Summary of Significant Accounting Policies (Policy)

3 Months Ended

Mar. 31, 2013

Description of Business

Description of Business  

DPL is a diversified regional energy company organized in 1985 under the laws of Ohio.  DPL’s two reportable segments are the Utility segment, comprised of its DP&L subsidiary, and the Competitive Retail segment, comprised of its DPLER operations, which include the operations of DPLER’s wholly owned subsidiary MC Squared.  Refer to Note 11 for more information relating to these reportable segments.  

DP&L is a public utility incorporated in 1911 under the laws of Ohio.  DP&L is engaged in the generation, transmission, distribution and sale of electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio.  Electricity for DP&L's24 county service area is primarily generated at eight coal-fired power plants and is distributed to more than 514,000 retail customers.  Principal industries served include automotive, food processing, paper, plastic manufacturing and defense.   

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

DPLER sells competitive retail electric service, under contract, to residential, commercial, industrial and governmental customers.  DPLER’s operations include those of its wholly owned subsidiary, MC Squared, which was acquired on February 28, 2011.  DPLER has approximately 247,000 customers currently located throughout Ohio and Illinois.  DPLER does not own any transmission or generation assets, and all of DPLER’s electric energy was purchased from DP&L or PJM to meet its sales obligations.  DPLER’s sales reflect the general economic conditions and seasonal weather patterns of the areas it serves. 

DPL’s other significant subsidiaries include DPLE, which owns and operates peaking generating facilities from which it makes wholesale sales of electricity and MVIC, our captive insurance company that provides insurance services to us and our subsidiaries.  All of DPL’s subsidiaries are wholly owned. 

DPL also has a wholly owned business trust, DPL Capital Trust II, formed for the purpose of issuing trust capital securities to investors.     

DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators while its generation business is deemed competitive under Ohio law.  Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates, and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs. 

DPL and its subsidiaries employed 1,475 people as of March 31, 2013, of which 1,412 employees were employed by DP&L.  Approximately 53% of all DPL employees are under a collective bargaining agreement which expires on October 31, 2014. 

Financial Statement Presentation

Financial Statement Presentation  

DPL’s Condensed Consolidated Financial Statements include the accounts of DPL and its wholly owned subsidiaries except for DPL Capital Trust II which is not consolidated, consistent with the provisions of GAAP.  DP&L’s undivided ownership interests in certain coal-fired generating facilities and numerous transmission facilities are included in the financial statements at amortized cost, which was adjusted to fair value at the Merger date for DPL.  Operating revenues and expenses of these facilities are included on a pro rata basis in the corresponding lines in the Condensed Consolidated Statement of Operations.  See Note 4 for more information. 

All material intercompany accounts and transactions are eliminated in consolidation.   

These financial statements have been prepared in accordance with GAAP for interim financial statements, the instructions of Form 10-Q and Regulation S-X.  Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been omitted from this interim report.  Therefore, our interim financial statements in this report should be read along with the annual financial statements included in our Form 10-K for the fiscal year ended December 31, 2012.   

In the opinion of our management, the Condensed Consolidated Financial Statements presented in this report contain all adjustments necessary to fairly state our financial position as of March 31, 2013; our results of operations for the three months ended March 31, 2013 and 2012 and our cash flows for the three months ended March 31, 2013 and 2012.  Unless otherwise noted, all adjustments are normal and recurring in nature.  Due to various factors, including but not limited to, seasonal weather variations, the timing of outages of electric generating units, changes in economic conditions involving commodity prices and competition, and other factors, interim results for the three months ended March 31, 2013 may not be indicative of our results that will be realized for the full year ending December 31, 2013. 

The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the revenues and expenses of the periods reported.  Actual results could differ from these estimates.  Significant items subject to such estimates and judgments include:  the carrying value of property, plant and equipment; unbilled revenues; the valuation of derivative instruments; the valuation of insurance and claims liabilities; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; the valuation of AROs; assets and liabilities related to employee benefits; goodwill; and intangibles. 

Goodwill Impairment

Goodwill Impairment

In connection with the Merger, DPL remeasured the carrying amount of all of its assets and liabilities to fair value, which resulted in the recognition of goodwill assigned to DPL’s two reporting units, DPLER and the DP&L Reporting Unit, which includes DP&L and other entities.  FASC 350 “Intangibles – Goodwill and Other” requires that goodwill be tested for impairment at the reporting unit level at least annually or more frequently if impairment indicators are present.  In evaluating the potential impairment of goodwill, we make estimates and assumptions about revenue, operating cash flows, capital expenditures, growth rates and discount rates based on our budgets and long term forecasts, macroeconomic projections, and current market expectations of returns on similar assets.  There are inherent uncertainties related to these factors and management’s judgment in applying these factors.  Generally, the fair value of a reporting unit is determined using a discounted cash flow valuation model.  We could be required to evaluate the potential impairment of goodwill outside of the required annual assessment process if we experience situations, including but not limited to:  deterioration in general economic conditions; changes to our operating or regulatory environment; increased competitive environment; increase in fuel costs particularly when we are unable to pass its effect to customers; negative or declining cash flows; loss of a key contract or customer, particularly when we are unable to replace it on equally favorable terms; or adverse actions or assessments by a regulator.  These types of events and the resulting analyses could result in goodwill impairment expense, which could substantially affect our results of operations for those periods.

Receivables

Sale of Receivables 

In the first quarter of 2012, DPLER began selling receivables from DPLER customers in Duke Energy’s territory to Duke Energy.  These sales are at face value for cash at the amounts billed for DPLER customers’ use of energy.  Total receivables sold to Duke Energy during the three months endedMarch 31, 2013 and 2012 were $4.5 million and  $2.0 million, respectively.  Similarly, MC Squared sells receivables from their customers in ComEd territory to ComEd.  Total receivables sold to ComEd during the three months endedMarch 31, 2013 and 2012 were $16.9 million and $0.0million, respectively

Property, Plant and Equipment

Property, Plant and Equipment  

We record our ownership share of our undivided interest in jointly-held plants as an asset in property, plant and equipment.  Property, plant and equipment are stated at cost.  For regulated transmission and distribution property, cost includes direct labor and material, allocable overhead expenses and an allowance for funds used during construction (AFUDC).  AFUDC represents the cost of borrowed funds and equity used to finance regulated construction projects.  For non-regulated property including unregulated generation property, cost is similarly defined except financing costs are reflected as capitalized interest without an equity component. 

Capitalization of AFUDC and interest ceases at either project completion or at the date specified by regulators.  The total AFUDC and capitalized interest was $0.3 million and $1.4 million during the three months endedMarch 31, 2013 and 2012, respectively.  

For substantially all depreciable property, when a unit of property is retired, the original cost of that property less any salvage value is charged to Accumulated depreciation and amortization. 

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

Intangibles

Intangibles 

Intangibles include emission allowances, renewable energy credits, customer relationships, customer contracts and the value of our ESP.  Emission allowances are carried on a first-in, first-out (FIFO) basis for purchased emission allowances.  In addition, we recorded emission allowances at their fair value as of the Merger date.  Net gains or losses on the sale of excess emission allowances, representing the difference between the sales proceeds and the carrying value of emission allowances, are recorded as a component of our fuel costs and are reflected in Operating income when realized.  During the three months ended March 31, 2013 and 2012,  DPL had no gains from the sale of emission allowances.   

Customer relationships recognized as part of the purchase accounting associated with the Merger are amortized over ten to seventeen years and customer contracts are amortized over the average length of the contracts.  The value of the ESP was amortized over one year on a straight-line basis.  Emission allowances are amortized as they are used in our operations on a FIFO basis.  Renewable energy credits are amortized as they are used or retired. 

Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities

Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities 

DPL collects certain excise taxes levied by state or local governments from its customers.  These taxes are accounted for on a net basis and recorded as a reduction in revenues.  The amounts for the three months endedMarch 31, 2013 and 2012 were $13.4 million and $12.9 million, respectively

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Standards 

Offsetting Assets and Liabilities

The FASB recently issued ASU 2013-01 “Scope Clarification of Disclosures about Offsetting Assets and Liabilities”to limit the scope of ASU 2011-11 “Disclosures about Offsetting Assets and Liabilities” to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions.  This ASU is effective for annual and interim periods beginning on or after January 1, 2013.  The FASB clarified that the disclosures were not intended to include trade receivables and other contracts for financial instruments that may be subject to a master netting arrangement.  We adopted this rule which resulted in enhanced disclosures.  This did not have a material effect on our overall results of operations, financial position or cash flows.

Comprehensive Income

The FASB recently issued ASU 2013-02 “Comprehensive Income (Topic 220):  Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” effective for annual and interim periods beginning after December 15, 2012. This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, this ASU requires an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.  We adopted this rule which resulted in enhanced disclosures.  This did not have a material effect on our overall results of operations, financial position or cash flows.

Recently Adopted Accounting Standards  

Offsetting Assets and Liabilities 

In December 2011, the FASB issued ASU 2011-11 “Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11) effective for interim and annual reporting periods beginning on or after January 1, 2013.  We adopted this ASU on January 1, 2013.  This standard updates FASC Topic 210 “Balance Sheet.”  ASU 2011-11 updates the disclosures for financial instruments and derivatives to provide more transparent information around the offsetting of assets and liabilities.  Entities are required to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and/or subject to an agreement similar to a master netting agreement.  This rule did not have a material effect on our overall results of operations, financial position or cash flows. 

Testing Indefinite-Lived Intangible Assets for Impairments 

In July 2012, the FASB issued ASU 2012-02 “Testing Indefinite-Lived Intangible Assets for Impairment” (ASU 2012-02) effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012.  We adopted this ASU on January 1, 2013.  This standard updates FASC Topic 350 “Intangibles-Goodwill and Other.”  ASU 2012-02 permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with FASC Subtopic 350-30.  This rule did not have a material effect on our overall results of operations, financial position or cash flows.

DP&L [Member]

Description of Business

Description of Business  

DP&L is a public utility incorporated in 1911 under the laws of Ohio.  DP&L is engaged in the generation, transmission, distribution and sale of electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio.  Electricity for DP&L's24 county service area is primarily generated at eight coal-fired power plants and is distributed to more than 514,000 retail customers.  Principal industries served include automotive, food processing, paper, plastic manufacturing and defense.  DP&L is a wholly owned subsidiary of DPL. 

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

DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators while its generation business is deemed competitive under Ohio law.  Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates, and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs. 

DP&L employed 1,412 people as of March 31, 2013.  Approximately 55% of all employees are under a collective bargaining agreement which expires on October 31, 2014. 

Financial Statement Presentation

Financial Statement Presentation  

DP&L does not have any subsidiaries.  DP&L has undivided ownership interests in seven electric generating facilities and numerous transmission facilities which are included in the financial statements at amortized cost.  Operating revenues and expenses of these facilities are included on a pro rata basis in the corresponding lines in the Condensed Statement of Operations.  See Note 4 for more information.   

These financial statements have been prepared in accordance with GAAP for interim financial statements, the instructions of Form 10-Q and Regulation S-X.  Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been omitted from this interim report.  Therefore, our interim financial statements in this report should be read along with the annual financial statements included in our Form 10-K for the fiscal year ended December 31, 2012.   

In the opinion of our management, the Condensed Financial Statements presented in this report contain all adjustments necessary to fairly state our financial position as of March 31, 2013; our results of operations for the three months ended March 31, 2013 and 2012 and our cash flows for the three months ended March 31, 2013 and 2012.  Unless otherwise noted, all adjustments are normal and recurring in nature.  Due to various factors, including but not limited to, seasonal weather variations, the timing of outages of electric generating units, changes in economic conditions involving commodity prices and competition, and other factors, interim results for the three months ended March 31, 2013 may not be indicative of our results that will be realized for the full year ending December 31, 2013. 

The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the revenues and expenses of the periods reported.  Actual results could differ from these estimates.  Significant items subject to such estimates and judgments include: the carrying value of property, plant and equipment; unbilled revenues; the valuation of derivative instruments; the valuation of insurance and claims liabilities; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; the valuation of AROs; and assets and liabilities related to employee benefits.

Property, Plant and Equipment

Property, Plant and Equipment  

We record our ownership share of our undivided interest in jointly-held plants as an asset in property, plant and equipment.  Property, plant and equipment are stated at cost.  For regulated transmission and distribution property, cost includes direct labor and material, allocable overhead expenses and an allowance for funds used during construction (AFUDC).  AFUDC represents the cost of borrowed funds and equity used to finance regulated construction projects.  For non-regulated property including unregulated generation property, cost is similarly defined except financing costs are reflected as capitalized interest without an equity component. 

Capitalization of AFUDC and interest ceases at either project completion or at the date specified by regulators.  The total of AFUDC and capitalized interest was $0.3 million and $1.4 million for the three months endedMarch 31, 2013 and 2012, respectively. 

For substantially all depreciable property, when a unit of property is retired, the original cost of that property less any salvage value is charged to Accumulated depreciation and amortization. 

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

Intangibles

Intangibles 

Intangibles consist of emission allowances and renewable energy credits.  Emission allowances are carried on a first-in, first-out (FIFO) basis for purchased emission allowances.  Net gains or losses on the sale of excess emission allowances, representing the difference between the sales proceeds and the carrying value of emission allowances, are recorded as a component of our fuel costs and are reflected in Operating income when realized.  Emission allowances are amortized as they are used in our operations.  Renewable energy credits are amortized as they are used or retired.  During the three months ended March 31, 2013 and 2012,  DP&L had no gains from the sale of emission allowances.

Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities

Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities 

DP&L collects certain excise taxes levied by state or local governments from its customers.  These taxes are accounted for on a net basis and are recorded as a reduction in revenues.  The amounts for the three months endedMarch 31, 2013 and 2012 were $13.4 million and $12.9 million, respectively.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Standards 

Offsetting Assets and Liabilities

The FASB recently issued ASU 2013-01 “Scope Clarification of Disclosures about Offsetting Assets and Liabilities”to limit the scope of ASU 2011-11 “Disclosures about Offsetting Assets and Liabilities” to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions.  This ASU became effective for annual and interim periods beginning on or after January 1, 2013.  The FASB clarified that the disclosures were not intended to include trade receivables and other contracts for financial instruments that may be subject to a master netting arrangement.  We adopted this rule which resulted in enhanced disclosures.  This did not have a material effect on our overall results of operations, financial position or cash flows.

Comprehensive Income

The FASB recently issued ASU 2013-02 “Comprehensive Income (Topic 220):  Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” effective for annual and interim periods beginning after December 15, 2012. This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, this ASU requires an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.  We adopted this rule which resulted in enhanced disclosures.  This did not have a material effect on our overall results of operations, financial position or cash flows.

Recently Adopted Accounting Standards  

Offsetting Assets and Liabilities 

In December 2011, the FASB issued ASU 2011-11 “Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11) effective for interim and annual reporting periods beginning on or after January 1, 2013.  We adopted this ASU on January 1, 2013.  This standard updates FASC 210 “Balance Sheet.”  ASU 2011-11 updates the disclosures for financial instruments and derivatives to provide more transparent information around the offsetting of assets and liabilities.  Entities are required to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and/or subject to an agreement similar to a master netting agreement.  These new rules did not have a material impact on our overall results of operations, financial position or cash flows. 

Testing Indefinite-Lived Intangible Assets for Impairments 

In July 2012, the FASB issued ASU 2012-02 “Testing Indefinite-Lived Intangible Assets for Impairment” (ASU 2012-02) effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012.  We adopted this ASU on January 1, 2013.  This standard updates FASC Topic 350 “Intangibles-Goodwill and Other.”  ASU 2012-02 permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with FASC Subtopic 350-30.  These new rules did not have a material impact on our overall results of operations, financial position or cash flows.

Related Party Transactions

Related Party Transactions 

In the normal course of business, DP&L enters into transactions with other subsidiaries of DPL.  The following table provides a summary of these transactions: