Overview and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Overview and Summary of Significant Accounting Policies

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Overview and Summary of Significant Accounting Policies

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 14 for more information relating to these reportable segments.

On November 28, 2011, DPL was acquired by AES in the Merger and DPL became a wholly owned subsidiary of AES. See Note 2.

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's 24 county service area is primarily generated at eight coal-fired power plants and is distributed to more than 500,000 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 and industrial customers. DPLER’s operations include those of its wholly owned subsidiary, MC Squared, which was acquired on February 28, 2011. DPLER has approximately 175,000 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 1,501 people as of September 30, 2012, of which 1,443 employees were employed by DP&L. Approximately 52% of all employees are under a collective bargaining agreement which expires on October 31, 2014.

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 plants are included in the financial statements at amortized cost, which was adjusted to fair value at the Merger date for DPL Inc. Operating revenues and expenses of these generating plants are included on a pro rata basis in the corresponding lines in the Condensed Consolidated Statement of Operations. See Note 5 for more information.

Certain excise taxes collected from customers have been reclassified out of operating expenses in the 2011 presentation to conform to AES’ presentation of these items. These taxes are presented net within revenue. Certain immaterial amounts from prior periods have been reclassified to conform to the current reporting presentation.

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, 2011.

In the opinion of our management, the Condensed Consolidated Financial Statements presented in this report contain all adjustments necessary to fairly state our financial condition as of September 30, 2012; our results of operations for the three and nine months ended September 30, 2012 and our cash flows for the nine months ended September 30, 2012 and 2011. 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 and nine months ended September 30, 2012 may not be indicative of our results that will be realized for the full year ending December 31, 2012.

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.

On November 28, 2011, AES completed the Merger with DPL. As a result of the Merger, DPL is an indirectly wholly owned subsidiary of AES. DPL’s basis of accounting incorporates the application of FASC 805, “Business Combinations” (FASC 805) as of the date of the Merger. FASC 805 requires the acquirer to recognize and measure identifiable assets acquired and liabilities assumed at fair value as of the Merger date. DPL’s Condensed Consolidated Financial Statements and accompanying footnotes have been segregated to present pre-merger activity as the “Predecessor” Company and post-merger activity as the “Successor” Company. Purchase accounting impacts, including goodwill recognition, have been “pushed down” to DPL, resulting in the assets and liabilities of DPL being recorded at their respective fair values as of November 28, 2011. The purchase price allocation was finalized in the third quarter of 2012.

As a result of the push down accounting, DPL’s Condensed Consolidated Statements of Operations subsequent to the Merger include amortization expense relating to purchase accounting adjustments and depreciation of fixed assets based upon their fair value. Therefore, the DPL financial data prior to the Merger will not generally be comparable to its financial data subsequent to the Merger.

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 approximately $2,576.3 million of goodwill (see Note 2), 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. In the third quarter of 2012, we recorded an impairment charge of $1,850.0 million against the goodwill at DPL’s DP&L Reporting Unit. See Note 15 for more information.

As part of the purchase accounting, values were assigned to various intangible assets, including customer relationships, customer contracts and the value of our ESP.

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 billed amounts for DPLER customers’ use of energy. There is no recourse or any other continuing involvement associated with the sold receivables. Total receivables sold during the three and nine months ended September 30, 2012 were $6.1 million and $11.3 million, respectively.

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, cost also includes capitalized interest. Capitalization of AFUDC and interest ceases at either project completion or at the date specified by regulators. AFUDC and capitalized interest was $0.9 million and $1.1 million during the three months and $3.4 million and $3.5 million during the nine months ended September 30, 2012 and 2011, respectively.

For unregulated generation property, cost includes direct labor and material, allocable overhead expenses and interest capitalized during construction using the provisions of GAAP relating to the accounting for capitalized interest.

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 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 cost of emission allowances, are recorded as a component of our fuel costs and are reflected in Operating income when realized. During the nine months ended September 30, 2012 and 2011, DPL had no gains from the sale of emission allowances. Beginning in January 2010, part of the gains on emission allowances were used to reduce the overall fuel rider charged to our SSO retail customers.

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 ESP is 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.

Prior to the Merger date, emission allowances and renewable energy credits were carried as inventory. Emission allowances and renewable energy credits are now carried as intangibles in accordance with AES’ policy. The amounts for 2011 have been reclassified to reflect this change in presentation.

