UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

|X| x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year endedDecember 31, ~~2002~~2003

OR
~~|_|~~

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

For the transition period from ________ to ________

Commission File Number1-2385

~~THE DAYTON POWER AND LIGHT COMPANY~~
~~(Exact name of registrant as specified in its charter)~~

THE DAYTON POWER AND LIGHT COMPANY

(Exact name of registrant as specified in its charter)

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


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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES o NO x

~~YES |X| NO |_|~~Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule ~~126-2)~~12b-2). YES o NO x

~~YES |X| NO |_|~~The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant as of June 30, 2003: None.

Number of shares of registrant’s common stock outstanding as of ~~December~~October 31, ~~2002,~~2004, all of which were held by DPL Inc., was 41,172,173.

1DOCUMENTS INCORPORATED BY REFERENCE

None.

~~THE DAYTON POWER AND LIGHT COMPANY~~The Dayton Power and Light Company

Index to Annual Report on Form 10-K
Fiscal Year Ended December 31, ~~2002~~2003

		Page NoNo.
	~~Part I~~
	Part I
Item 1		Business	3
Item 2		Properties	16
Item 3		Legal Proceedings	16
Item 4		Submission of Matters to a Vote of Security Holders	16	18

	Part II

Item 5		Market for Registrant’s Common Equity and Related Shareholder Matters	17	18
Item 6		Selected Financial Data	17	18
Item 7		Management’s Discussion and Analysis of Financial Condition and Results of Operations	18	19
Item 7A		Quantitative and Qualitative ~~Disclosure~~Disclosures about Market Risk	32	33
Item 8		Financial Statements and Supplementary Data	33	34
Item 9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	58	78
Item 9A	Controls and Procedures	79
	~~Part III~~

	Part III
Item 10		Directors and Executive Officers of the Registrant	58	81
Item 11		Executive Compensation	62	86
Item 12		Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	67	107
Item 13		Certain Relationships and Related Transactions	67	109
Item 14	Principal Accountant Fees and Services	~~Controls and Procedures~~	68	110

	Part IV

Item 15		Exhibits, Financial Statement Schedules and Reports on Form 8-K	68	112

	Other

		Signatures	72	118
	Schedule II - Valuation and Qualifying Accounts	~~Certifications~~ 121
	Subsidiaries of The Dayton Power and Light Company	74
	Independent Auditors’ Consent
	Consent of Independent Accountants
	Certifications

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

The Company’s public internet site is http://www.dplinc.com. The Company makes available through its internet site, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC.

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

PART I

Item 1 —- Business

THE COMPANYThe Dayton Power and Light Company

The Dayton Power and Light Company ~~(“DP&L”~~(DP&L or ~~“the Company”)~~the Company) is a wholly-owned subsidiary of DPL Inc. (DPL). DP&L is a public utility incorporated in 1911 under the laws of ~~Ohio in 1911. The Company~~Ohio. DP&L sells electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. Electricity for ~~the Company’s 24 county~~DP&L’s 24-county service area is generated at eight power plants and is distributed to more than 500,000 retail customers. Principal industries served include automotive, food processing, paper, ~~technology,~~plastic manufacturing and defense. The Company’s sales reflect the general economic conditions and seasonal weather patterns of the area.

The Company employed ~~1,464~~1,441 persons as of December 31, ~~2002,~~2003, of which ~~1,217~~1,181 were full-time employees and ~~247~~260 were part-time employees.

All of the outstanding shares of common stock of the Company are held by DPL, ~~Inc. (“DPL”),~~ which became the Company’s corporate parent, effective April 21, 1986.

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

COMPETITIONRECENT DEVELOPMENTS

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

On March 15, 2004, the Audit Committee retained the law firm of Taft, Stettinius & Hollister LLP (TS&H) to represent the Committee in an independent review of each of the matters raised by the Thobe Memorandum. TS&H subsequently retained an accounting firm as a forensic accountant to assist in this review. On April 27, 2004, TS&H submitted a written report of its findings to the members of the Audit Committee (the Report).

A copy of the Report is filed as an exhibit to this Form 10-K. TS&H stated in its Report that no person had indicated to it, nor had it uncovered in the course of its review, any uncorrected material inaccuracies in the Company’s and DPL’s books and records. Further, TS&H reported that it had determined that some of Mr. Thobe’s concerns were based on incomplete information or were matters of judgment. TS&H did, however, recommend further follow-up by the Audit Committee and improvements relating to disclosures, communication, access to information, internal controls and the culture of the Company and DPL Inc. in certain areas.

Senior management was given the opportunity to review and comment on the Report. Mr. Forster, Ms. Muhlenkamp and Stephen F. Koziar, Jr., formerly the Company’s and DPL’s Chief Executive Officer and President, each submitted written responses disagreeing with a number of the Report’s conclusions. They also provided additional information regarding the internal control and process issues that were raised by the Thobe Memorandum and corroborated in the Report. In light of the responses by senior management, TS&H prepared a supplement to the Report, dated May 15, 2004 (the Supplement). In the Supplement, TS&H addressed the information and documentation provided by senior management and incorporated the revised findings. A copy of the Supplement is also filed as an exhibit to this Form 10-K.

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

Pursuant to the recommendations set forth in the Report, the Company and DPL have disclosed in this Annual Report on Form 10-K the terms of certain agreements with Valley Partners, Inc., (the “Valley Partners Agreements”), which were terminated, as well as purported amendments to the Company’s and DPL’s deferred compensation plans that were made in December 2003 and the resulting distributions of deferred compensation that were made to senior management in 2003. The Company and DPL have reviewed the termination of the Valley Partners Agreements, the purported amendments to the Company’s and DPL’s deferred compensation plans, and the December 2003 distributions, and have initiated legal proceedings challenging the propriety of those terminations and distributions and the validity of those amendments. Notwithstanding the uncertain validity of the purported amendments to the plans, the Company has accounted for the plans as they have been administered. (See Item 3 - Legal Proceedings.)

The Audit Committee and the Company’s senior management continue to evaluate the Report and Supplement, and are considering what additional action, if any, to take in response to the findings and recommendations therein.

Auditor’s Letter
The Company’s auditors, KPMG LLP (KPMG), have delivered a management letter to the Company regarding internal control and communication issues within the Company noted during their 2003 examination. This letter and management’s response are described in Item 9A of this Form 10-K.

Governmental and Regulatory Inquiries
On or about June 24, 2004, the SEC commenced a formal investigation into issues raised by the Thobe Memorandum. The Company and DPL are cooperating with the investigation.

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

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

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

Director and Management Changes
Effective May 16, 2004, the Board of Directors unanimously elected current directors Robert D. Biggs as Executive Chairman and W August Hillenbrand as Vice-Chairman. The Board of Directors also appointed DPLE (a subsidiary of DPL Inc.) President, James V. Mahoney, as President and Chief Executive Officer of the Company and DPL and current Treasurer, Pamela Holdren, as Interim Chief Financial Officer of the Company and DPL.

The elections and appointments follow the retirement of Stephen F. Koziar, Jr., director, President and Chief Executive Officer of the Company and DPL, and director and Secretary/Treasurer of MVE and the resignations of Peter H. Forster, Chairman of the Board, director and consultant to the Company and DPL, and Chairman of the Board and director of MVE; and Caroline E. Muhlenkamp, director and President of MVE and Group Vice President and interim Chief Financial Officer of the Company and DPL. In connection with Mr. Koziar’s retirement and Mr. Forster and Ms. Muhlenkamp’s resignations, each of the Company, Mr. Koziar, Mr. Forster and Ms. Muhlenkamp reserved all rights under applicable law and under any existing agreements. On July 8, 2004, Mr. Forster and Ms. Muhlenkamp filed a complaint in the Circuit Court of the Fourth Judicial Circuit, Duval County, Florida, alleging claims against the Company, DPL and MVE for breach of contract, conversion, promissory estoppel and declaratory judgment relating to their consulting contract and employment agreement, respectively. The defendants removed the case to the U.S. District Court for the Middle District of Florida, Jacksonville Division, on August 9, 2004. Defendants have moved to dismiss the case for lack of jurisdiction or, in the alternative, to transfer the case to the U.S. District Court for the Southern District of Ohio. On September 17, 2004, Mr. Forster and Ms. Muhlenkamp responded to defendant’s motions. (See Item 3 - Legal Proceedings, and Legal Matters under Note 14 of the Notes to Consolidated Financial Statements).

On July 21, 2004, the Company and DPL entered into an employment agreement with Robert D. Biggs, who became Executive Chairman of the Board effective May 16, 2004. Mr. Biggs retired as a Managing Partner of PricewaterhouseCoopers LLP (PwC) in 1999 and

received retirement benefits from PwC which, if continued, could have affected whether PwC qualifies as an independent auditing firm for the Company. PwC was DPL’s and the Company’s independent auditor until March 2003 and was required to give its consent to the filing of this Form 10-K. In order for PwC to be independent, Mr. Biggs has agreed to accept his retirement benefit from PwC in the form of an annuity which provides an annual retirement benefit that is $71,000 less than the amount he previously received from PwC directly. To compensate Mr. Biggs for the resulting reduction in his PwC retirement benefits, the Company and DPL purchased an annuity that will pay Mr. Biggs $71,000 per year for life in addition to the compensation described in Item 11 – Executive Compensation. The Company and DPL will also provide Mr. Biggs with gross-up payments for any income taxes incurred by him in connection with the annuity such that Mr. Biggs is in the same after-tax position as if no income taxes had been imposed. On October 5, 2004, the Company, DPL and Mr.Biggs signed a letter agreement modifying his employment agreement to clarify that the effective date for the grant of stock options to Mr. Biggs pursuant to his employment agreement was October 5, 2004 and not May 16, 2004. Upon Mr. Biggs' death, Mr. Biggs' spouse will receive an annual amount equal to 30% of the total annuity payable to Mr. Biggs for life. This arrangement will continue to be binding even if Mr. Biggs no longer serves as Executive Chairman.

On September 17, 2004, the Company and DPL appointed Gary Stephenson as Vice President, Commercial Operations.

On September 28, 2004, the Company and DPL appointed Glenn E. Harder, General Lester L. Lyles, Dr. Ned J. Sifferlen and James V. Mahoney to the Board of Directors to fill vacancies created by resignations and retirement.

Restatement

On October 28, 2004, DPL’s Audit Committee (the Audit Committee) determined that the Company’s previously issued financial statements for the fiscal years ended December 31, 2000, 2002, and 2003 and for the quarters ended March 31, 2002 through September 30, 2003 should be restated. The Audit Committee has discussed the issues surrounding the restatement for the periods ending on or before December 31, 2002 with the Company’s independent accountants, PricewaterhouseCoopers LLP (PwC) and for periods ending after December 31, 2002 with the Company’s independent accountants, KPMG LLP (KPMG). Both PwC and KPMG have informed the Audit Committee that they concur with the restatement decision.

As a result of the Audit Committee’s response to the Report and during the 2003 year-end financial closing process, the Company identified certain adjustments to prior period financial statements. As a result, the Company has restated its consolidated financial statements for the fiscal years ended December 31, 2001 and 2002, and for the quarters ended March 31, 2002 through December 31, 2002. This restatement increased net income by $2.1 million to $245.6 million for 2002 and reduced net income by $1.7 million to $233.6 million for 2001. The beginning balance in Earnings Reinvested in the Business for 2001 was reduced by $13.9 million to $191.5 million. All applicable financial information contained in this Annual Report on Form 10-K gives effect to these statements.

For information concerning the restatements made, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 of the Notes to Consolidated Financial Statements included in Item 8.

COMPETITION AND REGULATION

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

In October 1999, legislation became effective in Ohio that gave electric utility customers a choice of energy providers ~~as of~~beginning on January 1, 2001. Under ~~the~~this legislation, electric generation, ~~aggregation,~~ power marketing, and power brokerage services supplied to retail customers in Ohio isare deemed to be competitive and isare not subject to supervision and regulation by the ~~Public Utilities Commission of Ohio (“PUCO”).~~ PUCO.

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

The ~~transition plan provides~~Electric Transition Plan provided for a three-year transition period, which began on January 1, 2001 and ~~ends~~ended on December 31, 2003. The plan also ~~provides~~provided for a 5% residential rate reduction on the generation component of the rates, which reduced annual revenue by approximately $14 million; rate certainty for the ~~three year~~three-year period for customers that ~~continue~~continued to purchase power from ~~the Company;~~DP&L; guaranteed rates for a six-year period for transmission and delivery services; and recovery by DP&L of transition costs of approximately $600 million. ~~Under the plan, the Company has the organizational and financial flexibility to continue its growth initiatives.~~

On October 28, 2002, DP&L filed with the PUCO ~~requesting~~a request for an extension of its market development period from December 31, 2003 to December 31, ~~2005. If approved by the PUCO, the extension of the market development period will~~2005 that, if granted, would continue DP&L’s current rate structure and provide its retail customers with rate stability. ~~It is unknown when~~On May 28, 2003, DP&L filed with the PUCO a Stipulation and Recommendation entered into with five other parties (Ohio Consumers’ Counsel (the OCC), Industrial Energy Users-Ohio, PUCO Staff, Partners for Affordable Energy, and Community Action Partnership of the Greater Dayton Area). On September 2, 2003, the PUCO issued an Opinion and Order adopting the Stipulation with modifications (the Stipulation). The Stipulation provides the following: DP&L’s market development period will ~~rule~~continue through December 31, 2005; retail generation rates will remain frozen at present levels; a credit issued to customers who elect competitive retail generation service will increase over two years; and a rate stabilization period from January 1, 2006 through December 31, 2008, during which DP&L’s retail generation rates in effect on ~~this request.~~January 1, 2004 will serve as market-based rates. The Stipulation also provides that beginning January 1, 2006, rates may be modified by up to 11% of generation rates to reflect increased costs associated with fuel, environmental compliance, taxes, regulatory changes, and security measures. Further, the PUCO may approve an increase to the residential generation discount commencing January 1, 2006. The PUCO denied applications for rehearing on October 22, 2003. The PUCO’s decision was appealed to the Ohio Supreme Court on December 19, 2003. That appeal was argued before the Ohio Supreme Court on October 12, 2004 and the decision is pending.

On ~~September 30, 1996,~~February 20, 2003, the ~~Federal Energy Regulatory Commission (“FERC”) conditionally accepted~~PUCO issued an Entry requesting comments from interested stakeholders on the ~~Company’s market-based sales tariff, which allowed~~proposed rules for the ~~Company~~conduct of a competitive bidding process that will take place at the end of the market development period. DP&L submitted comments and reply comments on March 7 and March 21, 2003, respectively. The PUCO issued final rules on December 23, 2003. Under DP&L’s Stipulation discussed above, these rules will not affect DP&L until January 1, 2009.

On March 20, 2003, the PUCO issued an Entry initiating a PUCO investigation regarding the desirability, feasibility, and timing of declaring that retail ancillary metering, billing and/or collection services are competitive retail electric services that consumers may obtain from any supplier. The initiation of this investigation was based on a requirement in the 1999 Ohio deregulation legislation. The PUCO asked interested stakeholders to ~~sell wholesale generation supply at prices that reflect current market prices. On September 27, 2002,~~file comments by June 6, 2003 and reply comments by July 7, 2003. DP&L filed comments and will actively participate in this case and evaluate the potential outcome of this proceeding.

As of December 31, 2003, two unaffiliated marketers were registered as competitive retail electric service (CRES) providers in DP&L’s service territory; to date, there has been no significant activity. DPL Energy Resources, Inc., an ~~updated market power analysis~~affiliated company, is also a registered CRES provider. In addition, several communities in DP&L’s service area have passed

ordinances allowing the communities to become government aggregators for the purpose of offering alternative electric generation supplies to their citizens. To date none of these communities have aggregated. There has been a complaint filed at the PUCO concerning the pricing of DP&L’s billing services. Additionally, a complaint has been filed at the PUCO alleging that DP&L has established improper barriers to competition. On October 13, 2004 the parties reached a settlement on pricing of DP&L’s billing services that DP&L will charge CRES providers. Additionally on October 19, 2004, DP&L entered into a settlement with Dominion Retail, Green Mountain Energy and the ~~FERC~~Staff of the PUCO that resolves all matters in ~~support~~the competition barrier complaint. This settlement provides that DP&L will modify the manner in which customer partial payments are applied to billing charges and DP&L will no longer offer to purchase the receivables of ~~its authority~~CRES providers who operate in DP&L’s certified territory. Both settlements are subject to PUCO approval.

Like other utilities and energy marketers, DP&L may sell or purchase electric generating capacity on the wholesale market. DP&L competes with other generators, privately and municipally owned electric utilities and rural electric cooperatives when selling electricity. The ability of DP&L to sell this electricity will depend on how DP&L’s price, terms and conditions compare to those of other suppliers. In addition, from time to time, DP&L may purchase power ~~at market-based rates.~~

~~The Company competes with~~from other suppliers. These purchases may be affected by privately and municipally owned electric utilities and rural electric cooperatives, and other alternate fuel suppliers on the basis of price and service. ~~The Company purchases generation capacity from DPL Energy, LLC, a wholly owned subsidiary of DPL.~~

Like other utilities and energy marketers, the Company from time to time may have electric generating capacity available for sale on the wholesale market. The Company competes with other generators to sell electricity provided by such capacity. The ability of the Company to sell this electricity will depend on how the Company’s price, terms and conditions compare to those of other suppliers. In addition, from time to time, the Company makes power purchases from other suppliers.

~~The Company~~DP&L provides transmission and wholesale electric service to twelve municipal customers in its service territory, which distribute electricity within their ~~corporate~~incorporated limits. ~~In addition to these municipal customers, the Company~~DP&L also maintains an interconnection agreement with one municipality that has the capability to generate a portion of its energy requirements. Sales to these municipalities represented ~~1.2%~~1% of total electricity sales in ~~2002.~~2003.

The municipal agreements provide, among other things, for the sale of firm power by the Company to the municipalities on specified terms. However, the parties disagree in their interpretation of this portion of the agreement and the Company filed suit against the eleven municipalities on December 28, 1998. The dispute was subsequently settled in 1999. In December 1999, the Company filed a second suit against the municipalities to claim the municipalities’ initial failure to pay for certain services rendered under the contract. The municipalities filed a complaint at the FERC claiming violation of a mediation clause. On November 4, 2002, the FERC issued an order in the case that was favorable to DP&L, and is not expected to result in a material impact on DP&L’s financial position.

~~The FERC~~Federal Energy Regulatory Commission (FERC) issued a final rule on December 20, 1999, ~~specifying the minimum characteristics and functions for Regional Transmission Organizations (“RTO”). The rule~~which required ~~that~~ all public utilities that own, operate, or control interstate transmission lines to file a proposal to join ~~an RTO~~a Regional Transmission Organization (RTO) by October 15, 2000 or file a description of efforts taken to participate in an RTO, reasons for not participating in an RTO, any obstacles to participation in an RTO and any plans for further work ~~towards~~toward participation. ~~The Company~~DP&L filed with the FERC ~~on October 16, 2000~~ to join the Alliance RTO. On December 19, 2001, the FERC issued an order rejecting the Alliance RTO as a stand-alone RTO. However, on April 24, 2002, the FERC approved the Alliance RTO companies’ proposal to form an independent transmission company that will operate under the umbrella of an existing RTO. As of December 31, 2002, the Company had invested approximately $8 million in its efforts to join the Alliance RTO. The FERC has recognized in ~~its order~~various orders that substantial losses were incurred to establish the Alliance RTO and that it would consider proposals for rate recovery of prudently incurred costs.

DP&L invested approximately $8 million in its efforts to join the Alliance RTO. On May 28, 2002, ~~the Company~~DP&L filed a notice with the FERC stating its intention to join the ~~PJM~~Pennsylvania Jersey Maryland Interconnection L.L.C. ~~(“PJM”)~~(PJM), an organization responsible for the operation and control of the bulk electric power system throughout major portions of five Mid-Atlantic states and the District of Columbia. On July 31, 2002, the FERC granted ~~the Company~~DP&L conditional approval to join PJM. In June 2003, DP&L turned over five transmission functions for PJM to operate including OASIS management, ATC calculations, scheduling, market monitoring and security coordination. As of December 31, 2003, DPL had invested a total of approximately $15.0 million in its efforts to join an RTO. On ~~September~~July 30, ~~2002, the Company signed an implementation agreement with PJM~~2004, DP&L made a filing with the ~~expectation that the Company will be~~FERC to withdraw its transmission tariff and to become fully integrated into PJM’s tariff effective October 1, 2004. The Company was fully integrated into PJM on October 1, 2004.

