Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

8. Income Taxes

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

		Successor						Predecessor
		November 28, 2011			January 1, 2011
		through			through			Years ended December 31,
$ in millions		December 31, 2011			November 27, 2011			2010			2009
Computation of Tax Expense
Federal income tax expense / (benefit) (a)	$	(2.0	)	$	88.4		$	151.7		$	119.9
Increases (decreases) in tax resulting from:
State income taxes, net of federal effect		0.1			3.8			2.4			0.9
Depreciation of AFUDC - Equity		(0.3	)		(2.9	)		(2.2	)		(2.0	)
Investment tax credit amortized		(0.2	)		(2.3	)		(2.8	)		(2.8	)
Section 199 - domestic production deduction		-			(3.6	)		(9.1	)		(4.6	)
Non-deductible merger costs		0.1			6.0			-			-
Non-deductible merger-related compensation		3.5			-			-			-
Derivatives		(0.1	)		-			-			-
Compensation and benefits		-			13.8			0.4			(0.7	)
Income not subject to tax		(0.6	)		-			-			-
Other, net (b)		0.1			(1.2	)		2.6			1.8
Total tax expense	$	0.6		$	102.0		$	143.0		$	112.5
Components of Tax Expense
Federal - Current	$	0.4		$	53.2		$	84.8		$	(84.4	)
State and Local - Current		0.4			0.9			1.1			(1.8	)
Total Current	$	0.8		$	54.1		$	85.9		$	(86.2	)
Federal - Deferred	$	(0.2	)	$	43.2		$	55.9		$	196.0
State and Local - Deferred		-			4.7			1.2			2.7
Total Deferred	$	(0.2	)	$	47.9		$	57.1		$	198.7
Total tax expense	$	0.6		$	102.0		$	143.0		$	112.5
Components of Deferred Tax Assets and Liabilities
		Successor			Predecessor
		December 31,			December 31,
$ in millions		2011			2010
Net Noncurrent Assets / (Liabilities)
Depreciation / property basis	$	(490.7	)	$	(618.6	)
Income taxes recoverable		(8.6	)		(10.3	)
Regulatory assets		(25.1	)		(12.4	)
Investment tax credit		10.5			11.3
Intangibles		(57.5	)		-
Compensation and employee benefits		(7.9	)		21.0
Long-term debt		10.3			-
Other (c)		19.6			(14.1	)
Net noncurrent (liabilities)	$	(549.4	)	$	(623.1	)
Net Current Assets / (Liabilities) (d)
Other	$	0.8		$	(1.1	)
Net current assets	$	0.8		$	(1.1	)

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

(b) Includes benefits of $2.3 million and $0.3 million, and an expense of $2.0 million in 2011, 2010 and 2009, respectively, of income tax related to adjustments from prior years.

(c) The Other noncurrent liabilities caption includes deferred tax assets of $15.4 million in 2011 and $13.1 million in 2010 related to state and local tax net operating loss carryforwards, net of related valuation allowances of $6.7 million in 2011 and $13.1 million in 2010.

These net operating loss carryforwards expire from 2017 to 2026.

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

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CONFIDENTIAL

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
		November 28, 2011			January 1, 2011
		through			through			Years ended December 31,
$ in millions		December 31, 2011			November 27, 2011			2010		2009
Expense / (benefit)	$	(1.2	)	$	(33.2	)	$	5.8	$	(1.7	)

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
2009 (Predecessor):
Balance at January 1, 2009	$	1.9
Tax positions taken during prior periods		-
Tax positions taken during current period		20.6
Settlement with taxing authorities		(3.2	)
Lapse of applicable statute of limitations		-
Balance at December 31, 2009		19.3
2010 (Predecessor):
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
Tax positions taken during current period		3.5
Settlement with taxing authorities		-
Lapse of applicable statute of limitations		-
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 prior periods		-
Tax positions taken during current period		0.1
Settlement with taxing authorities		-
Lapse of applicable statute of limitations		-
Balance at December 31, 2011	$	25.0

Of the December 31, 2011 balance of unrecognized tax benefits, $26.1 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.