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. Prior to the Merger date, certain excise and other taxes were recorded gross. Effective on the Merger date, these taxes are accounted for on a net basis and recorded as a reduction in revenues for presentation in accordance with AES policy. The amounts for the three months ended September 30, 2012 and 2011 were $13.8 million and $14.3 million, respectively. The amounts for the nine months ended September 30, 2012 and 2011 were $38.5 million and $39.9 million, respectively. The 2011 amounts were reclassified to conform to this presentation.

Share-Based Compensation

We measure the cost of employee services received and paid with equity instruments based on the fair-value of such equity instrument on the grant date. This cost is recognized in results of operations over the period that employees are required to provide service. Liability awards are initially recorded based on the fair-value of equity instruments and are to be re-measured for the change in stock price at each subsequent reporting date until the liability is ultimately settled. The fair-value for employee share options and other similar instruments at the grant date are estimated using option-pricing models and any excess tax benefits are recognized as an addition to paid-in capital. The reduction in income taxes payable from the excess tax benefits is presented in the Condensed Consolidated Statements of Cash Flows within Cash flows from financing activities. As a result of the Merger (see Note 2), vesting of all DPL share-based awards was accelerated as of the Merger date, and none are in existence at September 30, 2012.

Recently Issued 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 expect to adopt 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. We do not expect these new rules to 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 expect to adopt 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. After adoption, we do not expect these new rules to have a material impact on our overall results of operations, financial position or cash flows.

Recently Adopted Accounting Standards

Fair Value Disclosures

In May 2011, the FASB issued ASU 2011-04 “Fair Value Measurements” (ASU 2011-04) effective for interim and annual reporting periods beginning after December 15, 2011. We adopted this ASU on January 1, 2012. This standard updates FASC 820, “Fair Value Measurements.” ASU 2011-04 essentially converges US GAAP guidance on fair value with the IFRS guidance. The ASU requires more disclosures around Level 3 inputs. It also increases reporting for financial instruments disclosed at fair value but not recorded at fair value and provides clarification of blockage factors and other premiums and discounts. These new rules did not have a material effect on our overall results of operations, financial position or cash flows.

Comprehensive Income

In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” (ASU 2011-05) effective for interim and annual reporting periods beginning after December 15, 2011. We adopted this ASU on January 1, 2012. This standard updates FASC 220, “Comprehensive Income.” ASU 2011-05 essentially converges US GAAP guidance on the presentation of comprehensive income with the IFRS guidance. The ASU requires the presentation of comprehensive income in one continuous financial statement or two separate but consecutive statements. Any reclassification adjustments from other comprehensive income to net income are required to be presented on the face of the Statement of Comprehensive Income. These new rules did not have a material effect on our overall results of operations, financial position or cash flows.

Goodwill Impairment

In September 2011, the FASB issued ASU 2011-08 “Testing Goodwill for Impairment” (ASU 2011-08) effective for interim and annual reporting periods beginning after December 15, 2011. We adopted this ASU on January 1, 2012. This standard updates FASC 350, “Intangibles-Goodwill and Other.” ASU 2011-08 allows an entity to first test Goodwill using qualitative factors to determine if it is more likely than not that the fair value of a reporting unit has been impaired; if so, then the two-step impairment test is performed. We will incorporate these new requirements in our future goodwill impairment testing.

Derivative gross vs. net presentation – Following the acquisition of DPL in November 2011 by AES, DPL began presenting its derivative positions on a gross basis in accordance with AES policy. This change has been reflected in the 2011 balance sheet contained in these statements.

DP&L [Member]

Overview and Summary of Significant Accounting Policies

Notes to Condensed Financial Statements (Unaudited)

1. Overview and Summary of Significant Accounting Policies

Description of Business

On November 28, 2011, DP&L’s parent company DPL was acquired by AES in the Merger and DPL became an indirectly wholly owned subsidiary of AES. See Note 2 for more information.

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 employed 1,443 people as of September 30, 2012. Approximately 54% of all employees are under a collective bargaining agreement which expires on October 31, 2014.

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. Operating revenues and expenses of these generating plants are included on a pro rata basis in the corresponding lines in the Condensed Consolidated Statement of Operations. See Note 5 for more information.

Certain excise taxes collected from customers have been reclassified out of operating expense and recorded as a reduction in revenues in the 2011 presentation to conform to AES’ presentation of these items. These taxes are presented net within revenue. Certain immaterial amounts from prior periods have been reclassified to conform to the current reporting presentation.

