Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

8. Income Taxes

DPL’s components of income tax expense were as follows:

	Successor				Predecessor
$ in millions	Year ended December 31, 2012		November 28, 2011 through December 31, 2011		January 1, 2011 through November 27, 2011		Year ended December 31, 2010
Computation of tax expense
Federal income tax expense / (benefit)(a)	$	(588.7)	$	(2.0)	$	88.4	$	151.7
Increases (decreases) in tax resulting from:
State income taxes, net of federal effect		3.5		0.1		3.8		2.4
Depreciation of AFUDC - Equity		(2.4)		(0.3)		(2.9)		(2.2)
Investment tax credit amortized		(0.3)		(0.2)		(2.3)		(2.8)
Section 199 - domestic production deduction		(2.1)		-		(3.6)		(9.1)
Non-deductible merger costs		-		0.1		6.0		-
Non-deductible merger-related compensation		0.6		3.5		-		-
Non-deductible goodwill impairment		636.0		-		-		-
Derivatives		-		(0.1)		-		-
Compensation and benefits		-		-		13.8		0.4
Income not subject to tax		-		(0.6)		-		-
Other, net (b)		1.1		0.1		(1.2)		2.6
Total tax expense	$	47.7	$	0.6	$	102.0	$	143.0
Components of tax expense
Federal - current	$	48.6	$	0.4	$	53.2	$	84.8
State and Local - current		1.2		0.4		0.9		1.1
Total current		49.8		0.8		54.1		85.9
Federal - deferred		(4.9)		(0.2)		43.2		55.9
State and local - deferred		2.8		-		4.7		1.2
Total deferred		(2.1)		(0.2)		47.9		57.1
Total tax expense	$	47.7	$	0.6	$	102.0	$	143.0

Components of Deferred Tax Assets and Liabilities (Successor)
	December 31,
$ in millions	2012		2011
Net non-current Assets / (Liabilities)
Depreciation / property basis	$	(517.0)	$	(489.8)
Income taxes recoverable		(12.3)		(24.0)
Regulatory assets		(20.6)		(23.5)
Investment tax credit		1.2		10.5
Intangibles		(2.4)		(51.3)
Compensation and employee benefits		2.2		(0.8)
Long-term debt		(2.0)		13.2
Other (c)		16.0		25.1
Net non-current liabilities	$	(534.9)	$	(540.6)
Net current Assets / (Liabilities) (d)
Other	$	4.7	$	(0.8)
Net current assets / (liabilities)	$	4.7	$	(0.8)

(a)The statutory tax rate of 35% was applied to pre-tax earnings.

(b)Includes expense of $1.2 million and benefits of $0.0 million, $2.3 million and $0.3 million in the year ended December 31, 2012, the period November 28, 2011 through December 31, 2011, the period January 1, 2011 through November 27, 2011 and the year ended December 31, 2010, respectively, of income tax related to adjustments from prior years.

(c)The Other non-current liabilities caption includes deferred tax assets of $20.4 million in 2012 and $15.4 million in 2011 related to state and local tax net operating loss carryforwards, net of related valuation allowances of $16.2 million in 2012 and $6.7 million in 2011.  These net operating loss carryforwards expire from 2013 to 2026.

(d)Amounts are included within Other prepayments and current assets on the Consolidated Balance Sheets of DPL.

The following table presents the tax expense / (benefit) related to pensions, postretirement benefits, cash flow hedges and financial instruments that were credited to Accumulated other comprehensive loss.

	Successor				Predecessor
$ in millions	Year ended December 31, 2012		November 28, 2011 through December 31, 2011		January 1, 2011 through November 27, 2011		Year ended December 31, 2010
Tax expense / (benefit)	$	(2.5)	$	(1.2)	$	(33.2)	$	5.8

Accounting for Uncertainty in Income Taxes 

We apply the provisions of GAAP relating to the accounting for uncertainty in income taxes.  A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

$ in millions
2010 (Predecessor)
Balance at January 1, 2010	$	19.3
Tax positions taken during prior periods		(0.4)
Tax positions taken during current period		-
Settlement with taxing authorities		0.3
Lapse of applicable statute of limitations		0.2
Balance at December 31, 2010		19.4
January 1, 2011 through November 27, 2011 (Predecessor)
Tax positions taken during prior periods		2.0
Settlement with taxing authorities		3.5
Balance at November 27, 2011	$	24.9
November 28, 2011 through December 31, 2011 (Successor)
Balance at November 28, 2011	$	24.9
Tax positions taken during current period		0.1
Balance at December 31, 2011		25.0
2012 (Successor)
Tax positions taken during prior period		(6.3)
Tax positions taken during current period		(0.4)
Balance at December 31, 2012	$	18.3

Of the December 31, 2012 balance of unrecognized tax benefits, $19.4 million is due to uncertainty in the timing of deductibility offset by $1.1 million of unrecognized tax liabilities that would affect the effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits in Income tax expense.  The following table represents the amounts accrued as well as the expense / (benefit) recorded as of and for the periods noted below:

Amounts in Balance Sheet	Successor
$ in millions	December 31, 2012		December 31, 2011
Liability / (asset)	$	0.8	$	0.9
Amounts in Statement of Operations	Successor				Predecessor
$ in millions	Year ended December 31, 2012		November 28, 2011 through December 31, 2011		January 1, 2011 through November 27, 2011		Year ended December 31, 2010
Expense / (benefit)	$	(0.1)	$	-	$	0.6	$	0.2

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

U.S. Federal – 2007 and forward

State and Local – 2007 and forward

All of the unrecognized tax benefits are expected to be settled within the next twelve months.

The Internal Revenue Service began an examination of our 2008 Federal income tax return during the second quarter of 2010.  The examination was completed on January 18, 2013 and we do not expect the results of this examination to have a material effect on our financial condition, results of operations and cash flows.

As a result of the Merger, DPL and its subsidiaries file U.S. federal income tax returns as a part of the consolidated U.S. income tax return filed by AES.  Prior to the Merger, DPL and its subsidiaries filed a consolidated U.S. federal income tax return.  The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach.

DP&L [Member]

Income Taxes

7. Income Taxes

DP&L’s components of income tax expense were as follows:

$ in millions	Year ended December 31, 2012		Year ended December 31, 2011		Year ended December 31, 2010
Computation of tax expense
Federal income tax expense / (benefit)(a)	$	50.9	$	103.8	$	144.2
Increases (decreases) in tax resulting from:
State income taxes, net of federal effect		(2.0)		1.4		1.9
Depreciation of AFUDC - Equity		3.0		(3.2)		(2.2)
Investment tax credit amortized		(2.5)		(2.5)		(2.8)
Section 199 - domestic production deduction		(2.5)		(4.9)		(9.1)
Non-deductible merger-related compensation		0.6		3.6		-
ESOP		-		13.6		-
Compensation and benefits		-		(5.3)		-
Other, net (b)		7.6		(2.3)		3.2
Total tax expense	$	55.1	$	104.2	$	135.2
Components of Tax Expense
Federal - current	$	52.1	$	54.9	$	83.1
State and Local - current		1.0		0.9		0.8
Total current		53.1		55.8		83.9
Federal - deferred		4.7		47.1		50.1
State and local - deferred		(2.7)		1.3		1.2
Total deferred		2.0		48.4		51.3
Total tax expense	$	55.1	$	104.2	$	135.2

	December 31,
$ in millions	2012		2011
Net non-current Assets / (Liabilities)
Depreciation / property basis	$	(622.1)	$	(613.1)
Income taxes recoverable		(12.3)		(8.6)
Regulatory assets		(20.6)		(18.8)
Investment tax credit		9.6		10.5
Compensation and employee benefits		0.3		(4.2)
Other		(6.9)		(3.5)
Net non-current liabilities	$	(652.0)	$	(637.7)
Net current Assets / (Liabilities) (c)
Other	$	2.0	$	1.5
Net current assets	$	2.0	$	1.5

(a)The statutory tax rate of 35% was applied to pre-tax earnings.

(b)Includes expense of $7.6 million and benefits of $2.4 million and  $0.3 million in 2012,  2011 and 2010, respectively, of income tax related to adjustments from prior years.

(c)Amounts are included within Other prepayments and current assets on the Balance Sheets of DP&L.

The following table presents the tax (benefit) / expense related to pensions, postretirement benefits, cash flow hedges and financial instruments that were credited to Accumulated other comprehensive loss.

$ in millions	Year ended December 31, 2012		Year ended December 31, 2011		Year ended December 31, 2010
Tax expense / (benefit)	$	(0.8)	$	(7.2)	$	0.1

Accounting for Uncertainty in Income Taxes 

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

$ in millions
Year ended December 31, 2011
Balance at January 1, 2011	$	19.4
Tax positions taken during prior periods		2.0
Tax positions taken during current period		3.6
Balance at December 31, 2011	$	25.0
Year ended December 31, 2012
Tax positions taken during prior periods		(6.3)
Tax positions taken during current period		(0.4)
Balance at December 31, 2012	$	18.3

Of the December 31, 2012 balance of unrecognized tax benefits, $19.4 million is due to uncertainty in the timing of deductibility offset by $1.1 million of unrecognized tax liabilities that would affect the effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits in Income tax expense.  The following table represents the amounts accrued as well as the expense / (benefit) recorded as of and for the periods noted below:

Amounts in Balance Sheet
$ in millions	Year ended December 31, 2012		Year ended December 31, 2011		Year ended December 31, 2010
Liability	$	0.8	$	0.9	$	0.3
Amounts in Statement of Operations
$ in millions	Year ended December 31, 2012		Year ended December 31, 2011		Year ended December 31, 2010
Expense / (benefit)	$	(0.1)	$	0.6	$	0.4

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

U.S. Federal – 2007 and forward

State and Local – 2007 and forward

All of the unrecognized tax benefits are expected to settle within the next twelve months.

The Internal Revenue Service began an examination of our 2008 Federal income tax return during the second quarter of 2010.  The examination was completed on January 18, 2013 and we do not expect the results of this examination to have a material effect on our financial condition, results of operations and cash flows.

As a result of the Merger, DPL and its subsidiaries file U.S. federal income tax returns as a part of the consolidated U.S. income tax return filed by AES.  Prior to the Merger, DPL and its subsidiaries filed a consolidated U.S. federal income tax return.  The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach.