition is not accepted by the Supreme Court, or if the Supreme Court grants certiorari and upholds the D.C. Circuit’s decision, USEPA will have to move forward to set Maximum Available Control Technology (MACT) standards for coal- and oil-fired electric generating units. It is likely the USEPA would take at least three years to gather new data to promulgate updated MACT standards and another three years for the regulations to become effective. At this time, DP&L is unable to determine the impact of ~~this lawsuit, if any,~~the promulgation of new MACT standards on its ~~overall results of operations,~~ financial position or ~~cash flows.~~results of operations.
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Table of Contents
On July 11, 2008, the United States Court of Appeals for the District of Columbia Circuit issued a decision that vacated the USEPA’s Clean Air Interstate Rule (CAIR) and its associated Federal Implementation Plan. This decision remands these issues back to the USEPA. The USEPA and a group representing utilities filed a request for a rehearing en banc on September 24, 2008. The USEPA issued CAIR on March 10, 2005 to regulate certain upwind states with respect to fine particulate matter and ozone. CAIR created interstate trading programs for annual NOx emission allowances and made modifications to an existing trading program for SO2 that were to take effect in 2010. The court’s decision, in part, invalidated the new NOx annual emission allowance trading program and the modifications to the SO2 emission trading program, and created uncertainty regarding future NOx and SO2 emission reduction requirements and their timing. CAIR remains in effect pending a mandate by the court implementing its decision. On October 21, 2008, the court requested that the litigation parties submit their views as to an appropriate court mandate.

In ~~February~~the fourth quarter of 2007, ~~Ohio’s Regional Air Pollution Control Agency (RAPCA), issued a Notice of Violation (NOV) to~~ DP&L began a program for selling excess emission allowances, including annual NOx emission allowances and SO2 emission allowances that were the subject of CAIR trading programs. In subsequent quarters, DP&L recognized gains from the sale of excess emission allowances to third parties. The court’s CAIR decision has affected the trading market for excess allowances and impacted DP&L’s program for selling additional excess allowances. Although this impact on the sale of excess allowances has not had, nor do we expect it to have, a material effect on our financial position, the overall impact of the court’s decision, and of the actions the USEPA or others will take in response to this decision, on DPL and DP&L is not fully known at this time and could have an adverse effect on us.
Environmental Regulation and Litigation Related to Water Quality
On July 9, 2004, the USEPA issued final rules pursuant to the CAA governing existing facilities that have cooling water intake structures. The rules require an assessment of impingement and/or entrainment of organisms as a result of cooling water withdrawal. A number of parties appealed the rules to the Federal Court of Appeals for the Second Circuit in New York and the court issued an opinion, on January 25, 2007, remanding several aspects of the rule to USEPA for reconsideration. Several parties petitioned the U.S. Supreme Court for review of the lower court decision. On April 14, 2008, the Supreme Court elected to review the lower court decision on the issue of whether USEPA can compare costs with ~~respect~~benefits in determining the best technology available for minimizing adverse environmental impact at cooling water intake structures. Briefs were submitted to ~~an allegedly failed performance test of one boiler~~the Court this summer and oral arguments will likely be held in November ~~2006~~or December 2008 with a potential decision rendered in 2009.
On February 5, 2008, we received a letter from Ohio EPA indicating that they intend to impose a compliance schedule, as part of the final National Pollutant Discharge Elimination System (NPDES) Permit, that requires us to implement one of two diffuser options for ~~particulate matter at~~ ~~DP&L’s~~ ~~Hutchings Generating Station.~~the discharge of water from the Stuart station into the Ohio River as identified in the thermal discharge study conducted pursuant to requirements contained in a previous permit. The two diffuser options identified by Ohio EPA could cost approximately $33 million based on preliminary cost estimates, of which our pro-rata ownership share would be approximately $11.5 million. On ~~June 29, 2007, the U.S. Environmental Protection Agency (US EPA) Region V, issued a NOV to~~ ~~DP&L~~ ~~with respect to the same performance test and with respect to earlier tests for particulates conducted in 1996 and 1998 for a different boiler at the same station. Representatives~~March 6, 2008, representatives from DP&L met with ~~officials from US~~Ohio EPA ~~Region V and RAPCA on July 24, 2007~~ to discuss the ~~referenced performance tests, subsequent performance tests,~~issue and ~~past~~reiterate DP&L’s position that diffusers were not cost-effective. We agreed to explore other potential solutions and ~~planned operations at the Station.~~ ~~DP&L~~ ~~is unable~~share findings with Ohio EPA. On June 6, 2008, we sent a letter to ~~predict at this time what further actions, if any, will~~Ohio EPA stating that we would be ~~taken by the US EPA or RAPCA with respect~~willing to ~~these NOVs.~~
32

~~Notes~~restrict public access to the ~~Condensed Consolidated Financial Statements (continued)~~thermal discharge during the warmest months of the year. On August 22, 2008, we received word from Ohio EPA that this option would be acceptable and would be incorporated in the NPDES permit.

~~10.~~11. Executive Litigation

On May 21, 2007, we settled ~~the~~ litigation with three of our former executives. As part of this settlement, ~~the three~~these former executives relinquished and dismissed all their claims, including those related to certain deferred compensation, RSUs, MVE incentives, stock options and legal fees. The RSUs and stock options relinquished and forfeited were 1.3 million and 3.6 million, respectively. Prior to the settlement date, DPLhad accrued obligations of approximately $64.2 million, of which DP&Lhad accrued obligations of approximately $60.3 million. Included in these amounts was approximately $3.1 million associated with the forfeiture of stock options. In exchange for our payment of $25 million, all of these claims were settled. The $25 million settlement was funded from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation.

As a result of this settlement, ~~during the second quarter ended June 30, 2007,~~ DPLrealized a net pre-tax gain in continuing and discontinued operations of approximately $31.0 million and ~~$8.2~~$8.1 million, respectively. The net gain iswas comprised of the reversal of the $64.2 million of accrued obligations less the $25 million settlement. The obligations related to the discontinued operations were associated with the management of DPL’s financial asset portfolio, which was conducted in ~~our MVE subsidiary.~~MVE. The MVE operations were discontinued in 2005 with the sale of the financial asset portfolio. The $25 million settlement expense was allocated between continuing and discontinued operations based on the proportionate share of continuing and discontinued obligations. ~~The following table outlines the components of~~ ~~DPL’s~~ ~~net pre-tax gain for continuing and discontinued operations:~~

Continuing operations:

Reversal of accrued obligations

$
50.8

Allocated settlement expense

(19.8
)
Net gain from continuing operations

$
31.0

Discontinued operations:

Reversal of accrued obligations

$
13.4

Allocated settlement expense

(5.2
)
Net gain from discontinued operations

$
8.2

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~~As a result of this settlement during the second quarter ended June 30, 2007,~~Similarly, DP&Lrealized a net pre-tax gain in continuing operations of approximately $35.3 million. Accrued obligations associated with the former executives’ litigation were recorded by DP&Lsince the obligations were associated with our non-qualified benefit plans. DP&Lhad no ownership of DPL’s discontinued financial asset portfolio ~~business,~~business; therefore, these liabilities were reversed and DP&L’snet pre-tax gain was recorded within continuing operations. ~~The following table outlines the components of~~ ~~DP&L’s~~ ~~net gain:~~

~~Continuing operations:~~
~~Reversal of accrued obligations~~
~~$60.3~~
~~Allocated settlement expense~~
~~(25.0~~
)
~~Net gain from continuing operations~~
~~$35.3~~
~~The $25 million settlement was funded from the sale of financial assets held in~~ ~~DP&L’s~~ ~~Master Trust Plan for deferred compensation.~~ As part of this transaction, ~~during the second quarter ended June 30, 2007,~~ DPL and DP&Lrecorded a $3.2 million realized gain which iswas reflected in investment income.
~~11. Insurance Recovery Claim~~
~~On April 30, 2007,~~ ~~DP&L~~ executed a settlement agreement for $14.5 million with one of our insurers, Associated Electric & Gas Insurance Services (AEGIS), under a fiduciary liability policy to recoup a portion of legal fees associated with our litigation against three former executives. This was recorded as a reduction to operation and maintenance expense during the ~~second quarter~~three months ended June 30, 2007.

~~On May 16, 2007,~~ ~~DPL~~ ~~and~~ ~~DP&L~~ ~~notified one of our insurers, Energy Insurance Mutual Limited, under an umbrella fiduciary liability policy, of our intent to pursue a claim for additional legal fees that~~ ~~DPL~~ ~~and~~ ~~DP&L~~ ~~incurred in defending claims made by the three former executives.~~
33

~~Notes to the Condensed Consolidated Financial Statements (continued)~~12. Common Shareholders’ Equity

In February 2000, ~~12. Regulatory Matters~~DPL
~~We apply~~ entered into a series of recapitalization transactions which included the ~~provisions~~issuance of ~~Statement~~31.6 million warrants for an aggregate purchase price of ~~Financial Accounting Standards No. 71, “Accounting~~$50 million. The warrants are exercisable, in whole or in part, for common shares at any time during the ~~Effects~~twelve-year period commencing on March 13, 2000. Each warrant is exercisable for one common share, subject to anti-dilution adjustments (e.g., stock split, stock dividend) at an exercise price of Certain Types of Regulation,” (SFAS 71) to our regulated operations. This accounting standard defines regulatory assets/liabilities as the deferral of incurred costs/benefits expected to be reflected in future customer rates.
Regulatory liabilities are reflected on the Condensed Consolidated Balance Sheet under the caption entitled “Other Deferred Credits”. Regulatory assets and liabilities on the Condensed Consolidated Balance Sheet include:
$ in millions

Type of
Recovery (a)

Amortization
Through

At
September 30,
2007

At
December 31,
2006

Regulatory Assets:

Deferred recoverable income taxes

C/B

Ongoing

$
51.9

$
53.1

Pension and postretirement benefits

C

Ongoing

44.5

47.1

Electric Choice system costs

F

2010

11.0

13.5

Regional transmission organization costs

C

2014

10.3

11.4

Deferred storm costs

C

2008

2.7

5.4

PJM administrative costs

F

2009

3.4

4.6

Power plant emission fees

C

Ongoing

4.4

4.5

Rate case expenses

F

2010

0.8

1.0

Retail settlement system costs

3.1

3.1

PJM integration costs

F

2015

1.1

1.4

Other costs

3.8

3.5

Total regulatory assets

$
137.0

$
148.6

Regulatory Liabilities:

Asset retirement obligations - regulated property

$
90.7

$
86.3

Postretirement benefits

7.1

7.6

SECA net revenue subject to refund

20.4

18.7

Total regulatory liabilities

$
118.2

$
112.6

~~(a)~~~~F — Recovery of incurred costs plus rate of return.~~
~~C — Recovery of incurred costs only.~~
~~B — Balance has an offsetting liability resulting in no impact on rate base.~~
~~Regulatory Assets:~~
We evaluate our regulatory assets each period and believe recovery of these assets is probable. We have received or requested a return on certain regulatory assets for which we are currently recovering or seeking recovery through rates.
~~Deferred recoverable income taxes~~ represent deferred income tax assets recognized from the normalization of flow-through items as the result of amounts previously provided to customers. Since currently existing temporary differences between the financial statements and the related tax basis of assets will reverse in subsequent periods, deferred recoverable income taxes are amortized.$21.00 per common share.

~~Pension and postretirement benefits~~ represent the unfunded benefit obligation related to the transmission and distribution areas of our electric business. We have historically recorded these costs on the accrual basis, and these costs have been historically recovered through rates. This factor, combined with the historical precedents from the Public Utilities Commission of Ohio (PUCO) and the Federal Energy Regulatory Commission (FERC), makes future rate recovery of these costs probable.
~~Electric Choice system costs~~ represent costs incurred to modify the customer billing system for unbundled rates and electric choice bills relative to other generation suppliers and information reports provided to the state administrator of the low-income electric program. In February 2005, the PUCO approved a stipulation allowing us to recover certain costs incurred for modifications to our billing system from all customers in our service territory. On March 1, 2006, the PUCO issued an order that allowed us to begin collecting this rider immediately. We expect to recover all costs over five years.
~~Regional transmission organization costs~~ represent costs incurred to join a Regional Transmission Organization (RTO) that controls the receipts and delivery of bulk power within the service area. These costs are being amortized over a 10-year period that commenced in October 2004.
34

~~Notes to the Condensed Consolidated Financial Statements (continued)~~
~~Deferred storm costs~~ ~~include costs incurred by us to repair damage from the~~During December 2004 and January 2005, ~~ice storms.~~these warrants were acquired by Lehman Brothers Inc. (Lehman) who, in turn, subsequently transferred 19.6 million of these warrants to unaffiliated third parties. On ~~July~~September 18, 2008, Lehman exercised the 12 ~~2006, the PUCO approved our tariff as proposed and we began recovering these deferred costs over a two-year period beginning August 1, 2006.~~
~~PJM administrative costs~~ contain the administrative fees billed to us by PJM Interconnection, L.L.C. (PJM) as a member of PJM. Pursuant to a PUCO order issued on January 25, 2006, these deferred costs will be recovered over a three-year period from retail ratepayers beginning February 2006.
~~Power plant emission fees~~ ~~represent costs paid to the State of Ohio for environmental monitoring~~million warrants, that ~~are or will be recovered from customers over various periods~~it had retained, under a ~~PUCO rate rider.~~
~~Rate case expenses~~ ~~represent costs incurred~~cashless exercise transaction resulting in ~~connection with~~ the ~~Rate Stabilization Surcharge that was approved by the PUCO and implemented in January 2006. These costs are being amortized over a five-year period.~~
~~Retail settlement system costs~~ represent costs to implement a retail settlement system that reconciles the amount of energy a competitive retail electric service (CRES) supplier delivers to its customers and what its customers actually use. Based on case precedent in other utilities’ cases, the cost of this system is recoverable through our next transmission rate case that will be filed at the FERC. The timing of this case is uncertain at this time.
~~PJM integration costs~~ ~~include infrastructure costs and other related expenses incurred by PJM and reimbursed~~issuance by ~~DP&L~~DPL ~~to integrate us into the RTO. Pursuant to a FERC order, the costs are being recovered over a 10-year period beginning May 2005~~of 2.3 million shares of common stock. Such shares were issued from ~~wholesale customers within PJM.~~
~~Other costs~~ ~~primarily include consumer education advertising regarding electric deregulation and will be recovered over various periods.~~
~~Regulatory Liabilities:~~
~~Asset retirement obligations - regulated property~~ ~~reflect an estimate of amounts recovered in rates that are expected to be expended to remove existing transmission and distribution property from service upon retirement.~~
~~Postretirement benefits~~ reflect a regulatory liability that was recorded for the portion of the unrealized gain on our postretirement trust assets related to the transmission and distribution areas of our electric business.   We have historically recorded these transactions on an accrual basis and these costs have historically been recovered through rates. This factor, combined with the historical precedents from the PUCO and the FERC, make it probable that these amounts will be reflected in future rates.
~~SECA (Seams Elimination Cost Adjustment) net revenue subject to refund~~ represents the deferral of net SECA revenue accrued in 2005 and 2006. SECA revenue and expenses represent FERC ordered transitional payments to replace the through-and-out transmission rates that were eliminated within the PJM/Midwest Independent Transmission System Operator, Inc. (MISO) region. A hearing was held in early 2006 to determine the amount of these transitional payments. A hearing examiner’s recommendation of August 2006 has been appealed by multiple parties including ~~DP&L~~~~. To date,~~treasury stock. Lehman no ~~ruling by the FERC has been issued. We received and paid these transitional payments from May 2005 through March 2006.~~
longer holds any ~~13.~~~~Ownership of Facilities~~
~~DP&L~~ and two other Ohio utilities have undivided ownership interests in seven electric generating facilities and numerous transmission facilities. Certain expenses, primarily fuel costs for the generating units, are allocated to the owners based on their energy usage. The remaining expenses, as well as investments in fuel inventory, plant materials, operating supplies and capital additions, are allocated to the owners in accordance with their respective ownership interests. As of September 30, 2007, ~~DP&L~~DPL ~~had $334.0 million of construction work in progress at such facilities.~~warrants.
35

~~Notes to the Condensed Consolidated Financial Statements (continued)~~
~~DP&L’s~~ ~~undivided ownership interest in such jointly owned facilities at September 30, 2007 is as follows:~~

DP&L Share

DP&L Investment

Ownership
(%)

Production
Capacity
(MW)

Gross Plant
in Service
($ in millions)

Accumulated
Depreciation
($ in millions)

Construction Work
in Progress
($ in millions)

Production Units:

Beckjord Unit 6

50.0

207

63

53

7

Conesville Unit 4

16.5

129

34

27

24

East Bend Station

31.0

186

199

128

9

Killen Station

67.0

424

568

249

12

Miami Fort Units 7&8

36.0

360

270

103

70

Stuart Station

35.0

839

392

205

201

Zimmer Station

28.1

365

1,055

568

11

Transmission (at varying percentages)

90

50

0

DPL’s and DP&L’s share of operating costs associated with the jointly-owned generating facilities are included within the corresponding line on the Condensed Consolidated Statement of Results of Operations and our share of the investment is included in the Condensed Consolidated Balance Sheet.

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

This report includes the combined filing of DPL Inc. (DPL) and The Dayton Power and Light Company (DP&L). DP&L is the principal subsidiary of DPL providing approximately 99% of DPL’s total consolidated revenue and approximately 95% of DPL’s total consolidated asset base. Throughout this report the terms “we,” “us,” “our,” and “ours” are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in this section.
Certain statements contained in this ~~report~~discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Matters discussed in this report that 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 future economic performance, taking into account the information currently available to management. These statements are not statements of historical fact and are typically identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” ~~“will”~~“will,” and similar expressions. 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 ~~DPL’s~~our control, including but not limited to: abnormal or severe weather and catastrophic weather-related damage; unusual maintenance or repair requirements; changes in fuel costs and purchased power, coal, environmental emissions, natural gas, oil, and other commodity prices; volatility and changes in markets for electricity and other energy-related commodities; performance of our suppliers and other counterparties; increased competition and deregulation in the electric utility industry; increased competition in the retail generation market; changes in interest rates; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, emission levels and regulations, rate structures or tax laws; changes in federal and/or state environmental laws and regulations to which DPL and its subsidiaries are subject; the development of Regional Transmission Organizations (RTOs), including PJM Interconnection, L.L.C. (PJM) to which DPL’s operating subsidiary (DP&L) has given control of its transmission functions; changes in ~~DPL’s~~our purchasing processes, pricing, delays, employee, contractor, and supplier performance and availability; significant delays associated with large construction projects; growth in ~~DPL’s~~our service territory and changes in demand and demographic patterns; changes in accounting rules and the effect of accounting pronouncements issued periodically by accounting standard-setting bodies; financial market conditions; the outcomes of litigation and regulatory investigations, proceedings or inquiries; general economic conditions; and the risks and other factors discussed in DPL’s and DP&L’s filings with the Securities and Exchange Commission.

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Table of Contents
Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based.

36The following discussion should be read in conjunction with the accompanying unaudited financial statements and related footnotes included in Part 1 – Financial Information.

BUSINESS OVERVIEW

~~This report includes~~DPL is a diversified regional energy company organized in 1985 under the ~~combined filing~~laws of Ohio. Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio 45432 – telephone (937) 224-6000.
DPL’s principal subsidiary is DP&L. DP&L is a public utility incorporated in 1911 under the laws of Ohio. DP&L sells electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. DP&L also sells electricity to DPL Energy Resources (DPLER), an affiliate, to satisfy the electric requirements of its retail customers. Electricity for DP&L’s 24 county service area is primarily generated at eight coal-fired power plants and is distributed to more than 513,000 retail customers. Principal industries served include automotive, food processing, paper, plastic manufacturing, and defense.
DP&L’s sales reflect the general economic conditions and seasonal weather patterns of the area. DP&L sells excess energy and capacity into the wholesale market.
DPL’s significant subsidiaries (all of which are wholly owned) include DPL Energy LLC (DPLE), which engages in the operation of peaking generating facilities and sells power in wholesale markets; DPLER, which sells retail electric energy under contract to major industrial and commercial customers in West Central Ohio; and Miami Valley Insurance Company (MVIC), our captive insurance company that provides insurance sources to us and our subsidiaries. DP&L has one significant subsidiary, DPL Finance Company, Inc., which is wholly owned and provides financing to DPL ~~Inc. (DPL)~~, DP&L and other affiliated companies.
DPL and DP&L conduct their principal business in one business segment - Electric.
As we look forward, there are a number of issues that we believe may have a significant impact on our business and operations described above. The ~~Dayton Power~~following issues mentioned below are not meant to be exhaustive but to provide insight to matters that have or are likely to have an effect on our industry and ~~Light Company~~business:
·Clean Air Interstate Rule (CAIR) decision by the U.S. Court of Appeals for the District of Columbia Circuit
On July 11, 2008, the United States Court of Appeals for the District of Columbia Circuit issued a decision that vacated the United States Environmental Protection Agency’s (USEPA) CAIR and its associated Federal Implementation Plan. This decision remands these issues back to the USEPA. The USEPA issued CAIR on March 10, 2005 to regulate certain upwind states with respect to fine particulate matter and ozone. CAIR created interstate trading programs for annual nitrogen oxide (NOx) emission allowances and made modifications to an existing trading program for sulfur dioxide (SO2) that were to take effect in 2010. The court’s decision, in part, invalidated the new NOx annual emission allowance trading program and the modifications to the SO2 emission trading program, and created uncertainty regarding future NOx and SO2 emission reduction requirements and their timing. CAIR remains in effect pending a mandate by the court implementing its decision. On October 21, 2008, the court requested that the litigation parties submit their views as to an appropriate court mandate.
In the fourth quarter of 2007, DP&L began a program for selling excess emission allowances, including annual NOx emission allowances and SO2 emission allowances that were the subject of CAIR trading programs. In subsequent quarters, ~~(DP&L).~~ DP&Lis recognized gains from the ~~principal subsidiary~~sale of excess emission allowances to third parties. The court’s CAIR decision has affected the trading market for excess allowances and impacted ~~DPL~~ DP&L~~providing approximately 99%~~’s program for selling additional excess allowances. Although this impact on the sale of ~~DPL’s~~ ~~total consolidated revenue~~excess allowances has not had, nor do we expect it to have, a material effect on our financial position, the overall impact of the court’s decision, and ~~approximately 93%~~ of ~~DPL’s~~ ~~total consolidated asset base. Throughout~~the actions the USEPA or others will take in response to this ~~report, the terms we, us, our and ours are used to refer to both~~decision, on DPL and DP&L~~, respectively~~ is not fully known at this time and ~~altogether, unless~~could have an adverse effect on us.
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·Ohio Senate Bill 221
On May 1, 2008, substitute Senate Bill 221, an Ohio electric energy bill, was signed by the ~~context indicates otherwise. Discussions or areas~~Governor and went into effect July 31, 2008. In compliance with Senate Bill 221, DP&L filed its electric security plan on October 10, 2008. The bill and DP&L’s electric security plan filing are further discussed in the UPDATES / OTHER MATTERS section below. While the overall financial impact of this ~~report that apply only to~~ ~~DPL~~ or ~~DP&L~~ ~~will clearly be noted in the section. Historically,~~new legislation on DPL and DP&L will not be known for some time, it may materially impact our financial condition.
·Greenhouse Gases
The rules issued by the USEPA and Ohio Environmental Protection Agency (Ohio EPA) that require substantial reductions in SO2, NOX, and mercury emissions may impact our business and operations. We are installing (and have ~~filed separate SEC filings.~~installed) emission control technology and are taking other measures to comply with required reductions.
In addition to the requirements related to emissions of SO2, NOX and mercury noted above, there is a growing concern nationally and internationally about global climate change and the contribution of emissions of greenhouse gases, including most significantly, carbon dioxide (CO2).  This concern has led to increased interest in legislation at the federal level and actions at the state level as well as litigation relating to greenhouse gas emissions, including a recent U.S. Supreme Court decision holding that the USEPA has the authority to regulate CO2 emissions from motor vehicles under the Clean Air Act (CAA).  Increased pressure for carbon dioxide emissions reduction is also coming from investor organizations and the international community. If legislation or regulations are passed at the federal or state levels imposing mandatory reductions of CO2 and other greenhouse gases on generation facilities, the cost of achieving such reductions could be material to us.
·      ~~DPL~~ Fuel and Commodity Prices
Recently, the coal market has experienced significant price volatility. We are now in a global market for coal in which our domestic price is increasingly affected by international supply disruptions and demand balance. Coal exports from the U.S. have increased significantly in recent years. In addition, domestic issues like government-imposed direct costs and permitting issues are affecting mining costs and supply availability. Our approach is to hedge the fuel costs for our anticipated electric sales. For the years ended December 31, 2009 and 2010, we have hedged our coal requirements with coal mine operators and financial institutions to meet our committed sales. We may not be able to hedge the entire exposure of our operations from commodity price volatility. To the extent our suppliers do not meet their contractual commitments or we are not hedged against price volatility, our results of operations, financial position, or cash flows could be materially affected. As part of DP&L’s electric security plan filing, the Company is requesting regulatory authority to defer fuel and fuel related costs that exceed the amount that is in current rates. A final regulatory decision on our plan is expected in the first quarter of 2009.
·Credit Market
The current global credit crisis may adversely affect our business and financial results. During 2007, higher interest rates, falling property prices, and a significant increase in the number of sub-prime mortgages originated in 2005 and 2006 contributed to dramatic increases in mortgage delinquencies and defaults in 2007 and the nine months ended September 30, 2008. The anticipated future delinquencies among high-risk, or sub-prime, borrowers in the United States is expected to continue in the foreseeable future. The widespread dispersion of credit risk related to mortgage delinquencies and defaults through the securitization of mortgage-backed securities (MBS), sales of collateralized debt obligations (CDOs) and the creation of structured investment vehicles (SIVs), as well as the unclear impact on large banks of MBS, CDOs, and SIVs, caused banks to reduce their loans to each other or make them at higher interest rates. Liquidity and credit concerns were further exacerbated in September 2008 with Lehman Brothers’ bankruptcy filing, the sale of Merrill Lynch to Bank of America, the U.S. government conservatorship of Fannie Mae and Freddie Mac, and the U.S. government loan to AIG. Because of this, the ability of corporations to obtain funds through the issuance of debt was negatively impacted. We issue debt to cover the costs of certain of our operations and expenditures and the inability to issue such debt on reasonable terms, or at all, could negatively affect our business and financial results.
Despite the unprecedented volatility in the capital and credit markets, we believe that our liquidity position remains strong and is further strengthened by the completion of our major construction projects during 2008. We expect our existing sources of liquidity to remain sufficient to meet our anticipated obligations and those of our subsidiaries, and currently do not anticipate any need for significant changes in our operational plans.
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·Storm Costs
On September 14, 2008, the Midwest region was severely affected by hurricane-force winds which resulted in significant property damage and disruptions to the supply of electric energy to retail customers. Through September 30, 2008, we deferred approximately $7.4 million of the costs associated with the storm restoration. We plan to file a request for an accounting order seeking approval to defer these costs.
·Collective Bargaining Agreement
During the three months ended September 30, 2008, we began negotiations with employees covered under our collective bargaining agreement which is set to expire on October 31, 2008. On October 24, 2008, we reached a tentative agreement with these employees on a new three year labor agreement. This tentative agreement is subject to a ratification vote by the covered employees anticipated to occur during the fourth quarter of 2008. The current agreement is expected to expire before the new agreement is finalized. Though we expect the tentative agreement to be ratified and that our employees will continue to work during the ratification process, it is possible that this tentative agreement will not be ratified which could result in labor disruptions affecting some or all of our operations. We have contingency plans in place to mitigate the impact that any labor stoppages could have on our customers. A lengthy strike by our employees could have an adverse effect on our operations and financial condition.
UPDATES / OTHER MATTERS
Competition and Regulation Updates
Ohio Matters Updates
Ohio Retail Rates
On May 1, 2008, substitute Senate Bill 221 (SB 221), an Ohio electric energy bill, was signed by the Governor and went into effect July 31, 2008. This new law states that all Ohio distribution utilities must file either an electric security plan or a market rate option to be in effect January 1, 2009. Under the market rate option, a periodic competitive bid process will set the retail generation price after the utility demonstrates that it can meet certain market criteria and bid requirements set out in the bill. Also, under this option, utilities that still own generation in the state are required to phase in the market rate option over a period of not less than five years. An electric security plan may allow for adjustments to the standard offer for costs associated with environmental compliance; fuel and purchased power; construction of new or investment in specified generating facilities; the provision of standby and default service, operating, maintenance, or other costs including taxes. As part of its electric security plan, the utility is permitted to file an infrastructure improvement plan that will specify the initiatives the utility will take to rebuild, upgrade, or replace its electric distribution system, including cost recovery mechanisms. Both the market rate option and electric security plan option involve a “substantially excessive earnings” test based on the earnings of other companies with similar business and financial risks. The PUCO issued three sets of rules related to implementation of the new law. The first set of rules was issued in final form on September 17, 2008 and addressed topics such as the information that must be included in an electric security plan as well as a market rate option, the earnings test requirements, corporate separation revisions, and rules relating to the recovery of transmission and ancillary service costs.
This new law contains annual targets relating to advanced energy portfolio standards, renewable energy, demand reduction, and energy efficiency standards.�� The standards require that, by the year 2025, 25% of the total number of kilowatt hours of electricity sold by the utility to retail electric consumers must come from alternative energy resources, which include “advanced energy resources” such as distributed generation, clean coal, advanced nuclear, energy efficiency, and fuel cell technology; and “renewable energy resources” such as solar, hydro, wind, geothermal, and biomass. At least half of the 25% must be generated from renewable energy resources, including 0.5% from solar energy. In addition, the proposed bill requires annual energy efficiency reductions that reach 22.3% by 2025 and peak demand reduction requirements that reach 7.75% by 2018. The advanced energy portfolio and energy efficiency standards begin in 2009 with increases in requirement percentages each year. If any targets are not met, compliance penalties will apply. Rules relating to implementation of these targets were issued in draft form on August 20, 2008. DP&L provided comments on the rules as did many other interested parties. While the overall financial impact of this bill will not be known for some time, implementation of the bill and compliance with its requirements could have a material impact on our financial condition.
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In compliance with SB 221, DP&L ~~now file combined SEC reports~~filed its electric security plan at the PUCO on October 10, 2008. This plan contains three parts: 1) a standard offer plan, 2) a customer conservation and energy management plan, and 3) an ~~interim~~alternative energy plan. The standard offer plan states that DP&L intends to maintain its current rate plan through December 31, 2010, and ~~annual basis.~~addresses compliance issues related to the PUCO rules. The plan also contains revisions to DP&L’s corporate separation plan that would allow the utility to provide competitive, behind the meter services, and seeks PUCO approval to defer fuel, purchased power, and fuel-related costs that exceed the amount that is currently being recovered in rates. The energy conservation and demand management part of the plan seeks PUCO approval of a suite of energy efficiency and demand response programs, as well as a comprehensive advanced meter infrastructure and smart grid deployment initiative, designed to provide customers with programs, tools, and information to better control their energy usage. The alternative energy part of the plan seeks recovery of costs associated with complying with the alternative energy targets contained in SB 221 and associated administrative costs. The PUCO has the authority to approve or modify DPL’s electric security plan request. The PUCO has not yet set a hearing schedule for this proceeding. A final decision from the PUCO regarding DP&L’s electric security plan is expected in the first quarter of 2009.

~~DPL~~Federal Matters Updates ~~is a regional electric energy and utility company and through its principal subsidiary,~~ ~~DP&L~~~~, is primarily engaged in the generation, transmission and distribution of electricity in West Central Ohio.~~ ~~DPL~~ ~~and~~ ~~DP&L~~ strive to achieve disciplined growth in energy margins while limiting volatility in both cash flows and earnings and to achieve stable, long-term growth through efficient operations and strong customer and regulatory relations. More specifically, ~~DPL~~ ~~and~~ ~~DP&L’s~~ strategy is to match energy supply with load or customer demand; to maximize profits while effectively managing exposure to movements in energy and fuel prices and to utilize the transmission and distribution assets that transfer electricity at the most efficient cost, while maintaining the highest level of customer service and reliability.
We operate and manage generation assets and are exposed to a number of risks through this process. These risks include, but are not limited to, electricity wholesale price risk, fuel supply and price risk and power plant performance. We attempt to manage these risks through various means. For instance, we operate a portfolio of wholly-owned and jointly-owned generation assets that is diversified as to fuel source, cost structure and operating characteristics. We are focused on the operating efficiency of these power plants and maintaining their availability.
~~Like other electric utilities and energy marketers,~~ ~~DP&L~~ ~~and DPL Energy, LLC (DPLE), one of~~ ~~DPL’s~~ ~~wholly-owned subsidiaries, may sell or purchase electric products on the wholesale market.~~ ~~DP&L~~ ~~and DPLE compete with other generators, power marketers, privately and municipally-owned electric utilities and rural electric cooperatives when selling electricity. The ability of~~ ~~DP&L~~ ~~and DPLE to sell this electricity will depend on how~~ ~~DP&L’s~~ ~~and DPLE’s price, terms and conditions compare to those of other suppliers.~~
We~~operate and manage~~transmission and distribution assets in a rate-regulated environment. Accordingly, this subjects us to regulatory risk in terms of the costs that we may recover and the investment returns that we may collect in customer rates. We are focused on delivering electricity and maintaining high standards of customer service and reliability in a cost-effective manner.
We operate in a regulated and deregulated environment. The electric utility industry has historically operated in a regulated environment. However, in recent years, there have been a number of federal and state regulatory and legislative decisions aimed at promoting competition and providing customer choice. Market participants have therefore created new business models to exploit opportunities. The marketplace is now comprised of independent power producers, energy marketers and traders, energy merchants, transmission and distribution providers and retail energy suppliers. There have also been new market entrants and activity among the traditional participants such as: mergers, acquisitions, asset sales and spin-offs of lines of business. In addition, transmission systems are being operated by Regional Transmission Organizations (RTOs).
As part of Ohio’s electric deregulation law, all of the state’s investor-owned utilities are required to join a RTO. The role of the RTO is to administer an electric marketplace and ensure reliability of the transmission grid. In October 2004, ~~DP&L~~ successfully integrated its 1,000 miles of high-voltage transmission into the PJM Interconnection, L.L.C. (PJM) RTO. PJM ensures the reliability of the high-voltage electric power system serving 51 million people in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. PJM coordinates and directs the operation of the region’s transmission grid; administers the world’s largest competitive wholesale electricity market; and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.
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As a member of PJM, DP&L is subject to charges and costs associated with PJM operations as approved by the Federal Energy Regulatory Commission (FERC). ~~As discussed below,~~FERC Orders issued in ~~connection with~~2007, regarding the ~~recovery~~allocation of ~~such~~ costs of large transmission facilities within PJM, could result in ~~retail rates,~~additional costs being allocated to DP&L incurs significant administrative charges. Additionally, PJM’s role in administering the regional transmission grid and planning regional transmission expansion improvements results in periodic proposals by PJM and other stakeholder members of PJM to the FERC to allocate and charge costs associated with the transmission system to PJM’s members, including ~~DP&L~~. ~~DP&L~~ ~~and other interested parties have the right to intervene and offer counter-proposals.~~
~~UPDATES / OTHER MATTERS~~
~~Impact of AEP Settlement~~
On November 18, 2004, the State of New York and seven other states (the States) filed suit against the American Electric Power Corporation (AEP) and various subsidiaries, alleging various Clean Air Act (CAA) violations at a number of AEP electric generating facilities, including Conesville Unit 4 (co-owned by AEP’s subsidiary Columbus Southern, Duke Energy’s subsidiary Cincinnati Gas & Electric, and us). The case was subsequently consolidated with similar cases brought by the federal EPA and other plaintiffs dating back to 1999, which cases also involved AEP electric generating facilities. On October 9, 2007, AEP filed before the federal district court in Ohio a consent decree executed by AEP, the EPA, the States and the other plaintiffs. The consent decree is a comprehensive and complex settlement of issues presented in the case. It affects us only with respect to Conesville Unit 4, which is made subject to requirements to install Selective Catalytic Reduction (SCR) units and Flue Gas Desulfurization (FGD) units by December 31, 2010. Because the co-owners had previously budgeted for such installation, this portion of the settlement does not materially change projected costs. AEP will also be required to operate its power plants, including Conesville Unit 4, to meet specified annual caps across all of the power plants covered by the consent degree. It is expected that AEP will be able to meet those annual cap requirements without materially affecting Conesville Unit 4’s operations beyond the requirements to install and operate SCR and FGD equipment. The consent decree also requires the payment by AEP of a $15 million civil penalty and to incur costs of $60 million in environmental damage mitigation projects. The share of such costs that may ultimately be assigned to Conesville Unit 4 and any further share assigned to us as a co-owner has not been determined but is not expected to be material. The court will provide an opportunity for public comment on the proposed consent decree. After public comment is received, the court will review the proposed consent decree and has the power to accept or reject it. DPL cannot predict when the court will issue a ruling or what that ruling may be.
~~Depreciation Expense and Study Update~~
In July 2007, DPL completed a depreciation rate study for non-regulated generation property based on its property, plant and equipment balances as of December 31, 2005, with adjustments for subsequent scrubber additions. The results of the depreciation study concluded that ~~DPL’s~~ ~~depreciation rates should be reduced due to asset lives being extended beyond previously estimated lives.~~ ~~DPL~~ adjusted the depreciation rates for its non-regulated generation property, effective August 1, 2007, reducing depreciation expense. For the three months ended September 30, 2007, the reduction in depreciation expense increased income from continuing operations by $3.8 million, increased net income by approximately $2.4 million and increased earnings per share (EPS) by approximately $0.02 per share. For the period from August 1, 2007 to December 31, 2007, the reduction in depreciation expense will increase income from continuing operations of approximately ~~$9.5~~$12 million ~~increase net income~~or more annually by ~~approximately $5.9 million and increase EPS by approximately $0.06 per share.~~
~~Updates on Competition and Regulation~~
~~Ohio Matters~~
~~Since January 2001,~~ ~~DP&L’s~~ ~~electric customers have been permitted to choose their retail electric generation supplier.~~~~DP&L~~ ~~continues to have the exclusive right to provide delivery service in its state certified territory. The Public Utilities Commission of Ohio (PUCO) maintains jurisdiction over~~ ~~DP&L’s~~ delivery of electricity, the standard offer supply service that customers receive if they do not choose an alternative retail electricity supplier and other rates and charges associated with the provision of retail electric service.
~~As of September 30, 2007, four unaffiliated marketers were registered as Competitive Retail Electric Service (CRES) providers in~~ ~~DP&L’s~~ service territory. While there has been some customer switching to date, it represented less than approximately 0.20 percent of sales through the third quarter ending September 30, 2007. DPL Energy Resources, Inc. (DPLER), an affiliated company, is also a registered CRES provider and accounted for nearly all of the total kWh supplied by CRES providers within ~~DP&L’s~~ ~~service territory in 2006 and 2007. In addition, several communities in~~ ~~DP&L’s~~ ~~service area have passed ordinances allowing the communities to~~
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~~become government aggregators for the purpose of offering alternative electric generation supplies to their citizens. To date, none of these communities have aggregated their generation load.~~
~~DP&L~~ agreed to implement a Voluntary Enrollment Program (VEP) that would provide customers with an option to choose a competitive supplier to provide their retail generation service should switching not reach 20% in each customer class. The 20% threshold has never been reached. Customers who elected to participate in the program have been grouped together and collectively bid out to CRES providers. Four rounds of bidding were conducted for the 2007 program resulting in no bids being received. ~~DP&L~~ ~~has completed its obligations under this residential program.~~
~~On April 4, 2005,~~2012. DP&L filed a ~~request at~~notice of appeal to the ~~PUCO to implement a new rate stabilization surcharge (RSS) effective January 1, 2006 to recover cost increases associated~~U.S. Court of Appeals, D.C. Circuit on March 18, 2008. The appeal has been consolidated with ~~environmental capital, related operations and maintenance costs and fuel expenses.~~ ~~DP&L~~ ~~entered into a settlement agreement that extended~~ ~~DP&L’s~~ ~~rate stabilization period through December 31, 2010 and allowed for recovery~~other appeals taken by other interested parties of ~~certain fuel and environmental investment costs. The PUCO adopted~~ the ~~settlement, but ruled that the environmental rider will be by-passable by all customers who take service from alternate generation suppliers. Applications for rehearing were denied~~same FERC Orders and the case was appealed to the Ohio Supreme Court by the Ohio Consumers’ Counsel. On September 5, 2007, the Ohio Supreme Court affirmed the PUCO’s approval of the settlement agreement but remanded one aspect of the order, that the RSS tariff should be part of the Company’s generation tariffs instead of distribution tariffs. The Company will file to modify its tariffs accordingly and does not believe this tariff change will impact its future revenues.
On September 25, 2007, Senate Bill 221 was introduced in the Ohio Legislature. The bill codifies, in draft form, the governor’s proposed energy policy. As currently drafted, the bill states that the standard service offer currently in effect will continue until a distribution utility files either an energy security plan or a market-based alternative by which the retail price will be set by a periodic competitive bid process. In order to file a market-based alternative, the utility has the burden of proof to demonstrate that there is effective competition in its service territory. The PUCO will establish rules for filing an energy security plan which may allow for adjustments to the standard offer for environmental compliance costs, cost of fuel and purchased power, construction costs of new generating facilities or an index price. Once a utility’s energy security plan is approved by the PUCO, the utility is required to file an infrastructure improvement plan that will specify the initiatives the utility will take to rebuild, upgrade or replace its distribution infrastructure. The proposed bill establishes a goal that by 2025, twenty-five percent of the generation used to supply standard offer generation service in the state will come from advanced energy resources which may include: renewable energy sources, clean coal technology, advanced nuclear generation, fuel cells and co-generation. It creates a federal energy advocate that will evaluate the costs and benefits associated with Regional Transmission Organizations on behalf of the state. It promotes construction of advanced energy projects by providing low interest loans and grants; promotes energy efficiency and advanced metering infrastructure investments and directs the PUCO to develop reliability performance targets. The outcome of this proceeding and its financial impact on the Company cannot be determined at this time.
~~Federal Matters~~
On April 19, 2007, the FERC issued an Order with regard to the allocation of costs associated with new planned transmission facilities. FERC ordered that the cost of new, high-voltage facilities be socialized across the PJM region and the costs of new facilities at lower voltages beconsolidated cases have been assigned to the ~~load centers that benefit from~~7th Circuit. The Company cannot predict the ~~new facilities. The methodology for identifying beneficiaries was set for hearing. On September 14, 2007,~~ ~~DP&L~~~~, along with~~outcome or timing of a decision in the majority of other stakeholders in PJM, filed a proposed settlement regarding the cost allocation methodology for the new facilities at lower voltages. In addition, on April 19, 2007, the FERC issued an Order relating to the allocation of costs associated with existing transmission facilities, upholding the existing PJM rate design. These Orders are subject to rehearing and the appeal process. The financial impact of the Order to socialize new, high-voltage facilities will be passed on as costs are incurred by utilities constructing such projects and will be reflected in PJM charges to ~~DP&L~~~~. Over time, this Order is likely to increase PJM charges to~~ ~~DP&L~~~~. Although the impact of cost allocation could be material, management believes these costs should be recoverable through retail rates.~~appeals.

As a member of PJM, the value of DP~~&L’s~~&L’s generation capacity ~~will be~~is affected by changes in and the ~~clearing~~clearing results of the PJM capacity ~~construct.~~market. The ~~new construct introduces~~market utilizes a ~~new~~ Reliability Pricing Model (RPM) that changes the way generation capacity is priced and planned for by PJM. PJM held ~~its first RPM auction during April 2007~~a series of auctions with the most recent taking place in May 2008 for the ~~2007/2008~~2011/2012 planning year ~~and held its second RPM auction during July 2007 for the 2008/2009 planning year. A third auction was held in October 2007 for the 2009/2010 planning year.~~ ~~DP&L~~ ~~does~~. The results of these auctions have not ~~expect~~had a material impact on ~~its~~our results of operations, financial position or cash ~~flows due~~flows. The FERC decisions establishing RPM have been appealed by various entities to a Federal appeals court. RPM remains in effect pending the outcome of the appeal. DP&L has intervened in support of the FERC decisions. On March 19, 2008, a large coalition of consumers filed a motion to request a FERC Technical Conference to evaluate whether the RPM market is performing as expected, and proposed that the RPM market structure should be modified or replaced. In a related, but separate action, many of the same group of consumers filed a complaint, on May 30, 2008, alleging that bidding approaches and other actions taken by unspecified market participants have resulted in unjust and unreasonable allocation of costs of $26 billion across PJM. On September 18, 2008, FERC dismissed the complaint, but directed PJM and its stakeholders to evaluate the design of the RPM with the intention of making changes on a prospective basis, and to file a progress report with the FERC by December 15, 2008. The FERC also directed its staff to convene a technical conference in February 2009 on the issues raised by the complaint. DP&L is unable to predict any potential changes in the PJM capacity market that may result from these ~~three auctions.~~proceedings.

39In April 2008, DPL was notified that the IRS would audit its 2005 federal income tax return. That IRS audit has commenced and DPL cannot determine the outcome of the audit.