In the opinion of our management, the Condensed Financial Statements presented in this report contain all adjustments necessary to fairly state our financial condition as of September 30, 2012, our results of operations for the three and nine months ended September 30, 2012 and our cash flows for the nine months ended September 30, 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 and nine months ended September 30, 2012 may not be indicative of our results that will be realized for the full year ending December 31, 2012.

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

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, cost also includes capitalized interest. Capitalization of AFUDC and interest ceases at either project completion or at the date specified by regulators. AFUDC and capitalized interest was $0.9 million and $1.1 million for the three months and $3.4 million and $3.5 million for the nine months ended September 30, 2012 and 2011, 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 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 cost of emission allowances, are recorded as a component of our fuel costs and are reflected in Operating income when realized. During the nine months ended September 30, 2012 and 2011, DP&L had no gains from the sale of emission allowances. Emission allowances are amortized as they are used in our operations. Renewable energy credits are amortized as they are used or retired.

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. Prior to the Merger date, certain excise and other taxes were recorded on a gross basis. Effective on the Merger date, these taxes are accounted for on a net basis and are recorded as a reduction in Revenues for presentation in accordance with AES policy. The amounts for the three months ended September 30, 2012 and 2011 were $13.8 million and $14.3 million, respectively. The amounts for the nine months ended September 30, 2012 and 2011 were $38.5 million and $39.9 million, respectively. The 2011 amounts were reclassified to conform to this presentation.

Share-Based Compensation

We measured the cost of employee services received and paid with equity instruments based on the fair-value of such equity instrument on the grant date. This cost was recognized in results of operations over the period that employees were required to provide service. Liability awards were initially recorded based on the fair-value of equity instruments and were re-measured for the change in stock price at each subsequent reporting date until the liability was ultimately settled. The fair-value for employee share options and other similar instruments at the grant date were estimated using option-pricing models and any excess tax benefits were recognized as an addition to paid-in capital. The reduction in income taxes payable from the excess tax benefits was presented in the Condensed Statements of Cash Flows within Cash flows from financing activities. As a result of the Merger (see Note 2), vesting of all DPL share-based awards was accelerated as of the Merger date, and none are in existence at September 30, 2012.

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:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
DP&L Revenues:
Sales to DPLER (a)	$	93.3	$	90.2	$	263.1	$	246.3
Sales to MC Squared (b)	$	19.8	$	-	$	20.1	$	-

DP&L Operations and Maintenance Expenses:
Premiums paid for insurance services provided by MVIC (c)	$	(0.7)	$	(0.8)	$	(1.9)	$	(2.4)
Expense recoveries for services provided to DPLER (d)	$	1.2	$	1.1	$	2.7	$	2.8

(a)

DP&L sells power to DPLER to satisfy the electric requirements of DPLER’s retail customers. The revenue dollars associated with sales to DPLER are recorded as wholesale revenues in DP&L’s Financial Statements. The increase in DP&L’s sales to DPLER during the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011, is primarily due to customers electing to switch their generation service from DP&L to DPLER.

(b)

DP&L sells power to MC Squared to satisfy the electric requirements of DPLER’s retail customers. The revenue dollars associated with sales to DPLER are recorded as wholesale revenues in DP&L’s Financial Statements. The increase in DP&L’s sales to MC Squared during the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011, is due to these sales beginning in September 2012.

(c)	MVIC, a wholly owned captive insurance subsidiary of DPL, provides insurance coverage to DP&L and other DPL subsidiaries for workers’ compensation, general liability, property damages and directors’ and officers’ liability. These amounts represent insurance premiums paid by DP&L to MVIC.

(d)

In the normal course of business DP&L incurs and records expenses on behalf of DPLER. Such expenses include but are not limited to employee-related expenses, accounting, information technology, payroll, legal and other administrative expenses. DP&L subsequently charges these expenses to DPLER at DP&L’s cost and credits the expense in which they were initially recorded.

Recently Issued 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 expect to adopt 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. We do not expect these new rules to 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 expect to adopt 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. We do not expect these new rules to have a material impact on our overall results of operations, financial position or cash flows.

Recently Adopted Accounting Standards

Fair Value Disclosures

Comprehensive Income

Derivative gross vs. net presentation – Following the acquisition of DPL in November 2011 by AES, DP&L began presenting its derivative positions on a gross basis in accordance with AES policy. This change has been reflected in the 2011 balance sheet contained in these statements.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

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