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Page 19

CONFIDENTIAL

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			Predecessor
		December 31,		December 31,	December 31,
$ in millions		2011		2010	2009
Liability / (asset)	$	0.9	$	0.3	$	(0.1	)
Amounts in Statement of Operations		Successor			Predecessor
		November 28, 2011		January 1, 2011
		through		through	Years ended December 31,
$ in millions		December 31, 2011		November 27, 2011	2010				2009
Expense / (benefit)	$	-	$	0.6	$	0.2		$	(0.1	)

Following is a summary of the tax years open to examination by major tax jurisdiction: U.S. Federal 2007 and forward State and Local 2005 and forward

None of the unrecognized tax benefits are expected to significantly increase or decrease 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 is still ongoing 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.

DP&L [Member]

Income Taxes

7. Income Taxes

For the years ended December 31, 2011, 2010 and 2009, DP&Ls components of income tax were as follows:

	For the years ended December 31,
$ in millions		2011			2010			2009
Computation of Tax Expense
Federal income tax (a)	$	103.8		$	144.2		$	134.2
Increases (decreases) in tax resulting from:
State income taxes, net of federal effect		1.4			1.9			0.4
Depreciation of AFUDC - Equity		(3.2	)		(2.2	)		(2.0	)
Investment tax credit amortized		(2.5	)		(2.8	)		(2.8	)
Section 199 - domestic production deduction		(4.9	)		(9.1	)		(4.6	)
Non-deductible merger-related compensation		3.6			-			-
ESOP		13.6			-			-
Compensation and benefits		(5.3	)		-			-
Other, net (b)		(2.3	)		3.2			(0.7	)
Total tax expense	$	104.2		$	135.2		$	124.5
Components of Tax Expense
Federal - Current	$	54.9		$	83.1		$	(70.3	)
State and Local - Current		0.9			0.8			(2.5	)
Total Current		55.8			83.9			(72.8	)
Federal - Deferred		47.1			50.1			194.4
State and Local - Deferred		1.3			1.2			2.9
Total Deferred		48.4			51.3			197.3
Total tax expense	$	104.2		$	135.2		$	124.5

Components of Deferred Tax Assets and Liabilities
		At December 31,
$ in millions		2011			2010
Net Noncurrent Assets / (Liabilities)
Depreciation / property basis	$	(613.1	)	$	(595.6	)
Income taxes recoverable		(8.6	)		(10.3	)
Regulatory assets		(18.8	)		(12.4	)
Investment tax credit		10.5			11.3
Compensation and employee benefits		(4.2	)		21.0
Other		(3.5	)		(9.7	)
Net noncurrent (liabilities)	$	(637.7	)	$	(595.7	)
Net Current Assets / (Liabilities) (c)
Other	$	1.5		$	(1.1	)
Net current assets	$	1.5		$	(1.1	)

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

(b) Includes a benefit of $2.4 million, $0.3 million and, an expense of $0.8 million in 2011, 2010 and 2009, 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.

	For the years ended December 31,
$ in millions		2011			2010		2009
Expense / (benefit)	$	(7.2	)	$	0.1	$	(0.5	)

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
Balance at January 1, 2009	$	1.9
Tax positions taken during prior periods		-
Tax positions taken during current period		20.6
Settlement with taxing authorities		(3.2	)
Lapse of applicable statute of limitations		-
Balance at December 31, 2009	$	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
Tax positions taken during prior periods		2.0
Tax positions taken during current period		3.6
Settlement with taxing authorities		-
Lapse of applicable statute of limitations		-
Balance at December 31, 2011	$	25.0

Of the December 31, 2011 balance of unrecognized tax benefits, $26.1 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
	Years ended December 31,
$ in millions	2011		2010		2009
Liability / (asset)	$	0.9	$	0.3	$	(1.0	)

Amounts in Statement of Operations
	Years ended December 31,
$ in millions	2011		2010		2009
Expense / (benefit)	$	0.6	$	0.4	$	(0.1	)

Following is a summary of the tax years open to examination by major tax jurisdiction: U.S. Federal 2007 and forward State and Local 2005 and forward

None of the unrecognized tax benefits are expected to significantly increase or decrease 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 is still ongoing 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 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.