~~ENVIRONMENTAL CONSIDERATIONS~~Environmental Updates

DPL,DP&L and our subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and laws by federal, state and local authorities. ~~The environmental issues that may impact us include:~~
•~~The CAA and state laws and regulations (including State Implementation Plans) require compliance, obtaining permits and reporting as to air emissions.~~
•Litigation with the federal and certain state governments and certain special interest groups regarding whether modifications to or maintenance of certain coal-fired generating plants required additional permitting or pollution control technology, and/or whether emissions from coal-fired generating plants cause or contribute to global climate changes.
•~~Rules issued by the US and state EPA that require substantial reductions in SO~~₂~~, mercury and NOx emissions. DPL is installing (and has installed) emission control technology and is taking other measures to comply with required reductions.~~
•The Federal Clean Water Act, which prohibits the discharge of pollutants into waters of the United States except pursuant to appropriate permits. In July 2004, the US EPA adopted a new Clean Water Act rule to reduce the number of fish and other aquatic organisms killed at once-through cooled power plants.
•Solid and hazardous waste laws and regulations, which govern the management and disposal of certain wastes. The majority of solid waste created from the combustion of coal and fossil fuels is fly ash and other coal combustion byproducts, which the EPA has determined are not hazardous waste subject to Resource Conservation and Recovery Act (RCRA).

As well as imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. In the normal course of business, we have investigatory and remedial activities underway at these facilities to comply, or to determine compliance, with such regulations. We record liabilities for probable estimated loss in accordance with Statement of Financial Accounting Standards No. 5 ~~(SFAS 5),~~ “Accounting for Contingencies” (SFAS 5), as discussed in Note 1 of ~~the~~ Notes to Condensed Consolidated Financial Statements. DPL,through its wholly owned captive insurance subsidiary ~~Miami Valley Insurance Company (MVIC),~~MVIC, has an ~~actuarial~~actuarially calculated reserve for environmental matters. Weevaluate the potential liability related to probable losses quarterly and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material effect on our results of operations, financial position or cash flows.

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Sierra Club
In ~~addition~~September 2004, the Sierra Club filed a lawsuit against DP&L and the other owners of the Stuart generating station in the United States District Court for the Southern District of Ohio for alleged violations of the Clean Air Act (CAA) and the station’s operating permit. On August 7, 2008, a consent decree was filed in the United States District Court in full settlement of these CAA claims. Under the terms of the consent decree, DP&L and the other owners of the Stuart generating station agreed to (i) certain emission targets related to nitrogen oxides (NOx), sulfur dioxide (SO2) and particulate matter; (ii) make energy efficiency and renewable energy commitments that are conditioned on receiving Public Utilities Commission of Ohio approval for the recovery of costs; (iii) forfeit 5,500 sulfur dioxide allowances; and (iv) provide funding to a third party non-profit organization to establish a solar water heater rebate program. DP&L and the other owners of the station also entered into an attorneys’ fee agreement to pay a portion of the Sierra Club’s attorney and expert witness fees. The parties to the ~~requirements related~~lawsuit filed a joint motion on October 22, 2008, seeking and order by the United States District Court approving the consent decree with funding for the third party non-profit organization set at $300,000. On October 23, 2008, the United States District Court approved the consent decree. We have determined that the terms of the consent decree will not have a material impact on our overall results of operations, financial position, or cash flows.
Notices of Violation Involving Wholly Owned Plants
In 2007, the Ohio EPA and the USEPA issued Notices of Violation (NOVs) to ~~emissions~~DP&L for alleged violations of ~~sulfur dioxide, nitrogen oxides~~the CAA at the O.H. Hutchings station. The NOVs alleged deficiencies relate to stack opacity and ~~mercury noted above, there~~particulate emissions. DP&L has provided data regarding DP&L’s maintenance expenses and operating results to the Ohio EPA and the USEPA and to the DOJ, which is providing legal support to the USEPA. Discussions, monitored by Ohio EPA, are on-going between DP&L and the DOJ and USEPA regarding a possible resolution of this matter. A settlement of this matter could include a combination of future commitments for compliance and civil penalties of an unspecified amount. At this time, DP&L is unable to determine the timing, costs, or method by which the issues may be resolved.
Notices of Violation Involving Co-Owned Plants
On March 13, 2008, Duke Energy Ohio Inc., the operator of the Zimmer generating station, received a NOV and a Finding of Violation from the USEPA alleging violations of the CAA, the Ohio State Implementation Program (SIP) and permits for the Station in areas including SO2, opacity, and increased heat input. DP&L is a ~~growing concern nationally~~co-owner of the Zimmer generating station and ~~internationally about global climate change~~could be affected by the eventual resolution of this matter. Duke Energy Ohio Inc. is expected to act on behalf of itself and the ~~contribution~~co-owners with respect to this matter. At this time, DP&L is unable to determine whether any additional actions will take place with respect to this matter.
Environmental Regulation and Litigation Related to Air Quality
On February 8, 2008, a three-judge panel of the Court of Appeals, D.C. Circuit, struck down the USEPA regulations that were designed to establish a trading program for mercury emissions, finding that the USEPA had not complied with statutory requirements applicable to “de-listing” mercury as a hazardous air pollutant and that a cap-and-trade approach was not authorized by law for “listed” hazardous air pollutants. The USEPA and a group representing utilities filed a request for rehearing en banc (i.e., a rehearing before all the D.C. Circuit judges). That request was denied on May 20, 2008. A petition for a writ of ~~greenhouse gases, including most significantly, carbon dioxide.  This concern has led to increased interest in legislation at~~certiorari was filed with the ~~federal level, actions at the state level, as well as litigation relating to greenhouse gas emissions, including a recent~~ U.S. Supreme Court on September 17, 2008. If the petition is not accepted by the Supreme Court, or if the Supreme Court grants certiorari and upholds the D.C. Circuit’s decision, ~~holding~~USEPA will have to move forward to set Maximum Available Control Technology (MACT) standards for coal- and oil-fired electric generating units. It is likely the USEPA would take at least three years to gather new data to promulgate updated MACT standards and another three years for the regulations to become effective. At this time, DP&L is unable to determine the impact of the promulgation of new MACT standards on itsfinancial position or results of operations.
On July 11, 2008, the United States Court of Appeals for the District of Columbia Circuit issued a decision that vacated the USEPA’s CAIR and its associated Federal Implementation Plan. This decision remands these issues back to the USEPA. The USEPA and a group representing utilities filed a request for a rehearing en banc on September 24, 2008. The USEPA issued CAIR on March 10, 2005 to regulate certain upwind states with respect to fine particulate matter and ozone. CAIR created interstate trading programs for annual NOx emission allowances and made modifications to an existing trading program for SO2 that were to take effect in 2010. The court’s decision, in part, invalidated the new NOx annual emission allowance trading program and the modifications to the SO2 emission trading program, and created uncertainty regarding future NOx and SO2 emission reduction requirements and their timing. CAIR remains in effect pending a mandate by the court implementing its decision. On October 21, 2008, the court requested that the ~~EPA~~litigation parties submit their views as to an appropriate court mandate.
36

Table of Contents
In the fourth quarter of 2007, DP&L began a program for selling excess emission allowances, including annual NOx emission allowances and SO2 emission allowances that were the subject of CAIR trading programs. In subsequent quarters, DP&L recognized gains from the sale of excess emission allowances to third parties. The court’s CAIR decision has affected the ~~authority~~trading market for excess allowances and impacted DP&L’s program for selling additional excess allowances. Although this impact on the sale of excess allowances has not had, nor do we expect it to ~~regulate carbon dioxide emissions from motor vehicles under~~have, a material effect on our financial position, the ~~CAA.  Increased pressure for carbon dioxide emissions reduction also is coming from investor organizations~~overall impact of the court’s decision, and of the ~~international community. If legislation~~actions the USEPA or ~~regulations are passed at the federal or state levels imposing mandatory reductions of carbon dioxide and other greenhouse gases~~others will take in response to this decision, on ~~generation facilities, the cost to~~ DPL and DP&L is not fully known at this time and could have an adverse effect on us.
Environmental Regulation and Litigation Related to Water Quality
On July 9, 2004, the USEPA issued final rules pursuant to the Clean Water Act governing existing facilities that have cooling water intake structures. The rules require an assessment of ~~such reductions~~impingement and/or entrainment of organisms as a result of cooling water withdrawal. A number of parties appealed the rules to the Federal Court of Appeals for the Second Circuit in New York and the Court issued an opinion on January 25, 2007 remanding several aspects of the rule to USEPA for reconsideration. Several parties petitioned the U.S. Supreme Court for review of the lower court decision. On April 14, 2008, the Supreme Court elected to review the lower court decision on the issue of whether USEPA can compare costs with benefits in determining the best technology available for minimizing adverse environmental impact at cooling water intake structures. Briefs were submitted to the Court this summer and oral argument will likely be held in November or December 2008. A decision may be rendered in 2009.
On February 5, 2008, we received a letter from Ohio EPA indicating that they intend to impose a compliance schedule, as part of the final National Pollutant Discharge Elimination System (NPDES) Permit, that requires us to implement one of two diffuser options for the discharge of water from the Stuart station into the Ohio River as identified in the thermal discharge study conducted pursuant to requirements contained in a previous permit. The two diffuser options identified by Ohio EPA could cost approximately $33 million based on preliminary cost estimates, of which our pro-rata share would be ~~significant.~~approximately $11.5 million. On March 6, 2008, representatives from DP&L met with Ohio EPA to discuss the issue and reiterate our position that diffusers were not cost-effective. We agreed to explore other potential solutions and share findings with Ohio EPA. On June 6, 2008, we sent a letter to Ohio EPA stating that we would be willing to restrict public access to the thermal discharge during the warmest months of the year. On August 22, 2008, we received word from Ohio EPA that this option would be acceptable and would be incorporated in the NPDES permit.

40FGD Project Implementation

Test operations of the flue gas desulfurization (FGD) equipment on Stuart station units 1 and 2 were completed during the three months ended September 30, 2008. The equipment is currently in service.
FINANCIAL OVERVIEW

As more fully discussed in later sections of this Form 10-Q, the following were ~~the~~ significant themes and events for the three months and nine months ended September 30, ~~2007:~~2008:

•·      ~~For~~During the nine months ended September 30, 2008, DP&L sold excess emission allowances to various counterparties realizing total net gains of $30.5 million. There were no gains recorded from sales of emission allowances during the three months ended September 30, ~~2007,~~ ~~DPL’s~~ ~~basic and diluted EPS of $0.56 and $0.53, respectively, increased over the basic and dilutive EPS for the same period of the prior year by $0.09 and $0.10, respectively.~~2008.

•·      ~~For the nine months ended September 30, 2007,~~ ~~DPL’s~~ ~~basic and diluted EPS of $1.63 and $1.49, respectively, increased over the basic and dilutive EPS for the same period of the prior year by $0.47 and $0.42, respectively.~~
•~~DPL’s~~ ~~revenues for~~During the three months and nine months ended September 30, ~~2007 increased 8% and 10%, respectively, compared to the same periods in 2006 primarily due to weather driven retail sales volume, increase in average retail rates and the revenue~~2008, DP&L realized ~~from the PJM capacity auctions.~~ ~~DPL’s~~ ~~purchased power costs for the three and nine months ended September 30, 2007 increased$21.0~~total net gains of $28.5 million and ~~$94.1~~$40.3 million, respectively, ~~over the same periods in 2006.~~from coal sales to various counterparties related to both DP&L and partner-operated generating facilities.

•·      ~~DPL’s~~ ~~cash flows from operations were $211.8~~On June 27, 2008, we entered into a $42.0 million settlement agreement with the Ohio Department of Taxation (ODT) resolving all outstanding audit issues and ~~$212.4~~appeals, including uncertain tax positions for tax years 1998 through 2006. The $42.0 million ~~for~~payment was made to the ODT in July 2008. Due to this settlement agreement, the balance of our unrecognized state tax liabilities recorded at March 31, 2008, in the amount of $56.3 million, was reversed resulting in a recorded income tax benefit of $8.5 million, net of federal tax impact, during the nine months ended September 30, ~~2007 and 2006, respectively.~~2008.
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Table of Contents

•~~DP&L’s~~ ~~revenues~~Also, for the three ~~and nine~~ months ended September 30, ~~2007 increased 8% and 10%, respectively, compared to~~2008:
·DPL’s revenue decreased by 2% over the same ~~periods~~period in ~~2006 primarily~~2007 mainly due to ~~weather driven~~decreased retail and wholesale sales volume, ~~increase~~partially offset by increased retail and wholesale prices and increased RTO capacity and other RTO revenues.
·DPL’s fuel costs decreased by 35% over the same period in ~~average retail rates~~2007 mainly due to decreased generation output and ~~the revenue realized~~gains from the ~~PJM~~sale of excess coal.
·DPL’s purchased power costs increased by 46% mainly due to increased RTO capacity ~~auctions.~~charges and increased purchased power volumes and prices. Operation and maintenance expense increased slightly by 1%.
·DP&L’s revenues decreased by 4% over the same period in 2007 mainly due to decreased retail and wholesale sales volume, partially offset by increased retail and wholesale prices and increased RTO capacity and other RTO revenues.
·DP&L’s fuel costs decreased by 35% over the same period in 2007 mainly due to decreased generation output and gains from the sale of excess coal.
·      DP&L’s purchased power costs ~~for the three~~increased by 31% mainly due to increased RTO capacity charges, and ~~nine months ended September 30, 2007~~ increased ~~$21.0 million~~purchased power volumes and ~~$93.5 million, respectively, over the same periods in 2006.~~prices. Operation and maintenance expense increased by 2%.

•~~DP&L’s~~ ~~cash flows from operations for~~For the nine months ended September 30, ~~2007 of $239.6 million were 11% lower than the cash flows from operations of $270.7 million for~~2008:
·DPL’s revenue increased by 6% over the same period in ~~2006 primarily~~2007 mainly due to ~~changes in working capital.~~increased RTO capacity and other RTO revenues, and increased retail prices, partially offset by decreased retail and wholesale sales volume.

·DPL’s fuel costs, excluding the gains from the sale of emission allowances discussed above, decreased by 12% over the same period in 2007 mainly due to decreased generation output and gains from the sale of excess coal.
41
·DPL’s purchased power costs increased by 33% mainly due to increased RTO capacity and other RTO charges, partially offset by reduced purchased power volumes. Operation and maintenance expense increased slightly by 1%.
·DP&L’s revenue increased by 5% over the same period in 2007 mainly due to increased RTO capacity and other RTO revenues, and increased retail prices, partially offset by decreased retail and wholesale sales volumes.
·DP&L’s fuel costs, excluding the gains from the sale of emission allowances discussed above, decreased by 11% over the same period in 2007 mainly due to decreased generation output and gains from sales of excess coal.
·DP&L’s purchased power costs increased by 28% mainly due to increased RTO capacity and other RTO charges partially offset by reduced purchased power volumes. Operation and maintenance expense decreased by 2%.
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Table of Contents
RESULTS OF OPERATIONS —– DPL Inc.

DPL’s results of operations include the results of its subsidiaries, including the consolidated results of DP&L and all of DP&L’s consolidated subsidiaries. DP&L provides approximately 99% of the total revenues of DPL. All material intercompany accounts and transactions have been eliminated in consolidation. A separate specific discussion of the results of operations for DP&L is presented elsewhere in this report.

~~Financial~~Income Statement Highlights —– DPL

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2008

2007

2008

2007

Revenues:

Retail

$
315.7

$
326.2

$
920.8

$
915.7

Wholesale

27.9

52.9

124.8

140.0

RTO revenues

31.3

26.6

84.4

63.8

RTO Capacity revenues

36.8

13.3

70.7

17.6

Other revenues

2.8

3.0

8.7

8.5

Total revenues

$
414.5

$
422.0

$
1,209.4

$
1,145.6

Cost of revenues:

Fuel

$
62.2

$
95.9

$
223.0

$
251.7

Gains from sale of emission allowances (a)

—

—

(30.5
)
(1.2
)
Purchased power

56.8

35.9

122.2

129.9

RTO charges (b)

29.2

34.0

101.7

71.4

RTO Capacity charges (b)

33.8

12.2

65.0

16.2

Total cost of revenues

$
182.0

$
178.0

$
481.4

$
468.0

Gross margins (c)

$
232.5

$
244.0

$
728.0

$
677.6

Gross margin as a percentage of revenues

56
%
58
%
60
%
59
%

Operating income

$
96.2

$
110.8

$
324.5

$
283.7

Basic earnings per share:

Continuing operations

$
0.44

$
0.56

$
1.58

$
1.54

Discontinued operations

—

��

—

0.09

Total basic

$
0.44

$
0.56

$
1.58

$
1.63

Diluted earnings per share:

Continuing operations

$
0.42

$
0.53

$
1.49

$
1.40

Discontinued operations

—

—

—

0.09

Total diluted

$
0.42

$
0.53

$
1.49

$
1.49

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2007

2006

2007

2006

Revenues:

Retail

$
326.2

$
307.2

$
915.7

$
848.7

Wholesale

52.9

61.8

140.0

129.7

RTO ancillary (a)

39.9

20.6

81.4

55.7

Other revenues, net of fuel costs

3.0

2.8

8.5

8.4

Total revenues

422.0

392.4

1,145.6

1,042.5

Less: Fuel

95.9

99.4

250.5

262.2

Purchased power (a)

82.1

61.1

217.5

123.4

Gross margins (b)

$
244.0

$
231.9

$
677.6

$
656.9

Gross margins as a percentage of revenues

57.8
%
59.1
%
59.1
%
63.0
%

Operating income

$
110.8

$
98.5

$
283.7

$
257.6

Basic Earnings per share:

Continuing operations

$
0.56

$
0.44

$
1.54

$
1.06

Discontinued operations

—

0.03

0.09

0.10

Net income

$
0.56

$
0.47

$
1.63

$
1.16

(a)
Gains from the sale of emission allowances are included in fuel costs in the Condensed Consolidated Statements of Results of Operations.
(b)
RTO capacity and other RTO charges are included in total purchased power in the Condensed Consolidated Statements of Results of Operations.
(c)
~~(a)~~RTO ancillary revenues include PJM capacity revenues of $13.3 million and $17.6 million for the three and nine months ended September 30, 2007, respectively. Purchased power includes PJM capacity charges of $12.2 million and $16.2 million for the three and nine months ended September 30, 2007, respectively. For the same periods of the prior year, PJM capacity revenues and charges were immaterial.
~~(b)~~For purposes of discussing operating results, we present and discuss gross margins. 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 our financial performance.
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Table of Contents

DPL —Inc. – Revenues
Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore,DPL’s retail sales volume is impacted by the number of heating and cooling degree days occurring during a year. Since, generally, DPL plans to utilize its internal generating capacity to supply its retail customers’ needs first, increases in retail demand will decrease the volume of internal generation available to be sold in the wholesale market and vice versa.

The wholesale market covers a multi-state area and settles on an hourly basis throughout the year. Factors impactingDPL’s wholesale sales volume each hour of the year include commodity and wholesale market prices;DPL’s retail demand; retail demand elsewhere throughout the entire wholesale market area;DPL and non-DPL plants’ availability to sell into the wholesale market and weather conditions across the multi-state region.DPL’s plan is to make wholesale sales when market prices allow for the economic operation of its generation facilities not being utilized to meet its retail demand.

The following table provides a summary of changes in revenues from the prior period:
42

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

$ in millions

2007 vs. 2006

2007 vs. 2006

2008 vs. 2007

2008 vs. 2007

Retail

Rate

$
13.1

$
31.0

$
7.9

$
33.3

Volume

6.4

36.9

(18.2
)
(27.6
)
Other miscellaneous

(0.5
)
(0.9
)
Other

(0.2
)
(0.6
)
Total retail change

$
19.0

$
67.0

$
(10.5
)
$
5.1

Wholesale

Rate

$
0.9

$
10.5

$
9.1

$
31.5

Volume

(9.8
)
(0.2
)

(34.1
)
(46.7
)
Total wholesale change

$
(8.9
)
$
10.3

$
(25.0
)
$
(15.2
)

Other

RTO services

$
19.3

$
25.7

Other

0.2

0.1

Total other change

$
19.5

$
25.8

RTO capacity and other

RTO capacity and other revenues

$
28.0

$
73.9

Total revenues change

$
29.6

$
103.1

Total revenues

$
(7.5
)
$
63.8

For the three months ended September 30, ~~2007,~~2008, revenues decreased $7.5 million, or 2%, over the same period of the prior year. This decrease was primarily the result of lower retail and wholesale sales volume, partially offset by an increase in RTO capacity and other RTO revenues and higher average rates for retail and wholesale sales.
·      The net decrease in retail revenues results primarily from a 6% decrease in sales volume, partially offset by a 3% increase in average retail rates due largely to the second phase of an environmental investment rider.
·      The decrease in retail sales volume is primarily the result of milder weather which caused cooling degree days to decrease 19%.
·      The net decrease in wholesale revenues is primarily a result of a 65% decrease in sales volume due largely to unplanned outages, partially offset by a 48% increase in wholesale average rates.
·      RTO capacity and other RTO revenues, consisting primarily of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves, and capacity payments under the RPM construct, increased $28.0 million over the same three month period of the prior year. This increase primarily resulted from additional income of $28.2 million realized from the PJM capacity auction and other RTO revenues.
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Table of Contents
For the nine months ended September 30, 2008, revenues increased ~~$29.6~~$63.8 million, or 8%6%, ~~to $422.0 million from $392.4 million for~~over the same period in the prior year. This increase was primarily the result of higher average rates for retail and wholesale sales ~~higher retail sales volume~~ and an increase in RTO ~~ancillary revenue. Retail~~capacity and other RTO revenues, ~~increased $19.0 million, or 6%, resulting~~partially offset by lower retail and wholesale sales volume.
·      The net increase in retail revenues results primarily from a 4% increase in average retail rates ~~primarily relating~~due largely to the second phase of an environmental investment rider, and a 2% increase in weather driven sales volume as total degree days increased 5%. These increases resulted in a $13.1 million rate variance and a $6.4 million sales volume variance.   Wholesale revenues decreased $8.9 million, or 14%, primarily resulting from a 16% decrease in wholesale sales volume, partially offset by a ~~2% increase~~3% decrease in ~~average market rates.~~sales volume.
·      The decrease in sales volume ~~resulted in~~is primarily a ~~$9.8 million unfavorable volume variance and~~result of milder weather which caused cooling degree days to decrease 23%, partially offset by an increase in heating degree days of 5%.
·      The net decrease in wholesale revenues is primarily a result of a 33% decrease in sales volume due largely to unplanned outages, partially offset by a 34% increase in wholesale average ~~market rates resulted in a $0.9 million favorable rate variance. For the three months ended September 30, 2007,~~rates.
·      RTO ~~ancillary~~capacity and other RTO revenues, ~~increased $19.3 million~~consisting primarily ~~resulting from $13.3 million realized from the PJM capacity auction and $6.0 million of PJM transmission loss credits. RTO ancillary revenues primarily consist~~ of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves, and capacity payments under the ~~new~~ RPM construct. RTO ancillary revenues from the PJM capacity auction are substantially offset by RTO ancillary charges for PJM capacity charges included in purchase power. Other RTO ancillary revenues are partially offset by other RTO ancillary charges in purchased power.
~~For the nine months ended September 30, 2007, revenues~~construct, increased ~~$103.1~~$73.9 million ~~or 10% to $1,145.6 million from $1,042.5 million for~~over the same period inof the prior year. This increase ~~was~~ primarily ~~the result~~resulted from additional income of higher average rates for retail and wholesale sales, higher retail sales volume and an increase in RTO ancillary revenue. Retail revenues increased $67.0 million resulting from a 4% increase in weather driven sales volume as total degree days increased 14% and a 4% increase in average retail rates primarily relating to the environmental investment and storm recovery riders. These increases resulted in a $36.9 million sales volume variance and a $31.0 million rate variance. Wholesale revenues increased $10.3 million, or 8%, primarily resulting from an 8% increase in average market rates. The increase in average market rates resulted in a $10.5 million favorable rate variance. For the nine months ended September 30, 2007, RTO ancillary revenues increased $25.7 million compared to the same period in 2006 primarily resulting from $17.6$73.7 million realized from the PJM capacity auction ~~$8.7 million of PJM transmission losses~~ and congestion credits and $2.3 million from the sale of financial transmission rights (FTRs), partially offset by an adjustment of $2.8 million for Seams Elimination Cost Adjustment (SECA). RTO ancillary revenues primarily consist of compensation for use of ~~DP&L’s~~ transmission assets, regulation services, reactive supply and operating reserves and capacity payments under the new RPM construct. RTO ancillary revenues from the PJM capacity auction are substantially offset by RTO ancillary charges for PJM capacity charges included in purchase power. Other RTO ancillary revenues are partially offset by other RTO ~~ancillary charges in purchased power.~~revenues.
43

DPL ~~— Margins, Fuel and Purchased Power~~Inc. – Cost of Revenues
For the three months ended September 30, 2007, gross margin of $244.0 million increased $12.1 million, or 5%, from $231.9 million during the same period of 2006. As a percentage of total revenues, gross margin decreased to 57.8% in the third quarter of 2007 compared to 59.1% in the third quarter of 2006. This result primarily reflects the favorable impact of the increase in retail revenues and lower fuel costs, offset by increased purchased power costs.2008:
·      Fuel costs, which include coal ~~natural~~(net of sales), gas, oil, and emission allowance sales and costs, decreased ~~by $3.5~~$33.7 million, or 4%35%, ~~in the third quarter of 2007~~ compared to the same period in ~~2006~~2007. This decrease is primarily due to ~~lower average~~increased net gains of $27.8 million realized from sales of excess coal combined with decreased fuel ~~prices,~~usage due primarily to a 25% decrease in generation output largely attributable to unplanned outages. These decreases were partially offset by increased fuel prices. The successful installation of FGD equipment at Miami Fort, Killen and Stuart stations has allowed us the ability to burn coal with a ~~1% increase in generation output.~~wide range of sulfur content and, accordingly, we purchase and sell coal as we seek to achieve optimum levels of production efficiency. Gains or losses from sales of coal are recorded as a component of fuel costs.
·      Purchased power increased ~~$21.0~~$37.7 million, ~~in the third quarter of 2007~~or 46%, compared to the same period in ~~2006~~2007. This increase primarily ~~resulting~~results from a ~~$19.5~~$5.0 million increase ~~due~~relating to higher average market rates, ~~and $12.2~~a $16.0 million related to RTO ancillary charges for PJM capacity charges partially offset by decreased costs of $10.4 million relating to a 22% decrease in purchased power volume. The decrease in purchased power volume was primarily the result of increased production at our generating facilities. The RTO ancillary charges for PJM capacity charges are substantially offset by RTO ancillary revenues for PJM capacity resulting in minimal impact to gross margin.
For the nine months ended September 30, 2007, gross margin of $677.6 million increased $20.7 million, or 3%, from $656.9 million during the same period of 2006. As a percentage of total revenues, gross margin decreased to 59.1% in 2007 compared to 63.0% in 2006. This result primarily reflects the favorable impact of both retail and wholesale revenues discussed above and lower fuel costs offset by increased purchased power costs. Fuel costs, which include coal, natural gas, oil and emission allowance costs, decreased by $11.7 million, or 4%, for the nine months ended September 30, 2007 compared to the same period in 2006. This decrease was primarily due to a 4% decrease in generation output and a decrease in average fuel prices. Purchased power increased $94.1 million for the nine months ended September 30, 2007 compared to the same period in 2006 reflecting $58.8 million of increased chargesincrease relating to higher volumes of purchased power ~~volume, an $18.2~~due largely to unplanned outages, and a $16.8 million increase ~~due~~in RTO capacity and other RTO charges. We purchase power to ~~higher average market rates and $16.2 million related to RTO ancillary charges for PJM capacity charges. The increase in purchased power volume was primarily the result of increased~~satisfy retail sales volume ~~and partner operated~~when generating facilities ~~being less~~are not available ~~compared to the prior year~~ due to planned and unplanned ~~outages. In addition, we purchase power~~outages, or when market prices are below the marginal costs associated with our ~~higher cost~~ generating facilities. ~~The RTO ancillary charges for PJM capacity charges are substantially offset by RTO ancillary revenues for PJM capacity resulting in minimal impact to gross margin.~~
~~DPL~~ — ~~Operation and Maintenance~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2007 vs. 2006

2007 vs. 2006

Power production costs

$
6.3

$
19.7

Legal costs

(0.8
)
3.2

Mark-to-market adjustments for deferred compensation

(0.8
)
2.9

Service operations

0.2

2.2

Insurance claims reserves

—

(3.1
)
Pension expense

(3.8
)
(4.5
)
Gain on sale of corporate aircraft

—

(6.0
)
Insurance settlement

—

(14.5
)
Other, net

1.8

0.8

Total operation and maintenance expense

$
2.9

$
0.7

For the quarter ended September 30, 2007, operation and maintenance expense increased $2.9 million, or 5%, compared to the same period in 2006 primarily resulting from increased power production maintenance costs of $4.0 million that were largely related to boiler and turbine maintenance and other power production operating costs of $2.3 million. These increases were offset in part by a $3.8 million decrease in pension expense resulting primarily from a $1.1 million 2007 actuarial study adjustment and the recognition of $2.6 million in 2006 for a lump sum distribution to a former officer.

For the nine months ended September 30, 2008:
·      Fuel costs decreased $58.0 million, or 23%, compared to the same period in 2007, primarily due to increases in net gains of $29.3 million from the sale of DP&L’s excess emission allowances and $39.8 million realized from the sale of DP&L’s excess coal combined with a decrease in the usage of fuel due mainly to a 6% decrease in generation output largely attributable to unplanned outages. These decreases were partially offset by increased fuel prices. The successful installation of FGD equipment at Miami Fort, Killen and Stuart stations has allowed us the ability to burn coal with a wide range of sulfur content and, accordingly, we purchase and sell coal as we seek to achieve optimum levels of production efficiency. Gains or losses from sales of coal and emission allowances are recorded as components of fuel costs.
·      Purchased power increased $71.4 million, or 33%, compared to the same period in 2007. The increase in purchased power primarily results from a $16.2 million increase relating to higher average market rates and a $79.1 million increase in RTO capacity and other RTO charges, partially offset by a $23.8 million decrease relating to lower volumes of purchased power. We purchase power to satisfy retail sales volume when generating facilities are not available due to planned and unplanned outages, or when market prices are below the marginal costs associated with our generating facilities.
41

Table of Contents
DPL Inc. – Gross Margins
For the three months ended September 30, 2008, gross margin of $232.5 million decreased $11.5 million, or 5%, from $244.0 million in the same period of the prior year. As a percentage of total revenues, gross margin decreased to 56% in 2008 compared to 58% in 2007.
For the nine months ended September 30, 2008, gross margin of $728.0 million increased $50.4 million, or 7%, from $677.6 million in the same period of the prior year. As a percentage of total revenues, gross margin increased to 60% in 2008 compared to 59% in 2007.
These gross margin results reflect the impact of revenues and cost of revenues discussed above.
DPL Inc. – Operation and Maintenance

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2008 vs. 2007

2008 vs. 2007

Insurance settlement

$
—

$
14.5

Generating facilities operating expenses

3.8

7.1

Gain on sale of corporate aircraft

—

6.0

Turbine maintenance costs

0.4

4.3

Legal costs

(0.9
)
(17.3
)
Deferred compensation (primarily mark-to-market adjustments)

(0.8
)
(7.2
)
Boiler maintenance costs

0.3

(2.1
)
Pension

0.1

(2.0
)
Other, net

(2.0
)
(1.0
)
Total operation and maintenance expense

$
0.9

$
2.3

For the three months ended September 30, 2008, operation and maintenance expense ~~remained relatively flat, increasing $0.7~~increased $0.9 million, or 1%, compared to the ~~prior year.~~same period in 2007. This variance was primarily ~~comprised~~due to an increase in operating expenses at our generating facilities largely due to the operation of ~~increased power production maintenance costs~~the FGD and Selective Catalytic Reduction (SCR) equipment, and gypsum disposal. Gypsum is a by-product of ~~$15.1 million that were mostly related to boiler and turbine maintenance and other power production operating costs~~the operation of ~~$4.6 million; increased~~the FGD equipment. This increase was partially offset by:
·      a decrease in legal costs ~~of $3.2 million primarily related~~due largely to the litigation settlement with ~~the~~ three of our former ~~executives; $2.9 million~~executives in ~~mark-to-market adjustments related to~~May 2007, and
·      a decrease in deferred compensation ~~assets and increased service operations~~ costs ~~of $2.2 million primarily related~~(primarily mark-to-market adjustments) associated to ~~overhead line~~a large degree with deferred compensation liabilities for the former executives.

For the nine months ended September 30, 2008, operation and maintenance expense increased $2.3 million, or 1%, compared to the same period in 2007. This variance was primarily due to:
44

~~restoration activities. These increases were nearly offset by a $14.5 million~~·the 2007 insurance settlement ~~reimbursing~~which reimbursed us for legal fees relating to the litigation with ~~the~~ three former ~~executives; a~~executives,
·      an increase in operating expenses largely due to the operation of the FGD and SCR equipment, and gypsum disposal,
·the gain on ~~the~~ sale of the corporate aircraft ~~of $6.0 million;~~realized in 2007, and
·      an increase in turbine maintenance costs incurred due to an unplanned outage at a ~~$4.5 million~~jointly-owned production unit.
These increases were partially offset by:
·a decrease in ~~pension expense resulting primarily from~~ legal costs due largely to the litigation settlement with three of our former executives in May 2007,
·a ~~$1.1 million 2007 actuarial study adjustment and the recognition of $2.6 million~~decrease in ~~2006 for a lump sum distribution~~deferred compensation costs (primarily mark-to-market adjustments) associated to a large degree with deferred compensation liabilities for the former ~~officer.~~executives,
·lower boiler maintenance costs largely attributable to timing of scheduled outages, and
·lower pension costs primarily due to the plan funding made in November 2007.
42

Table of Contents

DPL —Inc. – Depreciation and Amortization
For the three months ended September 30, 2008, depreciation and amortization expense increased $1.4 million compared to the same period in 2007. This increase was primarily the result of higher plant balances due largely to installation of the FGD equipment, partially offset by the impact of lower depreciation rates for generation property which were put into effect on August 1, 2007.
For the nine months ended September 30, ~~2007,~~2008, depreciation and amortization expense decreased ~~$5.2~~$0.4 million ~~and $11.3 million, respectively,~~ compared to the same ~~periods~~period in ~~2006,~~2007. This decrease was primarily ~~reflecting the absence~~a result of ~~depreciation for the peaking units sold during the first quarter of 2007 and~~ the impact of lower depreciation rates for generation property which were put into effect on August 1, 2007, ~~reducing expense by $3.8 million. This decrease was~~ partially offset by ~~higher costs~~an increase to the depreciation expense related to ~~increased~~higher plant balances ~~primarily resulting from the~~due largely to installation of ~~pollution control~~the FGD equipment.

DPL Inc. – General Taxes— ~~Amortization of Regulatory Assets~~
For the three months and nine months ended September 30, ~~2007, amortization of regulatory assets~~2008, general taxes increased ~~$3.1~~$1.6 million and $8.4 million, respectively, compared to the same ~~period~~periods in ~~2006,~~2007. These increases were primarily ~~for~~ the ~~amortization~~result of ~~incremental 2004/2005 severe storm costs that began on August 1, 2006.~~higher property taxes due mainly to capital improvements which have led to higher assessed property values, combined with increased tax rates.

DPL —Inc. – Net Gain on Settlement of Executive Litigation
On May 21, 2007, we settled ~~the~~ litigation with ~~the~~ three former executives. In exchange for aour payment of $25 million, the three former executives relinquished and dismissed all of their claims, including those related to deferred compensation, restricted stock units (RSUs), MVE incentives, stock options, and legal fees. As a result of this settlement, during the ~~second quarter~~nine months ended ~~June~~September 30, 2007, DPLrealized a net pre-tax gain in continuing operations of approximately $31.0 million. ~~See Note 10 of Notes to Condensed Consolidated Financial Statements.~~

DPL —Inc. – Investment Income
For the three months ended September 30, ~~2007,~~2008, investment income ~~decreased $1.8 million~~remained relatively flat compared to ~~$1.2 million from $3.0 million for~~ the same period in ~~2006. This decrease was primarily due to lower interest income relating to lower cash and short-term investment balances in 2007 compared to 2006.~~2007.

For the nine months ended September 30, ~~2007,~~2008, investment income decreased ~~$4.4~~$6.4 million, to ~~$9.5~~$3.1 million, ~~from $13.9 million for~~compared to the same period in ~~2006.~~2007. This decrease was primarily the result of:
·      $3.2 million of ~~lower interest income relating to lower cash and short-term investment balances~~gains realized in 2007 ~~compared to 2006, partially offset by $3.2 million in realized gains~~ from the sale of financial assets held in DP&L’sMaster Trust Plan for deferred compensation which were used for the settlement payment to the three former ~~executives.~~executives, and
·      lower cash and short-term investment balances combined with overall lower market yields on investments in 2008 compared to 2007.

DPL Inc. —– Interest Expense
For the three months ended September 30, ~~2007,~~2008, interest expense ~~decreased $8.0~~increased $5.0 million, or ~~32%~~30%, compared to the same period in ~~2006~~2007, resulting primarily from ~~$4.6 million less~~lower capitalized interest ~~associated with~~due to the completion of the FGD project at the Stuart station, partially offset by the redemption of ~~DPL~~ ~~debt ($225~~the $100 million ~~8.25%~~6.25% Senior ~~Notes) and $4.0~~Notes in May 2008.
For the nine months ended September 30, 2008, interest expense increased $8.5 million, ~~of greater~~or 14%, compared to the same period in 2007 resulting primarily from:
·      lower capitalized interest ~~primarily related~~due to ~~increased pollution control capital expenditures. These decreases were partially offset by $1.0 million~~the completion of the FGD projects at Miami Fort, Killen, and Stuart stations,
·      additional interest expense associated with DP&L’s ~~new $100~~$90 million ~~4.8% Series~~variable rate pollution control bonds issued ~~September 13, 2006.~~November 15, 2007, and

·      the write-off of unamortized debt issuance costs relating to pollution control bonds following their repurchase from the bondholders on April 4, 2008. See Note 4 of Notes to Condensed Consolidated Financial Statements.
These increases were partially offset by:
·      the redemption of the $225 million 8.25% Senior Notes in March 2007 and the $100 million 6.25% Senior Notes in May 2008.
43

Table of Contents
DPL Inc. – Other Income / (Deductions)
For the three months and nine months ended September 30, ~~2007, interest expense decreased $17.7~~2008, other deductions of $0.4 million ~~or 23%, compared to 2006 primarily~~and $0.9 million, respectively, changed from ~~$10.8 million less interest from the redemption of~~ ~~DPL~~ debt ($225 million, 8.25% Senior Notes) and $9.7 million of increased capitalized interest primarily related to increased pollution control capital expenditures. These decreases were partially offset by $3.4 million of interest expense associated with ~~DP&L’s~~ ~~new $100 million, 4.8% Series pollution control bonds issued September 2006 and $1.1 million of interest expense associated with~~ ~~DP&L’s~~ ~~short-term borrowing of $95 million from its unsecured revolving credit agreement of $220 million.~~
~~DPL~~ — ~~Other Income (Deductions)~~
~~For the three months ended September 30, 2007,~~ other income of $2.0 million ~~increased from $0.2~~and $2.6 million, ~~of other deductions~~respectively, recorded for the same ~~period~~periods of the prior ~~year~~year. These changes from other income to other deductions primarily ~~resulting~~resulted from the recognition in 2007 of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement).

For the nine months ended September 30, 2007, other income of $2.6 million increased $2.5 million from $0.1 million for the same period of the prior year primarily resulting from the recognition of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement).
45

DPL —Inc. – Income Tax Expense
For the three months and nine months ended September 30, 2007, income taxes increased $7.4 million and $28.7 million, respectively, compared to the same periods in 2006, primarily reflecting an increase in pre-tax book income.
~~DPL — Discontinued Operations~~
For the three months ended September 30, ~~2007, there was no activity relating to discontinued operations resulting in a $3.4~~2008, income taxes decreased $10.0 million, ~~decrease~~or 27%, compared to the same period in ~~2006. During~~ the prior year, ~~we recognized $3.4 million~~primarily reflecting:
·      a 23% decrease in pre-tax book income, and
·      a decrease in the effective tax rate resulting from the phase-out of ~~earnings from discontinued operations which was comprised of a pre-tax gain of $5.7 million less associated expenses and taxes relating to~~ the ~~recognition of a deferred gain associated with the financial asset portfolio.~~Ohio Franchise Tax.

For the nine months ended September 30, ~~2007, discontinued operations~~2008, income taxes decreased ~~$1.0~~$16.0 million, or 16%, compared to the same period in ~~2006. During~~2007, primarily reflecting:
·      a 3% decrease in pre-tax book income,
·      a decrease in the ~~first nine months we recognized $10.0 million of earnings~~effective tax rate resulting from ~~discontinued operations which was comprised~~the phase-out of the ~~net (pre-tax) gain of $8.2 million realized from~~Ohio Franchise Tax, and
·      a decrease in tax expense due to the settlement of the litigation with the three former executives less associated income taxes and a (pre-tax) gain of $8.2 million relating to the recognition of deferred gains from the financial asset portfolio less associated taxes and expenses. During the prior year we recognized $11.0 million of earnings from discontinued operations which was comprised of a pre-tax gain of $18.9 million less associated expenses and taxes relating to the recognition of a deferred gain associated with the financial asset portfolio.
Ohio Franchise Tax issues. See Note ~~3 and Note 10~~5 of ~~the~~ Notes to Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS —– The Dayton Power and Light Company (DP&L)

~~Financial~~Income Statement Highlights —– DP&L

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2007

2006

2007

2006

Revenues:

Retail

$
285.7

$
272.2

$
804.7

$
748.9

Wholesale

94.0

97.5

253.0

231.5

RTO ancillary (a)

39.9

20.6

81.4

55.7

Total revenues

419.6

390.3

1,139.1

1,036.1

Less: Fuel

87.6

90.9

240.2

251.0

Purchased power (a)

91.7

70.7

228.2

134.7

Gross margins (b)

$
240.3

$
228.7

$
670.7

$
650.4

Gross margins as a percentage of revenues

57.3
%
58.6
%
58.9
%
62.8
%

Operating income

$
113.2

$
107.1

$
287.6

$
295.3

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2008

2007

2008

2007

Revenues:

Retail

$
278.0

$
285.7

$
809.5

$
804.7

Wholesale

61.9

94.0

233.7

253.0

RTO revenues

30.4

26.6

83.5

63.8

RTO Capacity revenues

31.2

13.3

65.1

17.6

Total revenues

$
401.5

$
419.6

$
1,191.8

$
1,139.1

Cost of revenues:

Fuel

$
57.0

$
87.6

$
214.1

$
241.4

Gains from sale of emission allowances (a)

—

—

(30.5
)
(1.2
)
Purchased power

58.0

45.5

126.0

140.5

RTO charges (b)

28.3

34.0

100.8

71.5

RTO Capacity charges (b)

33.8

12.2

65.0

16.2

Total cost of revenues

$
177.1

$
179.3

$
475.4

$
468.4

Gross margins (c)

$
224.4

$
240.3

$
716.4

$
670.7

Gross margin as a percentage of revenues

56
%
57
%
60
%
59
%

Operating Income

$
93.5

$
113.2

$
330.4

$
287.6

(a)     ~~RTO ancillary revenues include PJM capacity revenues~~Gains from the sale of ~~$13.3 million and $17.6 million for~~emission allowances are included in fuel costs in the ~~three and nine months ended September 30, 2007, respectively. Purchased power includes PJM capacity charges~~Condensed Consolidated Statements of ~~$12.2 million and $16.2 million for the three and nine months ended September 30, 2007, respectively. For the same periods~~Results of ~~the prior year, PJM capacity revenues and charges were immaterial.~~Operations.
(b)     RTO capacity and other RTO charges are included in total purchased power in the Condensed Consolidated Statements of Results of Operations.
(c)For purposes of discussing operating results, we present and discuss gross margins. 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 our financial performance.

4644

Table of Contents

DP&L —– Revenues
Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore,DP&L’s retail sales volume is impacted by the number of heating and cooling degree days occurring during a year. Since, generally,DP&L plans to utilize its internal generating capacity to supply its retail customers’ needs first, increases in retail demand will decrease the volume of internal generation available to be sold in the wholesale market and vice versa.

The wholesale market covers a multi-state area and settles on an hourly basis throughout the year. Factors impactingDP&L’s wholesale sales volume each hour of the year include commodity and wholesale market prices;DP&L’s retail ~~demand,~~demand; retail demand elsewhere throughout the entire wholesale market area;DP&Land non-DP&L plants’ availability to sell into the wholesale market and weather conditions across the multi-state region.DP&L’s plan is to make wholesale sales when market prices allow for the economic operation of its generation facilities that are not being utilized to meet its retail demand.