Effective October 1, 2004, PJM began to assess a FERC-approved administrative fee on every megawatt consumed by DP&L customers. On October 26, 2004, DP&L filed an application with the PUCO for authority to modify its accounting procedures to defer collection of this PJM administrative fee, effective October 1, 2004, plus carrying charges, until such time as DP&L has obtained the authority to adjust its rates (i.e., after January 1, 2006) pursuant to DP&L’s approved Stipulation and Recommendation. The application is pending.

The FERC’s July 31, 2002 Order also addressed the justness and reasonableness of the PJM and Midwest Independent Transmission System Operator (MISO) rates and related revenue distribution protocols. On March 31, 2003, an Initial Decision was issued finding that the PJM/MISO’s rates had not been shown to be unjust and unreasonable. On July 23, 2003, the FERC issued an Order rejecting in part the Initial Decision and found that the rates for transmission service through and out of the service territories of seven former Alliance RTO companies, including DP&L, may be unjust, unreasonable, or unduly discriminatory or preferential. On August 15, 2003, DP&L filed a submission with the FERC stating that there

is no basis for the elimination of DP&L’s through and out rates prior to the date that it joined an RTO. The FERC issued an order directing that through and out rates of all former Alliance, MISO and PJM RTO companies be eliminated. Subsequently, the FERC required the parties to enter into settlement discussions. On March 19, 2004, the FERC approved a settlement agreement regarding transmission pricing that allows DP&L to continue to charge its existing transmission rate until December 1, 2004. The settlement agreement also outlines the principles and procedures to arrive at a single, long term transmission pricing structure to be effective December 1, 2004. On September 27, 2004, the FERC instituted a proceeding under Federal Power Act Section 206 to implement a new long-term transmission pricing structure intended to eliminate seams in the PJM and MISO regions. The ultimate disposition of this case may affect the recovery of transmission revenues by DP&L. On October 1, 2004, DP&L, along with approximately sixty (60) other parties filed a long-term pricing plan at FERC. If approved, the plan will provide for continuation of DP&L’s existing transmission rate until 2008 and transitional payments of approximately $3 million.

In a November 1, 2001 Order, as modified on April 14, 2004, FERC required entities with market-based rate authority to submit their triennial market-based reviews using new criteria. In DP&L’s case, this submission would have been due August 11, 2004. On July 30, 2004, DP&L requested a new compliance date sixty days after integration into PJM to enable DP&L to provide an analysis that reflects the market ~~by May 1, 2003.~~as it will exist in PJM. On ~~December 11, 2002,~~October 14, 2004, FERC denied that request and on October 15, 2004, the Company ~~executed the PJM West Transmission Owners Agreement and along~~filed its triennial market-based review with the other new PJM companies, jointly submitted the PJM Open Access Transmission Tariff (“OATT”) filing. This filing adopts a transitional rate design that will maintain revenue and cost neutrality while eliminating all seams within the newly expanded PJM.FERC.

On ~~September 12, 2002, the Ohio Consumers’ Counsel, Industrial Energy Users-Ohio and~~March 10, 2003, American Municipal ~~Power-Ohio,~~Power of Ohio, Inc., on behalf of DP&L’s municipal customers (Municipals), filed a complaint at the FERC alleging the Municipals will be faced with higher rates under their 1994 Power Services Agreement with DP&L once the Company is fully integrated into an RTO as discussed above. A settlement was filed with the ~~PUCO alleging~~FERC on October 14, 2003. The settlement provides that the ~~Company had failed~~power services agreements will continue to ~~join~~be effective. It also describes how transmission services will be provided as DP&L joins PJM and ~~transfer operational control to a~~preserves the transmission rates and most ancillary services. The FERC approved ~~RTO. The Company filed a motion to dismiss~~ the ~~complaint~~settlement on ~~October 24, 2002. While the Company intends to vigorously defend this case, the impact of the complaint cannot be determined at this time.~~December 23, 2003.

On July 31, 2002, the FERC issued a Standard Market Design Notice of Proposed Rulemaking ~~(“SMD NOPR”)~~(SMD NOPR). The SMD NOPR ~~establishes~~established a proposed set of rules to standardize wholesale electric market design to create wholesale competition and efficient transmission systems. The ~~impact~~effect of this proposed rulemaking on ~~the Company~~DP&L cannot be determined at this time.

On July 22, 1998, the PUCO approved the implementation of Minimum Electric Service and Safety Standards for all of Ohio’s investor-owned electric utilities. This order details minimum standards of performance for a variety of service related functions effective July 1, 1999. On December 21, 1999, the PUCO issued additional rules proposed by the PUCO staff, which were designed to guide the electric utility companies as they prepare to enter into deregulation. These rules include certification of providers of competitive retail electric services, minimum competitive retail electric service standards, monitoring the electric utility market, and establishing procedures for alternative dispute resolution. There were also rules issued to amend existing rules for noncompetitive electric service and safety standards and electric companies long-term forecast reporting. The Company submitted comments on the proposed rules on January 31, 2000. The rules were finalized by the PUCO in June 2000 and did not have a material impact on the Company’s financial position.

On March 21, 2002, the PUCO staff proposed modifications to the Minimum Electric Service and Safety Standards, which establish performance standards for various service related functions of investor-owned electric utilities. The proposed modifications ~~impact~~affect billing, collections, allocation of customer payments, meter reading, and distribution circuit performance. The ~~Company submitted comments~~PUCO issued final rules on September 26, 2002 and ~~reply comments on the proposed rules, and~~DP&L filed an application for rehearing on October 26, 2002. The PUCO issued an Entry on Rehearing on March 18, 2003. These rules were filed with the ~~final rules~~Joint Committee on ~~September 26, 2002, but has granted applications for rehearing to provide more time for rule review.~~Agency Rule Review on July 30, 2003 and were effective January 1, 2004. The ~~cost to the Company~~effect of ~~compliance with~~ these rules is ~~unknown at~~not material to the Company.

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

CONSTRUCTION PROGRAM

~~Construction additions~~9

DP&L has requested approval from the PUCO to extend the filing of its Annual 2003 Report until after the filing of its 2003 Form 10-K. DP&L has also requested approval from the FERC to extend the filing of its FERC Form 1 and FERC Form 3-Qs until after the filing of its 2003 Form 10-K. All of these requests are expected to approximate $109 million in 2003, and were $129 million 2002 and $164 million in 2001. The capital program includes environmental compliance, which is expected to approximate $39 million in 2003, and was $69 and $58 million in 2002 and 2001, respectively.pending.

CONSTRUCTION ADDITIONS

Construction additions were $98 million, $129 million and $164 million in 2003, 2002 and 2001, respectively, and are expected to approximate $88 million in 2004. Planned construction additions for 2004 relate to DP&L’s environmental compliance program, power plant equipment, and its transmission and distribution system. During the last three years, capital expenditures have been utilized to make significant progress on DP&L’s Nitrogen Oxide (NOx) compliance program and to make power plant improvements.

~~Construction plans~~Capital projects are subject to continuing review and are ~~expected to be~~ revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental standards, among other factors. ~~The Company’s~~Over the next four years, DP&L is projecting to spend $800 million in capital projects, approximately half of which is to meet changing environmental standards. DP&L’s ability to complete its capital projects and the reliability of future service will be affected by its financial condition, the availability of internal and external funds at reasonable cost, and adequate and timely ~~rate recovery. The Company~~return on these capital investments. DP&L expects to finance its construction ~~program in 2003~~additions over the next few years with ~~internal~~internally-generated funds.

See ENVIRONMENTAL CONSIDERATIONS for a description of environmental control projects and regulatory proceedings ~~which~~that may change the level of future construction additions. The potential ~~impact~~effect of these events on ~~the Company’s~~DP&L’s operations cannot be estimated at this time.

ELECTRIC OPERATIONS AND FUEL SUPPLY

DP&L’s present winter generating capacity is approximately 3,400 megawatts (MW). Of this capacity, approximately 2,800 MW is derived from coal-fired steam generating stations and the balance consists of combustion turbine and diesel-powered peaking units. Approximately 87% of the existing steam generating capacity is provided by certain units owned as tenants in common with The Cincinnati Gas & Electric Company (CG&E) and Columbus Southern Power Company (CSP). As a tenant in common, each company owns a specified undivided share of each of these units, is entitled to its share of capacity and energy output, and has a capital and operating cost responsibility proportionate to its ownership share. Additionally, DP&L, CG&E and CSP own as tenants in common, 884 circuit miles of 345,000-volt transmission lines. DP&L has several interconnections with other companies for the purchase, sale and interchange of electricity.

The Company’s present winter generating capability is 3,371,000 KW. Of this capability, 2,843,000 KW (approximately 84%) is derived from coal-fired steam generating stations and the balance consists of combustion turbine and diesel-powered peaking units. Approximately 87% (2,472,000 KW) of the existing steam generating capability is provided by certain units owned as tenants in common with The Cincinnati Gas & Electric Company (“CG&E”) or with CG&E and Columbus Southern Power Company (“CSP”). Each company owns a specified undivided share of each of these units, is entitled to its share of capacity and energy output, and has a capital and operating cost responsibility proportionate to its ownership share.

~~The~~DP&L’s remaining steam generating ~~capability (371,000 KW)~~capacity (approximately 365 MW) is derived from a generating station owned solely by ~~the Company. The Company’s~~DP&L. DP&L’s all-time net peak load was ~~3,130,000 KW,~~3,130 MW, occurring in 1999. The present summer generating capability is ~~3,269,000 KW.~~

MW Rating

Station
   Ownership*
   Operating
Company
   Location
      Company
Portion
   Total

Coal Units

Hutchings          W    Company       Miamisburg, OH          371       371
Killen          C    Company       Wrightsville, OH          402       600
Stuart          C    Company       Aberdeen, OH          820       2,340
Conesville-Unit 4          C    CSP       Conesville, OH          129       780
Beckjord-Unit 6          C    CG&E       New Richmond, OH          210       420
Miami Fort-Units 7 & 8          C    CG&E       North Bend, OH          360       1,000
East Bend-Unit 2          C    CG&E       Rabbit Hash, KY          186       600
Zimmer          C    CG&E       Moscow, OH          365       1,300

Combustion Turbines or Diesel

Hutchings          W    Company       Miamisburg, OH          33       33
Yankee Street          W    Company       Centerville, OH          138       138
Monument          W    Company       Dayton, OH          12       12
Tait          W    Company       Dayton, OH          10       10
Sidney          W    Company       Sidney, OH          12       12
Tait Gas Turbines 1-3          W    Company       Moraine, OH          304       304
Killen          C    Company       Wrightsville, OH          16       24
Stuart          C    Company       Aberdeen, OH          3       10

*W = Wholly-Owned
~~C = Commonly Owned~~approximately 3,300 MW.

In order to transmit energy to their respective systems from their commonly owned generating units, the companies have constructed and own, as tenants in common, 847 circuit miles of 345,000-volt transmission lines. The Company has several interconnections with other companies for the purchase, sale and interchange of electricity. In July 2001, the Company completed a 40.2-mile long, 345,000-volt circuit between CG&E’s Foster Substation and DP&L’s Bath Substation. The circuit is jointly owned by2003, DP&L ~~and CG&E.~~

~~The Company~~ generated ~~over 97%~~99% of its electric output from coal-fired units ~~in 2002. The remainder was~~and 1% from oil or natural gas-fired units, which were used to meet peak demands.

The ~~Company~~following table sets forth DP&L’s generating stations and where indicated, those stations which DP&L owns as a tenant in common.

				MW Rating

Station	Ownership*	Operating Company	Location	DP&L Portion	Total

Coal Units
Hutchings	W	DP&L	Miamisburg, OH	365	365
Killen	C	DP&L	Wrightsville, OH	402	600
Stuart	C	DP&L	Aberdeen, OH	820	2,340
Conesville-Unit 4	C	CSP	Conesville, OH	129	780
Beckjord-Unit 6	C	CG&E	New Richmond, OH	207	207
Miami Fort-Units 7 & 8	C	CG&E	North Bend, OH	360	1,000
East Bend-Unit 2	C	CG&E	Rabbit Hash, KY	186	600
Zimmer	C	CG&E	Moscow, OH	365	1,300
Combustion Turbines or Diesel
Hutchings	W	DP&L	Miamisburg, OH	23	23
Yankee Street	W	DP&L	Centerville, OH	107	107
Monument	W	DP&L	Dayton, OH	12	12
Tait Diesels	W	DP&L	Dayton, OH	10	10
Sidney	W	DP&L	Sidney, OH	12	12
Tait Units 1-3	W	DP&L	Moraine, OH	256	256
Killen	C	DP&L	Wrightsville, OH	12	18
Stuart	C	DP&L	Aberdeen, OH	3	10

*W = Wholly-Owned

C = Commonly-Owned

DP&L has contracted ~~approximately 95%~~all of its ~~total~~projected coal requirements for ~~2003~~2004 with the balance to be obtained by spot market purchases. The prices to be paid by ~~the Company~~DP&L under its long-term coal contracts are subject to adjustment in accordance with various indices. Each contract has features that will limit price escalations in any given year. As a result of the rising coal market, DP&L expects its 2004 coal cost to exceed its 2003 coal costs by approximately 15%.

The average cost of fuel ~~cost~~used per kilowatt-hour ~~(“kWh”)~~(kWh) generated ~~of fuel burned for electric generation (coal, gas and oil) for the year~~ was 1.29¢ in 2003, 1.26¢ in 2002 and 1.31¢ in ~~2001, and 1.18¢ in 2000.~~2001. With the onset of competition in January 2001, the Electric Fuel Component ~~became part of~~was frozen under DP&L’s Electric Transition Plan and is reflected in the Standard Offer Generation ~~Rate.~~rate to its customers. See RATE REGULATION AND GOVERNMENT LEGISLATION and ENVIRONMENTAL CONSIDERATIONS.

GAS OPERATIONS AND GAS SUPPLY

In October 2000, the Company completed the sale of its natural gas retail distribution assets and certain liabilities for $468 million in cash. The transaction resulted in a pre-tax gain of $183 million ($121 million net of taxes). Proceeds from the sale were used to finance DPL’s regional generation expansion and reduce outstanding short-term debt.

RATE REGULATION AND GOVERNMENT LEGISLATION

~~The Company’s sales to retail customers are subject to rate regulation by the PUCO and various municipalities. The Company’s~~
SEASONALITY
The power delivery business is seasonal and weather patterns can have a material impact on operating performance. In the region served by DP&L, demand for electricity is generally greater in the summer months associated with cooling and in the winter months associated with heating as compared to other times of the year. Historically, the power delivery operations of DP&L have generated less revenues and income when weather conditions are milder in the winter and cooler in the summer.
GAS OPERATIONS AND GAS SUPPLY
In October 2000, DP&L completed the sale of its natural gas retail distribution assets and certain liabilities for $468.0 million in cash. The transaction resulted in a pre-tax gain of $183.0 million ($121.0 million net of taxes). Proceeds from the sale were used to finance DP&L’s regional generation expansion and reduce outstanding short-term debt.
RATE REGULATION AND GOVERNMENT LEGISLATION
DP&L’s sales to retail customers are subject to rate regulation by the PUCO. DP&L’s wholesale electric rates to municipal corporations and other distributors of electric energy are subject to regulation by the FERC under the Federal Power Act.

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

Ohio legislation extends the jurisdiction of the PUCO to the records and accounts of certain public utility holding company systems, including DPL. The legislation extends the PUCO’s supervisory powers to a holding company system’s general condition and capitalization, among other matters, to the extent that they relate to the costs associated with the provision of public utility service.

Based on existing ~~regulatory~~PUCO authorization, regulatory assets and liabilities are recorded on the Consolidated Balance Sheet ~~include:~~(see Note 4 of Notes to Consolidated Financial Statements).

At December 31,
($ in millions)
2002
2001

Regulatory transition costs (a)       $ 49.3    $ 97.2
Income taxes recoverable through future revenues (b)          34.6       39.2
Other costs (b)          21.8       20.7

Total       $ 105.7    $ 157.1

~~(a)~~ As discussed in the COMPETITION section, the Company received PUCO approval of its transition plan for the deregulation of its generation business. Accordingly, the Company discontinued the use of its regulatory accounting model for its generation operations. As a result, a $63.7 million before tax benefits ($41.4 million net of taxes) reduction of generation-related regulatory assets was recorded in the third quarter of 2000 as an extraordinary item and other generation-related regulatory assets were reclassified to the “Regulatory transition costs” asset.

~~(b)~~ Certain deferred costs remain authorized for recovery by regulators. These relate primarily to the Company’s electric transmission and distribution operations and are being amortized over the recovery period of the assets involved.

Under ~~the~~ legislation passed in 1999, the percentage of income payment plan ~~(“PIPP”)~~(PIPP) for eligible low-income households was converted to a ~~universal service fund~~Universal Service Fund in 2001. The universal service program is administered by the Ohio Department of Development and provides for full recovery of arrearages for qualifying ~~low income~~low-income customers. ~~As part of the Company’s Electric Transition Plan, the Company was granted authority to recover PIPP arrearages remaining as of December 31, 2000 as part of a transition charge.~~

In 2000, the PUCO amended the rules for Long-Term Forecast Reports for all investor-owned electric transmission and distribution companies in Ohio. Under these rules, each transmission and/or distribution company must annually file a Long-Term Electric Forecast Report, which presents 10-year energy and demand transmission and distribution forecasts. The reports also must contain information on the company’s existing and planned transmission and distribution systems, as well as a substantiation of the need for any system upgrades or additions. The Company filed a combined 2000/2001 Long-Term Electric Forecast Report under these amended rules in March 2001.

The PUCO is composed of ~~five~~the following commissioners appointed to staggered five-year ~~terms. The current Commission is composed of the following members:~~terms:

	Name		Beginning of Term		End of Term
~~Judith A. Jones~~	~~April 2002~~	~~April 2007~~
~~Clarence D. Rogers~~	~~February 2001~~	~~April 2006~~
~~Rhonda H. Fergus~~	~~April 2000~~	~~April 2005~~
Chairman Alan R. Schriber	~~April 1999~~	April 2004		April 2009
Donald L. Mason	~~April 1998~~	April 2003		April 2008
Judith A. Jones	April 2002	April 2007
Clarence D. Rogers	February 2001	April 2006
Rhonda H. Fergus	April 2000	April 2005

See COMPETITION AND REGULATION for more detail regarding the ~~impact~~effect of ~~legislation passed in October 1999.~~legislation.

ENVIRONMENTAL CONSIDERATIONS

The operations of DP&L, including DP&L’s commonly-owned facilities, are subject to a wide range of federal, state, and local environmental regulations and law as to air and water quality, disposal of solid waste and other environmental matters, including the location, construction and operation of new and existing electric generating facilities and most electric transmission lines. As such, existing environmental regulations may be periodically revised. In addition to revised rules, new legislation could be enacted that may affect the Company’s estimated construction expenditures. See CONSTRUCTION ADDITIONS. In the normal course of business, DP&L has ongoing programs and activities underway at these facilities to comply, or to determine compliance, with such existing, new and/or proposed regulations and legislation.

DP&L has been identified, either by a government agency or by a private party seeking contribution to site clean-up costs, as a potentially responsible party (PRP) at a number of sites pursuant to state and federal laws. DP&L records liabilities for probable estimated loss in accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies.” To the extent a probable loss can only be estimated by reference to a range of equally probable outcomes, and no amount within the range appears to be a better estimate than any other amount, DP&L accrues for the low end of the ~~Company, including~~range. Because of uncertainties related to these matters, accruals are based on the ~~commonly owned facilities operated by~~best information available at the ~~Company, CG&E~~time. DP&L evaluates the potential liability related to probable losses quarterly and ~~CSP, are subject to federal, state, and local regulation as to air and water quality, disposal of solid waste and other environmental matters, including~~may revise its estimates. Such revisions in the location, construction and initial operation of new electric generating facilities and most electric transmission lines. The possibility exists that current environmental regulations could be revised which could change the level of estimated construction expenditures. See CONSTRUCTION PROGRAM.

Air Quality

The Clean Air Act Amendments of 1990 (the “CAA”) have limited sulfur dioxide and nitrogen oxide emissions nationwide. The CAA restricts emissions in two phases. Phase I compliance requirements became effective on January 1, 1995 and Phase II requirements became effective on January 1, 2000.