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2007 vs. 2006

2007 vs. 2006

Retail

Rate

$
8.5

$
24.2

Volume

5.7

32.5

Other miscellaneous

(0.7
)
(0.9
)
Total retail change

$
13.5

$
55.8

Wholesale

Rate

$
12.0

$
21.9

Volume

(15.5
)
(0.4
)
Total wholesale change

$
(3.5
)
$
21.5

RTO ancillary

RTO services

$
19.3

$
25.7

Total revenues change

$
29.3

$
103.0

The following table provides a summary of changes in revenues from the prior period:

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2008 vs. 2007

2008 vs. 2007

Retail

Rate

$
8.3

$
29.6

Volume

(15.9
)
(24.3
)
Other

(0.1
)
(0.5
)
Total retail change

$
(7.7
)
$
4.8

Wholesale

Rate

$
32.3

$
68.7

Volume

(64.4
)
(88.0
)
Total wholesale change

$
(32.1
)
$
(19.3
)

RTO capacity and other

RTO capacity and other revenues

$
21.7

$
67.2

Total revenues

$
(18.1
)
$
52.7

For the three months ended September 30, ~~2007,~~2008, revenues ~~increased $29.3~~decreased $18.1 million, or 8%4%, ~~to $419.6 million from $390.3 million for~~over the same period inof the prior year. This ~~increase~~decrease was primarily the result of lower retail and wholesale sales volume, partially offset by higher average rates for retail and wholesale sales, ~~higher retail sales volume~~ and an increase in RTO ~~ancillary revenue. Retail~~capacity and other RTO revenues.
·      The net decrease in retail revenues ~~increased $13.5 million, or 5%, resulting~~results primarily from a 6% decrease in sales volume, partially offset by a 3% increase in average retail rates ~~primarily relating~~due largely to the second phase of an environmental investment ~~rider and a 2% increase~~rider.
·      The decrease in ~~weather driven~~retail sales volume ~~as total~~is primarily a result of milder weather which caused cooling degree days ~~increased 5%~~to decrease 19%. ~~These increases resulted in an $8.5 million rate variance and a $5.7 million sales volume variance.   Wholesale revenues decreased $3.5 million, or 4%, primarily resulting from a 16%~~
·      The net decrease in wholesale ~~sales volume, partially offset by~~revenues is primarily the result of a ~~15% increase in average market rates. The~~68% decrease in sales volume ~~resulted in a $15.5 million unfavorable volume variance and~~due largely to unplanned outages, partially offset by an increase in wholesale average ~~market rates resulted in a $12.0 million favorable rate variance. For the three months ended September 30, 2007, the~~rates.
·      RTO ~~ancillary~~capacity and other RTO revenues, ~~increased $19.3 million~~consisting primarily ~~resulting from $13.3 million realized from the PJM capacity auction and $6.0 million of PJM transmission loss credits. RTO ancillary revenues primarily consist~~ of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves, and capacity payments under the ~~new~~ RPM ~~construct. RTO ancillary revenues~~construct, increased $21.7 million over the same period of the prior year. This increase resulted from additional income realized from the PJM capacity auction ~~are substantially offset by RTO ancillary charges for PJM capacity charges included in purchase power. Other RTO ancillary revenues are partially offset by~~and other RTO ~~ancillary charges in purchased power.~~revenues.
45

Table of Contents

For the nine months ended September 30, ~~2007,~~2008, revenues increased ~~$103.0~~$52.7 million, or ~~10%~~5%, ~~to $1,139.1 million from $1,036.1 million for~~over the same period inof the prior year. This increase was primarily the result of higher average rates for retail and wholesale sales, ~~higher retail sales volume~~ and an increase in RTO ~~ancillary revenue. Retail~~capacity and other RTO revenues, ~~increased $55.8 million resulting~~partially offset by lower retail and wholesale sales volume.
·      The net increase in retail revenues results primarily from a 4% increase in ~~weather driven sales volume as total degree days increased 14% and a 3% increase in~~ average retail rates ~~primarily relating~~due largely to the second phase of an environmental investment ~~and storm cost recovery riders. These increases resulted~~rider, partially offset by a 3% decrease in ~~a $32.5 million~~sales volume.
·      The decrease in retail sales volume ~~variance and~~is primarily a $24.2 million rate variance. Wholesale revenues increased $21.5 million, or 9%, primarily resulting from a 9% increase in average market rates. The increase in average market rates resulted in a $21.9 million favorable rate variance. For the nine months ended September 30, 2007, the RTO ancillary revenues increased $25.7 million comparedresult of milder weather which caused cooling degree days to the same period in 2006 primarily resulting from $17.6 million realized from the PJM capacity auction, $8.7 million of PJM transmission losses and congestion credits and $2.3 million from the sale of financial transmission rights (FTRs)decrease 23%, partially offset by an ~~adjustment~~increase in heating degree days of ~~$2.8 million for Seams Elimination~~5%.

·      The net decrease in wholesale revenues is primarily a result of a 35% decrease in sales volume due largely to unplanned outages, partially offset by a 42% increase in wholesale average rates.
47

~~Cost Adjustment (SECA).~~·      RTO ~~ancillary~~capacity and other RTO revenues, consisting primarily ~~consist~~ of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves, and capacity payments under the ~~new~~ RPM ~~construct. RTO ancillary revenues~~construct, increased $67.2 million over the same period of the prior year. This increase resulted from additional income realized from the PJM capacity auction ~~are substantially offset by RTO ancillary charges for PJM capacity charges included in purchase power. Other RTO ancillary revenues are partially offset by~~and other RTO ~~ancillary charges in purchased power.~~revenues.

DP&L ~~— Margins, Fuel and Purchased Power~~– Cost of Revenues
For the three months ended September 30, 2007, gross margin of $240.3 million increased $11.6 million, or 5%, from $228.7 million during the same period of 2006. As a percentage of total revenues, gross margin decreased to 57.3% in the third quarter of 2007 compared to 58.6% in the third quarter of 2006. This result primarily reflects the favorable impact of the increase in retail revenues and lower fuel costs, offset by increased purchased power costs.2008:
·      Fuel costs, which include coal ~~natural~~(net of sales), gas, oil, and emission allowance sales and costs, decreased ~~by $3.3~~$30.6 million, or 4%35%, ~~in the third quarter of 2007~~ compared to the same period in ~~2006~~2007. This decrease is primarily due to ~~lower average~~increased net gains of $27.8 million realized from sales of excess coal combined with decreased fuel ~~prices,~~usage due primarily to a 24% decrease in generation output largely attributable to unplanned outages. These decreases were partially offset by increased fuel prices. The successful installation of FGD equipment at Miami Fort, Killen, and Stuart stations has allowed us the ability to burn coal with a ~~1% increase in generation output.~~wide range of sulfur content and, accordingly, we purchase and sell coal as we seek to achieve optimum levels of production efficiency. Gains or losses from sales of coal are recorded as a component of fuel costs.
·      Purchased power increased ~~$21.0~~$28.4 million, ~~in the third quarter of 2007,~~or 31%, compared to the same period in ~~2006,~~2007. This increase primarily ~~resulting~~results from a ~~$17.2~~$11.5 million increase ~~due~~relating to higher ~~average market rates and $12.2 million related to RTO ancillary charges for PJM capacity charges, partially offset by a decrease~~volumes of ~~$8.2 million related to a 14% decrease in~~ purchased power volume. The decrease in purchased power volume was primarily the result of increased production at our generating facilities. The RTO ancillary charges for PJM capacity charges are substantially offset by RTO ancillary revenues for PJM capacity resulting in minimal impactdue largely to ~~gross margin.~~
For the nine months ended September 30, 2007, gross margin of $670.7 million increased $20.3 million, or 3%, from $650.4 million during the same period of 2006. As a percentage of total revenues, gross margin decreased to 58.9% in 2007 compared to 62.8% in 2006. This result primarily reflects the favorable impact of both retail and wholesale revenues discussed above and lower fuel costs offset by increased purchased power costs. Fuel costs, which include coal, natural gas, oil and emission allowance costs, decreased by $10.8 million, or 4%, for the nine months ended September 30, 2007, compared to the same period in 2006, primarily due to a 4% decrease in generation outputunplanned outages and a decrease in average fuel prices. Purchased power costs increased $93.5 million for the nine months ended September 30, 2007, compared to the same period in 2006, reflecting $62.6 million of increased charges related to higher purchased power volume, a $13.8$15.9 million increase ~~due~~in RTO capacity and other RTO charges. We purchase power to ~~higher average market rates and $16.2 million related to RTO ancillary charges for PJM capacity charges. The increase in purchased power volume was primarily the result of increased~~satisfy retail sales volume ~~and partner operated~~when generating facilities ~~being less~~are not available ~~compared to the prior year~~ due to planned and unplanned ~~outages. In addition, we purchase power~~outages or when market prices are below the marginal costs associated with our ~~higher cost~~ generating facilities. ~~The RTO ancillary charges for PJM capacity charges are substantially offset by RTO ancillary revenues for PJM capacity resulting in minimal impact to gross margin.~~
~~DP&L~~ — ~~Operation and Maintenance~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2007 vs. 2006

2007 vs. 2006

Power production costs

$
6.3

$
19.7

Service operations

0.3

2.2

Low-income payment program

0.2

1.7

Mark-to-market adjustments for deferred compensation

(0.3
)
1.4

Pension expense

(3.7
)
(4.3
)
Other, net

2.2

2.3

Total operation and maintenance expense

$
5.0

$
23.0

For the quarter ended September 30, 2007, operation and maintenance expense increased $5.0 million, or 8%, compared to the same period in 2006 primarily resulting from increased power production maintenance costs of $4.0 million that were largely related to boiler and turbine maintenance and other power production operating costs of $2.3 million. These increases were offset in part by a $3.7 million decrease in pension expense resulting primarily from a $1.1 million 2007 actuarial study adjustment and the recognition of $2.6 million in 2006 for a lump sum distribution to a former officer.

For the nine months ended September 30, 2008:
·      Fuel costs decreased $56.6 million, or 24%, compared to the same period in 2007, primarily due to increases in net gains of $29.3 million from the sale of DP&L’s excess emission allowances and $39.8 million realized from the sale of DP&L’s excess coal, combined with a decrease in the usage of fuel due mainly to a 6% decrease in generation output largely attributable to unplanned outages. These decreases were partially offset by an increase in fuel prices. The successful installation of FGD equipment at the Miami Fort, Killen, and Stuart stations has allowed us the ability to burn coal with a wide range of sulfur content and, accordingly, we purchase and sell coal as we seek to achieve optimum levels of production efficiency. Gains or losses from sales of coal and emission allowances are recorded as components of fuel costs.
·      Purchased power increased $63.6 million, or 28%, compared to the same period in 2007. The increase in purchased power primarily results from a $14.8 million increase relating to higher average market rates and a $78.1 million increase in RTO capacity and other RTO charges, partially offset by a $29.3 million decrease relating to lower volumes of purchased power. We purchase power to satisfy retail sales volume when generating facilities are not available due to planned and unplanned outages, or when market prices are below the marginal costs associated with our generating facilities.
46

Table of Contents
DP&L – Gross Margins
For the three months ended September 30, 2008, gross margin of $224.4 million decreased $15.9 million, or 7%, from $240.3 million in the same period of the prior year. As a percentage of total revenues, gross margin decreased to 56% in 2008 compared to 57% in 2007.
For the nine months ended September 30, 2008, gross margin of $716.4 million increased $45.7 million, or 7%, from $670.7 million in the same period of the prior year. As a percentage of total revenues, gross margin increased to 60% in 2008 compared to 59% in 2007.
These gross margin results reflect the impact of revenues and cost of revenues discussed above.
DP&L – Operation and Maintenance

Three Months Ended

Nine Months Ended

September 30,

September 30,

$ in millions

2008 vs. 2007

2008 vs. 2007

Deferred compensation (primarily mark-to-market adjustments)

$
(0.3
)
$
(5.9
)
Legal costs

(0.6
)
(3.2
)
Boiler maintenance costs

0.3

(2.1
)
Pension

0.1

(2.0
)
Generating facilities operating expenses

3.9

7.2

Turbine maintenance costs

0.4

4.3

Other, net

(2.4
)
(3.1
)
Total operation and maintenance expense

$
1.4

$
(4.8
)
For the three months ended September 30, 2008, operation and maintenance expense increased ~~$23.0~~$1.4 million ~~or 13%,~~ compared to the ~~prior year.~~same period in 2007. This variance was primarily ~~comprised~~due to an increase in operating expenses at our generating facilities largely due to the operation of ~~increased power production maintenance costs~~the FGD and SCR equipment, and gypsum disposal. Gypsum is a by-product of ~~$15.2 million that were mostly related to boiler and turbine maintenance, and other power production operating costs~~the operation of ~~$4.5 million; increased service operations costs of $2.2 million primarily related to overhead line restoration activities; $1.7 million of increased costs associated with~~ the ~~low-income payment program; and $1.4 million in mark-to-market adjustments related to deferred compensation assets. These~~
48

~~increases were~~FGD equipment. This increase was partially offset by a ~~$4.3 million~~ decrease in ~~pension expense resulting primarily from a $1.1 million 2007 actuarial study adjustment and the recognition of $2.6 million in 2006 for a lump sum distribution~~deferred compensation costs (primarily mark-to-market adjustments) associated to a large degree with deferred compensation liabilities for the former ~~officer.~~executives, and legal costs.
For the nine months ended September 30, 2008, operation and maintenance expense decreased $4.8 million compared to the same period in 2007. This variance was primarily due to:
·      a decrease in deferred compensation costs (primarily mark-to-market adjustments) associated to a large degree with deferred compensation liabilities for the former executives,
·      a decrease in legal fees,
·      lower boiler maintenance costs largely attributable to timing of scheduled outages, and
·      lower pension costs primarily due to the plan funding made in November 2007.
These decreases were partially offset by:
·      an increase in operating expenses at our generating facilities largely due to the operation of the FGD and SCR equipment, and gypsum disposal, and
·      an increase in turbine maintenance costs incurred due to an unplanned outage at a jointly-owned production unit.

DP&L —– Depreciation and Amortization

For the three months ended September 30, 2008, depreciation and amortization expense increased $1.4 million compared to the same period in 2007. This increase was primarily the result of higher plant balances due largely to installation of the FGD equipment, partially offset by the impact of lower depreciation rates for generation property which were put into effect on August 1, 2007.
For the nine months ended September 30, ~~2007,~~2008, depreciation and amortization expense decreased ~~$1.6~~$0.2 million ~~and $1.6 million, respectively,~~ compared to the same ~~periods~~period in ~~2006,~~2007. This decrease was primarily ~~reflecting~~a result of the impact of lower depreciation rates for generation property which were put into effect on August 1, 2007, ~~reducing expense by $3.8 million. This decrease was~~ partially offset by ~~higher costs~~an increase to the depreciation expense related to ~~increased~~higher plant balances ~~primarily resulting from~~due largely to the installation of ~~pollution control~~the FGD equipment.
47

Table of Contents

DP&L – General Taxes— ~~Amortization of Regulatory Assets~~
For the three months and nine months ended September 30, ~~2007, amortization of regulatory assets~~2008, general taxes increased ~~$3.1~~$1.8 million and $8.6 million, respectively, compared to the same ~~period~~periods in ~~2006, primarily for the amortization of incremental 2004/2005 severe storm costs that began on August 1, 2006.~~
~~DP&L — Investment Income~~
~~For the nine months ended September 30, 2007, investment income increased $2.7 million to $7.5 million from $4.8 million for the same period in 2006. This increase was~~2007. These increases were primarily the result of ~~$3.2 million in realized gains from the sale of financial assets held in~~ ~~DP&L’s~~ ~~Master Trust Plan for deferred compensation used for the settlement payment~~higher property taxes due mainly to ~~the three former executives.~~capital improvements which have led to higher assessed property values, combined with increased tax rates.

DP&L — ~~Other Income (Deductions)~~
For the three months ended September 30, 2007, other income of $2.1 million increased from $0.2 million of other deductions for the same period of the prior year primarily resulting from the recognition of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement).
For the nine months ended September 30, 2007, other income of $2.7 increased $2.6 million from $0.1 million from the same period of the prior year primarily resulting from the recognition of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement).
~~DP&L —~~– Net Gain on Settlement of Executive Litigation
On May 21, 2007, we settled ~~the~~ litigation with ~~the~~ three former executives. In exchange for aour payment of $25 million, the three former executives relinquished and dismissed all of their claims, including those related to deferred compensation, RSUs, MVE incentives, stock options, and legal fees. As a result of this settlement, during the ~~second quarter~~nine months ended ~~June~~September 30, 2007, DP&Lrealized a net pre-tax gain in continuing operations of approximately $35.3 million.
DP&L – Interest Expense
For the three months ended September 30, 2008, interest expense increased $5.0 million compared to the same period in 2007 primarily resulting from lower capitalized interest due to the completion of the FGD project at the Stuart station.
For the nine months ended September 30, 2008, interest expense increased $12.6 million compared to the same period in 2007 primarily from:
·      lower capitalized interest due to the completion of the FGD projects at Miami Fort, Killen, and Stuart stations,
·      additional interest expense associated with DP&L’s $90 million variable rate pollution control bonds issued November 15, 2007, and
·      the write-off of unamortized debt issuance costs relating to pollution control bonds following their repurchase from the bondholders on April 4, 2008. See Note 104 of Notes to Condensed Consolidated Financial Statements.
~~DP&L~~ — ~~Interest Expense~~
For the three months ended September 30, 2007, interest expense decreased $1.6 million compared to the same period of 2006, primarily related to $4.0 million of increased capitalized interest resulting from pollution control capital expenditures at the generating plants, partially offset by increased interest of $1.0 million related to the $100 million 4.8% Series pollution control bonds issued in September 2006 and $1.6 million in interest to ~~DPL~~ ~~on a short-term loan of $90 million.~~
For the nine months ended September 30, 2007, interest expense decreased $3.4 million compared to the same period of 2006, primarily related to $9.7 million of increased capitalized interest resulting from pollution control capital expenditures at the generating plants, partially offset by increased interest of $3.4 million related to the $100 million, 4.8% Series pollution control bonds issued in September 2006; $1.6 million in interest to ~~DPL~~ ~~on a short-term loan of $90 million and $1.1 million of interest related to the $95 million draw on our revolving credit facility.~~

DP&L —– Other Income ~~Tax Expense~~/ (Deductions)
For the three months and nine months ended September 30, 2008, other deductions of $0.4 million and $1.0 million, respectively, changed from other income of $2.1 million and $2.7 million, respectively, recorded for the same periods of the prior year. These changes from other income to other deductions primarily resulted from the recognition in 2007 of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement).
DP&L – Income Tax Expense
For the three months ended September 30, 2008, income taxes ~~increased $3.1~~decreased $12.1 million, ~~and $11.7 million~~or 29%, compared to the same ~~periods~~period in ~~2006,~~2007, primarily ~~reflecting an increase~~reflecting:
·      a 25% decrease in pre-tax book ~~income.~~income, and

·      a decrease in the effective tax rate resulting from the phase-out of the Ohio Franchise Tax.
49
For the nine months ended September 30, 2008, income taxes decreased $17.6 million, or 15%, compared to the same period in the prior year, primarily reflecting:
·      a 3% decrease in pre-tax book income,
·      a decrease in the effective tax rate resulting from the phase-out of the Ohio Franchise Tax, and
·      a decrease in tax expense due to the settlement of the Ohio Franchise Tax issues. See Note 5 of Notes to Condensed Consolidated Financial Statements.
48

Table of Contents

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL REQUIREMENTS

DPL’s financial condition, liquidity, and capital requirements ~~includes~~include the consolidated results of DP&L and all of DP&L’s consolidated subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
During the fourth quarter ended December 31, 2007, we identified immaterial changes in certain accounts payable balances that had not been correctly presented in our prior period cash flow statements. Changes in accounts payable balances representing capital expenditures had previously been classified with cash flows from operating activities and should have been classified with capital expenditures as part of investing activities. Accordingly, the Condensed Consolidated Statements of Cash Flows for all periods presented have been reclassified to conform to the current presentation. See Note 1 of Notes to Condensed Consolidated Financial Statements.

DPL’s Cash Position
DPL’s cash and cash equivalents totaled ~~$98.7~~$26.3 million at September 30, ~~2007,~~2008, compared to ~~$262.2~~$134.9 million at December 31, ~~2006,~~2007, a decrease of ~~$163.5 million. In addition,~~ ~~DPL~~ had restricted funds held in trust at September 30, 2007 of $0.5 million in comparison to $10.1 million at December 31, 2006. The decrease in cash and cash equivalents was primarily attributed to the retirement of the $225.0 million ~~DPL~~ 8.25% Senior Notes, $250.1 million in capital expenditures and $83.7 million in dividends paid on common stock. The decrease was partially offset by $211.8 million generated from operating activities; $158.4 million from the sale of peaking units and the corporate aircraft; $15.0 million from the exercise of stock options, including tax effects, and $10.1 million of restricted funds drawn to fund pollution control capital expenditures.
~~DP&L’s Cash Position~~
~~DP&L’s~~ ~~cash and cash equivalents totaled $12.3 million at September 30, 2007, compared to $46.1 million at December 31, 2006, a decrease of $33.8~~$108.6 million. The decrease in cash and cash equivalents was primarily attributed to ~~$247.8~~cash used to retire $100.0 million in long-term debt, $173.8 million in capital expenditures, $89.9 million in dividends paid on common stock, and ~~$125.0~~$9.9 million in purchases of short-term investments. This decrease was partially offset by cash provided by operating activities of $242.5 million and $20.5 million of restricted funds drawn to fund pollution control capital expenditures. At September 30, 2008, DPL had $16.5 million in restricted funds held in trust relating to the 2007 issuance of $90.0 million in pollution control bonds. On April 4, 2008, DP&L repurchased the bonds from bondholders, and holds them in trust while it continues to evaluate market conditions and explore suitable long-term financing alternatives. See Note 4 of Notes to Condensed Consolidated Financial Statements.
DP&L’s Cash Position
DP&L’s cash and cash equivalents totaled $33.8 million at September 30, 2008, compared to $13.2 million at December 31, 2007, an increase of $20.6 million. The increase in cash and cash equivalents was primarily attributed to $273.8 million in cash generated from operating activities, and $20.5 million of restricted funds drawn to fund pollution control capital expenditures, partially offset by $173.1 million in capital expenditures, $80.0 million in dividends paid on common stock to our parent DPL,~~. These cash outflows were largely offset by $239.6~~ and a $20.0 million ~~in cash generated from operating activities, $90.0 million in a net~~ short-term loan ~~owed~~repayment to ~~our parent~~ DPL~~, and $10.1~~. At September 30, 2008, DP&L had $16.5 million in restricted funds ~~drawn~~held in trust relating to ~~fund~~the 2007 issuance of $90.0 million in pollution control ~~capital expenditures at our generating plants.~~bonds. On April 4, 2008, DP&L repurchased the bonds from bondholders, and holds them in trust while it continues to evaluate market conditions and explore suitable long-term financing alternatives. See Note 4 of Notes to Condensed Consolidated Financial Statements.
In July 2008, DPL and DP&L made a $42 million payment to the Ohio Department of Taxation (ODT) in accordance with the settlement agreement reached on June 27, 2008. See Note 5 of Notes to Condensed Consolidated Financial Statements.

Operating Activities

For the nine months ended September 30, ~~2007~~2008 and ~~2006,~~2007, cash flows from operations were as follows:

Net Cash provided by Operating Activities

$ in millions

2007

2006

DPL

$
211.8

$
212.4

DP&L

$
239.6

$
270.7

Nine Months Ended

September 30,

$ in millions

2008

2007

DPL

$
242.5

$
235.0

DP&L

$
273.8

$
262.8

The tariff-based revenue from our energy business 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 coupled with the rate relief approved by the PUCO ~~for 2006 and beyond, provides~~will provide us with a reasonably predictable cash flow from operations.

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Table of Contents
DPL’s Cash provided by Operating Activities
DPL generated net cash from operating activities of ~~$211.8~~$242.5 million and ~~$212.4~~$235.0 million ~~for~~during the ~~nine months~~nine-month periods ended September 30, ~~2007~~2008 and ~~2006,~~2007, respectively. The net cash provided by operating activities for ~~the nine months ended September 30,~~2008 and 2007 was primarily the result of ~~operating profitability,~~cash received from utility customers, partially offset by cash used for ~~working capital.~~fuel, purchased power, operating expenditures, interest, and taxes. The ~~net cash provided by operating activities for the nine months ended September 30, 2006 was primarily the result of operating profitability, partially offset by cash used for~~fluctuations in working capital ~~specifically taxes.~~result from the timing of payments made and cash receipts from our utility customers.

DP&L’s Cash provided by Operating Activities
DP&L generated net cash from operating activities of ~~$239.6~~$273.8 million and ~~$270.7~~$262.8 million induring the ~~nine months~~nine-month periods ended September 30, ~~2007~~2008 and ~~2006,~~2007, respectively. The net cash provided by operating activities for ~~the nine months ended September 30,~~2008 and 2007 was primarily the result of ~~operating profitability,~~cash received from utility customers, partially offset by ~~an increase in~~ cash used for fuel, purchased power, operating expenditures, interest and taxes. The fluctuations in working ~~capital. The net~~capital result from the timing of payments made and cash ~~provided by operating activities for the nine months ended September 30, 2006 was primarily the result of operating profitability.~~receipts from our utility customers.
50

Investing Activities

For the nine months ended September 30, ~~2007~~2008 and ~~2006,~~2007, cash flows from investing activities were as follows:

Net Cash used for Investing Activities

$ in millions

2007

2006

DPL

$
(91.7
)
$
(155.9
)

DP&L

$
(247.8
)
$
(281.7
)

Nine Months Ended

September 30,

$ in millions

2008

2007

DPL

$
(183.7
)
$
(114.9
)

DP&L

$
(173.1
)
$
(271.0
)

DPL’s Cash used for Investing Activities
DPL’s net cash used for investing activities was ~~$91.7~~$183.7 million and ~~$155.9~~$114.9 million during the nine-month periods ended September 30, 2008 and 2007, respectively. For 2008, net cash flows used for investing activities were related to capital expenditures and the purchase of investment grade corporate bonds. The corporate bonds have an effective yield of 6.67%, and mature in November 2008 and February 2009. Net cash flows used for investing activities during the nine months ended September 30, 2007 ~~and 2006, respectively. Net cash used for investing activities for the nine months ended September 30, 2007 was~~were related to capital expenditures that were ~~partially~~largely offset by proceeds from the sale of two peaking units and a corporate aircraft. ~~Net cash used for investing activities for the nine months ended September 30, 2006 was related to capital expenditures, partially offset by the net sale of short-term investments and securities.~~

DP&L’s Cash used for Investing Activities
DP&L’s net cash used for investing activities was ~~$247.8~~$173.1 million and ~~$281.7~~$271.0 million ~~for~~during the ~~nine months~~nine-month periods ended September 30, ~~2007~~2008 and ~~2006,~~2007, respectively. Net cash flows used for investing activities ~~for~~during both ~~years was~~these periods were related to capital expenditures.

Financing Activities

For the nine months ended September 30, ~~2007~~2008 and ~~2006,~~2007, cash flows from financing activities were as follows:

Net Cash ~~(used for)/provided by~~used for Financing Activities

Nine Months Ended

September 30,

$ in millions

2007

2006

2008

2007

DPL

$
(283.6
)
$
(462.4
)

$
(167.4
)
$
(283.6
)

DP&L

$
(25.6
)
$
22.5

$
(80.1
)
$
(25.6
)

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Table of Contents

DPL’s Cash ~~(used for)/provided by~~used for Financing Activities
DPL’s net cash used for financing activities during the nine months ended September 30, 2008 was $167.4 million compared to $283.6 million during the same period of the prior year. Net cash flows used for financing activities during the nine months ended September 30, 2008 were primarily the result of cash used to redeem the $100 million 6.25% Senior Notes in May 2008 and to pay dividends of $89.9 million to stockholders, partially offset by withdrawals of $20.5 million from the restricted funds held in trust. Net cash flows used for financing activities in the nine months ended September 30, 2007 were ~~$283.6 million compared to the same period of 2006 of $462.4 million. Net cash used for financing activities for the nine months ended September 30, 2007 was~~ the result of cash used to redeem the $225 million 8.25% Senior Notes onin March 1, 2007 and to pay dividends to stockholders of $83.7 million, partially offset by cash received from the exercise of stock options, including tax effect, of ~~$14.5~~$15.0 million and withdrawals of $10.1 million from the restricted funds held in trust.
DP&L’s Cash used for Financing Activities
DP&L’s net cash used for financing activities during the nine months ended September 30, 2008 was $80.1 million compared to $25.6 million during the same period of the prior year. Net cash flows used for financing activities during the nine months ended September 30, 2008 were primarily the result of cash used to pay common stock dividends of $80.0 million to our parent DPL and a short-term loan repayment to DPL of $20.0 million, partially offset by withdrawals of $20.5 million from restricted funds held in trust. Net cash used for financing activities for the nine months ended September 30, 2006 was the result of cash used to repurchase $400.0 million of common stock and pay dividends to common shareholders of $85.7 million, partially offset by the receipt of $23 million of restricted funds held in trust.
~~DP&L’s Cash (used for)/provided by Financing Activities~~
~~DP&L’s~~ net cash used for financing activities for the nine months ended September 30, 2007 was $25.6 million compared to cash provided from financing activities of $22.5 million for the nine months ended September 30, 2006. Net cashflows used for financing activities for 2007 ~~was~~were primarily the result of cash used to pay common stock dividends to our parent DPL of $125.0 million, ~~and preferred dividends to third parties of $0.7 million,~~ partially offset by ~~$90.0 million for~~ a net short-term loan from our parent DPL of $90.0 million and withdrawals of $10.1 million offrom restricted funds held in trust. Net cash provided by financing activities of $22.5 million for the nine months ended September 30, 2006 was primarily the result of $23.1 million of draws from funds held by the trustee to finance our solid waste pollution control capital expenditures, partially offset by $0.6 million for dividends on preferred stock.
51

DPL and DP&L have obligations to make future payments for capital expenditures, debt agreements, lease agreements and other long-term purchase ~~obligations. We also~~obligations, and have certain contingent commitments such as guarantees. We believe our cash flows from operations, the credit facilities (existing or future arrangements), the senior notes and other short- and long-term debt financing, will be sufficient to satisfy our future working capital, capital expenditures, and other financing requirements for the foreseeable future. Our ability to generate positive cash flows ~~from operations~~ is dependent on general economic conditions, competitive pressures and other business and risk factors described in Item 1a of our ~~fiscal 2006~~Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and ~~Part II,~~supplemented by those described in Item 1a of Part II of this ~~Form 10-Q.~~quarterly report. If we are unable to generate sufficient cash flows, ~~from operations,~~ or otherwise comply with the terms of our credit facilities, the senior notes and other long-term debt, we may be required to refinance all or a portion of our existing debt or seek additional financing alternatives. A discussion of each of our critical liquidity commitments is outlined below.

Capital Requirements
DPL’s construction additions were $168.1 million and $275.4 million during the nine-month periods ended September 30, 2008 and ~~$260.0~~2007, respectively. DPL is expected to spend approximately $75 million for the ~~nine months ended September 30, 2007 and 2006, respectively, and are expected to approximate $360 million in 2007.~~
~~DP&L’s~~ ~~construction additions were $273.5 million and $258.2 million for the nine months ended September 30, 2007 and 2006, respectively, and are expected to approximate $360 million in 2007.~~
remainder of 2008. Planned construction additions for ~~2007~~2008 relate to DP&L’s environmental compliance program, power plant equipment, and its transmission and distribution system.
DP&L’s construction additions were $166.9 million and $273.5 million during the nine-month periods ended September 30, 2008 and 2007, respectively. DP&L isexpected to spend approximately $75 million for the remainder of 2008. Planned construction additions for 2008 relate to DP&L’s environmental compliance program, power plant equipment, and its transmission and distribution system.

Capital projects are subject to ~~continuous~~continuing review and are revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental ~~standards. For the remainder of 2007, 2008 and 2009,~~standards, among other factors. DPL, through its subsidiary DP&L, is projecting to spend an estimated ~~$705~~$665 million in capital projects ~~approximately 40%~~for the period 2008 through 2010. DP&L filed its electric security plan (ESP) with the PUCO on October 10, 2008. Included in the filing were proposed capital investments related to the company’s Customer Conservation and Energy Management Programs (CCEM). If approved by the PUCO, for the period 2009 to 2010, DP&L is projecting to spend an estimated $120 million of ~~which are to meet changing environmental standards. In our Form 10-Q, as~~the aforementioned $665 million in CCEM capital projects. A final decision from the PUCO regarding DP&L’s electric security plan is expected in the first quarter of ~~June 30, 2007, we reported our estimated capital spending to be approximately $675 million. This increase is due primarily to increases in capital projects at~~ ~~DPL~~ ~~operated generating plants.~~2009. Our ability to complete capital projects and the reliability of future service will be affected by our financial condition, the availability of internal funds, and the reasonable cost of external funds. We expect to finance our construction additions ~~in 2007~~ with a combination of cash on hand, short-term financing, ~~tax-exempt~~long-term debt, and cash flows from operations.

51

Table of Contents
Debt and ~~Debt Covenants~~Liquidity
During the three months ended March 31, 2006, the Ohio Department of Development (ODOD) awarded DP&L ~~is considering issuing in conjunction with~~ the ability to issue, over three years, up to $200 million of qualified tax-exempt financing from the ODOD’s 2005 volume cap carryforward. On September 13, 2006, the Ohio Air Quality Development Authority (OAQDA) ~~another series~~issued $100 million of ~~tax-exempt~~4.80% fixed interest rate OAQDA Revenue bonds ~~to finance~~2006 Series A due September 1, 2036. In turn, DP&L borrowed these funds from the ~~remaining solid waste disposal facility costs at Miami Fort, Killen, Stuart~~OAQDA. These funds were placed in escrow with a trustee and, ~~Conesville generating stations.~~as of April 3, 2007, DP&L had drawn out the entirety of the funds.

On November ~~21, 2006,~~15, 2007, the OAQDA issued $90 million of insured, collateralized, variable rate OAQDA Revenue bonds due November 1, 2040. In turn, DP&L ~~entered into a new~~borrowed these funds from the OAQDA. DP&L subsequently repurchased these bonds from the bondholders on April 4, 2008. This transaction is further discussed in Note 4 of Notes to Condensed Consolidated Financial Statements.
The $175 million 8.00% DPL Senior Notes are due on March 31, 2009. DPL expects to repay this debt obligation using the cash flows to be generated from future operating activities. Our future liquidity is further strengthened due to the completion and installation of FGD equipment at the Stuart station, which had required significant cash outlays. In addition, our $220 million ~~unsecured~~ revolving credit ~~agreement replacing its $100 million facility. This new agreement has a five year term that expires on~~facility, which does not expire until November ~~21,~~ 2011, is available to fund working capital needs, property acquisitions, and ~~provides~~ ~~DP&L~~ ~~with the ability to increase the size of the facility by an additional $50 million at any time. The facility contains one financial covenant:~~ ~~DP&L’s~~ ~~total debt to total capitalization ratio~~construction until long-term funding, if needed, is ~~not to exceed 0.65 to 1.00. This covenant is currently met.~~arranged. As of September 30, ~~2007,~~ ~~DP&L~~ ~~had no~~2008, the outstanding borrowings under this ~~facility. Fees associated with this~~ credit facility are approximately $0.2 million per year, however, changes in credit ratings may affect fees and the applicable interest rate. This revolving credit agreement also contains a $50 million letter of credit sublimit. As of September 30, 2007, ~~DP&L~~ ~~had no outstanding letters of credit against the facility.~~ ~~DP&L~~ ~~has certain contractual agreements for the sale and purchase of power, fuel and related energy services that contain credit rating related clauses allowing the counter parties~~amounted to ~~seek additional surety under certain conditions.~~$90 million.

~~Issuance of additional amounts of first mortgage bonds by~~ ~~DP&L~~Debt Covenants ~~is limited by the provisions of its mortgage. However, management believes that~~ ~~DP&L~~ continues to have sufficient capacity to issue first mortgage bonds to satisfy its requirements in connection with its construction programs. The amounts and timing of future financings will depend upon market and other conditions, rate increases, levels of sales and construction plans.
~~During the second quarter of 2007,~~ ~~DPL~~ ~~entered into a short-term loan to~~ ~~DP&L~~ ~~for $105 million.~~ ~~DP&L~~ paid down $15 million of this loan during the third quarter, leaving a current outstanding loan balance of $90 million. This short-term loan does not affect our debt covenants. There are no other inter-company debt collateralizations or debt guarantees between ~~DPL~~, ~~DP&L~~ ~~and their subsidiaries. None of the debt obligations of~~ ~~DPL~~ or ~~DP&L~~ ~~are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries.~~
52

There ~~was~~have been no ~~change~~changes to our debt covenants as ~~described~~disclosed in our Annual Report on Form 10-K ~~as of~~for the fiscal year ended December 31, ~~2006.~~2007. We are in compliance with all of our debt covenants.

Credit Ratings
~~Currently,~~ ~~DPL’s~~ ~~senior unsecured~~
The following table outlines the rating of each company and ~~DP&L’s~~ ~~senior secured debt credit ratings are as follows:~~date of the rating:

DPL Inc.

DP&L

Outlook

Effective

Fitch Ratings

BBB+

A+

~~Stable~~Positive

~~March 2007~~
April 2008
Moody’s Investors Service

~~Baa3~~Baa2

A3A2

Positive

~~June 2006~~
July 2008
Standard & Poor’s Corp.

BBB-

~~BBB+~~A-

~~Stable~~Positive

~~February 2007~~
April 2008

Off-Balance Sheet Arrangements
DPL Inc. - Guarantees
In the normal course of business, DPL enters into various agreements with our wholly owned generating subsidiary DPLE providing financial or performance assurance to third parties. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to DPLE on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish DPLE’s intended commercial purposes. Such agreements fall outside the scope of FASB Interpretation No. 45, “Guarantor’s Accounting and ~~DP&L~~ ~~do not~~Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” There have ~~any off-balance sheet arrangements that have or are reasonably likely~~been no material changes to ~~have a current or future effect~~our guarantees as disclosed in our Annual Report on ~~our financial condition, revenues or expenses, results~~Form 10-K for the fiscal year ended December 31, 2007.
52

Table of ~~operations, liquidity, capital expenditures or capital resources that are material to investors.~~Contents

Contractual Obligations ~~and Commercial Commitments~~
We ~~enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations. At September 30, 2007, these include:~~

Payment Year

$ in millions

Total

2007

2008-2009

2010-2011

Thereafter

DPL

Long-term debt

$
1,550.0

$
—

$
275.0

$
297.4

$
977.6

Interest payments

1,026.4

23.9

170.7

144.0

687.8

Pension and postretirement payments

219.1

5.5

45.2

46.5

121.9

Capital lease

2.3

0.2

1.5

0.6

—

Operating leases

0.8

0.4

0.3

0.1

—

Coal contracts (a)

925.8

104.6

578.8

242.4

—

Limestone contracts (a)

57.7

0.6

9.5

10.9

36.7

Reserve for uncertain tax provisions

41.9

41.9

—

—

—

Other contractual obligations

337.2

232.8

86.5

14.5

3.4

Total contractual obligations

$
4,161.2

$
409.9

$
1,167.5

$
756.4

$
1,827.4

DP&L

��

Long-term debt

$
783.2

$
—

$
—

$
—

$
783.2

Interest payments

542.6

9.8

78.3

78.3

376.2

Pension and postretirement payments

219.1

5.5

45.2

46.5

121.9

Capital lease

2.3

0.2

1.5

0.6

—

Operating leases

0.8

0.4

0.3

0.1

—

Coal contracts (a)

925.8

104.6

578.8

242.4

—

Limestone contracts (a)

57.7

0.6

9.5

10.9

36.7

Reserve for uncertain tax provisions

41.9

41.9

—

—

—

Other contractual obligations

337.2

232.8

86.5

14.5

3.4

Total contractual obligations

$
2,910.6

$
395.8

$
800.1

$
393.3

$
1,321.4

~~(a)~~ ~~DP&L~~~~-operated units~~

~~Long-term debt:~~
~~DPL’s~~ ~~long-term debt, as~~There have been no material changes, outside the ordinary course of ~~September 30,~~business, to the information disclosed in the contractual obligations table in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 ~~consists of~~ ~~DP&L’s~~ ~~first mortgage bonds and tax-exempt pollution control bonds,~~ ~~DPL~~ ~~unsecured notes and includes current maturities and unamortized debt discounts.~~except those relating to the following transactions:

·      On April 4, 2008, DP~~&L’s~~&L ~~long-term debt, as~~repurchased all of ~~September 30, 2007, consists of first mortgage~~the issued and outstanding $90 million variable rate OAQDA Revenue bonds ~~tax-exempt pollution control bonds~~from the bondholders and ~~includes an unamortized debt discount.~~
~~See~~placed them in a custody account. This transaction is further discussed in Note 84 of Notes to Condensed Consolidated Financial Statements.

53

~~Interest payments:~~·
~~Interest payments associated~~      On June 27, 2008, DPL entered into a $42 million settlement agreement with the ~~long-term debt described above.~~
~~Pension~~Ohio Department of Taxation (ODT) resolving all outstanding audit issues and ~~postretirement payments:~~
~~As of September 30, 2007,~~ ~~DP&L~~ ~~had estimated future benefit payments as outlined~~appeals, including uncertain tax positions for tax years 1998 through 2006. The $42 million payment was made to the ODT in July 2008. This transaction is further discussed in Note 65 of Notes to Condensed Consolidated Financial Statements. ~~These estimated future benefit payments are projected through 2016.~~

~~Capital lease:~~·
~~As of September 30,~~      At December 31, 2007, DP&L had ~~a capital lease~~contractual obligations relating to the installation of FGD equipment in the amount of $144 million. During the three months ended September 30, 2008, test operations of FGD equipment on Stuart station units 1 and 2 were completed and the equipment was placed in service. The open contractual obligations relating to the installation of FGD equipment was therefore reduced to $8.8 million at September 30, 2008. It is expected that ~~expires in September 2010.~~these open contractual obligations will be satisfied within the next twelve months.

~~Operating leases:~~Commercial Commitments
~~As of September 30, 2007,~~ ~~DPL~~ ~~and~~ ~~DP&L~~ had several operating leases with various terms and expiration dates. Not included in this total is approximately $88,000 per year related to right-of-way agreements that are assumed to have no definite expiration dates.

~~Coal contracts:~~
~~DP&L~~ ~~has entered into various long-term coal contracts to supply portions~~With the exception of ~~its coal requirements for its generating plants. Contract prices are subject to periodic adjustment and~~the transactions discussed in the preceding paragraph, there have ~~features that limit price escalation in any given year.~~
~~Limestone contracts:~~
~~DP&L~~ ~~has entered into a contract to supply limestone for its generating facilities.~~
~~Reserve for uncertain tax positions:~~
~~On January 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). There was~~been no ~~significant impact~~material changes, outside the ordinary course of business, to our overall results of operations, cash flows or financial position. The total amount of unrecognized tax benefits as of the date of adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest. During 2007, we recorded an additional $1.6 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.9 million as of September 30, 2007. None of the unrecognized tax benefits are due to uncertainty in the timing of deductibility.
~~Other contractual obligations:~~
~~As of September 30, 2007,~~ ~~DPL~~ ~~and~~ ~~DP&L~~ ~~had various other contractual obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.~~
We ~~enter into various~~ commercial commitments ~~which may affect the liquidity of~~as disclosed in our ~~operations. At September 30, 2007, these include:~~
~~Credit facilities:~~
~~In November 2006,~~ ~~DP&L~~ ~~replaced its $100 million revolving credit agreement with a $220 million five-year facility that expires~~Annual Report on ~~November 21, 2011.~~ ~~DP&L~~ ~~has the ability to increase the size of the facility by an additional $50 million at any time. At September 30, 2007, there were no outstanding borrowings under this facility.~~
~~Guarantees:~~
~~DP&L~~ ~~owns a 4.9% equity ownership interest in an electric generation company. As of September 30, 2007,~~ ~~DP&L~~ ~~could be responsible~~Form 10-K for the ~~repayment of 4.9%, or $34.1 million, of a $695 million debt obligation that matures in 2026.~~
~~In two separate transactions in November and~~fiscal year ended December ~~2006,~~ ~~DPL~~ agreed to be a guarantor of the obligations of its wholly-owned subsidiary, DPLE, regarding the sale of the Darby Electric Peaking Station to American Electric Power and the sale of the Greenville Electric Peaking Station to Buckeye Electric Power, Inc. In both cases, ~~DPL~~ ~~has agreed to guarantee the obligations of DPLE over a multiple year period as follows:~~31, 2007.
$ in millions

2007

2008

2009

2010

Darby

$
30.6

$
23.0

$
15.3

$
7.7

Greenville

$
14.8

$
11.1

$
7.4

$
3.7

54

MARKET RISK

~~As a result~~In the normal course of ~~our operating, investing and financing activities,~~business, we are subject to certain market risks including, but not limited to, reliance on third parties; changes in commodity prices for electricity, coal, environmental emissions and ~~natural gas as well as~~gas; and fluctuations in interest rates. We rely on many suppliers for the purchase and delivery of inventory, including coal and equipment components, to operate our energy production, transmission, and distribution functions. Unanticipated disruptions in our purchasing processes, delays, and supplier availability may affect our business and operating results. In addition, we rely on others to provide professional services, such as, but not limited to, actuarial calculations, internal audit services, payroll processing, and various consulting services. Commodity pricing exposure includes the impacts of weather, internal generation plant performance, market demand, increased competition, and other economic conditions. For purposes of potential risk analysis, we use sensitivity analysis to quantify potential impacts of market rate changes on the results of operations. The sensitivity analysis represents hypothetical changes in market values that may or may not occur in the future.

Our Risk Management Committee (RMC) is responsible for establishing risk management policies and the monitoring and reporting of risk exposures. The RMC meets on a regular basis with the objective of identifying, assessing, and quantifying material risk issues and developing strategies to manage these risks.
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Table of Contents
Commodity Pricing Risk
Recently, the coal market has experienced significant price volatility. We are now in a global market for coal in which our domestic price is increasingly affected by international supply disruptions and demand balance. Coal exports from the U.S. have increased significantly in recent years. In addition, domestic issues like government-imposed direct costs and permitting issues are affecting mining costs and supply availability. Our approach is to hedge the fuel costs for our anticipated electric sales. For the years ended December 31, 2009 and 2010, we have hedged our coal requirements with coal mine operators and financial institutions to meet our committed sales. We may not be able to hedge the entire exposure of our operations from commodity price volatility. To the extent we are not hedged against price volatility, our results of operations, financial position, or cash flows could be materially affected. As part of DP&L’s electric security plan filing, the Company is requesting regulatory authority to defer fuel and fuel related costs that exceed the amount that is in current rates. A final regulatory decision on our plan is expected in the first quarter of 2009.
Approximately ~~12%~~10% of DPL’s and ~~22%~~20% of DP&L’s electric revenues for the nine months ended September 30, ~~2007~~2008 were from sales of excess energy and capacity in the wholesale market. Energy and capacity in excess of the needs of existing retail customers are sold onin the wholesale market when we can identify opportunities with positive margins. As of September 30, ~~2007,~~2008, a hypothetical increase or decrease of 10% in DPL’s annual wholesale revenues could result in approximately ~~a $12~~an $11 million increase or decrease to ~~annual~~ net income, assuming no increases ~~or decreases~~ in fuel and purchased power costs. As of September 30, ~~2007,~~2008, a hypothetical increase or decrease of 10% in DP&L’s annual wholesale revenues could result in approximately a $21 million increase or decrease to ~~annual~~ net income, assuming no increases ~~or decreases~~ in fuel and purchased power costs.

DPL’s fuel (including coal, ~~natural~~ gas, oil and emission allowances) and purchased power costs as a percent of total operating costs in both the nine months ended September 30, ~~2007~~2008 and ~~2006~~2007 were 54% ~~and 49%, respectively.~~. DP&L’s fuel (including coal, ~~natural~~ gas, oil and emission allowances) and purchased power costs as a percent of total operating costs were 55% ~~and 52% in~~for both the ~~nine months ended~~nine-month periods ending September 30, ~~2007~~2008 and ~~2006, respectively.~~2007. We have substantially all of the total expected coal volume needed to meet our retail and firm wholesale sales requirements for ~~2007~~2008 under contract. The majority of our contracted coal is purchased at fixed prices. Some contracts provide for periodic adjustment and some are priced based on market indices. Substantially all contracts have features that limit price escalations in any given year. Our consumption of SO2 allowances should decline in ~~2007~~2008 due to ~~planned~~ emission control upgrades. We do not expect to purchase SO2 allowances for ~~2007.~~2008. The exact consumption of SO2 allowances will depend on market prices for power, availability of our generation units, the ~~timing~~operation of emission control equipment, ~~upgrade completion~~ and the actual sulfur content of the coal burned. DP&L does not plan to purchase NOXx allowances for ~~2007.~~the remainder of 2008. Fuel costs are impacted by changes in volume and price and are driven by a number of variables including weather, reliability of coal deliveries, scheduled outages, and generation plant mix. ~~Fuel~~Based on lower volume and gains realized from coal sales (and excluding the effect of emission allowance sales), fuel costs are ~~forecasted~~forecast to be ~~flat~~approximately 10% lower in ~~2007~~2008 compared to ~~2006.~~2007.

Purchased power costs depend, in part, upon the timing and extent of planned and unplanned outages of our generating capacity. We will purchase power on a discretionary basis when wholesale market conditions provide opportunities to obtain power at a cost below our internal production costs. As of September 30, ~~2007,~~2008, a hypothetical increase or decrease of 10% in DPL’s annual fuel and purchased power costs could result in approximately a ~~$34~~$31 million increase or decrease ~~or increase~~ to ~~annual~~ net ~~income, assuming no increases or decreases in sales revenues.~~income. As of September 30, ~~2007,~~2008, a hypothetical increase or decrease of 10% in DP&L’s annual fuel and purchased power costs could result in approximately a ~~$35~~$30 million increase or decrease ~~or increase~~ to ~~annual~~ net ~~income, assuming no increases or decreases in sales revenues.~~income.

Interest Rate Risk
As a result of our normal ~~borrowing~~investing and ~~leasing~~borrowing activities, our financial results are exposed to fluctuations in interest rates, which we manage through our regular financing activities. We maintain both cash on deposit and investments in cash equivalents that may be affected by adverse interest rate fluctuations. ~~Our long-term debt represents publicly and privately held secured and unsecured notes and debentures with fixed interest rates.~~ At September 30, ~~2007,~~2008, we ~~had no outstanding borrowings under~~maintained only fixed rate long-term debt. As discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, we repurchased $90 million of our ~~revolving credit facility.~~OAQDA Revenue bonds on April 4, 2008.
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Table of Contents

The carrying value of DPL’s debt was ~~$1,552.3~~$1,542.0 million at September 30, ~~2007,~~2008, consisting of DP&L’s first mortgage bonds, DP&L’s tax-exempt pollution control bonds, ~~our~~DPL’s unsecured notes,DP&L’s borrowings on its revolving credit facility, and DP&L’s capital ~~lease.~~leases. The fair value of this debt was ~~$1,564.8~~$1,487.2 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 September 30, 2007, are as follows:~~
55

DPL’s Long-term Debt

Expected Maturity

Amount

Date

($ in millions)

Average Rate

2007

$                     0.2

6.5%

2008

100.7

6.3%

2009

175.8

8.0%

2010

0.6

6.9%

2011

297.4

6.9%

2012

—

—

Thereafter

977.6

5.6%

Total

$              1,552.3

6.2%

Fair Value

$              1,564.8

The carrying value of DP&L’s debt was ~~$785.5~~$874.9 million at September 30, ~~2007,~~2008, consisting of ~~our~~DP&L’s first mortgage bonds, ~~our~~ tax-exempt pollution control bonds, borrowings on its revolving credit facility, and ~~our~~ capital ~~lease.~~leases. The fair value of this debt was ~~$777.0~~$812.6 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 September 30, 2007, are as follows:~~

DP&L’s Long-term Debt

Expected Maturity

Amount

Date

($ in millions)

Average Rate

2007

$                     0.2

6.5%

2008

0.7

6.9%

2009

0.8

6.9%

2010

0.6

6.9%

2011

—

—

2012

—

—

Thereafter

783.2

5.0%

Total

$                  785.5

5.0%

Fair Value

$                  777.0

~~Debt maturities for~~ ~~DPL~~ ~~and~~ ~~DP&L~~ ~~in 2007 are expected to be financed with a combination of short-term borrowings, tax-exempt pollution control bonds and internal funds.~~

CRITICAL ACCOUNTING ESTIMATES

DPL’s and DP&L’s condensed consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, our management is required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on our historical experience and assumptions that we believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain.

Different estimates could have a material effect on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Historically, however, recorded estimates have not differed materially from actual results. Significant items subject to such judgments include: the carrying value of property, plant and equipment; unbilled revenues; income taxes; valuation of regulatory assets and liabilities; the valuation of insurance and claims costs; ~~valuation allowances for receivables and deferred income taxes;~~ the valuation of ~~reserves related to current litigation and~~ assets and liabilities related to employee ~~benefits.~~benefits; and the valuation of contingent and other obligations. Actual results may differ from those estimates. Refer to our ~~2006~~ Annual Report ~~filed~~ on Form 10-K for the fiscal year ended December 31, 2007 for a complete listing of our critical accounting policies and estimates. There have been no material changes to these critical accounting policies and estimates.

~~Recently Issued Accounting Pronouncements~~
A discussion of recently issued accounting pronouncements is described in Note 1 of the Notes to the Condensed Consolidated Financial Statements and such discussion is incorporated by reference in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and made a part hereof.
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Table of Contents
~~OPERATING STATISTICS~~ELECTRIC SALES AND REVENUES

DPL Inc.

DP&L (a)

DPL Inc.

DP&L (a)

Three Months Ended
September 30,

Nine Months Ended
September 30,

Three Months Ended
September 30,

Nine Months Ended
September 30,

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

2007

2006

2007

2006

2007

2006

2007

2006

September 30,

September 30,

September 30,

September 30,

Electric sales (millions in kWh)

2008

2007

2008

2007

2008

2007

2008

2007

Electric sales (millions of kWh)

Residential

1,505

1,432

4,276

3,939

1,505

1,432

4,276

3,939

1,375

1,505

4,144

4,276

1,375

1,505

4,144

4,276

Commercial

1,101

1,075

3,038

2,906

1,101

1,075

3,038

2,906

1,055

1,101

3,001

3,038

1,055

1,101

3,001

3,038

Industrial

1,139

1,169

3,233

3,254

1,139

1,169

3,233

3,254

1,099

1,139

3,062

3,233

1,099

1,139

3,062

3,233

Other retail

397

380

1,111

1,069

397

380

1,111

1,069

380

397

1,096

1,111

380

397

1,096

1,111

Total retail

4,142

4,056

11,658

11,168

4,142

4,056

11,658

11,168

3,909

4,142

11,303

11,658

3,909

4,142

11,303

11,658

Wholesale

967

1,149

2,645

2,649

967

1,149

2,645

2,649

343

967

1,762

2,645

305

967

1,724

2,645

Total

5,109

5,205

14,303

13,817

5,109

5,205

14,303

13,817

4,252

5,109

13,065

14,303

4,214

5,109

13,027

14,303

Operating revenues
($ in thousands)

Residential

$
148,419

$
137,317

$
410,736

$
369,412

$
148,419

$
137,317

$
410,736

$
369,412

$
139,759

$
148,419

$
409,349

$
410,736

$
139,759

$
148,419

$
409,349

$
410,736

Commercial

85,619

79,651

241,381

223,950

80,085

73,672

226,960

207,192

84,402

85,619

249,073

241,381

78,831

80,085

232,240

226,960

Industrial

64,525

64,147

185,014

181,639

34,720

35,214

101,244

98,586

64,039

64,525

182,246

185,014

36,955

34,720

101,642

101,244

Other retail

25,049

22,927

70,879

65,161

19,907

22,779

57,974

65,074

25,121

25,049

72,973

70,879

19,949

19,907

59,028

57,974

Other miscellaneous revenues

2,570

3,222

7,701

8,615

2,581

3,235

7,747

8,646

2,444

2,570

7,193

7,701

2,452

2,581

7,199

7,747

Total retail

$
326,182

$
307,264

$
915,711

$
848,777

$
285,712

$
272,217

$
804,661

$
748,910

$
315,765

$
326,182

$
920,834

$
915,711

$
277,946

$
285,712

$
809,458

$
804,661

Wholesale

52,892

61,762

139,995

129,704

94,025

97,438

253,032

231,469

27,820

52,892

124,745

139,995

61,937

94,025

233,747

253,032

RTO ancillary revenues

39,833

20,652

81,389

55,695

39,833

20,652

81,389

55,695

RTO and capacity revenues

68,101

39,833

155,123

81,389

61,583

39,833

148,605

81,389

Other revenues, net of fuel costs

3,052

2,733

8,545

8,356

—

—

—

—

2,810

3,052

8,709

8,545

—

—

—

—

Total

$
421,959

$
392,411

$
1,145,640

$
1,042,532

$
419,570

$
390,307

$
1,139,082

$
1,036,074

$
414,496

$
421,959

$
1,209,411

$
1,145,640

$
401,466

$
419,570

$
1,191,810

$
1,139,082

Electric customers at end of period

Residential

455,801

456,134

455,801

456,134

455,801

456,134

455,801

456,134

455,537

455,801

455,537

455,801

455,537

455,801

455,537

455,801

Commercial

49,665

49,158

49,665

49,158

49,665

49,158

49,665

49,158

50,071

49,665

50,071

49,665

50,071

49,665

50,071

49,665

Industrial

1,813

1,828

1,813

1,828

1,813

1,828

1,813

1,828

1,806

1,813

1,806

1,813

1,806

1,813

1,806

1,813

Other

6,425

6,349

6,425

6,349

6,425

6,349

6,425

6,349

6,489

6,425

6,489

6,425

6,489

6,425

6,489

6,425

Total

513,704

513,469

513,704

513,469

513,704

513,469

513,704

513,469

513,903

513,704

513,903

513,704

513,903

513,704

513,903

513,704

(a)~~DP&L~~ ~~sells power to DPLER (a subsidiary of~~ ~~DPL~~~~). These sales are classified as wholesale on~~ ~~DP&L’s~~ ~~financial statements and retail sales for~~ ~~DPL~~~~. The kWh volumes contain all volumes distributed on the~~ ~~DP&L~~ ~~system which include the retail sales by DPLER. The sales for resale volumes are omitted to avoid duplicate reporting.~~
DP&L sells power to DPLER (a subsidiary of DPL). These sales are classified as wholesale on DP&L’s financial statements and retail sales for DPL. The kWh volumes contain all volumes distributed on the DP&L system which include the retail sales by DPLER. The sales for resale volumes are omitted to avoid duplicate reporting.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

See the ~~“Market Risk”~~“MARKET RISK” section in Part I of Item 2.
2 of this report.

Item 4. Controls and Procedures

Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for establishing and maintaining our disclosure controls and procedures. These controls and procedures were designed to ensure that material information relating to us and our subsidiaries is communicated to the CEO and CFO. We evaluated these disclosure controls and procedures as of the end of the period covered by this report with the participation of our CEO and CFO. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective: (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and ~~forms~~forms; and (ii) to ensure that information required to be disclosed by us in the reports that we submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting during the ~~most recently completed quarter~~three months ended September 30, ~~2007~~2008 that has materially affected, or is reasonably likely to materially affect, internal control over reporting.

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Table of Contents

~~PART~~Part II – Other Information

Item 1 — – Legal Proceedings

In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. We believe the amounts provided in our ~~Condensed Consolidated Financial Statements,~~condensed consolidated financial statements, as prescribed by GAAP, for these matters 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 our ~~Condensed Consolidated Financial Statements.~~condensed consolidated financial statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of September 30, ~~2007,~~2008, cannot be reasonably determined.

~~Certain~~The information set forth below is limited to certain recent developments concerning our legal proceedings and should be read in which we are involved are discussed in Part I, Item 1—Environmental Considerations, Item 1—Competition and Regulation, Item 3 and Note 15 to the Consolidated Financial Statements included therein ofconjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2006. The following discussion is limited to recent developments~~2007, and our Quarterly Reports on Form 10-Q for the three months ended March 31, 2008 and June 30, 2008. Information concerning ~~our~~the legal proceedings ~~and should be read~~discussed in ~~conjunction with~~ the ~~earlier report.~~UPDATES/OTHER MATTERS – Environmental Updates section of Part 1, Item 2 of this Quarterly Report on Form 10-Q is incorporated by reference into this Item.

~~Environmental~~State Income Tax Audit
As previously disclosed, on June 27, 2008, we entered into a $42 million settlement agreement with the Ohio Department of Taxation (ODT) resolving all outstanding audit issues, for tax years 1998 through 2006, that were discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. In July 2008, we made the $42 million settlement payment to ODT. This settlement is further discussed in Note 5 of Notes to Condensed Consolidated Financial Statements.
Sierra Club
In September 2004, the Sierra Club filed a lawsuit against DP&L and the other owners of the Stuart ~~Generating Station~~generating station in the United States District Court for the Southern District of Ohio for alleged violations of the Clean Air Act (CAA) and the ~~Station’s~~station’s operating permit. ~~DP&L~~~~, on behalf of all co-owners, is leading the defense of this matter. A sizable amount of discovery has taken place, expert reports have been~~On August 7, 2008, a consent decree was filed ~~by both parties and depositions of experts are expected to occur~~ in the ~~fourth quarter~~United States District Court in full settlement of ~~2007. Dispositive motions are to be filed in January 2008. No trial date has been set.~~these CAA claims. Under the terms of the consent decree, DP&L ~~is unable~~and the other owners of the Stuart generating station agreed to ~~determine~~(i) certain emission targets related to nitrogen oxides (NOx), sulfur dioxide (SO2), and particulate matter; (ii) make energy efficiency and renewable energy commitments that are conditioned on receiving Public Utilities Commission of Ohio (PUCO) approval for the recovery of costs; (iii) forfeit 5,500 sulfur dioxide allowances; and (iv) provide funding to a third party non-profit organization to establish a solar water heater rebate program. DP&L and the other owners of the station also entered into an attorneys’ fee agreement to pay a portion of the Sierra Club’s attorney and expert witness fees. The parties to the lawsuit filed a joint motion on October 22, 2008, seeking an order by the United States District Court approving the consent decree with funding for the third party non-profit organization set at $300,000. On October 23, 2008, the United States District Court approved the consent decree. We have determined that the terms of the consent decree will not have a material impact ~~of this lawsuit, if any,~~ on ~~its~~our overall results of operations, financial position, or cash flows.
Insurance Recovery Claim
On May 16, 2007, DPL filed an insurance claim with Energy Insurance Mutual (EIM) to recoup legal expenses associated with our litigation against three of our former executives. The litigation against the former executives was settled on May 21, 2007. Mediation with EIM on this claim occurred on May 29, 2008, at which time the parties did not reach agreement. DPL and EIM are currently scheduling arbitration of this insurance claim.

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Table of Contents

Item 1a —– Risk Factors

~~A comprehensive listing of~~We consider the risk factors ~~that we consider to be the most significant to your decision to invest in our stock is~~ provided in our most recent Annual Report on Form 10-K and ~~is incorporated herein by reference. The~~the risk factors set forth below to be the most significant in your decision to invest in our stock. Our most recent Annual Report on Form 10-K may be obtained as discussed ~~in section, ‘Website Access to Reports.’~~on Page 4 of this report. If any of ~~the listed~~these events occur, our business, financial position or results of operation could be materially affected. ~~The following risk factors included in our 2006 Form 10-K for year ended December 31, 2006 have been updated as follows:~~

~~Reliance on Third Parties~~Clean Air Interstate Rule (CAIR) decision by the U.S. Court of Appeals for the District of Columbia Circuit
~~We rely~~
On July 11, 2008, the United States Court of Appeals for the District of Columbia Circuit issued a decision that vacated the U.S. Environmental Protection Agency’s (USEPA’s) CAIR and its associated Federal Implementation Plan. This decision remands these issues back to the USEPA. The USEPA issued CAIR on ~~many~~March 10, 2005 to regulate certain upwind states with respect to fine particulate matter and ozone. CAIR created interstate trading programs for annual NOx emission allowances and made modifications to an existing trading program for SO2 that were to take effect in 2010. The court’s decision, in part, invalidated the new NOx annual emission allowance trading program and the modifications to the SO2 emission trading program, and created uncertainty regarding future NOx and SO2 emission reduction requirements and their timing. CAIR remains in effect pending a mandate by the court implementing its decision. On October 21, 2008, the court requested that the litigation parties submit their views as to an appropriate court mandate.
In the fourth quarter of 2007, DP&L began a program for selling excess emission allowances, including annual NOx emission allowances and SO2emission allowances that were the subject of CAIR trading programs. In subsequent quarters, DP&L recognized gains from the sale of excess emission allowances to third ~~party suppliers~~parties. The court’s CAIR decision has affected the trading market for excess allowances and ~~contractors~~impacted DP&L’s program for selling additional excess allowances. Although this impact on the sale of excess allowances has not had, nor do we expect it to have, a material effect on our financial position, the overall impact of the court’s decision, and of the actions the USEPA or others will take in response to this decision, on DPL and DP&L is not fully known at this time and could have an adverse effect on us.
Ohio Senate Bill 221
On May 1, 2008, substitute Senate Bill 221, an Ohio electric energy bill, was signed by the Governor and went into effect July 31, 2008. In compliance with Senate Bill 221, DP&L filed its electric security plan on October 10, 2008. The bill and DP&L’s electric security plan filing are further discussed in the UPDATES / OTHER MATTERS section above. While the overall financial impact of this new legislation on DPL and DP&L will not be known for some time, implementation of the new legislation by DPL and DP&L may materially impact our energy production, transmission and distribution functions including: the purchase and delivery of coal and other inventory; the construction of capital assets and waste disposal management associated with our production processes (such as bottom ash, fly ash and gypsum). Unanticipated changes in our purchasing processes, supplier availability, supplier performance and pricingfinancial condition.
Credit Market
The current global credit crisis may adversely affect our business and ~~operating~~financial results. ~~In addition, we rely~~During 2007, higher interest rates, falling property prices, and a significant increase in the number of sub-prime mortgages originated in 2005 and 2006 contributed to dramatic increases in mortgage delinquencies and defaults in 2007 and the nine months ended September 30, 2008. The anticipated future delinquencies among high-risk, or sub-prime, borrowers in the United States is expected to continue in the foreseeable future. The widespread dispersion of credit risk related to mortgage delinquencies and defaults through the securitization of mortgage-backed securities (MBS), sales of collateralized debt obligations (CDOs) and the creation of structured investment vehicles (SIVs), as well as the unclear impact on ~~others~~large banks of MBS, CDOs, and SIVs, caused banks to ~~provide professional services, such as, but not limited~~reduce their loans to ~~actuarial calculations, internal audit services, payroll processing~~each other or make them at higher interest rates. Liquidity and ~~various consulting services.~~
~~Employees~~
~~Approximately 53%~~credit concerns were further exacerbated in September 2008 with Lehman Brothers’ bankruptcy filing, the sale of Merrill Lynch to Bank of America, the U.S. government conservatorship of Fannie Mae and Freddie Mac, and the U.S. government loan to AIG. Because of this, the ability of corporations to obtain funds through the issuance of debt was negatively impacted. We issue debt to cover the costs of certain of our ~~employees are under a collective bargaining agreement. If we are unable~~operations and expenditures and the inability to ~~negotiate future collective bargaining agreements, we~~issue such debt on reasonable terms, or at all, could ~~experience work stoppages which may~~negatively affect our business and ~~operating~~financial results.

Fuel and Commodity Prices
Recently, the coal market has experienced significant price volatility. We are now in a global market for coal in which our domestic price is increasingly affected by international supply disruptions and demand balance. Coal exports from the U.S. have increased significantly in recent years. In addition, domestic issues like government-imposed direct costs and permitting issues are affecting mining costs and supply availability. Our approach is to hedge the fuel costs for our anticipated electric sales. For the years ended December 31, 2009 and 2010, we have hedged our coal requirements with coal mine operators and financial institutions to meet our committed sales. We may not be able to hedge the entire exposure of our operations from commodity price volatility. To the extent our suppliers do not meet their contractual commitments or we are not hedged against price volatility, our results of operations, financial position, or cash flows could be materially affected.
58

Table of Contents

Item 2 —– Unregistered ~~Sale~~Sales of Equity Securities and Use of Proceeds

None

58

Item 3 —– Defaults Upon Senior Securities

None

Item 4 —– Submission of Matters to a Vote of Security Holders

None

Item 5 —– Other Information

None

59

Table of Contents

Item 6 —– Exhibits

DPL ~~Inc.~~

DP&L

Exhibit
Number

Exhibit

Location
X

X

31(a)

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith as Exhibit 31(a)

X

X

31(b)

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith as Exhibit 31(b)

X
31(c)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith as Exhibit 31(c)
X
31(d)
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith as Exhibit 31(d)

X

X

32(a)

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith as Exhibit 32(a)

X

X

32(b)

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith as Exhibit 32(b)

X
32(c)
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith as Exhibit 32(c)
X
32(d)
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith as Exhibit 32(d)

5960

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, DPL Inc. and The Dayton Power and Light Company has duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.

DPL Inc.
The Dayton Power and Light Company

~~(Registrants)~~
~~Date:~~
~~October 31, 2007~~
~~/s/ Paul M. Barbas~~

~~Paul M. Barbas~~
~~President and Chief Executive Officer~~
~~(principal executive officer)~~
(Registrants)

~~October 31, 2007~~
~~/s/ John J. Gillen~~
~~John J. Gillen~~
~~Senior Vice President and Chief Financial Officer~~
~~(principal financial officer)~~
~~October 31, 2007~~
~~/s/ Frederick J. Boyle~~
~~Frederick J. Boyle~~
~~Vice President and Chief Accounting Officer~~
~~(principal accounting officer)~~

Date:
October 29, 2008
/s/ Paul M. Barbas
Paul M. Barbas
President and Chief Executive Officer
(principal executive officer)
October 29, 2008
/s/ John J. Gillen
John J. Gillen
Senior Vice President, Chief Financial Officer and Treasurer
(principal financial officer)
October 29, 2008
/s/ Frederick J. Boyle
Frederick J. Boyle
Vice President—Finance, Chief Accounting Officer and Controller
(principal accounting officer)

6061

DP&L —– Other Income Tax Expense/ (Deductions)

DP&L – Income Tax Expense

DPL — Margins, Fuel and Purchased PowerInc. – Cost of Revenues

DPL —Inc. – Investment Income

DPL Inc. – Other Income / (Deductions)

DPL —Inc. – Income Tax Expense

DPL — Discontinued Operations

DP&L — Margins, Fuel and Purchased Power– Cost of Revenues

DP&L — Investment Income

	Three Months Ended September 30,
	2007					2006
$ in millions except per share amounts	Net Income		Shares	Per Share		Net Income		Shares	Per Share
Basic EPS	$	60.7	108.0	$	0.56	$	50.8	107.7	$	0.47

Effect of Dilutive
Securities:
Restricted stock units			—					1.2
Warrants			7.1					7.3
Stock options, performance and restricted shares			0.3					1.2

Diluted EPS	$	60.7	115.4	$	0.53	$	50.8	117.4	$	0.43

	Three Months Ended September 30,					Nine Months Ended September 30,
$ in millions	2007		2006			2007			2006

Investment expenses	$	—	$	(0.3	)	$	(0.4	)	$	(0.8	)
Income from discontinued operations	—		(0.3		)	(0.4		)	(0.8		)

Gain realized from sale	—		5.7			8.2			18.9
Net gain on sale	—		5.7			8.2			18.9

Gain on settlement of executive litigation	—		—			8.2			—

Earnings before income taxes	—		5.4			16.0			18.1
Income tax expense	—		(2.0		)	(6.0		)	(7.1		)
Earnings from discontinued operations, net	$	—	$	3.4		$	10.0		$	11.0

DPL Inc. $ in millions	At September 30, 2007			At December 31, 2006

Accounts receivable, net:
Retail customers	$	81.8		$	65.0
Partners in commonly-owned plants	68.9			51.5
Unbilled revenue	64.8			68.7
PJM	23.1			13.1
Wholesale and subsidiary customers	10.4			15.8
Other	9.5			7.1
Refundable franchise tax	5.2			5.2
Provision for uncollectible accounts	(1.6		)	(1.4		)
Total accounts receivable, net	$	262.1		$	225.0

Inventories, at average cost:
Fuel and emission allowances	$	69.5		$	52.4
Plant materials and supplies	34.6			32.6
Other	0.1			0.4
Total inventories, at average cost	$	104.2		$	85.4

Other current assets:
Prepayments	$	4.6		$	13.3
Deposits and other advances	1.0			17.8
Other	2.8			6.6
Total other current assets	$	8.4		$	37.7

Property, plant and equipment:
Construction work in process	$	338.5		$	376.0
Property, plant and equipment (a)	4,605.1			4,626.0
Total property, plant and equipment	$	4,943.6		$	5,002.0

Other assets:
Unamortized loss on reacquired debt	$	19.2		$	20.4
Unamortized debt expense	9.8			10.6
Master Trust assets	9.1			39.4
Investments	9.0			7.0
Commercial activities tax benefit	6.8			6.8
Other	0.3			0.5
Total other assets	$	54.2		$	84.7

Accounts payable:
Trade payables	$	59.1		$	75.7
Fuel accruals	49.3			37.3
Other	77.6			56.4
Total accounts payable	$	186.0		$	169.4

Other current liabilities:
Customer security deposits	$	18.9		$	19.4
Pension and retiree benefits payable	0.8			5.8
Financial transmission rights - future proceeds	—			2.7
Low income payment plan obligation	3.1			1.9
Unearned revenue	1.1			—
Other	3.5			8.5
Total other current liabilities	$	27.4		$	38.3

Other deferred credits:
Asset retirement obligations - regulated property	$	90.7		$	86.3
Pension liabilities	34.6			37.7
Retiree health and life benefits	28.2			28.5
Trust obligations	20.6			76.2
SECA net revenue subject to refund	20.4			18.7
Asset retirement obligations - generation property	11.9			11.7
Deferred gain on sale of portfolio	—			8.2
Employee benefit reserves	4.4			4.1
Litigation and claims reserves	4.5			3.4
Customer advances in aid of construction	3.4			3.0
Environmental reserves	0.1			0.1
Other	3.8			2.8
Total other deferred credits	$	222.6		$	280.7

(a)	Weighted average interest rate.

	Note: The tables above do not include the current portion of long-term debt.

DP&L $ in millions	At September 30, 2007			At December 31, 2006

Accounts receivable, net:
Retail customers	$	81.8		$	65.0
Partners in commonly-owned plants	68.9			51.5
Unbilled revenue	56.6			61.0
PJM	23.1			13.9
Wholesale and subsidiary customers	5.3			8.3
Refundable franchise tax	3.1			3.1
Other	5.8			4.2
Provision for uncollectible accounts	(1.6		)	(1.4		)
Total accounts receivable, net	$	243.0		$	205.6

Inventories, at average cost:
Fuel and emission allowances	$	69.5		$	52.4
Plant materials and supplies	33.2			30.2
Other	0.1			0.4
Total inventories, at average cost	$	102.8		$	83.0

Other current assets:
Prepayments	$	6.8		$	15.8
Deposits and other advances	0.8			17.0
Other	3.2			5.4
Total other current assets	$	10.8		$	38.2

Property, plant and equipment:
Construction work in process	$	337.6		$	375.2
Property, plant and equipment	4,350.7			4,075.4
Total property, plant and equipment	$	4,688.3		$	4,450.6

Other assets:
Master Trust assets	$	74.5		$	109.0
Unamortized loss on reacquired debt	19.2			20.4
Unamortized debt expense	8.3			8.6
Investments	0.6			0.6
Other	0.4			0.5
Total other assets	$	103.0		$	139.1

Accounts payable:
Trade payables	$	58.7		$	74.7
Fuel accruals	46.2			36.7
Other	77.8			54.8
Total accounts payable	$	182.7		$	166.2

Other current liabilities:
Customer security deposits	$	18.9		$	19.4
Pension and retiree benefits payable	0.8			5.8
Financial transmission rights - future proceeds	—			2.7
Low income payment plan obligation	3.1			1.9
Unearned revenue	1.1			—
Other	3.5			5.6
Total other current liabilities	$	27.4		$	35.4

Other deferred credits:
Asset retirement obligations - regulated property	$	90.7		$	86.3
Pension liabilities	34.6			37.7
Retiree health and life benefits	28.2			28.5
Trust obligations	20.6			76.2
SECA net revenue subject to refund	20.4			18.7
Asset retirement obligations - generation property	11.9			11.7
Employee benefit reserves	4.4			4.1
Litigation and claims reserves	4.5			3.4
Customer advances in aid of construction	3.4			3.0
Environmental reserves	0.1			0.1
Other	3.8			2.8
Total other deferred credits	$	222.6		$	272.5

DP&L	Nine Months Ended September 30,
$ in millions	2007			2006
Cash flows - other:
Payroll taxes payable	$	—		$	(2.0	)
Deposits and other advances	15.6			(10.5		)
Lump sum retirement payment	(4.9		)	—
Other	5.8			1.0
Total cash flows - other	$	16.5		$	(11.5	)

													Pension						Postretirement
$ in millions	Pension						Postretirement						2008			2007			2008			2007
	2007			2006			2007			2006
Service cost	$	0.2		$	1.0		$	—		$	—		$	0.8		$	0.2		$	—		$	—
Interest cost	4.0			4.3			0.4			0.5			4.1			4.0			0.4			0.4
Expected return on assets (a)	(5.5		)	(5.5		)	(0.1		)	(0.2		)	(6.0		)	(5.5		)	(0.1		)	(0.1		)

Amortization of unrecognized:
Actuarial (gain) loss	0.8			0.9			(0.2		)	(0.2		)	0.7			0.8			(0.2		)	(0.2		)
Prior service cost	0.6			0.7			—			—			0.6			0.6			—			—
Transition obligation	—			—			—			0.1			—			—			—			—
Net periodic benefit cost	0.1			1.4			0.1			0.2			$	0.2		$	0.1		$	0.1		$	0.1
Settlement cost (b)	—			2.6			—			—
Net periodic benefit cost after adjustments	$	0.1		$	4.0		$	0.1		$	0.2

(a)	The market-related value of assets is equal to the fair value of assets at implementation with subsequent asset gains and losses recognized in the market-value systematically over a three-year period.

~~(b)~~	The settlement cost pertains to a former officer (not related to our litigation settlement with three former executives) who elected to receive a lump sum distribution in January 2007 from the Supplemental Executive Retirement Plan.

		Weighted-Average
	Number of	Grant Date
$ in millions (except share amounts)	Options	Fair Value
Non-vested at January 1, 2007	10,000	$	0.05
Granted in first nine months 2007	—	—
Vested in first nine months 2007	—	—
Forfeited in first nine months 2007	—	—
Non-vested at September 30, 2007	10,000	$	0.05

	Options				RSUs				Performance Shares
	2008		2007		2008		2007		2008		2007
Outstanding at beginning of year	946,500		5,091,500		22,976		1,334,339		142,108		154,768
Granted	—		—		—		—		93,298		78,559
Dividends	—		—		—		11,656		—		—
Exercised	(90,400	)	(520,000	)	(11,253	)	(20,097	)	—		(22,462	)
Expired	—		—		—		—		(37,426	)	(21,583	)
Forfeited	—		(3,620,000	)	(1,603	)	(1,302,922	)	(7,253	)	(34,243	)
Outstanding at period end	856,100		951,500		10,120		22,976		190,727		155,039
Exercisable at period end	856,100		941,500		—		—		—		—

	Nine Months Ended
	September 30
	2007			2006
Options:
Outstanding at beginning of year	5,091,500			5,486,500
Granted	—			—
Exercised	(520,000		)	(10,000		)
Forfeited (a)	(3,620,000		)	(40,000		)
Outstanding at period-end	951,500			5,436,500
Exercisable at period-end	941,500			5,416,000

Weighted-average option prices per share:
Outstanding at beginning of year	$	21.95		$	21.86
Granted	$	—		$	—
Exercised	$	26.83		$	21.00
Forfeited	$	20.38		$	15.88
Outstanding at period-end	$	24.08		$	22.02
Exercisable at period-end	$	24.07		$	20.98

			Options Outstanding			Options Exercisable
			Weighted-	Weighted-			Weighted-
			Average	Average			Average
Range of Exercise			Contractual	Exercise			Exercise
Prices		Outstanding	Life	Price		Exercisable	Price
$	14.95 - $21.00	625,000	3.3 years	$	20.60	625,000	$	20.60
$	21.01 - $29.63	326,500	4.0 years	$	28.83	316,500	$	28.93

~~Number of non-vested shares~~	~~10,000~~
~~Date of grant~~	~~December 29, 2004~~
~~Expected volatility~~	~~26.1~~	%
~~Weighted-average expected volatility~~	~~26.1~~	%
~~Expected life (in years)~~	~~9.9~~
~~Expected dividends~~	~~4.7~~	%
~~Weighted-average expected dividends~~	~~4.7~~	%
~~Risk-free interest rate~~	~~4.3~~	%

	Nine Months Ended				Restricted Shares			Director RSUs				Mgt. Performance Shares
	September 30,				2008		2007	2008		2007		2008	2007
	2007		2006
RSUs:
Outstanding at beginning of year	1,334,339		1,319,399		42,200		19,000	13,573		—		—	—
Granted	—		—		39,347		23,200	15,752		14,920		39,144	—
Dividends	11,656		35,030		—		—	630		231		—	—
Exercised	(20,097	)	(22,516	)	(1,000	)	—	(13,721	)	(142	)	—	—
Expired					—		—	—		—		—	—
Forfeited	(1,302,922	)	(8,978	)	—		—	(1,149	)	(1,553	)	—	—
Outstanding at period-end	22,976		1,322,935
Exercisable at period-end	—		—
Outstanding at period end					80,547		42,200	15,085		13,456		39,144	—
Exercisable at period end					—		—	—		—		—	—

	Three Months Ending		Nine Months Ending
	September 30,		September 30,
	2007	2006	2007	2006
Expected volatility	13.4-16.7%	10.3-20.3%	10.6-43.5%	7.3-28.6%
Weighted-average expected volatility	14.4%	17.1%	16.2%	22.0%
Expected life (in years)	1.0-3.0	1.0-4.0	1.0-3.0	1.0-4.0
Expected dividends	3.6%	3.7-3.8%	3.5-3.6%	3.7-3.8%
Weighted-average expected dividends	3.6%	3.8%	3.5%	3.8%
Risk-free interest rate	4.0-4.1%	4.6-4.9%	4.0-5.0%	4.7-5.2%

	Number of		Weighted-Average
	Performance		Grant Date
$ in millions (except share amounts)	Shares		Fair Value
Non-vested at January 1, 2007	110,723		$	2.7
Granted in first nine months 2007	78,559		2.6
Vested in first nine months 2007	—		—
Forfeited in first nine months 2007	(34,243	)	(0.9		)
Non-vested at September 30, 2007	155,039		$	4.4

	Assets and Liabilities Measured at Fair Value on a Recurring Basis
					Level 1				Level 2				Level 3
					Based on Quoted				Based on
	Fair Value at				Prices in Active				Other Observable				Unobservable
	September 30, 2008				Market				Inputs				Inputs
$ in millions	DPL		DP&L (a)		DPL		DP&L (a)		DPL		DP&L		DPL		DP&L
Assets
Master Trust Assets	$	13.0	$	42.4	$	—	$	29.4	$	13.0	$	13.0	$	—	$	—
Derivative Assets	0.1		0.1		—		—		0.1		0.1		—		—
Total	$	13.1	$	42.5	$	—	$	29.4	$	13.1	$	13.1	$	—	$	—

Liabilities
Derivative Liabilities	$	2.1	$	2.1	$	—	$	—	$	2.1	$	2.1	$	—	$	—
Total	$	2.1	$	2.1	$	—	$	—	$	2.1	$	2.1	$	—	$	—

	Number of	Weighted-Average
	Restricted	Grant Date
$ in millions (except share amounts)	Shares	Fair Value
Non-vested at January 1, 2007	19,000	$	0.5
Granted in first nine months 2007	23,200			0.7
Vested in first nine months 2007	—			—
Forfeited in first nine months 2007	—			—
Non-vested at September 30, 2007	42,200	$		1.2

	Nine Months Ended
	September 30,
	2007	2006
Restricted Shares:
Outstanding at beginning of year	19,000	—
Granted	23,200	—
Exercised	—	—
Forfeited	—	—
Outstanding at period-end	42,200	—
Exercisable at period-end	—	—

	Number of		Weighted-Average
	Director		Grant Date
$ in millions (except for share amounts)	RSUs		Fair Value
Non-vested at January 1, 2007	—		$	—
Granted in first nine months 2007	14,920		0.5
Dividends accrued in the first nine months 2007	231		—
Vested in first nine months 2007	(6,643	)	(0.2		)
Forfeited in first nine months 2007	(1,553	)	—
Non-vested at September 30, 2007	6,955		$	0.3

			Payment Year
$ in millions	Total		2007		2008-2009		2010-2011		Thereafter
DPL

Long-term debt	$	1,550.0	$	—	$	275.0	$	297.4	$	977.6
Interest payments	1,026.4		23.9		170.7		144.0		687.8
Pension and postretirement payments	219.1		5.5		45.2		46.5		121.9
Capital lease	2.3		0.2		1.5		0.6		—
Operating leases	0.8		0.4		0.3		0.1		—
Coal contracts (a)	925.8		104.6		578.8		242.4		—
Limestone contracts (a)	57.7		0.6		9.5		10.9		36.7
Reserve for uncertain tax provisions	41.9		41.9		—		—		—
Other contractual obligations	337.2		232.8		86.5		14.5		3.4
Total contractual obligations	$	4,161.2	$	409.9	$	1,167.5	$	756.4	$	1,827.4

DP&L

Long-term debt	$	783.2	$	—	$	—	$	—	$	783.2
Interest payments	542.6		9.8		78.3		78.3		376.2
Pension and postretirement payments	219.1		5.5		45.2		46.5		121.9
Capital lease	2.3		0.2		1.5		0.6		—
Operating leases	0.8		0.4		0.3		0.1		—
Coal contracts (a)	925.8		104.6		578.8		242.4		—
Limestone contracts (a)	57.7		0.6		9.5		10.9		36.7
Reserve for uncertain tax provisions	41.9		41.9		—		—		—
Other contractual obligations	337.2		232.8		86.5		14.5		3.4
Total contractual obligations	$	2,910.6	$	395.8	$	800.1	$	393.3	$	1,321.4

Continuing operations:
Reversal of accrued obligations	$	50.8
Allocated settlement expense	(19.8		)
Net gain from continuing operations	$	31.0

Discontinued operations:
Reversal of accrued obligations	$	13.4
Allocated settlement expense	(5.2		)
Net gain from discontinued operations	$	8.2

~~Continuing operations:~~
~~Reversal of accrued obligations~~	~~$60.3~~
~~Allocated settlement expense~~	~~(25.0~~	)
~~Net gain from continuing operations~~	~~$35.3~~

$ in millions	Type of Recovery (a)	Amortization Through	At September 30, 2007		At December 31, 2006
Regulatory Assets:
Deferred recoverable income taxes	C/B	Ongoing	$	51.9	$	53.1
Pension and postretirement benefits	C	Ongoing	44.5		47.1
Electric Choice system costs	F	2010	11.0		13.5
Regional transmission organization costs	C	2014	10.3		11.4
Deferred storm costs	C	2008	2.7		5.4
PJM administrative costs	F	2009	3.4		4.6
Power plant emission fees	C	Ongoing	4.4		4.5
Rate case expenses	F	2010	0.8		1.0
Retail settlement system costs			3.1		3.1
PJM integration costs	F	2015	1.1		1.4
Other costs			3.8		3.5
Total regulatory assets			$	137.0	$	148.6

Regulatory Liabilities:
Asset retirement obligations - regulated property			$	90.7	$	86.3
Postretirement benefits			7.1		7.6
SECA net revenue subject to refund			20.4		18.7
Total regulatory liabilities			$	118.2	$	112.6

	DP&L Share			DP&L Investment
	Ownership (%)	Production Capacity (MW)	Gross Plant in Service ($ in millions)		Accumulated Depreciation ($ in millions)	Construction Work in Progress ($ in millions)
Production Units:
Beckjord Unit 6	50.0	207	63		53	7
Conesville Unit 4	16.5	129	34		27	24
East Bend Station	31.0	186	199		128	9
Killen Station	67.0	424	568		249	12
Miami Fort Units 7&8	36.0	360	270		103	70
Stuart Station	35.0	839	392		205	201
Zimmer Station	28.1	365	1,055		568	11
Transmission (at varying percentages)			90		50	0

DPL’s and DP&L’s share of operating costs associated with the jointly-owned generating facilities are included within the corresponding line on the Condensed Consolidated Statement of Results of Operations and our share of the investment is included in the Condensed Consolidated Balance Sheet.

	DPL Inc.	DP&L	Outlook	Effective

Fitch Ratings	BBB+	A+	~~Stable~~Positive	~~March 2007~~	April 2008
Moody’s Investors Service	~~Baa3~~Baa2	A3A2	Positive	~~June 2006~~	July 2008
Standard & Poor’s Corp.	BBB-	~~BBB+~~A-	~~Stable~~Positive	~~February 2007~~	April 2008

	DPL’s Long-term Debt
Expected Maturity	Amount
Date	($ in millions)	Average Rate

2007	$ 0.2	6.5%
2008	100.7	6.3%
2009	175.8	8.0%
2010	0.6	6.9%
2011	297.4	6.9%
2012	—	—
Thereafter	977.6	5.6%
Total	$ 1,552.3	6.2%

Fair Value	$ 1,564.8

	DP&L’s Long-term Debt
Expected Maturity	Amount
Date	($ in millions)	Average Rate

2007	$ 0.2	6.5%
2008	0.7	6.9%
2009	0.8	6.9%
2010	0.6	6.9%
2011	—	—
2012	—	—
Thereafter	783.2	5.0%
Total	$ 785.5	5.0%

Fair Value	$ 777.0

DPL ~~Inc.~~	DP&L	Exhibit Number	Exhibit	Location
X	X	31(a)	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 31(a)

X	X	31(b)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 31(b)

	X	31(c)	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 31(c)

	X	31(d)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 31(d)

X	X	32(a)	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 32(a)

X	X	32(b)	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 32(b)

	X	32(c)	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 32(c)

	X	32(d)	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 32(d)

			DPL Inc.
			The Dayton Power and Light Company
	~~(Registrants)~~

~~Date:~~	~~October 31, 2007~~	~~/s/ Paul M. Barbas~~
			~~Paul M. Barbas~~ ~~President and Chief Executive Officer~~ ~~(principal executive officer)~~
(Registrants)
	~~October 31, 2007~~	~~/s/ John J. Gillen~~
		~~John J. Gillen~~ ~~Senior Vice President and Chief Financial Officer~~ ~~(principal financial officer)~~

	~~October 31, 2007~~	~~/s/ Frederick J. Boyle~~
		~~Frederick J. Boyle~~ ~~Vice President and Chief Accounting Officer~~
		~~(principal accounting officer)~~


Date:	October 29, 2008	/s/ Paul M. Barbas
		Paul M. Barbas President and Chief Executive Officer (principal executive officer)


	October 29, 2008	/s/ John J. Gillen
		John J. Gillen Senior Vice President, Chief Financial Officer and Treasurer (principal financial officer)

	October 29, 2008	/s/ Frederick J. Boyle
		Frederick J. Boyle
		Vice President—Finance, Chief Accounting Officer and Controller
		(principal accounting officer)