~~The Company’s environmental compliance plan (“ECP”) was approved by the PUCO on May 6, 1993 and, on November 9, 1995, the PUCO approved the continued appropriateness~~estimates of the ~~ECP. Phase I requirements were met by switching to lower sulfur coal at several commonly owned electric generating facilities~~potential liabilities could have a material effect on the Company’s results of operations and increasing existing scrubber removal efficiency. Total capital expenditures to comply with Phase I of the CAA were approximately $5.5 million. Phase II requirements are being met primarily by switching to lower sulfur coal at all non-scrubbed coal-fired electric generating units.financial position.

Air and Water Quality
In November 1999, the United States Environmental Protection Agency ~~(“USEPA”)~~(USEPA) filed civil complaints and Notices of Violations ~~(“NOVs”)~~(NOVs) against operators and owners of certain generation facilities for alleged violations of the ~~CAA.~~Clean Air Act (CAA). Generation units operated by ~~partners~~ CG&E (Beckjord 6) and CSP (Conesville 4) and co-owned by ~~the Company~~DP&L were referenced in these actions. Numerous northeast states have filed complaints or have indicated that they will be joining the USEPA’s action against CG&E and CSP. ~~The Company~~DP&L was not identified in the NOVs, civil complaints or state actions. In December 2000, CG&E announced that it had reached an Agreement in Principle with the USEPA and other plaintiffs in an effort to settle the claims. ~~Discussions~~As of December 31, 2003, discussions on the final terms of the settlement ~~are ongoing. Therefore, it is not possible to determine~~continue and the outcome of these claims or the ~~impact,~~effect, if any, on ~~the Company.~~DP&L has not been determined. In June 2000, the USEPA issued a NOV to DP&L-operated J.M. Stuart Station (co-owned by ~~the Company,~~DP&L, CG&E, and CSP) for alleged violations of the CAA. The NOV contained allegations consistent with NOVs and complaints that the USEPA had ~~previously~~recently brought against numerous other coal-fired utilities in the Midwest. ~~The Company will~~DP&L intends to vigorously challenge the ~~NOV. At this time, it is not possible to determine~~NOV given the ~~outcome of these claims or the impact, if any, on the Company.~~

~~On November 22, 2002, the USEPA announced its~~ final ~~rule package on New Source Review reform and its proposed rule on the definition of “routine~~routine maintenance repair and ~~replacement.”~~ replacement rules discussed below.

On ~~December 31, 2002,~~September 21, 2004 the ~~final~~Sierra Club filed a lawsuit against the Company and ~~proposed rules were published in~~ the ~~Federal Register. Several northeast states have brought lawsuits challenging~~other owners of the ~~final rule~~Stuart Generating Station in the United States District Court for the Southern District of Ohio for alleged violations of the CAA. The Company intends to vigorously defend this matter.

On July 27, 2004, various residents of the Village of Moscow, Ohio notified CG&E, as the operator of Zimmer (co-owned by CG&E, DP&L and CSP), of their intent to sue for alleged violations of the CAA and air pollution nuisances. DP&L believes the allegations are meritless and believes CG&E on behalf of all co-owners will vigorously defend the matter.

On October 27, 2003, the USEPA published its final rules regarding the equipment replacement provision of the routine maintenance, repair and replacement (RMRR) exclusion of the CAA. Subsequently, on December 24, 2003, the U.S. Court of Appeals for the ~~District of Columbia. While~~D.C. Circuit stayed the ~~Company will conduct an extensive review~~effective date of the ~~published rules, it does not expect the~~ rule ~~changes to have a material effect~~pending its decision on the ~~Company’s financial position, earnings, or cash flow.~~merits of the lawsuits filed by numerous states and environmental organizations challenging the final rules. As a result of this ruling, it is expected that the Ohio Environmental Protection Agency (Ohio EPA) will delay its previously announced intent to adopt the RMRR rule. At this time DP&L is unable to determine the timing of this adoption.

In September 1998, the USEPA issued a final rule requiring states to modify their State Implementation Plans ~~(“SIPs”)~~(SIPs) under the CAA. The modified SIPs are likely to result in further nitrogen oxide (“NOx”) reduction requirements placed on coal-fired generating units by 2004. In order to meet these NOx requirements, the Company’s total capital expenditures are estimated to be approximately $175 million, of which $136 million has been spent to-date. Industry groups and others appealed the rules in United States District Court. The requirement for states to submit revised implementation plans has been stayed until the outcome of the litigation. In March 2000, the United States District Court upheld the rule. Industry groups and others have appealed this decision. As a result of the litigation, the Court extended the compliance date of the rule an additional year, until May 31, 2004. In March 2001, the United States Supreme Court refused to hear further appeals of the SIP rules. In December 1999, the USEPA issued final rules granting various CAA Section 126 petitions filed by northeast states. The Company’s facilities were identified, among many others, in the rulemaking. In January 2002, the USEPA announced that reductions required under the CAA Section 126 rulemaking will be extended until May 31, 2004 to be consistent with the NOx SIP rule. The Company’s current NOx reduction strategy and associated expenditures to meet the SIP call should satisfy the rulemaking reduction requirements.

On July 18, 2002, the Ohio ~~Environmental Protection Agency (“Ohio EPA”)~~EPA adopted rules that ~~will~~ constitute Ohio’s NOx SIP, ~~for NOx reductions. The state rules are~~which is substantially similar to ~~the reductions required under~~ the federal CAA Section 126 rulemaking and federal NOx ~~SIP rule. The USEPA has conditionally approved Ohio’s NOx~~ SIP. On ~~January 16,~~August 5, 2003, ~~the USEPA’s final~~USEPA published its conditional approval of Ohio’s NOx SIP, ~~appeared in~~with an effective date of September 4, 2003. Ohio’s SIP requires NOx reductions at coal-fired generating units effective May 31, 2004. In order to meet these NOx requirements, DP&L’s capital expenditures for the ~~Federal Register. The Company’s current~~installation of selective catalytic reduction (SCR) equipment are estimated to total approximately $175 million, of which $163 million has been invested through December 31, 2003. On May 31, 2004, DP&L began operation of its SCRs. DP&L’s NOx reduction strategy and associated expenditures to meet the federal reduction requirements should satisfy the ~~state~~Ohio SIP NOx reduction requirements.

On December ~~14, 2000,~~17, 2003, the USEPA proposed the Interstate Air Quality Rule (IAQR) designed to reduce and permanently cap sulfur dioxide and nitrogen oxide emissions from electric utilities. The proposed IAQR focuses on states, including Ohio, whose power plant emissions are believed to be significantly contributing to fine particle and ozone pollution in other

downwind states in the eastern United States. On June 10, 2004, the USEPA issued a ~~determination that coal-~~supplemental proposal to the IAQR, now renamed as the Clean Air Interstate Rule (CAIR). Until final rules are published, DP&L cannot determine the effect of the proposed rules on DP&L’s operations.

On January 30, 2004, the USEPA published its proposal to restrict mercury and other air toxics from coal-fired and oil-fired ~~electric generation units should be regulated for emissions~~utility plants. DP&L is reviewing the various proposed options and the impact of ~~mercury and hazardous air pollutants. The USEPA will issue~~each option. Until final rules are published, DP&L cannot determine the effect of the proposed rules ~~by December~~on DP&L’s operations.

Under the proposed cap and trade options for SO₂ and NOx, as well as mercury, DP&L estimates it will spend more than $424 million from 2004 through 2009 to install the necessary pollution controls. Plant specific mercury controls may result in higher costs. Due to the uncertainties associated with the proposed requirements, DP&L cannot project the final costs at this time.

On July 15, 2003, the Ohio EPA submitted to the USEPA its recommendations for eight-hour ozone nonattainment boundaries for the metropolitan areas within Ohio. On April 15, 2004, the USEPA issued its list of ozone nonattainment designations. DP&L owns and/or operates a number of facilities in counties designated as nonattainment with the ozone national ambient air quality standard. DP&L does not know at this time what future regulations may be imposed on its facilities and will closely monitor the regulatory process. Following the final ~~rules by December 2004. The impact~~designation of the ~~regulatory determination~~nonattainment areas, the Ohio EPA will have three years to develop regulations to attain and maintain compliance with the eight-hour ozone national ambient air quality standard. The IAQR/CAIR addresses harmonization with these issues. It is expected that the Ohio EPA will revise its SIP consistent with the IAQR/CAIR when these rules are finalized.

On February 13, 2004, Ohio EPA submitted to USEPA its recommended Particulate Matter 2.5 (PM 2.5) designations. This recommendation included counties in which DP&L operates and/or owns generating facilities. USEPA notified OHIO EPA on June 29, 2004 that it intended to include additional counties as nonattainment for PM 2.5, primarily those adjacent counties with power plants. Ohio EPA commented to USEPA on August 31, 2004, opposing the expansion of the nonattainment boundaries. USEPA intends to finalize the nonattainment designations by early 2005. Following the final designation of the nonattainment areas, the Ohio EPA will have three years to develop regulations to attain and maintain compliance with the PM 2.5 national ambient air quality standard. At this time DP&L cannot ~~be determined at this time.~~

~~In March 2002,~~determine the United States Court of Appeals for the District of Columbia upheld the USEPA’s National Ambient Air Quality Standards for ozone and fine particles. The USEPA is conducting a rulemaking regarding these standards. The impact of these standards and rules can not be determined at this time.effect such regulations will have on its operations.

In April 2002, the USEPA issued proposed rules governing existing facilities that have cooling water intake structures. Final rules ~~are anticipated~~were published in ~~February~~the Federal Register on July 9, 2004. DP&L anticipates that future studies may be needed at certain generating facilities. DP&L cannot predict the impact such studies may have on future operations.

On March 5, 2004, the USEPA issued final national emissions standards for hazardous air pollutants for stationary combustion turbines. The ~~impact~~effect of the final standards on DP&L’s operations is not expected to be material. On July 1, 2004, USEPA finalized, but has not yet published, rules ~~cannot be determined at this time.~~that remove four subcategories of new combustion turbines from regulation under the hazardous air pollutant regulations.

On April 14, 2003, the USEPA issued proposed final rules for standards of performance for stationary gas turbines. On May 23, 2003, the USEPA withdrew the direct final rules. The final rules were reissued on July 8, 2004.

On ~~July 29, 2002,~~May 5, 2004, the ~~Bush Administration offered~~USEPA issued its proposed ~~legislation known as~~regional haze rule, which addresses how states should determine best available retrofit technology (BART) for sources covered under the ~~“Clear Skies” initiative.~~regional haze rule. The proposal ~~calls~~gives states three options for ~~emissions reductions~~determining which sources should be subject to BART and provides guidelines for ~~sulfur dioxide, nitrogen oxides,~~states on conducting the technical analysis of possible controls as BART. The proposal is being issued to respond to the D.C. Circuit’s remand of the regional haze rule in American Corn Growers Association v. USEPA, 291 F.3d 1 (D.C. Cir. 2002), in which the court told the USEPA that the BART determination has to include analysis of the degree of visibility improvement resulting from the use of control technology at each source subject to BART and ~~mercury commencing between 2008 and 2010. Senator Jeffords also offered~~that the USEPA could not mandate that states follow a competing multi-pollutant proposal calling for reductions in sulfur dioxide, nitrogen oxides, mercury, and carbon dioxide emissions with earlier implementation dates. Neither proposal was passed in 2002. Several competing proposed bills revising the air pollution laws have emergedcollective contribution approach to determine whether sources in the ~~108~~^th ~~session~~state could reasonably be anticipated to contribute to visibility impairment in a Class I area. DP&L is reviewing the proposed rule to determine the impact on any of ~~Congress.~~its facilities. The ~~impact~~USEPA, in its June 10, 2004 supplemental CAIR, has proposed that BART-eligible electric generating units (EGUs) may be exempted from BART, if the state complies with the CAIR requirements through the adoption of the ~~potential legislation, if passed, cannot be determined at this time.~~CAIR Cap-and-trade program for SO₂ and NOx emissions. If Ohio adopts such a program, BART will not require any additional reductions.

On May 4, 2004, the Ohio EPA issued a final National Pollutant Discharge Elimination System (NPDES) permit for J.M. Stuart Station that continues the station’s 316(a) variance. During the three-year term of the draft permit, DP&L will conduct a thermal discharge study to evaluate the technical feasibility and economic reasonableness of water cooling methods other than cooling towers.
Land Use

~~The Company~~
DP&L and numerous other parties have been notified by the USEPA or the Ohio ~~Environmental Protection Agency (“Ohio EPA”)~~EPA that ~~it considers them~~they are Potentially Responsible Parties ~~(“PRP’s”)~~(PRPs) for clean-up at three superfund sites in Ohio: the North Sanitary (a.k.a. Valleycrest) Landfill in Dayton, ~~Montgomery County,~~ Ohio; the Tremont City Landfill in Springfield, Ohio; and the South Dayton Dump landfill site in Dayton, Ohio.

~~The Company~~DP&L and numerous other parties received notification from the Ohio EPA on July 27, 1994 that it considers them ~~PRP’s~~PRPs for ~~clean up~~clean-up of hazardous substances at the North Sanitary Landfill ~~site in Dayton, Ohio. The Company has~~site. DP&L did not ~~joined~~join the PRP group formed for the site because the available information ~~does~~demonstrated that DP&L did not ~~demonstrate that the Company contributed hazadous~~contribute hazardous substances to the ~~site. The Ohio EPA has not provided an estimated cost for this~~ site. In October 2000, the PRP group brought an action against ~~the Company~~DP&L and numerous other parties alleging that ~~the Company and the others~~they are ~~PRP’s~~PRPs that should be liable for a portion of clean-up costs at the site. While ~~the Company does~~DP&L did not believe it disposed of any hazardous ~~waste~~substances at this site, ~~it has~~on August 6, 2003, DP&L entered into ~~an Agreement in Principle~~a settlement agreement with the ~~PRP group to settle any~~PRPs for its alleged liability for ~~an immaterial amount. The~~the amount of $45 thousand, which is now final ~~resolution is not expected to have a material effect on~~and has been approved by the ~~Company’s financial position, earnings, or cash flow.~~United States District Court, Western Division of the Ohio Southern District.

~~The Company~~DP&L and numerous other parties received notification from the USEPA in January 2002 that it considers them PRPs for the Tremont City landfill site. The information available ~~information~~to DP&L does not demonstrate that ~~the Company~~DP&L contributed any hazardous substances to the site. ~~The Company will~~DP&L plans to vigorously challenge this action. ~~The final resolution is not expected to have a material effect on the Company’s financial position, earnings, or cash flow.~~

In September 2002, ~~the Company~~DP&L and other parties received a special notice that the USEPA considers them to be ~~PRP’s~~PRPs for the ~~clean up~~clean-up of hazardous substances at the South Dayton Dump landfill ~~site in Dayton, Ohio.~~site. The information available to DP&L does not demonstrate that DP&L contributed hazardous substances to the site. The USEPA seeks recovery of past costs and funding for a Remedial Investigation and Feasibility Study. The USEPA has not provided an estimated clean-up cost for this site. ~~The information available does not demonstrate that~~Should the ~~Company contributed hazardous substances to the site. The Company~~USEPA pursue such action, DP&L will vigorously challenge ~~this action. The final resolution is not expected to have a material effect on the Company’s financial position, earnings, or cash flow.~~it.

1315

The Dayton Power and Light CompanyTHE DAYTON POWER AND LIGHT COMPANY
OPERATING STATISTICS
ELECTRIC OPERATIONS

Years Ended December 31
2002
2001
2000
Electric Sales (millions of kWh)
          Residential          5,302       4,909       4,816
          Commercial          3,710       3,618       3,540
          Industrial          4,472       4,568       4,851
          Other retail          1,405       1,369       1,370

                  Total Retail       14,889       14,464       14,577
          Wholesale          4,358       3,591       2,946

                  Total          19,247       18,055       17,523

Electric Revenues (thousands)
          Residential       $ 463,197    $ 429,932    $ 422,733
          Commercial          259,496       255,149       245,097
          Industrial          204,627       210,022       236,670
          Other retail          95,463       92,992       93,227

                  Total Retail          1,022,783       988,095       997,727
          Wholesale          153,055       200,154       112,328

                  Total       $ 1,175,838    $ 1,188,249    $ 1,110,055

Electric Customers at End of Period
          Residential          449,153       447,066       444,683
          Commercial          47,400       46,815       46,218
          Industrial          1,905       1,908       1,928
          Other          6,304       6,318       6,156

                  Total          504,762       502,107       498,985

~~NOTE: See Note 13 to Consolidated Financial Statements for additional information.~~

The Dayton Power and Light Company
OPERATING STATISTICS
GAS OPERATIONS

	Years Ended December 31						Years Ended December 31,
	2002		2001		2000
Gas Sales (thousands of MCF)
							2003		2002		2001

Electric Sales (millions of kWh)
Residential		—		—		18,538		5,071		5,302		4,909
Commercial		—		—		5,838		3,699		3,710		3,618
Industrial		—		—		2,034		4,330		4,472		4,568
Public authorities		—		—		776
Transportation gas delivered		—		—		16,105
Other retail								1,409		1,405		1,369

Total retail								14,509		14,889		14,464
Wholesale								4,836		4,358		3,591

Total		—		—		43,291		19,345		19,247		18,055


Gas Revenues (thousands)
Operating Revenues ($ in thousands)
Residential		—		—	$	119,460	$	442,238	$	463,197	$	429,932
Commercial		—		—		35,262		243,474		259,496		255,149
Industrial		—		—		11,114		160,801		204,627		210,022
Public authorities		—		—		4,466
Other		—		—		13,554
Other retail								94,697		95,463		92,992

Total retail								941,210		1,022,783		988,095
Wholesale								242,232		153,055		200,154

Total		—		—	$	183,856	$	1,183,442	$	1,175,838	$	1,188,249


Gas Customers at End of Period
Electric Customers at End of Period
Residential		—		—		—		450,958		449,153		447,066
Commercial		—		—		—		47,253		47,400		46,815
Industrial		—		—		—		1,863		1,905		1,908
Public authorities		—		—		—

Other								6,322		6,304		6,318

Total		—		—		—		506,396		504,762		502,107

~~NOTE:~~
1)		~~The Company completed the sale of its natural gas retail distribution assets and certain liabilities in October 2000.~~

~~See Note 13 to Consolidated Financial Statements for additional information.~~

Item 2 —- Properties

Electric

Information relating to ~~the Company’s~~DP&L’s electric properties is contained in Item 1 ~~— BUSINESS, THE COMPANY,~~– CONSTRUCTION ~~PROGRAM,~~ADDITIONS, and ELECTRIC OPERATIONS AND FUEL ~~SUPPLY, and Item 8 — Notes 4 and 11 of Notes to Consolidated Financial Statements.~~

Gas

~~Information relating to the Company’s gas properties is contained in Item 1 — GAS OPERATIONS AND GAS SUPPLY and Note 3 of Notes to Consolidated Financial Statements.~~SUPPLY.

Substantially all property and plant of ~~the Company~~DP&L is subject to the lien of the Mortgage securing ~~the Company’s~~DP&L’s First Mortgage Bonds.

Item 3 —- Legal Proceedings

In the normal course of business, DP&L and its parent DPL are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. DP&L believes the amounts provided in its consolidated financial statements, as prescribed by generally accepted accounting procedures in the United States (GAAP), are adequate in light of the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in DP&L’s Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2003, cannot be reasonably determined.

~~Information~~On July 9, 2004, Mr. Forster and Ms. Muhlenkamp filed a lawsuit against the Company, DPL and MVE in the Circuit Court, Fourth Judicial Circuit, in and for Duval County, Florida. The complaint asserts that the Company, DPL and MVE (i) wrongfully terminated Mr. Forster and Ms. Muhlenkamp by undermining their authority and responsibility to manage the companies and excluding them from discussions on corporate financial issues and strategic planning after the Thobe Memorandum was distributed and (ii) breached Mr. Forster’s consulting contract and Ms. Muhlenkamp’s employment agreement by denying them compensation and benefits allegedly provided by the terms of such contract and agreement upon their termination from the Company and DPL. Mr. Forster and Ms. Muhlenkamp seek damages of an undetermined amount. On August 9, 2004, the defendants removed the case to the U.S. District Court for the Middle District of Florida, Jacksonville Division. On August 16, 2004, the defendants moved to dismiss the litigation based on the Florida federal court’s lack of jurisdiction over the Company, DPL and MVE, all of whom are companies based in Dayton, Ohio. In the alternative, the defendants requested that the court transfer the case to the U.S. District Court for the Southern District of Ohio, which has jurisdiction in Dayton, Ohio. On September 17, 2004, Mr. Forster and Ms. Muhlenkamp opposed these motions. The court has not yet ruled on the defendants’ motions.

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

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

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

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

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

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

In June 2002, a contractor’s employee received a verdict against DP&L for injuries he sustained while working at a DP&L power station. The Court awarded the contractor’s employee compensatory damages of approximately $0.8 million and prejudgement interest of approximately $0.6 million. On April 28, 2004, the appellate court upheld this verdict except the award for prejudgement interest. On September 1, 2004, the Ohio Supreme Court refused to hear the case, so the matter has been remanded to the trial court for a re-determination of whether prejudgement interest should be awarded. The trial court heard this matter on October 15, 2004 and the decision is pending.

Additional information relating to legal proceedings involving the Company isand DPL are contained in Item 1 ~~— BUSINESS, THE COMPANY,~~– COMPETITION ~~ELECTRIC OPERATIONS~~ AND ~~FUEL SUPPLY, RATE~~ REGULATION, ~~AND GOVERNMENT LEGISLATION,~~ ENVIRONMENTAL CONSIDERATIONS, and Item 8 —– Note 414 of Notes to Consolidated Financial Statements.

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

~~None.~~There were no submissions to the security holders in the fourth quarter.

PART II

Item 5 —- Market for Registrant’s Common Equity and Related Stockholder Matters

The Company’s common stock is held solely by parent DPL ~~Inc.~~ and as a result is not listed for trading on any stock exchange.

~~The information required by this item of Form 10-K is set forth in Item 8 — Selected Quarterly Information and the Financial and Statistical Summary.~~

As long as any Preferred Stock is outstanding, ~~the Company’s~~DP&L’s Amended Articles of Incorporation contain provisions restricting the payment of cash dividends on any of its ~~Common Stock~~common stock if, after giving effect to such dividend, the aggregate of all such dividends distributed subsequent to December 31, 1946 exceeds the net income of ~~the Company~~DP&L available for dividends on its Common Stock subsequent to December 31, 1946, plus ~~$1,200,000.~~$1.2 million. As of year-end, all earnings reinvested in the business of ~~the Company~~DP&L were available for Common Stock dividends.

~~Item 6 —~~~~Selected Financial Data~~

~~The~~Additional information ~~required by this item of Form 10-K~~concerning dividends paid on DP&L preferred stock is set forth in Item 8 —- Selected Quarterly Information and the Financial and Statistical Summary.

Item 6 - Selected Financial Data

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

Item 7 —- Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

~~The Dayton Power~~Certain statements contained in this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Matters discussed in this report which relate to events or developments that are expected to occur in the future, including management’s expectations, strategic objectives, business prospects, anticipated economic performance and ~~Light~~financial condition and other similar matters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs, assumptions and expectations of the Company’s future economic performance, taking into account the information currently available to management. These statements are not statements of historical fact. Such forward-looking statements are subject to risks and uncertainties and investors are cautioned that outcomes and results may vary materially from those projected due to various factors beyond the control of the Company, ~~(“DP&L”~~including but not limited to: abnormal or ~~“the Company”) reported earnings on common stock of $242.6 million, an increase of 3% over earnings on common stock of $234.4 million~~severe weather; unusual maintenance or repair requirements; changes in ~~2001. The earnings improvement was primarily attributable to higher retail residential and commercial revenues, and lower~~ fuel and purchased power costs, ~~partially offset~~coal, environmental emissions, gas and other commodity prices; increased competition; regulatory changes and decisions; changes in accounting rules; financial market conditions; and foreign currency market risk.

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. (See FACTORS THAT MAY AFFECT FUTURE RESULTS.)

Restatement of Financial Statements

~~Results~~$2.1 million to $245.6 million for 2002 and reduced net income by $1.7 million to $233.6 million for 2001. The beginning balance in Earnings Reinvested in the Business for 2001 ~~included $6.0~~was reduced by $13.9 million ~~after~~to $191.5 million. All applicable financial information contained in this Annual Report on Form 10-K gives effect to these statements.

The following table identifies the adjustments made to previously-released consolidated financial statements:

	Net Income Increase (Decrease)

	For the years ended December 31,

($ in millions)	2002			2001			Periods prior to 2001

Description of Adjustment
Supplemental Executive Retirement Plan (1)	$	3.8		$	(0.8	)	$	(19.0	)
Stock incentive units (2)		0.4			—			—
Accrued expenses (3)		(0.1	)		(1.1	)		(0.3	)

Sub-total pre-tax impact		4.1			(1.9	)		(19.3	)

Income taxes on non-deductible costs (4)		(0.4	)		(0.5	)		(1.2	)
Income taxes (5)		(1.6	)		0.7			6.6

Total Net Income Impact	$	2.1		$	(1.7	)	$	(13.9	)

(1) Reflects adjustment to record a settlement of the Company’s Supplemental Executive Retirement Plan for certain executives in 1997 and 2000 which had not been previously recorded, in addition to an adjustment to record the proper treatment for Company assets previously thought to be segregated and restricted solely for purposes of funding this plan. Adjustments made subsequent to 2000 reflect revisions to actuarial computations to consider the impact of those settlements on future actuarial calculations for the plan.

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

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

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

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

Consolidated Statement of Results of Operations: Adjustment decreased Operation and Maintenance expense by the amounts set forth in this table.

Consolidated Balance Sheet: At December 31, 2002, adjustment increased Other Paid-in Capital, net of Treasury Stock by $8.4 million, and reduced Deferred Credits and Other – Other by $8.8 million and Other Assets – Other by $0.1 million.

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

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

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

(4) Reflects adjustment to record tax expense for non-deductible costs not previously considered and provisions for estimated tax exposures.

Consolidated Statement of Results of Operations: Adjustment increased Income Tax expense by the amounts set forth in this table.

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

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

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

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

TRENDS, OVERVIEW AND FUTURE EXPECTATIONS

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.

In 2003, DP&L’s net income declined $6.2 million compared to the prior year. Overall, total revenue of $1,183.4 million exceeded the prior year by $7.6 million reflecting increased wholesale revenue. Operating expenses of $788.6 million in 2003 exceeded the prior year by $53.0 million or 7% relating to higher electric production costs and corporate expenses. In addition, DP&L’s results of operations were improved by an increase in investment income

relating to a $21.2 million settlement of interest rate hedges and the favorable effect of a $17.0 million cumulative effect of accounting change relating to the adoption of ~~the new accounting standard~~Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 143, “Accounting for ~~derivatives~~Asset Retirement Obligations” (SFAS 143). DP&L reported Earnings on Common Stock of $238.5 million in ~~the first quarter, and charges associated with a voluntary early retirement program completed~~2003 compared to $244.7 million in ~~June 2001 and a non-union workforce reduction program completed in November~~2002. DP&L reported Earnings on Common Stock of $232.7 million for 2001.

~~Several events affected~~In September 2003, the ~~Company’s results in 2000 as it prepared for the deregulation~~PUCO issued an order extending DP&L’s market development period through December 2004 and continues DP&L’s current rate structure and provides its retail customers with rate stability through 2008. DP&L believes its operations will remain strong and efficient, and expects its existing liquidity and future cash flow from operations to fully fund capital expenditures and planned debt reductions. As a result of the ~~energy markets. In~~rising coal market, DP&L expects its 2004 coal cost to exceed its 2003 coal costs by approximately 15%. DP&L anticipates marginal revenue growth in 2004.

See the ~~first quarter,~~Notes to Financial Statements and the Company expensed $4.2 million before tax benefits to realign its compensation programs more fully with shareholders’ interest. In the third quarter, the Company received an order from the Public Utilities Commission of Ohio (“PUCO”) approving its deregulation transition plan (“Transition Plan”), which resulted in an extraordinary charge of $63.7 million before tax benefits for the elimination of regulatory accounting for the generation business. In the fourth quarter, the Company completed the sale of its natural gas retail distribution operationsManagement’s Discussion and ~~reported a pre-tax gain on the sale of $182.5 million. Each of these events affected 2000 financial results as outlined below:~~Analysis section “FACTORS THAT MAY AFFECT FUTURE RESULTS.”

$ in millions 2002    2001    2000
Earnings on Common Stock       $ 242.6    $ 234.4    $ 297.9
Voluntary early retirement          —       3.2       —
Non-union reduction          —       3.8       —
Accounting change          —       (1.0 )    —
Compensation program          —       —       2.7
Deregulation order          —       —       41.4
Gas operations - gain on sale          —       —       (121.0 )

Earnings on Common Stock before unusual and extraordinary items       $ 242.6    $ 240.4    $ 221.0

18RESULTS OF OPERATIONS

Income Statement Highlights

$ in millions 2002    2001    2000
Electric:
Revenues       $ 1,175.8    $ 1,188.2    $ 1,110.1
Fuel          208.6       220.1       201.9
Purchased power          106.9       129.8       84.2



Net revenues          860.3       838.3       824.0

Gas Utility: (a)
Revenues          —       —       183.8
Gas purchased for resale          —       —       116.9



Net revenues          —       —       66.9

$ in millions	2003		2002 (as restated)		2001 (as restated)

Electric revenues	$	1,183.4	$	1,175.8	$	1,188.2
Less: Fuel		226.2		208.6		220.1
Purchased power		92.7		106.9		129.8

Net electric margins (a)	$	864.5	$	860.3	$	838.3

Operating Income	$	394.8	$	440.3	$	410.4

(a) For purposes of discussing operating results DP&L presents and discusses net electric 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 the company‘s financial performance.

Revenues
~~(a)~~ ~~The Company completed the sale of its natural gas retail distribution assets and certain liabilities in October 2000.~~

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

Electric revenues decreased in 2002 compared to 2001 ~~was~~ primarily ~~the~~reflecting lower wholesale revenues, which decreased $47.1 million or 24% as a result of ~~higher~~lower wholesale electric commodity prices. The decrease in wholesale revenues was partially offset by increases in retail residential and commercial revenues of $37.6 million or 5% resulting ~~primarily~~ from warmer than normal ~~summer~~ weather in ~~the current year. The increase in retail revenues was partially offset by decreased wholesale revenues of $47.1 million or 24% primarily as a result of lower wholesale electric commodity prices.~~2002. Cooling degree days were up 41% to 1,272 for ~~the current year~~2002 compared to 900 in 2001.

Operating Expenses
Net electric revenues of $864.5 million in 2003 increased by $4.2 million from $860.3 million in 2002. As a percentage of total electric revenues, net electric revenues slightly decreased by 0.1% to 73.1% in 2003 from 73.2% in 2002. This decline is primarily the ~~prior year.~~result of a lower volume of sales relating to retail customers and increased fuel and purchased power costs, partially offset by an increase in wholesale sales. Fuel costs increased by $17.6 million or 8% in 2003 compared to 2002 primarily related to increased generation for wholesale sales, partially offset by lower average fuel costs relating to wholesale sales. Purchased power costs decreased by $14.2 million or 13% in 2003 compared to 2002, primarily resulting from

lower volume of purchased power as the retail and wholesale capacity needs were met by internal generation. Fuel costs decreased $11.5 million or 6%5% in 2002 compared to 2001 as a result of the higher ~~availability in 2002~~utilization of coal plants ~~that use lower-cost~~which uses lower cost fuel. Purchased power costs decreased $22.9 million or ~~21%~~18% as a result of lower purchased power ~~volumes. In 2001, net electric revenues~~volumes and the increase of lower cost internal generation.

Operation and maintenance expense increased ~~$14.3~~$50.0 million or ~~2% over 2000 levels~~34% in 2003 compared to 2002 primarily as a result of ~~additional peaking generation capacity sales~~higher corporate costs and increased ~~wholesale revenues. Wholesale revenues~~electric production expenses. Corporate costs increased primarily resulting from ~~existing generation~~$22 million increase in executive compensation, $10.5 million increase for Directors & Officers liability insurance premiums, $5.8 million increase in executive incentives and $6.3 million increase in pension expense. Electric production expense increased $5.7 million primarily related to planned maintenance during scheduled outages, ash disposal and the expensing of cost of removal for retired assets as ~~a result~~required by FASB Statement of ~~higher sales volume~~Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations,” (SFAS 143). Transmission and ~~commodity prices. Growth in residential~~distribution expenses increased $3.3 million reflecting increased line clearance and ~~commercial sales of 2% was~~maintenance costs. These increases were partially offset by ~~declines~~$3.1 million decrease in industrial sales of 6%, reflecting economic conditions and mild weather, which reduced overall retail sales by 1%. Fuel costs for existing generation increased from 2000 levels as a result of higher spot-market prices for coal, and greater fuel usage and power purchases resulting from increased wholesale sales.

~~The decline in net gas revenues resulted from the sale of the natural gas retail distribution assets and certain liabilities, which was completed in October 2000.~~

postretirement benefits. Operation and maintenance expense decreased ~~$12.7~~$18.7 million or 8%11% in 2002 compared to 2001 primarily as a result of lower planned outage costs, lower ash disposal costs, and cost containment efforts. Operation and maintenance expense decreased $26.8 million or 14% in 2001 compared to 2000 primarily as a result of the sale of the natural gas retail distribution operations, lower employee benefit and insurance costs, and general cost containment efforts. These decreases were partially offset by charges for a voluntary early retirement program and a non-union workforce reduction program, totaling $10.7 million before tax benefits. Year to year variances in power plant maintenance costs result from the timing and extent of planned maintenance outages and coal ash removal activities, which can increase or decrease annual maintenance costs by as much as $10 million. Year to year variances in insurance and claims costs result primarily from adjustments to actuarially-determined reserve requirements for risks insured through a captive insurance company wholly-owned by DPL Inc. (“DPL”).

Depreciation and amortization expense ~~decreased $14.3~~was $116.1 million, ~~or 11%~~$114.9 million and $116.0 million for 2003, 2002 and 2001, respectively, reflecting a relatively consistent plant base.

Amortization of regulatory assets increased $1.0 million in ~~2001~~2003 compared to ~~2000 primarily as a result~~2002 reflecting the end of ~~depreciation rate changes for certain generation units in 2001 and~~ the ~~sale of the natural gas retail distribution assets.~~

~~Beginning January 1, 2001,~~ regulatory transition cost ~~assets of $144.8~~recovery period on December 31, 2003.

General taxes declined $2.6 million ~~are being amortized over~~or 2% in 2003 compared to 2002 resulting from a ~~three-year period based on transition revenues. As a result, amortization expense increased~~lower Ohio kWh excise tax related to customer usage and reduced franchise tax. This decrease was partially offset by ~~$30.6 million in 2001 for transition revenues recognized during the year.~~

higher property tax expense. General taxes increased $10.7 million or 11% in 2002 compared to 2001 primarily as a result of the ~~impact~~effect of the Ohio kWh excise tax that was first implemented in May 2001 and higher property taxes, partially offset by the elimination of the Ohio Public Utility Excise Tax at the end of 2001. ~~General taxes decreased $29.7~~

Investment Income (Loss)
Investment income increased $20.6 million ~~or 23%~~ in ~~2001~~2003 compared to ~~2000~~2002 primarily asfrom income of $21.2 million interest from the settlement of interest rate hedges related to the $470 million DP&L First Mortgage Bond refinancing. Investment income increased $0.6 million in 2002 compared to 2001 primarily resulting from an investment gain, partially offset by a ~~result of changes~~decrease in ~~tax laws associated with the Transition Plan and the sale of the natural gas retail distribution assets.~~interest income.

Other ~~income (deductions)~~Income (Deductions)
Other Income (Deductions) decreased ~~$14.5~~$1.3 million ~~or 58%~~to $7.1 million in 2003 from $8.4 million in 2002. Other Income (Deductions) decreased $15 million in 2002 compared to 2001 primarily as a result of lower income of $7.3 million recognized in ~~the current year~~2002 for the business interruption insurance policy related to deregulation ~~(see Issues and Financial Risks — Other Matters),~~ as compared to income of ~~$29.0~~$29.1 million recognized for such policy in the prior year. This decrease in 2002 was partially offset by decreased strategic consulting fees of $4.5 million and a $3.6 million decrease in benefit costs. ~~Other income (deductions)~~

Interest Expense
Interest expense decreased ~~$145.9~~by $1.7 million ~~or 85%~~ in ~~2001~~2003 compared to ~~2000~~2002 as a result of the pre-tax $182.5 million gain that was recognized in 2000 for the sale of the natural gas retail distribution operations, partially offset by the 2001 recognition of a receivable for insurance claims as previously discussed,refinancing First Mortgage Bonds at lower interest rates, lower interest on ESOP debt relating to sinking fund payments and ~~costs associated with certain compensation programs in 2000.~~

lower short-term debt levels. Interest expense decreased $7.9 million or 13% in 2002 compared to 2001 ~~and14% in 2001 compared to 2000~~ primarily as a result of higher capitalized interest and lower short-term debt levels.

~~Pursuant~~22

Income Tax Expense
Income tax expense decreased $1.2 million in 2003 compared to ~~deregulation legislation enacted~~2002, due to lower pre-tax income. Income tax expense increased $10.4 million in ~~Ohio and~~2002, compared to 2001, due to higher pre-tax income.

Cumulative Effect of Accounting Change
The cumulative effect of an accounting change of $17.0 million in 2003 reflects the ~~Order issued in September 2000 by~~adoption of the ~~PUCO, the Company discontinued the use~~provisions of its regulatory accounting model for its generation operations. As a result, a $63.7 million before tax benefits ($41.4 million net of taxes) reduction of generation-related regulatory assets was recorded in the third quarter of 2000 as an extraordinary item in accordance with the Financial Accounting Standard Board’s (“FASB”)FASB Statement of Financial Accounting Standards No. ~~101, “Regulated Enterprises-Accounting~~143, “Accounting for ~~the Discontinuation of Application of FASB Statement No. 71.”~~Asset Retirement Obligations” (SFAS 143). (See Note 41 of Notes to ~~the~~ Consolidated Financial Statements.)

The cumulative effect of an accounting change of $1.0 million in 2001 reflects the ~~Company’s~~ adoption of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended ~~(“SFAS No. 133”)~~(SFAS 133). ~~SFAS No. 133 requires~~(See Note 1 of Notes to Consolidated Financial Statements.)

LIQUIDITY, CAPITAL RESOURCES AND REQUIREMENTS

DP&L’s cash and temporary cash investments totaled $17.2 million at December 31, 2003 compared to $17.1 million at December 31, 2002.

The Company generated net cash from operating activities of $363.6 million, $360.8 million and $333.6 million in 2003, 2002 and 2001, respectively. The net cash from operating activities in 2003 was primarily the result of operating profitability offset by cash used for working capital, specifically the timing of tax payments. Net cash provided by operating activities in 2002 and 2001 was primarily driven by operating profitability offset by cash used for working capital. The tariff-based revenue of DP&L continues to be the principal source of cash from operating activities. Management believes that ~~all derivatives be recognized as either assets or liabilities~~the diversified retail customer mix of residential, commercial, and industrial classes provides DP&L with a reasonably predictable gross cash flow.

Net cash flows used for investing activities were $65.1 million, $138.8 million and $252.4 million in 2003, 2002 and 2001, respectively. The net cash used for investing activities in 2003 was primarily the result of $116.5 million for capital expenditures, partially offset by the settlement of the interest rate hedges. The net cash used in 2002 was the result of $138.8 million for capital expenditures. The net cash used for investing activities in 2001 was primarily the result of $161.5 million for capital expenditures and $90.9 million of income taxes paid associated with the gain on the sale of DP&L’s natural gas distribution business. DP&L’s capital expenditures have declined over the past three years with the completion of major construction initiatives.

Net cash flows used for financing activities were $298.4 million, $205.8 million and $83.7 million in 2003, 2002 and 2001, respectively. Net cash flows used for financing activities in 2003 primarily related to dividends paid on common stock and the retirement of long-term debt. These uses were partially offset by the net proceeds related to the issuance of long-term debt. Net cash used for financing activities in 2002 and 2001 primarily related to dividends paid on common stock.

In February 2004, DP&L entered into a $20 million Master Letter of Credit Agreement with a financial lending institution. This agreement, which expires in February 2005, supports performance assurance needs in the ~~consolidated balance sheet~~ordinary course of business. DP&L has certain contractual agreements for the sale and purchase of power, fuel and related energy services that contain credit rating related clauses allowing counter parties to seek additional surety under certain conditions. As of December 31, 2003, DP&L had no outstanding letters of credit.

DP&L had $150 million available through a revolving credit agreement with a consortium of banks. The agreement, which was scheduled to expire on December 10, 2004, was terminated on June 1, 2004. The facility was to be ~~measured~~used to support the Company’s business requirements and commercial paper program. The facility contained two financial covenants, including maximum debt to total capitalization and minimum earnings before interest and taxes (EBIT) to interest coverage. Fees associated with this credit facility were approximately $0.8 million per year, but a two-step increase in DP&L’s credit rating would have reduced the facility’s interest rate by 0.38%. A lower credit rating would not have increased the applicable interest rate. DP&L had no outstanding borrowings under this credit facility and no outstanding commercial paper balances at ~~fair value,~~year-end 2003 or 2002.

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

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

Construction Program and Financing

Capital Requirements
Construction additions were $98.0 million, $129.0 million and $164.0 million in 2003, 2002 and 2001, respectively and are expected to approximate ~~$109~~$88.0 million in ~~2003,~~2004.

Planned construction additions for 2004 relate to DP&L’s environmental compliance program, power plant equipment, and ~~were $129~~its transmission and distribution system. During the last three years, capital expenditures have been utilized to make significant progress on DP&L’s NOx compliance program and to make power plant improvements.

Capital projects are subject to continuing review and are revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental standards, among other factors. Over the next four years DP&L is projecting to spend $500 million in ~~2002 and $164 million in 2001. The~~ capital ~~program includes environmental compliance,~~projects approximately half of which is ~~expected~~ to ~~approximate $39 million in~~meet changing environmental standards. DP&L’s ability to complete its capital projects and the reliability of future service will be affected by its financial condition, the availability of internal and external funds at reasonable cost, and adequate and timely return on these capital investments. DP&L expects to finance its construction additions over the next few years with internally-generated funds.

Debt Obligations and Maturities
At December 31, 2003, ~~and was $69 and $58 million in 2002 and 2001, respectively.~~

~~The~~the Company’s scheduled maturities of long-term debt, including capital lease obligations, over the next ~~three~~five years ~~are~~were $1.1 million ~~each year.~~in 2004, $1.1 million in 2005, $1.1 million in 2006, $9.3 million in 2007 and $0.7 million in 2008. Substantially all property of DP&L is subject to the mortgage lien securing the First Mortgage Bonds. The Company expects to finance its ~~construction program and~~ debt maturities in ~~2003 and~~ 2004 with internal funds.

~~During 2001, investing cash flows included a cash payment~~On September 29, 2003, DP&L issued $470.0 million principal amount of ~~$90.9 million for income taxes associated with the tax gain on~~First Mortgage Bonds, 5.125% Series due 2013. The net proceeds from the sale of the ~~natural gas retail distribution operations that occurred~~bonds, after expenses, were used on October 30, 2003 to (i) redeem $226.0 million principal amount of DP&L’s First Mortgage Bonds, 8.15% Series due 2026, at a redemption price of 104.075% of the principal amount plus accrued interest to the redemption date, and (ii) redeem $220.0 million principal amount of DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at a redemption price of 103.765% of the principal amount plus accrued interest to the redemption date. The 5.125% Series due 2013 were not registered under the Securities Act of 1933, but were offered and sold through a private placement in ~~October 2000.~~

~~DPL and~~compliance with Rule 144A under the Securities Act of 1933. The bonds include step-up interest provisions requiring the Company ~~have $50.0 and $105.0 million, respectively, available through 364 day revolving credit agreements~~to pay additional interest if the securities remain unregistered with ~~a consortium of banks. These facilities provide an appropriate amount of credit support for~~ the ~~Company’s business requirements over the next year. Facility fees are approximately $0.2 million per year. The primary purpose~~SEC after 180 days from issuance.The sale of the ~~revolving credit facilities is to provide back-up liquidity for DPL’s~~bonds was not registered and, ~~the Company’s commercial paper programs. DPL and~~as a result, the Company ~~had no outstanding borrowings under~~is required to pay additional interest of 0.5% until an exchange offer for these ~~credit agreements at December 31, 2002 and 2001.~~

The Company has $65.0 million available in short-term informal lines of credit. The commitment fees are not material. The Company had no outstanding borrowings under these informal lines and no outstanding commercial paper balances at December 31, 2002 and 2001.securities is registered with the SEC.

Issuance of additional amounts of ~~first mortgage bonds~~First Mortgage Bonds by ~~the Company~~DP&L is limited by the provisions of its ~~mortgage.~~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 current refinancing and construction programs. The amounts and timing of future financings will depend upon market and other conditions, rate increases, levels of sales and construction plans. ~~The~~

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

Credit Ratings
Subsequent to the December 31, 2003 balance sheet, the Company currently has sufficient capacity to issue first mortgage bonds to satisfy its requirements in connection with the financing of its construction and refinancing programs during the five-year period 2003-2007.

~~At year-end 2002, the Company’s~~received multiple rating downgrades. Currently, DP&L’s senior secured debt credit ratings ~~were~~are as follows:

					Rating	Outlook	Effective

Fitch Ratings		BBB		Negative	April 2004
Moody’s Investors Service		Baa3		Negative	April 2004
Standard & Poor’s Corp.		~~BBB~~ BBB-
~~Moody’s Investors Service~~	Negative	A2
~~Fitch~~		A	March 2004

~~These~~DP&L’s secured debt ratings ~~which were received in the third quarter of 2002 as a result of annual credit reviews,~~ are ~~lower than prior ratings and remain~~ investment grade.

Debt Covenants
DP&L had $150 million available through a revolving credit agreement with a consortium of banks. The agreement, which was scheduled to expire on December 10, 2004, was terminated on June 1, 2004. The facility was to be used to support the Company’s business requirements and commercial paper program. The facility contained two financial covenants, including maximum debt to total capitalization and minimum earnings before interest and taxes (EBIT) to interest coverage. Fees associated with this credit facility were approximately $0.8 million per year, but a two-step increase in DP&L’s credit rating ~~agencies cited pressure~~would have reduced the

facility’s interest rate by 0.38%. A lower credit rating would not have increased the applicable interest rate. DP&L had no outstanding borrowings under this credit facility and no outstanding commercial paper balances at year-end 2003 or 2002.

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

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

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

Long-term Obligations and ~~concerns regarding the impact of the global economic downturn on~~Commercial Commitments
DP&L enters into various contractual and other long-term obligations that may affect the liquidity of ~~DPL’s financial asset portfolio~~its operations. At December 31, 2003, these include:

	Payment Year

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

Long-term debt	$	0.4	$	0.8	$	8.6	$	673.6	$	683.4
Capital lease		0.7		1.4		1.4		1.5		5.0
Operating leases		0.8		0.4		—		—		1.2
Coal contracts		237.6		152.7		80.4		127.5		598.2
Other long-term obligations		9.9		14.8		1.0		—		25.7

Total long-term obligations	$	249.4	$	170.1	$	91.4	$	802.6	$	1,313.5

	Long-term debt:
	Long-term debt as of December 31, 2003 consists of First Mortgage Bonds and guaranteed air quality development obligations, including current debt maturities.

	Capital lease:
	As of December 31, 2003, the Company had one capital lease that expires September 2010.

	Operating leases:
	As of December 31, 2003, the Company had several operating leases with various terms and expiration dates.

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

	Other long-term obligations:
	As of December 31, 2003, DP&L had various other long-term obligations incurred in the normal course of business including non-cancelable contracts to purchase goods and services with various terms and expiration dates.

DP&L enters into various commercial commitments, which may affect the ~~reason for their actions.~~

Market Risk

~~The Company’s financial results are impacted by changes in electricity, coal, and gas commodity prices as well as the impact on retail sales volume~~liquidity of ~~weather and economic conditions in the sales area. Six~~its operations. At December 31, 2003, these include:

	Expiring Year

Commercial Commitments ($ in millions)	2004		2005 & 2006		2007 & 2008		Thereafter		Total

Credit facilities	$	150.0	$	—	$	—	$	—	$	150.0
Guarantees		—		17.8		—		—		17.8

Total commercial commitments	$	150.0	$	17.8	$	—	$	—	$	167.8

	Credit facilities:
	DP&L had $150 million available through a revolving credit agreement with a consortium of banks that was scheduled to expire on December 10, 2004. At December 31, 2003, there were no borrowings outstanding under this credit agreement. In June 2004, the Company replaced this facility with a $100 million, 364 day unsecured credit facility that expires on May 31, 2005. The new facility may be increased to up to $150 million.

	Guarantees:
	DP&L owns a 4.9% equity ownership interest in an electric generation company. As of December 31, 2003, DP&L could be responsible for the repayment of 4.9%, or $14.9 million, of a $305.0 million debt obligation and also 4.9%, or $2.9 million, of a separate $60.0 million debt obligation. Both obligations mature in 2006.

MARKET RISK

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

Approximately 20 percent of ~~the Company’s 2002~~DP&L’s 2003 revenues were from ~~spot~~sales of excess energy ~~sales~~capacity in the wholesale market. Energy and capacity in excess of the needs of existing retail customers is sold in the wholesale market ~~contributing $19~~when DP&L can identify opportunities with positive margins. In 2003, sales of excess energy and capacity contributed $37.0 million in net electric ~~revenues.~~margins. This compares to net electric ~~revenues~~margins from ~~spot~~ wholesale energy and capacity sales of ~~$26~~$19.0 million in ~~2001.~~2002. This ~~decrease~~increase in net ~~wholesale~~ electric ~~revenues~~margins resulted primarily from ~~lower wholesale electricity prices in 2002. Spot wholesale energy~~higher average market prices. Wholesale sales in 2003 and 2002 averaged $29.20 and ~~2001 averaged~~ $22.14 ~~and $29.22~~ per megawatt hour, respectively. Retail electric sales in 2002 were favorably impacted by above normal weather. Across the year, heating and cooling degree days were 3% above normal, adding approximately $32 million in revenue. This favorable weather impact was partially offset by sluggish demand from industrial customers due to current economic conditions.

Fuel and purchased power costs represented ~~43%~~41% of total operating costs in ~~2002. The Company~~2003. DP&L has contracted for ~~approximately 95%~~all of its projected coal needs for ~~2003.~~2004, at an estimated cost per Btu increase of approximately 15% over average 2003 levels. Purchased power costs depend, in part, upon the timing and extent of planned and unplanned outages of ~~the Company’s~~its generating capacity. ~~The Company has not contracted for~~DP&L will purchase power on a discretionary basis when wholesale market conditions provide opportunities to obtain power at a cost below its ~~planned purchased power needs for 2003 at this time.~~internal production costs. A 2% change in overall fuel and purchased power costs would result in approximately a $3.5 million change in net income.

The carrying value of ~~the Company’s~~DP&L’s debt was ~~$667.0~~$688.4 million at December 31, ~~2002,~~2003, consisting of ~~the Company’s first mortgage bonds and~~DP&L’s First Mortgage Bonds, DP&L’s guaranteed air quality development ~~obligations.~~obligations and capital leases. The fair value of this debt was ~~$690.2~~$692.6 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The ~~following table presents the~~ principal cash repayments and related weighted average interest rates by maturity date for long-term, ~~fixed-rate~~fixed rate debt at December 31, ~~2002.~~2003 are as follows:

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

2003	$	1.1		7.4%
2004		1.1		7.4%	$	1.1		4.0	%
2005		1.1		7.4%		1.1		4.0	%
2006		1.1		7.4%		1.1		4.0	%
2007		9.3		6.5%		9.3		6.1	%
2008						0.7		2.7	%
Thereafter		653.3		7.5%		675.1		5.5	%

Total	$	667.0		7.5%	$	688.4		5.5	%


Fair Value	$	690.2			$	692.6

~~Because the long-term debt is at a fixed rate, the primary market risk to the Company would be short-term interest rate risk.~~ At December 31, ~~2002, the Company~~2003, DP&L had no short-term debt ~~outstanding, and therefore, no exposure to short-term~~outstanding.

In May 2003, DP&L entered into 60 day interest rate ~~risk.~~swaps designed to capture existing favorable interest rates in anticipation of future financings of $750 million First Mortgage Bonds. These hedges were settled in July 2003, at a fair value of $51.4 million and as a result DP&L received this amount. The ultimate effectiveness of the hedges resulted in a gain of $30.2 million and is reflected in Accumulated Other Comprehensive Income on the Consolidated Balance Sheet. This amount will be amortized to interest expense over the lives of the forecasted interest payments. The remaining market value of $21.2 million was recognized in Other Income (Deductions) on the Consolidated Statement of Results of Operations.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Regulation/Competition
DP&L operates in a rapidly changing industry with evolving industry standards and regulations. In recent years a number of federal and state developments aimed at promoting competition triggered industry restructuring. Regulatory factors, such as changes in the policies or procedures that set rates; changes in tax laws, tax rates, and environmental laws and regulations; changes in DP&L’s ability to recover expenditures for environmental

2328

Critical Accounting Policies

~~The accounting policies described below are viewed by management as critical because their application is the most relevant~~compliance, fuel and ~~material~~purchased power costs and investments made under traditional regulation through rates; and changes to the ~~Company~~’sfrequency and timing of rate increases, can affect the Company’s results of operations and financial ~~position~~condition. Additionally, financial or regulatory accounting principles or policies imposed by governing bodies can increase DP&L’s operational and monitoring costs affecting its results of operations and financial condition.

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

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

Reliance on Third Parties
DP&L relies on many suppliers for the purchase and delivery of inventory and components to operate its energy production and transmission functions. Unanticipated changes in DP&L’s purchase processes may affect the Company’s business and operating results. In addition, the Company relies on others to provide professional services.

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

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

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

Internal Controls
As described under Item 1 Business - Recent Developments, a review by independent counsel to the Audit Committee of the Board of Directors of the Company has identified recommendations for improvement relating to some of the concerns raised by the Company’s Controller including, among other things, internal controls. In addition, as further described under Item 9A. Controls and Procedures, during their year-end review, the Company’s independent auditors identified and reported to management and the Audit Committee two material weaknesses and certain other matters involving internal control deficiencies considered to be reportable conditions under standards established by the Public Company Accounting Oversight Board (PCAOB). The material weaknesses include conditions related to

(1) the Company’s process for recognizing an adjustment to the Company’s income tax provision to reflect a deductibility limitation under Section 162(m) with respect to executive deferred compensation distributions made during 2003 and (2) a complex and manual process for accounting and reporting transactions in DPL’s financial asset portfolio that may lead to improper accounting of such transactions in accordance with generally accepted accounting principles.

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

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

The Company is currently undertaking a thorough review of its internal controls as part of the Company’s preparation for compliance with the requirements under Section 404 of the Sarbanes-Oxley Act of 2002 and the Company is using this review to further assist in indentifying and correcting any control deficiencies. As expected, this review has revealed control weaknesses, which the Company has reported to the Audit Committee. The Company has since taken steps to strengthen its internal controls in these areas including increasing segregation of duties, writing policies where necessary, adding checks at key decision points and increasing supervisor review of transactions. These actions have been successful in eliminating a large percentage of the deficiencies noted, but additional remediation activities continue. Corrected control deficiencies are being retested by management to assure that remediation efforts were successful, and the Company’s auditors will perform independent testing of the Company’s internal controls as part of their year-end review. At this time, the Company has not completed its review of the existing controls and their effectiveness. Unless the material weaknesses described above, and any identified during this review, are remedied, there can be no assurances that the Company will be able to assert that its internal control over financial reporting is effective in the management report to be included in the Annual Report for the year ended December 31, 2004, pursuant to the rules adopted by the SEC under Section 404.

CRITICAL ACCOUNTING POLICIES

DP&L’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). In connection with the preparation of these financial statements, DP&L’s management 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 management’s historical experience and assumptions that are 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. DP&L’s critical accounting policies are those which require assumptions to be made about matters that are highly uncertain.

Different estimates could have a material effect on its financial results. Judgments and uncertainties affecting the application of these policies ~~require~~and estimates may result in materially different amounts being reported under different conditions or circumstances. Significant items subject to such judgments include the ~~use~~carrying value of ~~material judgments~~property, plant and ~~estimates.~~equipment; the valuation of derivative instruments; the valuation of financial assets; the valuation of insurance and claims costs; valuation allowances for receivables and deferred income taxes; and assets and liabilities related to employee benefits.

Long-lived Assets: ~~The Company accounts~~ In accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for ~~its~~the Impairment or Disposal of Long-Lived Assets,” long-lived assets ~~at depreciated historical cost. A long-lived asset (asset group) is tested~~to be held and used are reviewed for impairment whenever events or ~~changes in~~ circumstances indicate that ~~its~~the carrying amount may not be recoverable. ~~The~~When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. DP&L determines the fair value of these assets based upon estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. In analyzing the fair value and recoverability using future cash flows, the Company ~~would recognize an~~makes projections based on a number of assumptions and estimates of growth rates, future economic conditions, assignment of discount rates and estimates of terminal values. An impairment loss ~~only~~is recognized if the carrying amount of athe long-lived asset is not recoverable from its undiscounted cash flows. ~~Management judgement~~The measurement of impairment loss is ~~involved~~the difference between the carrying amount and fair value of the asset. Long-lived assets to be disposed of and/or held for sale are reported at the lower of carrying amount or fair value less cost to sell. DP&L determines the fair value of these assets in ~~both deciding if testing~~the same manner as described for ~~recoverability is necessary~~assets held and ~~in estimating undiscounted cash flows.~~used.

Regulatory ~~Assets: The Company~~Assets and Liabilities: DP&L capitalizes incurred costs as deferred regulatory assets when there is a probable expectation that the costs incurred will be recovered in future revenues as a result of the regulatory process. ~~See Note 4 to~~Regulatory liabilities represent current recovery of expected future costs. When applicable the ~~consolidated financial statements for further discussion of regulatory matters. The~~ Company ~~applied~~applies judgment in the use of ~~this principle when it concluded, as of December 31, 2000, that as a result of deregulation $63.7 million of generation related regulatory assets were no longer probable of recovery,~~these principles and ~~wrote off~~ these ~~assets as an extraordinary charge. These~~ estimates are based on expected usage by a customer class over the designated recovery period. ~~At December 31, 2002, $49.3 million~~See Note 4 of ~~generation related~~Notes to Consolidated Financial Statements for further disclosure of regulatory amounts.

Asset Retirement Obligation: In accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No.143, “Accounting for Asset Retirement Obligations” (SFAS 143) legal obligations associated with the retirement of long-lived assets ~~remain on the balance sheet~~are required to be ~~recovered~~recognized at their fair value at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and allocated to expense over the ~~remaining transition period ending December 31, 2003 unless extended.~~useful life of the asset. SFAS 143 also requires that components of previously recorded depreciation related to the cost of removal of assets upon retirement, whether legal asset retirement obligations or not, must be removed from a company’s accumulated depreciation reserve. DP&L makes assumptions, estimates and judgments that affect the reported amounts of assets, liabilities and expenses as they relate to asset retirement obligations. These assumptions and estimates are based on historical experience and assumptions that are believed to be reasonable at the time.

Unbilled Revenues: ~~The Company~~ DP&L records revenue for retail and other energy sales under the accrual method. For retail customers, revenues are recognized when the services are provided on the basis of periodic cycle meter readings and include an estimated accrual for the value of electricity provided from the meter reading date to the end of the reporting period. These estimates are based on the volume of energy delivered, historical usage and growth by customer class, and the ~~impact~~effect of weather variations on usage patterns. ~~Unbilled revenues recognized at December 31, 2002 totaled $56.9 million.~~

~~Pension and post retirement benefits: The Company accounts for its pension and post retirement benefit obligations in accordance with~~Financial Instruments: DP&L applies the provisions of FASB Statement of Financial Accounting Standards No. ~~87, “Employers’ Accounting~~115, “Accounting for ~~Pensions”~~Certain Investments in Debt and ~~No. 106 “Employers’ Accounting~~Equity Securities” (SFAS 115), for ~~Post Retirement Benefits~~its investments in debt and equity financial instruments of publicly traded entities and classifies the securities into different categories; held-to-maturity and available-for-sale. Available-for-sale securities are carried at fair value and unrealized gains and losses on those securities, net of deferred income taxes, are presented as a separate component of shareholder’s equity. Other than ~~Pensions.” These standards require the use~~temporary declines in value are recognized currently in earnings. Financial instruments classified as held-to-maturity are carried at amortized cost. The valuation of ~~assumptions, such as the long-term rate of return on assets, in determining the obligations, annual~~public equity security investments is based upon market quotations. The cost basis for public equity security and fixed maturity investments is average cost and funding requirements of the plans. In 2003, the Company lowered its long-term rate of return assumptions by 25 basis points to reflect the impact of recent trends on its long-term view. This reduction will result in an increase in pension costs of $0.7 million.

Also, on December 31, 2002, the Company lowered its assumed discount rate for pension and postretirement benefits by 50 basis points to reflect current interest rate conditions. Changes in the rate of return assumption, the discount rate, and other components used in the determination of pension or post retirement benefit costs are estimated to result in an overall increase of $5.0 million in pension costs in 2003 compared to 2002. Going forward, differences in the actual return on pension plan assets and assumed return or changes in the discount rate will impact the timing of contributions to the pension plan, if any, and the determination of whether or not a minimum liability should be recorded. Because the Company does not provide postretirement healthcare benefits to employees that retired after 1986, the Company’s exposure to changes in healthcare costs is limited. A one percentage point change in the assumed healthcare trend rate would affect postretirement benefit costs by $0.1 million

Issues and Financial Risks

This report contains certain forward-looking statements regarding plans and expectations for the future. Investors are cautioned that actual outcomes and results may vary materially from those projected due to various factors beyond the Company’s control, including abnormal weather, unusual maintenance or repair requirements, changes in fuel costs, increased competition, regulatory changes and decisions, changes in accounting rules, and adverse economic conditions.

~~Electric Restructuring Legislation~~amortized cost, respectively.

In October 1999, legislation became effective in Ohio that gave electric utility customers a choice of energy providers starting January 1, 2001. Under the legislation, electric generation, aggregation, power marketing31

Insurance and power brokerage services supplied to retail customers in Ohio are deemed to be competitive and are not subject to supervision and regulation by the PUCO. As required by the legislation, the Company filed its transition plan at the PUCO on December 20, 1999. The Company received PUCO approval of its plan on September 21, 2000.

The transition plan provides for a three-year transition period, which began on January 1, 2001 and ends on December 31, 2003. The plan also provides for a 5% residential rate reduction on the generation component of the rates, which reduced annual revenue by approximately $14 million; rate certainty for the three year period for customers that continue to purchase power from the Company; guaranteed rates for a six-year period for transmission and delivery services; and recovery of transition costs of approximately $600 million. Under the plan, DPL has the organizational and financial flexibility to continue its growth initiatives.

On October 28, 2002, DP&L filed with the PUCO requesting an extension of its market development period from December 31, 2003 to December 31, 2005. If approved by the PUCO, the extension of the market development period will continue DP&L’s current rate structure and provide its retail customers with rate stability. It is unknown when the PUCO will rule on this request.

The Federal Energy Regulatory Commission (“FERC”) issued a final rule on December 20, 1999 specifying the minimum characteristics and functions for Regional Transmission Organizations (“RTO”). The rule required that all public utilities that own, operate, or control interstate transmission lines file a proposal to join an RTO by October 15, 2000 or file a description of efforts taken to participate in an RTO, reasons for not participating in an RTO, any obstacles to participation in an RTO, and any plans for further work toward participation. The Company filed with the FERC on October 16, 2000 to join the Alliance RTO. On December 19, 2001, the FERC issued an order rejecting the Alliance RTO as a stand-alone RTO. However, on April 24, 2002, the FERC approved the Alliance RTO companies’ proposal to form an independent transmission company that will operate under the umbrella of an existing RTO. As of December 31, 2002, the Company had invested approximately $8 million in its efforts to join the Alliance RTO. The FERC recognized in its order that substantial losses were incurred to establish the Alliance RTO and that it would consider proposals for rate recovery of prudently incurred costs.
On May 28, 2002, the Company filed a notice with the FERC stating its intention to join the PJM Interconnection, L.L.C. (“PJM”), an organization responsible for the operation and control of the bulk electric power system throughout major portions of five Mid-Atlantic states and the District of Columbia. On July 31, 2002, the FERC granted the Company conditional approval to join PJM. On September 30, 2002, the Company signed an implementation agreement with PJM with the expectation that the Company will be fully integrated into the PJM market by May 1, 2003. On December 11, 2002, the Company executed the PJM West Transmission Owners Agreement and along with the other new PJM companies, jointly submitted the PJM Open Access Transmission Tariff (“OATT”) filing. This filing adopts a transitional rate design that will maintain revenue neutrality and mitigate cost shifts while eliminating all seams within the new expanded PJM.
On September 12, 2002, the Ohio Consumers’ Counsel, Industrial Energy Users-Ohio and American Municipal Power-Ohio, Inc. filed a complaint with the PUCO alleging that the Company had failed to join and transfer operational control to a FERC approved RTO. The Company filed a motion to dismiss the complaint on October 24, 2002. While the Company intends to vigorously defend this case, the impact of the complaint cannot be determined at this time.
On July 31, 2002, the FERC issued a Standard Market Design Notice of Proposed Rulemaking (“SMD NOPR”). The SMD NOPR establishes a set of rules to standardize wholesale electric market design to create wholesale competition and efficient transmission systems. The impact of this rulemaking on the Company cannot be determined at this time.
26
On July 22, 1998, the PUCO approved the implementation of Minimum Electric Service and Safety Standards for all of Ohio’s investor-owned electric utilities. This order details minimum standards of performance for a variety of service-related functions, effective July 1, 1999. On December 21, 1999, the PUCO issued additional rules proposed by the PUCO staff, which were designed to guide the electric utility companies as they prepare to enter into deregulation. These rules include certification of providers of competitive retail electric services, minimum competitive retail electric service standards, monitoring the electric utility market, and establishing procedures for alternative dispute resolution. There were also rules issued to amend existing rules for noncompetitive electric service and safety standards and electric companies long-term forecast reporting. The Company submitted comments on the proposed rules on January 31, 2000. The rules were finalized by the PUCO in June 2000 and did not have a material impact on the Company’s financial position.
On March 21, 2002, the PUCO staff proposed modifications to the Minimum Electric Service and Safety Standards, which establish performance standards for various service related functions of investor-owned electric utilities. The proposed modifications impact billing, collections, allocation of customer payments, meter reading, and distribution circuit performance. The Company submitted comments and reply comments on the proposed rules, and filed an application for rehearing on October 26, 2002. The PUCO issued the final rules on September 26, 2002, but has granted applications for rehearing to provide more time for rule review. The cost to the Company of compliance with these rules is unknown at this time.
On October 10, 2002, the PUCO initiated a proceeding to review the financial condition of major public utilities in Ohio. The purpose of this review is to ensure that any adverse financial consequences of parent or affiliated companies unregulated operations do not impact the financial integrity of the regulated public utility. The PUCO is not requesting any financial information from the utilities at this time. The Company filed comments on November 11, 2002, and reply comments on November 22, 2002. The impact of this review cannot be determined at this time.
~~Sale of Gas Operations~~
In October 2000, the Company completed the sale of its natural gas retail distribution assets and certain liabilities for $468 million in cash. The transaction resulted in a pre-tax gain of $183 million ($121 million net of tax), which is reflected in “Other income (deductions)” on the Consolidated Statement of Results of Operations. Proceeds from the sale were used to finance DPL’s regional generation expansion and reduce outstanding short-term debt.
27
~~Environmental~~
In November 1999, the United States Environmental Protection Agency (“USEPA”) filed civil complaints and Notices of Violations (“NOVs”) against operators and owners of certain generation facilities for alleged violations of the CAA. Generation units operated by partners CG&E (Beckjord 6) and CSP (Conesville 4) and co-owned by the Company were referenced in these actions. Numerous northeast states have filed complaints or have indicated that they will be joining the USEPA’s action against the partners. The Company was not identified in the NOVs, civil complaints or state actions. In December 2000, CG&E announced that it had reached an Agreement in Principle with the USEPA and other plaintiffs in an effort to settle the claims. Discussions on the final terms of the settlement are ongoing. Therefore, it is not possible to determine the outcome of these claims or the impact, if any, on the Company. In June 2000, the USEPA issued a NOV to DP&L-operated J.M. Stuart Station (co-owned by the Company, CG&E, and CSP) for alleged violations of the CAA. The NOV contained allegations consistent with NOVs and complaints that the USEPA had recently brought against numerous other coal-fired utilities in the Midwest. The Company will vigorously challenge the NOV. At this time, it is not possible to determine the outcome of these claims or the impact, if any, on the Company.
On November 22, 2002, the USEPA announced its final rule package on New Source Review reform and its proposed rule on the definition of “routine maintenance, repair and replacement.” On December 31, 2002, the final and proposed rules were published in the Federal Register. Several northeast states have brought lawsuits challenging the final rule in the United States Court of Appeals for the District of Columbia. While the Company will conduct an extensive review of the published rules, it does not expect the rule changes to have a material effect on the Company’s financial position, earnings, or cash flow.
In September 1998, the USEPA issued a final rule requiring states to modify their State Implementation Plans (“SIPs”) under the CAA. The modified SIPs are likely to result in further nitrogen oxide (“NOx”) reduction requirements placed on coal-fired generating units by 2004. In order to meet these NOx requirements, the Company’s capital expenditures are estimated to total approximately $175 million, of which $136 million has been spent to-date. Industry groups and others appealed the rules in United States District Court. The requirement for states to submit revised implementation plans has been stayed until the outcome of the litigation. In March 2000, the United States District Court upheld the rule. Industry groups and others have appealed this decision. As a result of the litigation, the Court extended the compliance date of the rule an additional year, until May 31, 2004. In March 2001, the United States Supreme Court refused to hear further appeals of the SIP rules. In December 1999, the USEPA issued final rules granting various CAA Section 126 petitions filed by northeast states. The Company’s facilities were identified, among many others, in the rulemaking. In January 2002, the USEPA announced that reductions required under the CAA Section 126 rulemaking will be extended until May 31, 2004 to be consistent with the NOx SIP rule. The Company’s current NOx reduction strategy and associated expenditures to meet the SIP call should satisfy the rulemaking reduction requirements.
28
On July 18, 2002, the Ohio Environmental Protection Agency (“Ohio EPA”) adopted rules that will constitute Ohio’s SIP for NOx reductions. The state rules are substantially similar to the reductions required under the federal CAA Section 126 rulemaking and federal NOx SIP rule. The USEPA has conditionally approved Ohio’s NOx SIP. The Company’s current NOx reduction strategy and associated expenditures to meet the federal reduction requirements should satisfy the state SIP reduction requirements.
On December 14, 2000, the USEPA issued a determination that coal- and oil-fired electric generating units should be regulated for emissions of mercury and hazardous air pollutants. The USEPA will issue proposed rules by December 2003 and final rules by December 2004. The impact of the regulatory determination cannot be determined at this time.
In March 2002, the United States Court of Appeals for the District of Columbia upheld the USEPA’s National Ambient Air Quality Standards for ozone and fine particles. The USEPA is conducting a rulemaking regarding these standards. The impact of these standards and rules can not be determined at this time.
In April 2002, the USEPA issued proposed rules governing existing facilities that have cooling water intake structures. Final rules are anticipated in August 2003. The impact of the final rules cannot be determined at this time.
On July 29, 2002, the Bush Administration offered proposed legislation known as the “Clear Skies” initiative. The proposal calls for emissions reductions for sulfur dioxide, nitrogen oxides, and mercury commencing between 2008 and 2010. Senator Jeffords also offered a competing multi-pollutant proposal calling for reductions in sulfur dioxide, nitrogen oxides, mercury, and carbon dioxide emissions with earlier implementation dates. Neither proposal was passed in 2002. The impact of the potential legislation, if passed, cannot be determined at this time.
The Company and numerous other parties have been notified by the USEPA or the Ohio EPA that it considers them Potentially Responsible Parties (“PRP’s”) for clean-up at three superfund sites in Ohio: the North Sanitary (a.k.a. Valleycrest) Landfill in Dayton, Montgomery County, Ohio; the Tremont City Landfill in Springfield, Ohio; and the South Dayton Dump landfill site in Dayton, Ohio.
The Company and numerous other parties received notification from the Ohio EPA on July 27, 1994 that it considers them PRP’s for clean-up of hazardous substances at the North Sanitary Landfill site in Dayton, Ohio. The Company has not joined the PRP group formed for the site because the available information does not demonstrate that the Company contributed hazardous substances to the site. The Ohio EPA has not provided an estimated cost for this site. In October 2000, the PRP group brought an action against the Company and numerous other parties alleging that the Company and the others are PRP’s that should be liable for a portion of clean-up costs at the site. While the Company does not believe it disposed of any hazardous waste at this site, it has entered into an Agreement in Principle with the PRP group to settle any alleged liability for an immaterial amount. The final resolution is not expected to have a material effect on the Company’s financial position, earnings, or cash flow. The Company and numerous other parties received notification from the USEPA in January 2002 for the Tremont City site. The available information does not demonstrate that the Company contributed any hazardous substances to the site. The Company will vigorously challenge this action. The final resolution is not expected to have a material effect on the Company’s financial position, earnings, or cash flow.
29
The Company and numerous other parties received notification from the USEPA in January 2002 for the Tremont City site. The available information does not demonstrate that the Company contributed any hazardous substances to the site. The Company will virgorously challenge this action. The final resolution is not expected to have a material effect on the Company’s financial position, earnings, or cash flow.
In September 2002, the Company and other parties received a special notice that the USEPA considers them to be PRP’s for the clean up of hazardous substances at the South Dayton Dump landfill site in Dayton, Ohio. The USEPA seeks recovery of past costs and funding for a Remedial Investigation and Feasibility Study. The USEPA has not provided an estimated clean-up cost for this site. The information available does not demonstrate that the Company contributed hazardous substances to the site. The Company will challenge this action. The final resolution is not expected to have a material effect on the Company’s financial position, earnings, or cash flow.
30
~~Other Matters~~

Claims Costs:A wholly-owned captive insurance subsidiary of DPL provides insurance coverage solely to DPL and its subsidiaries including, among other coverages, business interruption and specific risk coverage with respect to ~~environmental law and~~ electric deregulation. ~~“Insurance~~Insurance and Claims ~~and Costs”~~Costs on ~~DPL’s~~the Consolidated Balance Sheet ~~as of December 31, 2002 and 2001~~ includes insurance reserves, ~~of approximately $76 and $87 million, respectively, for this coverage~~which are based on actuarial methods and loss experience data. Such reserves are determined, in the aggregate, based on a reasonable estimation of probable insured events occurring. There is uncertainty associated with the loss estimates, and actual results could differ from the estimates. Modification of these loss estimates based on experience and changed circumstances are reflected in the period in which the estimate is ~~reevaluated. As~~re-evaluated.

Pension and Postretirement Benefits: DP&L accounts for its pension and postretirement benefit obligations in accordance with the ~~outcome~~provisions of electric deregulation becomes known during the three-year regulatory transition period ending December 31, 2003, policy payments from the captive subsidiary to DP&L, receivables for insurance claims for DP&L, or the release of the appropriate reserves will occur and be reflected in income. As of December 31, 2002, a $36 million receivable has been recognized by DP&L for insurance claims under its business interruption policy. Of this amount, $7.3 and $29.0 million was reported as other income in 2002 and 2001, respectively.

~~In June 2001, the FASB issued~~ Statement of Financial Accounting Standards No. ~~143 “Accounting~~87, “Employers’ Accounting for ~~Asset Retirement Obligations” (“SFAS~~Pensions” and No. ~~143”) which is effective~~106 “Employers’ Accounting for Postretirement Benefits Other than Pensions.” These standards require the ~~Company~~use of assumptions, such as the long-term rate of ~~January 1, 2003. SFAS No. 143 requires legal obligations associated with the retirement of long-lived~~return on assets, ~~to be recognized at their fair value at the time that~~in determining the obligations, ~~are incurred. The Company’s legal asset retirement obligations are composed of river structures~~annual cost, and ~~ash disposal facilities. Upon initial recognition of a liability, that cost should be capitalized as part~~funding requirements of the ~~related long-lived asset and allocated~~plans.

In 2004, DP&L lowered its long-term rate of return assumptions by 25 basis points to ~~expense over~~reflect the ~~useful life~~effect of ~~the asset. Application of the new rules is estimated to~~recent trends on its long-term view. This reduction will result in an increase in ~~net property, plant and equipment~~pension costs of approximately ~~$1 million~~$0.6 million. Effective December 31, 2003, DP&L lowered its assumed discount rate for pension and ~~recognition~~postretirement benefit obligations by 50 basis points to reflect current interest rate conditions. Changes in the rate of return assumption, the discount rate, and other components used in the determination of pension or postretirement benefit costs will result in an ~~asset retirement obligation~~overall increase of approximately ~~$4 million. SFAS No. 143 also requires that components~~$4.0 million in pension costs in 2004 compared to 2003.

In future periods, differences in the actual return on pension plan assets and assumed return or changes in the discount rate will affect the timing of ~~previously recorded depreciation accruals that relate~~contributions to the ~~cost~~pension plan, if any, and the determination of ~~removal of assets upon retirement,~~ whether ~~legal asset retirement obligations~~ or not ~~must~~a minimum liability should be ~~removed from a company’s accumulated depreciation reserve. It is estimated that this elimination of cost of removal will reduce the accumulated depreciation reserve~~recorded. DP&L provides postretirement healthcare benefits to employees who retired prior to 1987. A one percentage point change in the ~~range of $30 – $35~~assumed healthcare trend rate would affect postretirement benefit costs by $0.1 million. ~~The total cumulative effect of adoption of SFAS 143 will increase net income and shareholder’s equity by approximately $27 – $32 million. Beginning~~

Contingencies: DP&L records liabilities for probable estimated loss in January 2003, depreciation rates will be reduced to reflect the discontinuation of the cost of removal accrual for applicable non-regulated assets. The estimated impact is an increase of pre-tax income of $2 million. In addition, costs incurred for the removal of retired assets will be charged to operation and maintenance expense rather than to the accumulated depreciation reserve. The impact of this change will vary based on the extent of generating property removal activity.

~~Beginning January 1, 2003, the Company has changed its accounting for stock options to the fair value method set forth in~~accordance with Statement of Financial Accounting ~~Standard~~Standards No. ~~123,~~5 (SFAS 5), “Accounting for ~~Stock-Based Compensation (“SFAS No. 123”).~~Contingencies.” ~~This standard requires~~To the ~~recognition~~extent a probable loss can only be estimated by reference to a range of ~~compensation expense for stock based awards~~equally probable outcomes, and no amount within the range appears to be a better estimate than any other amount, DP&L accrues for the low end of the range. Because of uncertainties related to these matters, accruals are based on the ~~fair value~~best information available at the time. DP&L evaluates the potential liability related to probable losses quarterly and may revise its estimates. Such revisions in the estimates of the potential liabilities could have a material effect on the ~~date~~Company’s results of ~~grant rather than the intrinsic value as was used~~operations and financial position.

LEGAL AND OTHER MATTERS

A discussion of LEGAL AND OTHER MATTERS is described in Note 14 of Notes to Consolidated Financial Statements and in Item 3 - LEGAL PROCEEDINGS. Such discussions are incorporated by reference in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and made a part hereof.

Recently Issued Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in Note 1 of Notes to Consolidated Financial Statements and such discussion is incorporated by ~~the Company prior to January 1, 2003. The Company will adopt SFAS No. 123 on~~reference in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and made a ~~prospective basis for all grants issued after January 1, 2003. The effect of this new standard will depend on the timing, amount and terms of future stock option awards, if any.~~part hereof.

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

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

~~Information relating to Market Risk is contained in Item 7 — Management’s Discussion and Analysis.~~

Item 8 —– Financial Statements and Supplementary Data


~~Index to Consolidated Financial Statements~~		~~Page No.~~

~~Consolidated Statement of Results of Operations for the three years in the period ended December 31, 2002~~		34

~~Consolidated Statement of Cash Flows for the three years in the period ended December 31, 2002~~		35

~~Consolidated Balance Sheet as of December 31, 2002 and 2001~~		~~36-37~~


~~Consolidated Statement of Shareholder’s Equity for the three years in the period ended December 31, 2002~~		38

~~Notes to Consolidated Financial Statements~~		~~39-54~~

~~Report of Independent Accountants~~		57

~~Index to Supplemental Information~~		~~Page No.~~

~~Selected Quarterly Information~~		55

~~Financial and Statistical Summary~~		56

~~Index to Financial Statement Schedule~~

~~Schedule II — Valuation and qualifying accounts~~		76

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

The Dayton Power and Light Company

CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONSC o n s o l i d a t e d S t a t e m e n t o f R e s u l t s o f O p e r a t i o n s

For the years ended December 31,
$ in millions 2002 2001 2000
Revenues
Electric         $ 1,175.8     $ 1,188.2     $ 1,110.1
Gas (Note 3)             —         —         183.8




Total revenues             1,175.8         1,188.2         1,293.9





Expenses
Fuel             208.6         220.1         201.9
Purchased power             106.9         129.8         84.2
Gas purchased for resale (Note 3)             —         —         116.9
Operation and maintenance             151.6         164.3         191.1
Depreciation and amortization             114.9         116.0         130.3
Amortization of regulatory assets, net (Note 4)             48.1         46.9         16.3
General taxes             109.4         98.7         128.4




Total expenses             739.5         775.8         869.1





Operating Income             436.3         412.4         424.8

Other income (deductions) (Note 3)             10.3         24.8         170.7
Interest expense             (53.5 )     (61.5 )     (72.7 )





Income before income taxes, extraordinary item, and Cumulative Effect of Accounting Change             393.1         375.7         522.8

Income taxes             149.6         141.4         182.6





Income Before Extraordinary Item and Cumulative Effect of Accounting Change             243.5         234.3         340.2

Extraordinary item, net of tax             —         —         41.4
Cumulative effect of accounting change, net of tax             —         1.0         —





Net Income             243.5         235.3         298.8

Preferred dividends             0.9         0.9         0.9





Earnings on Common Stock         $ 242.6     $ 234.4     $ 297.9

	For the years ended December 31,

$ in millions	2003			2002 (as restated)			2001 (as restated)

Revenues
Electric	$	1,183.4		$	1,175.8		$	1,188.2

Operating Expenses
Fuel		226.2			208.6			220.1
Purchased power		92.7			106.9			129.8
Operation and maintenance		197.7			147.7			166.3
Depreciation and amortization		116.1			114.9			116.0
Amortization of regulatory assets, net (Note 4)		49.1			48.1			46.9
General taxes		106.8			109.4			98.7

Total operating expenses		788.6			735.6			777.8

Operating Income		394.8			440.2			410.4

Investment income (Note 1)		22.7			2.1			1.5
Other income (deductions)		7.1			8.4			23.4
Interest expense		(51.8	)		(53.5	)		(61.5	)

Income Before Income Taxes and Cumulative Effect of Accounting Change		372.8			397.2			373.8

Income tax expense		150.4			151.6			141.2

Income Before Cumulative Effect of Accounting Change		222.4			245.6			232.6

Cumulative effect of accounting change, net of tax (Note 1)		17.0			—			1.0

Net Income		239.4			245.6			233.6

Preferred dividends		0.9			0.9			0.9

Earnings on Common Stock	$	238.5		$	244.7		$	232.7

See Notes to Consolidated Financial Statements.

The Dayton Power and Light Company

CONSOLIDATED STATEMENT OF CASH FLOWSC o n s o l i d a t e d S t a t e m e n t o f C a s h F l o w s

For the years ended December 31,
$ in millions 2002 2001 2000
Operating Activities
Net income         $ 243.5     $ 235.3     $ 298.8
Adjustments:
Depreciation and amortization             114.9         116.0         130.3
Amortization of regulatory assets, net             48.1         46.9         16.3
Deferred income taxes             (14.8 )     (6.9 )     (60.5
Gain on sale of natural gas retail distribution operations             —         —         (182.5 )
Noncash extraordinary item, net of tax             —         —         41.4
Changes in working capital:
Accounts receivable             (3.1 )     30.5         (4.6 )
Accounts payable             (10.9 )     10.8         (43.7 )
Net intercompany receivables from parent             —         (6.3 )     6.2
Accrued taxes payable             (6.1 )     (24.5 )     63.5
Inventories             7.2         (15.7 )     (5.8 )
Other             (18.0 )     (52.5 )     26.0

     Net cash provided by operating activities             360.8         333.6         285.4

Investing Activities
Capital expenditures             (138.8 )     (161.5 )     (109.9 )
Proceeds from sale of natural gas retail distribution operations, net (Note 3)             —         (90.9 )     468.2

Net cash provided by (used for) investing activities             (138.8 )     (252.4 )     358.3

Financing Activities
Dividends paid on common stock             (204.5 )     (82.4 )     (606.4 )
Retirement of short-term debt, net             —         —         (123.0 )
Retirement of long-term debt             (0.4 )     (0.4 )     (0.4 )
Dividends paid on preferred stock             (0.9 )     (0.9 )     (0.9 )

Net cash used for financing activities             (205.8 )     (83.7 )     (730.7 )

Cash and temporary cash investments—
Net change             16.2         (2.5 )     (87.0 )
Balance at beginning of period             0.9         3.4         90.4

Balance at end of period         $ 17.1     $ 0.9     $ 3.4

Cash paid during the period for:
Interest         $ 49.4     $ 57.4     $ 69.2
Income taxes         $ 180.2     $ 224.8     $ 152.6

	For the years ended December 31,

$ in millions	2003			2002 (as restated)			2001 (as restated)

Operating Activities
Net income	$	239.4		$	245.6		$	233.6
Adjustments:
Depreciation and amortization		116.1			114.9			116.0
Amortization of regulatory assets, net		49.1			48.1			46.9
Deferred income taxes		(13.5	)		(13.4	)		(6.9	)
Income from interest rate hedge (Note 1)		(21.2	)		—			—
Cumulative effect of accounting change, net of tax		(17.0	)		—			(1.0	)
Changes in working capital:
Accounts receivable		(1.0	)		(3.1	)		30.5
Accounts payable		7.3			(10.9	)		11.8
Net intercompany receivables from parent		0.4			(7.5	)		(6.3	)
Accrued taxes payable		(30.6	)		(5.3	)		(24.5	)
Accrued interest payable		(8.8	)		—			—
Prepayments		(8.2	)		(4.6	)		(6.0	)
Inventories		4.5			7.2			(15.7	)
Deferred compensation assets		50.4			(0.3	)		3.1
Deferred compensation obligations		(46.8	)		(7.0	)		(10.9	)
Other		43.5			(2.9	)		(37.0	)

Net cash provided by operating activities		363.6			360.8			333.6

Investing Activities
Capital expenditures		(116.5	)		(138.8	)		(161.5	)
Settlement of interest rate hedges (Note 1)		51.4			—			—
Proceeds from sale of natural gas retail distribution operations, net		—			—			(90.9	)

Net cash used for investing activities		(65.1	)		(138.8	)		(252.4	)

Financing Activities
Dividends paid on common stock		(298.7	)		(204.5	)		(82.4	)
Issuance of long-term debt, net of issue costs (Note 9)		465.1			—			—
Retirement of long-term debt (Note 9)		(463.9	)		(0.4	)		(0.4	)
Dividends paid on preferred stock		(0.9	)		(0.9	)		(0.9	)

Net cash used for financing activities		(298.4	)		(205.8	)		(83.7	)

Cash and Temporary Cash Investments--
Net change		0.1			16.2			(2.5	)
Balance at beginning of period		17.1			0.9			3.4

Balance at end of period	$	17.2		$	17.1		$	0.9

Cash paid during the period for:
Interest	$	56.2		$	49.4		$	57.4
Income taxes	$	200.1		$	180.2		$	224.8

See Notes to Consolidated Financial Statements.

The Dayton Power and Light Company

CONSOLIDATED BALANCE SHEETSC o n s o l i d a t e d B a l a n c e S h e e t

At December 31,
$ in millions 2002 2001
Assets

Property
Property         $ 3,781.7     $ 3,666.2
Accumulated depreciation and amortization             (1,765.1 )     (1,670.0 )




Net property             2,016.6         1,996.2




Current Assets

Cash and temporary cash investments             17.1         0.9
Accounts receivable, less provision for uncollectible accounts of $10.9 and $12.4 respectively             159.4         156.3
Inventories, at average cost             54.1         61.3
Prepaid taxes             46.9         54.8
Other             65.2         25.5




Total current assets             342.7         298.8




Other Assets

Income taxes recoverable through future revenues             34.6         39.2
Other regulatory assets             71.1         117.9
Trust assets             115.6         141.1
Other assets             79.0         104.9




Total other assets             300.3         403.1




Total Assets
        $ 2,659.6     $ 2,698.1

	At December 31,

$ in millions	2003			2002 (as restated)

*Assets*

Property
Property, plant and equipment	$	3,875.4		$	3,781.7
Less: Accumulated depreciation and amortization		(1,769.1	)		(1,666.9	)

Net property		2,106.3			2,114.8

Current Assets
Cash and temporary cash investments (Note 3)		17.2			17.1
Accounts receivable, less provision for uncollectible accounts of $3.6 and $10.9, respectively		160.4			159.4
Net intercompany receivable from parent		—			36.3
Inventories, at average cost (Note 3)		49.6			54.1
Prepaid taxes		46.4			46.9
Other (Note 3)		24.4			20.0

Total current assets		298.0			333.8

Other Assets
Income taxes recoverable through future revenues		43.3			34.6
Other regulatory assets		36.1			80.1
Other (Note 3)		176.4			194.0

Total other assets		255.8			308.7

Total Assets	$	2,660.1		$	2,757.3

See Notes to Consolidated Financial Statements.

The Dayton Power and Light Company

~~CONSOLIDATED BALANCE SHEETS~~C o n s o l i d a t e d B a l a n c e S h e e t

(continued)

						At December 31,
		At December 31,
$ in millions	$ in millions	2002		2001		2003		2002 (as restated)

Capitalization and Liabilities

Capitalization
Common shareholder’s equity
Common stock		$	0.4	$	0.4	$	0.4	$	0.4
Other paid-in capital			771.7		771.6		780.5		780.1
Accumulated other comprehensive income			1.5		15.6		38.2		(0.8	)
Earnings reinvested in the business			395.3		357.3		321.7		381.9


Total common shareholder’s equity			1,168.9		1,144.9		1,140.8		1,161.6

Preferred stock			22.9		22.9		22.9		22.9
Long-term debt			665.5		666.6

Long-term debt (Note 9)							687.3		665.5

Total capitalization			1,857.3		1,834.4		1,851.0		1,850.0


Current Liabilities
Accounts payable			96.5		110.5		88.9		97.6
Accrued taxes			100.5		105.6		66.4		102.9
Accrued interest			19.0		19.0		10.2		19.0
Other			18.9		21.8

Other (Note 3)							24.6		19.0

Total current liabilities			234.9		256.9		190.1		238.5


Deferred Credits And Other
Deferred Credits and Other
Deferred taxes			370.9		397.0		381.7		363.3
Unamortized investment tax credit			55.1		58.0		52.2		55.1
Trust obligations			101.2		102.7
Other			40.2		49.1

Other (Note 3)							185.1		250.4

Total deferred credits and other			567.4		606.8		619.0		668.8

Contingencies (Note 14)

Total Capitalization and Liabilities		$	2,659.6	$	2,698.1	$	2,660.1	$	2,757.3

See Notes to Consolidated Financial Statements.

The Dayton Power and Light Company

CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITYC o n s o l i d a t e d S t a t e m e n t o f S h a r e h o l d e r s’ E q u i t y

Common Stock (a)
Accumulated
Other Earnings
Reinvested
$ in millions Outstanding
Shares Amount Other Paid-In
Capital Comprehensive
Income in the
Business Total
2000:
Beginning balance          41,172,173    $0.4    $769.7    $13.6    $513.9    $1,297.6
Comprehensive income:
Net income                                              298.8
Unrealized gains, net of reclassification adjustments, after tax (b)                                     23.7
Total comprehensive income                                                       322.5
Common stock dividends                                              (606.4 )    (606.4 )
Preferred stock dividends                                              (0.9 )    (0.9 )
Other                            0.1                         0.1

Ending balance          41,172,173       0.4       769.8       37.3       205.4       1,012.9

2001:
Comprehensive income:
Net income                                              235.3
Unrealized losses, net of reclassification adjustments, after tax (b)                                     (21.6 )
Total comprehensive income                                                       213.7
Common stock dividends                                              (82.4 )    (82.4 )
Preferred stock dividends                                              (0.9 )    (0.9 )
Parent company capital contribution                            1.7                         1.7
Other                            0.1       (0.1 )    (0.1 )    (0.1 )

Ending balance          41,172,173       0.4       771.6       15.6       357.3       1,144.9

2002:
Comprehensive income:
Net income                                              243.5
Unrealized losses, net of reclassification adjustments, after tax (b)                                     (14.1 )
Total comprehensive income                                                       229.4
Common stock dividends                                              (204.5 )    (204.5 )
Preferred stock dividends                                              (0.9 )    (0.9 )
Parent company capital contribution
Other                            0.1                (0.1 )    —

Ending balance          41,172,173    $0.4    $771.7    $  1.5    $395.3    $1,168.9

	Common Stock (a)				Other Paid-In Capital			Accumulated Other Comprehensive Income			Earnings Reinvested In the Business

$ in millions		Outstanding Shares		Amount										Total

Beginning balance (as restated)		41,172,173	$	0.4	$	815.9		$	35.1		$	191.5		$	1,042.9

2001 (as restated):
Net income												233.6
Net change in unrealized gains (losses) on financial instruments, net of reclassification adjustments									(29.6	)
Minimum pension liability									0.1
Deferred income taxes related to unrealized gains (losses)									8.0
Total comprehensive income															212.1
Common stock dividend						1.7						(82.4	)		(82.4	)
Preferred stock dividend												(0.9	)		(0.9	)
Parent company capital contribution															1.7
Employee / Director stock plans						2.6									2.6
Other						0.2			(0.2	)					—

Ending balance (as restated)		41,172,173	$	0.4	$	820.4		$	13.4		$	341.8		$	1,176.0

2002 (as restated):
Net income												245.6
Net change in unrealized gains (losses) on financial instruments, net of reclassification adjustments									(25.1	)
Minimum pension liability									(0.2	)
Deferred income taxes related to unrealized gains (losses)									11.0
Total comprehensive income															231.3
Common stock dividend												(204.5	)		(204.5	)
Preferred stock dividend												(0.9	)		(0.9	)
Parent company capital contribution															—
Employee / Director stock plans						(40.3	)								(40.3	)
Other									0.1			(0.1	)		—

Ending balance (as restated)		41,172,173	$	0.4	$	780.1		$	(0.8	)	$	381.9		$	1,161.6

2003:
Net income												239.4
Net change in unrealized gains (losses) on financial instruments, net of reclassification adjustments									17.0
Net change in deferred gains on cash flow hedges									29.5
Minimum pension liability									(0.2	)
Deferred income taxes related to unrealized gains (losses)									(7.3	)
Total comprehensive income															278.4
Common stock dividend												(298.7	)		(298.7	)
Preferred stock dividend												(0.9	)		(0.9	)
Parent company capital contribution															—
Employee / Director stock plans						0.3									0.3
Other						0.1			—			—			0.1

Ending balance		41,172,173	$	0.4	$	780.5		$	38.2		$	321.7		$	1,140.8


(a)		50,000,000 shares authorized.

~~(b)~~

~~Net of taxes of $12.8, $(8.0) and $(10.9) million in 2000, 2001 and 2002, respectively.~~

See Notes to Consolidated Financial Statements.

The Dayton Power and Light Company

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSN o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

1.
Summary of Significant Accounting Policies and Overview
1. SummaryDescription of Significant Accounting Policies

Business
The Dayton Power and Light Company ~~(“DP&L”~~(DP&L or ~~“the Company”)~~the Company) is a wholly-owned subsidiary of DPL Inc. ~~(“DPL”)~~(DPL). ~~The accounts~~DP&L is a public utility incorporated in 1911 under the laws of ~~the Company~~Ohio. DP&L sells electricity to residential, commercial, industrial and ~~its wholly-owned subsidiaries are included~~governmental customers in ~~the accompanying~~a 6,000 square mile area of West Central Ohio. Electricity for DP&L’s 24-county service area is generated at eight power plants and is distributed to more than 500,000 retail customers. Principal industries served include automotive, food processing, paper, technology and defense.

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

Estimates, Judgments and Reclassifications
The preparation of financial statements in conformity with GAAP requires management to make estimates and ~~assumptions~~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 reported. Significant items subject to such estimates and judgments include the carrying value of property, plant and equipment; the valuation of derivative instruments; the valuation of financial assets; the valuation of insurance and claims costs; valuation allowance for receivables and deferred income taxes; and assets and liabilities related to ~~future events. Reclassifications~~employee benefits. Actual results may differ from those estimates. Certain amounts from prior periods have been ~~made in certain prior years’ amounts~~reclassified to conform to the current reporting presentation. The consolidated financial statements principally reflect the results of operations and financial condition of the Company. DPL and its other wholly-owned subsidiaries provide certain administrative services to the Company. These costs were $5.4 million in 2002, $5.7 million in 2001, and $6.1 million in 2000. The primary service provided by the subsidiaries is insurance. The cost of service is either specifically identified with the Company or allocated based upon the relationships of payroll, revenue and/or property. Management considers the cost of service as reasonable and what would have been incurred on a stand-alone basis.

Revenues and Fuel

For periods prior to January 1, 2001, revenues include amounts charged to customers through fuel and gas recovery clauses, which were adjusted periodically for changes in such costs. Related costs that were recoverable or refundable in future periods were deferred along with the related income tax effects. As of February 2000, the Company’s Electric Fuel Component (“EFC”) was fixed at 1.30¢ per kilowatt-hour through the end of the year and the deferral of over/under-recovered fuel costs was no longer permitted. All remaining deferred fuel balances were amortized to expense in 2000. All gas deferred amounts were included in the sale of the natural gas retail distribution operations (see Note 3). Beginning January 1, 2001, the EFC rate of 1.30¢ became part of the base generation rate. Also included in revenues are amounts charged to customers through a surcharge for recovery of arrearages from certain eligible low-income households.

~~The Company~~
DP&L records revenue for services provided but not yet billed to more closely match revenues with expenses. Accounts receivable on the Consolidated Balance Sheet ~~includes~~include unbilled revenue of ~~$56.9~~$60.0 million and $59.3 million in 2003 and 2002, respectively. Also included in revenues are amounts charged to customers through a surcharge for recovery of uncollected amounts from certain eligible low income households. These charges were $6.3 million for 2003, $11.7 million for 2002 and ~~$55.4~~$8.4 million in 2001.

Allowance for Uncollectible Accounts
DP&L establishes provisions for uncollectible accounts using both historical average credit loss percentages of accounts receivable balances to project future losses and specific provisions for known credit issues.

Property, Plant and Equipment
DP&L records its ownership share of its undivided interest in jointly-held plants as an asset in property, plant and equipment. Property, plant and equipment is stated at cost. For regulated

Property, Maintenance and Depreciation

~~Property is shown at its original cost. Cost~~plant, cost includes direct labor and material, ~~and~~ allocable overhead ~~costs.~~costs and an allowance for funds used during construction (AFUDC). AFUDC represents the cost of borrowed funds and equity used to finance regulated construction projects. Capitalization of AFUDC ceases at either project completion or the date specified by regulators. AFUDC capitalized for borrowed funds was $0.1 million in 2003, $0.1 million in 2002 and $3.8 million in 2001. AFUDC capitalized for equity funds was $0.6 million in 2003, $0.4 million in 2002 and $0.9 million in 2001.

For unregulated plant, cost includes direct labor and material, allocable overhead costs and interest capitalized during construction. Capitalized interest was $8.3 million in 2003, $12.7 million in 2002 and $11.4 million in 2001.

For substantially all ~~of the~~ depreciable property, when a unit of property is retired, the original cost of that property ~~plus the cost of removal~~ less any salvage value is charged to ~~accumulated depreciation.~~Accumulated Depreciation and Amortization.

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

Depreciation
Depreciation expense is calculated using the straight-line method, which depreciates the cost of property over its estimated useful ~~life, at~~life. For generation, transmission and distribution assets, straight-line depreciation is applied on an average ~~rate of~~annual composite basis using group rates that approximated 3.3% for 2003 and 3.2% for 2002 and ~~2001,~~2001. Depreciation expense was $116.1 million in 2003, $114.9 million in 2002 and ~~3.5% for 2000.~~

~~Property is tested for impairment whenever events or changes~~$116.0 million in circumstances indicate that its carrying amount may not be recoverable. The Company would recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows.2001.

The ~~Company capitalizes certain interest costs~~following is a summary of property, plant and equipment with corresponding composite depreciation rates at December 31, 2003 and 2002:

$ in millions	2003		Composite Rate		2002		Composite Rate

Regulated:
Transmission	$	335.2		2.5%	$	335.6		2.6%
Distribution		889.1		3.7%		879.2		3.7%
General		53.7		8.0%		53.6		8.4%
Non-depreciable		54.4		0.0%		54.3		0.0%

Total regulated	$	1,332.4			$	1,322.7

Unregulated:
Production	$	2,330.6		3.1%	$	2,278.9		3.2%
Non-depreciable		15.5		0.0%		15.2		0.0%

Total unregulated	$	2,346.1			$	2,294.1


Total property in service	$	3,678.5		3.3%	$	3,616.8		3.2%
Construction work in progress		196.9		0.0%		164.9		0.0%

Total property, plant and equipment	$	3,875.4			$	3,781.7

Asset Retirement Obligations
DP&L adopted the provisions of the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143) during 2003. SFAS 143 requires legal obligations associated with the ~~construction~~retirement of ~~property. Capitalized interest totaled $8.7~~long-lived assets to be recognized at their fair value at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. SFAS 143 also requires that components of previously recorded depreciation related to the cost of removal of

assets upon retirement, whether legal asset retirement obligations or not, must be removed from a company’s accumulated depreciation reserve. DP&L’s legal obligations associated with the retirement of its long-lived assets consist primarily of river intake and discharge structures, coal unloading facilities, loading docks, ice breakers and ash disposal facilities. Application of SFAS 143 in 2003 resulted in an increase in net property, plant and equipment of $0.8 million, ~~$4.7~~the recognition of an asset retirement obligation of $4.6 million and ~~$2.4~~reduced DP&L’s accumulated depreciation reserve by $32.1 million due to cost of removal related to the non-regulated generation assets to other deferred credits. If the new accounting rule had been adopted on January 1, 2002, the asset retirement obligation would have approximated $4.3 million. Beginning in January 2003, depreciation rates were reduced to reflect the discontinuation of the cost of removal accrual for applicable non-regulated generation assets. This change reduced annual depreciation and amortization expense by $1.9 million. In addition, costs for the removal of retired assets are charged to operation and maintenance when incurred. Since the generation assets are not subject to Ohio regulation, DP&L recorded the net effect of adopting this standard in its Consolidated Statement of Results of Operations. The total cumulative effect of the adoption of SFAS 143 increased net income and shareholders’ equity by $28.3 million before tax.

DP&L continues to record cost of removal for its regulated transmission and distribution assets through its depreciation rates and recovers those amounts in rates charged to its customers. There are no known legal asset retirement obligations associated with these assets. The Company has reclassified $72 million and $66.1 million in ~~2002, 2001, and 2000, respectively.~~

~~The Company leases office equipment and office space under operating leases with varying terms. Future rental payments under these operating leases~~estimated costs of removal at December 31, 2003 and 2002, respectively, from Accumulated Depreciation and Amortization to regulatory liabilities for its transmission and distribution property. (See Note 4 of Notes to Consolidated Financial Statements.)

Regulatory Accounting
DP&L applies the provisions of FASB Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation”(SFAS 71). In accordance with SFAS 71, regulatory assets and liabilities are ~~not material.~~recorded in the Consolidated Balance Sheet. Regulatory assets are the deferral of costs expected to be recovered in future customer rates and regulatory liabilities represent current recovery of expected future costs.

If DP&L was required to terminate application of SFAS 71 for all of its regulated operations, the Company would have to record the amounts of all regulatory assets and liabilities in the Consolidated Statement of Results of Operations at that time. (See Note 4 of Notes to Consolidated Financial Statements.)
Inventory
Inventories, carried at average cost, include coal, oil and gas used for electric generation and material and supplies for utility operations.
Repairs and Maintenance

Costs associated with all planned ~~major~~ work and maintenance activities, primarily power plant outages, are recognized at the time the work is performed. These costs, ~~are either capitalized or expensed based on Company defined criteria. Outage costs~~which include labor, materials and supplies and outside services required to maintain equipment and facilities, are either capitalized or expensed based on defined units of property as required by the Federal Energy Regulatory Commission (FERC).

Stock-Based Compensation
DP&L accounts for DPL stock options granted to the Company’s ~~equipment and facilities.~~employees on or after January 1, 2003 under the fair-value method set forth in FASB Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This standard requires the recognition of compensation expense for stock-based awards

4041

Stock-Based Compensation Cost

~~The Company followed~~to reflect the fair value of the award on the date of grant. DP&L follows Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” ~~(“APB 25”)~~(APB 25) and related Accounting Principles Board and FASB interpretations in accounting for DPL Inc. stock options granted to the Company’s employees ~~during the three-year period 2002, 2001, and 2000.~~before January 1, 2003. If ~~the Company~~DP&L had used athe fair-value method of accounting for stock-based compensation ~~cost,~~granted prior to 2003, earnings on common stock would have been reported as follows:

   Years Ended December 31,
   2002    2001    2000
Earnings on common stock, as reported       $ 242.6    $ 234.4    $ 297.7
Add: Total stock-based employee compensation expense determined under APB 25, net of related tax effects          0.7       1.3       1.3
Deduct: Total stock-based employee compensation expense determined under fair-value based method, net of related tax effects          (2.6 )    (2.9 )    (2.6 )

Proforma earnings on common stock       $ 240.7    $ 232.8    $ 296.4

	Year Ended December 31,

$ in millions	2003			2002 (as restated)			2001 (as restated)

Earnings on common stock, as reported	$	238.5		$	244.7		$	232.7
Add: Total stock-based compensation expense determined under APB 25, net of related tax effects		—			0.7			1.3
Deduct: Total stock-based compensation expense determined under FAS 123, net of related tax effects		(2.7	)		(2.5	)		(2.9	)

Pro-forma earnings on common stock	$	235.8		$	242.9		$	231.1

Income Taxes

~~The Company has elected to apply~~DP&L applies the provisions of ~~the Financial Accounting Standard Board (“FASB”)~~FASB Statement of Financial Accounting ~~Standard~~Standards No. ~~123,~~109, “Accounting for ~~Stock-Based Compensation” on a prospective basis~~Income Taxes” (SFAS 109). SFAS 109 requires an asset and liability approach for ~~stock options granted on or after January 1, 2003. The impact~~financial accounting and reporting of ~~this change in accounting method will depend on the timing and amount of future stock options grants, if any.~~

Income Taxes

~~Deferred~~ income taxes ~~are provided for all temporary~~with tax effects of differences, based on currently enacted income tax rates between the financial ~~statement basis~~reporting and ~~the~~ tax basis of ~~assets and liabilities using~~accounting reported as Deferred Taxes in the ~~enacted~~Consolidated Balance Sheet. Deferred taxes are recognized for deductible temporary differences. Valuation reserves are provided unless it is more likely than not that the asset will be realized.

Investment tax ~~rate.~~credits, which have been used to reduce federal income taxes payable, have been deferred for financial reporting purposes. These deferred investment tax credits are amortized over the useful lives of the property to which they are related. For rate-regulated ~~business units,~~operations, additional deferred income taxes and offsetting regulatory assets or liabilities are recorded to recognize that the income taxes will be recoverable/refundable through future revenues. ~~Investment~~

DPL files a consolidated U. S. federal tax ~~credits previously deferred~~return in conjunction with its subsidiaries, including the Company. The consolidated tax liability is allocated to DPL and its subsidiaries as specified in the DPL tax allocation agreement which provides a consistent, systematic and rational approach. (See Note 5 of Notes to Consolidated Financial Statements.)

Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments are ~~being amortized over the lives of the related properties.~~

Consolidated Statement of Cash Flows

~~The temporary cash investments consist of liquid investments~~stated at cost, which approximates fair value. Investments with ~~an original maturity~~maturities of three months or ~~less.~~less are considered cash equivalents. Investments with maturities of less than one year are considered short-term. Cash, cash equivalents and short-term investments were $17.2 million at December 31, 2003 and $17.1 million at December 31, 2002.

Financial Derivatives

Insurance and Claims Costs
A wholly-owned captive insurance subsidiary of DPL provides insurance coverage solely to DPL, DP&L and other subsidiaries. Premiums for coverage are determined by a third-party actuary and charged to expense by the insured over the term of the policy. The Company has, among other coverages, business interruption and specific risk coverage with respect to electric deregulation. In 2001 and 2002, the Company recognized income of $29 million and $7 million, respectively, relating to its claims under the business interruption policy. By agreement dated December 31, 2001, the insurance subsidiary agreed to pay the Company $29 million with respect to claims under the business interruption policy, and in June 2003 agreed to pay the Company an additional $7 million, as a result of which the Company released the insurance subsidiary from future obligations under the business interruption policy. In September 2003, the Company received payment for the claims under the policy.

During the three-year regulatory transition period ending December 31, 2003, business interruption policy payments from the captive subsidiary to DP&L or the release of the appropriate reserves occurred and were reflected in income. As of December 31, 2002, a $36.3 million receivable was recognized by DP&L for insurance claims under its business interruption insurance policy which was included in Other Current Assets on the Consolidated Balance Sheet. Of this amount, $7.3 million and $29 million were reported as Other Income in 2002 and 2001, respectively. The captive subsidiary released $10.9 million in 2002 and $6.9 million in 2001 from the business interruption policy reserve reported as Other Income. In June 2003, the ultimate value of the business interruption risk coverage was settled between the captive insurance subsidiary and DP&L. The total settlement resulted in a $76 million reduction to insurance reserves of the captive subsidiary and a release from the business interruption policy reserve of $39.7 million which is reported as Other Income. Additionally, during the third quarter of 2003 the captive subsidiary settled the $36.3 million receivable recognized by DP&L for insurance claims under this policy.

Financial Derivatives
DP&L adopted ~~FASB”~~FASB Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging ~~activity,~~Activity,” (SFAS 133) as amended ~~(“SFAS No. 133”)~~ as of January 1, 2001. SFAS ~~No.~~ 133 requires that all derivatives be recognized as either assets or liabilities in the ~~consolidated balance sheet~~Consolidated Balance Sheet and be measured at fair value, and changes in the fair value be recorded in earnings, unless they are designated as a cash flow hedge of a forecasted transaction. As a result of adopting this accounting standard, ~~the Company~~DP&L recorded a cumulative effect of accounting change of $1.0 million in income, net of ~~tax.~~tax, in 2001.

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

DP&L uses forward contracts and ~~option purchase contracts~~options to reduce the Company’s exposure to changes in energy and commodity prices and as a hedge against the risk of changes in cash flows associated with expected electricity purchases. These purchases are required to meet full load requirements during times of peak demand or during planned and unplanned generation facility outages. ~~The Company~~DP&L also holds forward sales contracts that hedge against the risk of changes in cash flows associated with power sales during periods of projected generation facility availability. Prior to July 1, 2001, ~~the Company~~DP&L recorded the fair value of all these contracts as ~~“Other assets”~~Other Assets or ~~“Other liabilities”~~Other Liabilities on the Consolidated Balance Sheet with an offset to ~~“Accumulated other comprehensive income,” which is~~Accumulated Other Comprehensive Income, and earnings were recognized ~~as earnings~~ in the month of physical receipt or delivery of power. In June 2001, the FASB concluded that electric utilities could apply the normal purchases and sales exception for option-type contracts and forward contracts in electricity subject to specific criteria for the power buyers and ~~sellers.~~sellers under capacity contracts. Accordingly, ~~the Company~~DP&L began to apply the normal purchase and sales exception as defined in SFAS ~~No.~~ 133 as of July 1, 2001 and currently accounts for these contracts upon settlement. This change did not have a material ~~impact~~effect on ~~the Company’s~~DP&L’s financial position or results of operations.

In May 2003, DP&L entered into 60 day interest rate swaps designed to capture existing favorable interest rates in anticipation of future financings of $750.0 million first mortgage bonds. These hedges were settled in July 2003, at a fair value of $51.4 million, reflecting

increasing U.S. Treasury interest rates, and as a result DP&L received this amount. During 2003, the ultimate effectiveness of the hedges resulted in a gain of $30.2 million and was recorded in Accumulated Other Comprehensive Income on the Consolidated Balance Sheet. This amount will be amortized into income as a reduction to interest expense over the ten- and fifteen-year lives of the hedges. The ~~Company~~ineffective portion of the hedge of $21.2 million was recognized as Other Income (Deductions) on the Consolidated Statement of Results of Operations.

DP&L also holds emission allowance options ~~through 2004~~ that are classified as derivatives not subject to hedge accounting. The fair value of these contracts, which are in effect through 2004, is reflected as ~~“Other assets”~~Other Assets or ~~“Other liabilities”~~Other Liabilities on the Consolidated Balance Sheet and changes in fair value are recorded as ~~“Other income (deductions)”~~Other Income (Deductions) on the Consolidated Statement of Results of Operations. The ~~impact~~effect on net income was immaterial during ~~2002~~2001 through 2003.

Financial Instruments
DP&L applies the provision of FASB Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and ~~2001.~~Equity Securities” (SFAS 115), for its investments in debt and equity financial instruments of publicly traded entities and classifies the securities into different categories; held-to-maturity and available-for-sale. Available-for-sale securities are carried at fair value and unrealized gains and losses on those securities, net of deferred income taxes, are presented as a separate component of shareholders’ equity. Other than temporary declines in value are recognized currently in earnings. Financial instruments classified as held-to-maturity are carried at amortized cost. The valuation of public equity security investments is based upon market quotations. The cost basis for public equity security and fixed maturity investments is average cost and amortized cost, respectively.

2. RecentLegal, Environmental and Regulatory Contingencies
DP&L, in the normal course of business, is subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. DP&L believes the amounts provided in its consolidated financial statements, as prescribed by GAAP, adequately reflect 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, and to comply with applicable laws and regulations, will not exceed the amounts reflected in DP&L’s consolidated financial statements or will not have a material adverse effect on its consolidated results of operations, financial condition or cash flows. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2003 cannot currently be reasonably determined.
Recently Issued Accounting Standard

Standards
Statement of Financial Accounting Standards No. 149
In ~~June 2001,~~April 2003, the FASB issued Statement of Financial Accounting Standards No. ~~143 “Accounting~~149 (SFAS 149), “Amendment of Statement 133 on Derivatives and Hedging Activities.” SFAS 149 primarily reflects decisions previously made by the FASB’s Derivatives Implementation Group and other FASB projects relating to financial instruments. SFAS 149 amends and clarifies financial accounting and reporting for ~~Asset Retirement Obligations” (“SFAS No. 143”) which is~~derivative instruments, including those embedded in other contracts, and for hedging activities and was effective for ~~the Company as of January 1,~~contracts entered into or modified after June 30, 2003. ~~SFAS No. 143 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred.~~ The Company’s legal asset retirement obligations are composed of river structures and ash disposal facilities. Upon initial recognition of a liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. Application of the new rules is estimated to result in an increase in net property, plant and equipment of approximately $1 million and recognition of an asset retirement obligation of approximately $4 million. SFAS No. 143 also requires that components of previously recorded depreciation accruals that relate to the cost of removal of assets upon retirement, whether legal asset retirement obligations or not, must be removed from a company’s accumulated depreciation reserve. It is estimated that this elimination of cost of removal will reduce the accumulated depreciation reserve in the range of $30 — $35 million. The total cumulative effect of adoption of SFAS 143 will increase net income and shareholder’s equity by approximately $27 — $32 million. Beginning in January 2003, depreciation rates will be reduced to reflect the discontinuation of the cost of removal accrual for applicable non-regulated assets. The estimated impact is an increase of pre-tax income of $2 million. In addition, costs incurred for the removal of retired assets will be charged to operation and maintenance expense rather than to the accumulated depreciation reserve. The impact of this ~~change will vary based~~statement did not have a material effect on the ~~extent~~Company’s consolidated financial condition, results of ~~generating property removal activity.~~operations or cash flows.

3. Sale of the Gas Business

In October 2000, the Company completed the sale of its natural gas retail distribution assets and certain liabilities for $468 million in cash. The transaction resulted in a pre-tax gain of $183 million ($121 million net of taxes), which is reflected in “Other income (deductions)�� on the Consolidated Statement of Results of Operations. Proceeds from the sale were used to finance DPL’s regional generation expansion and reduce outstanding short-term debt.

4. Regulatory Matters

~~The Company applies the provisions FASB~~ Statement of Financial Accounting Standards No. ~~71,~~150
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), “Accounting for Certain Financial Instruments with the ~~Effects~~Characteristics of ~~Certain Types~~Both Liabilities and Equity.” SFAS 150 establishes standards for classifying and measuring certain financial

instruments as liabilities that embody obligations of ~~Regulation” (“~~the issuer and have characteristics of both liabilities and equity. SFAS 150 must be applied to instruments entered into or modified after May 31, 2003 and to all other instruments that existed as of the beginning of the first interim period after June 15, 2003. This standard, which was effective at the beginning of the third quarter of 2003, did not affect DP&L.

Financial Interpretation No. ~~71”)~~46 (Revised December 2003)
In December 2003, the FASB issued Financial Interpretation No. 46R (FIN 46R), which clarifies Financial Interpretation No. 46 (FIN 46) which requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. This standard did not affect DP&L.

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

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


2.	Restatement of Financial Statements

As a result of the Audit Committee’s response to a report prepared by Taft, Stettinius & Hollister LLP (see Note 16) and during the 2003 year-end financial closing process, the Company identified certain adjustments to prior period financial statements. As a result, the Company has restated its consolidated financial statements for the fiscal years ended December 31, 2001 and 2002, and for the quarters ended March 31, 2002 through December 31, 2002. This restatement increased net income by $2.1 million to $245.6 million for 2002 and reduced net income by $1.7 million to $233.6 million for 2001. The beginning balance in Earnings Reinvested in the Business for 2001 was reduced by $13.9 million to $191.5 million.

The consolidated opening balance sheet for the earliest period presented has been restated. Earnings Reinvested in the Business was reduced by $13.9 million to reflect certain accounting adjustments primarily related to the Company’s Supplemental Executive Retirement Plan (SERP) and taxes related to non-deductible expenses. Other Paid-in Capital, Net of Treasury Stock, was increased by $46.2 million to correctly reflect certain executive and director stock plans as equity, with a corresponding reduction in Deferred Credits and Other – Other. Accumulated Other Comprehensive Income was reduced by $2.3 million to reflect certain accounting adjustments related to the Company’s Supplemental Executive Retirement Plan.

As a result of the foregoing factors, the Company’s unaudited condensed consolidated financial statements for fical years 2002 and 2001 have been restated from amounts previously reported. The accompanying consolidated financial data set forth below presents the Company’s Consolidated Statements of Results of Operations for the years ended December 31, 2002 and 2001 and Consolidated Balance Sheet as of December 31, 2002 on a comparative basis showing the amounts as originally reported and as restated.

The following table identifies the adjustments made to previously-released consolidated financial statements:

	Net Income Increase (Decrease)

	For the years ended December 31,

Description of Adjustment ($ in millions)	2002			2001			Periods Prior to 2001

Supplemental Executive Retirement Plan (1)	$	3.8		$	(0.8	)	$	(19.0	)
Stock incentive units (2)		0.4			—			—
Accrued expenses (3)		(0.1	)		(1.1	)		(0.3	)

Sub-total pre-tax impact		4.1			(1.9	)		(19.3	)


Income taxes on non-deductible costs (4)		(0.4	)		(0.5	)		(1.2	)
Income taxes (5)		(1.6	)		0.7			6.6

Total Net Income Impact	$	2.1		$	(1.7	)	$	(13.9	)

(1) Reflects adjustment to record a settlement of the Company’s Supplemental Executive Retirement Plan for certain executives in 1997 and 2000 which had not been previously recorded, in addition to an adjustment to record the proper treatment for Company assets previously thought to be segregated and restricted solely for purposes of funding this plan. Adjustments made subsequent to 2000 reflect revisions to actuarial computations to consider impact of those settlements on future actuarial calculations for the plan.

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

Consolidated Statement of Results of Operations: Adjustment decreased Operation and Maintenance expense by the amounts set forth in this table.

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