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Overview and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Overview and Summary of Significant Accounting Policies

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 subsidiary. Refer to Note 15 of Notes to Condensed Consolidated Financial Statements for more information relating to these reportable segments. DP&L does not have any reportable segments.

DP&L is a public utility incorporated in 1911 under the laws of Ohio. DP&L is engaged in generation, transmission, distribution and the 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 general economic conditions, customers switching to other retail electric suppliers 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 purchased on February 28, 2011. DPLER has approximately 25,000 customers currently located throughout Ohio and Illinois. DPLER does not have any transmission or generation assets, and all of DPLER's electric energy was purchased from DP&L or PJM to meet its sales obligations.

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

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

All of DPL's subsidiaries are wholly-owned. DP&L does not have any subsidiaries.

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 1,528 people as of September 30, 2011, of which 1,497 employees were employed by DP&L. Approximately 53% of all employees are under a collective bargaining agreement which expires on October 31, 2011. We began negotiations with employees covered under our collective bargaining agreement during the three months ended September 30, 2011. See Note 14 of Notes to Condensed Consolidated Financial Statements for more information relating to the collective bargaining agreement.

Financial Statement Presentation

We prepare Condensed Consolidated Financial Statements for DPL. 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.

We prepare Condensed Financial Statements for DP&L. DP&L has undivided ownership interests in seven electric generating facilities and numerous transmission facilities. These undivided interests in jointly-owned facilities are accounted for on a pro rata basis in DP&L's Condensed Financial Statements.

Certain immaterial amounts from prior periods have been reclassified to conform to the current reporting presentation.

Deferred SECA revenue of $15.4 million at December 31, 2010 was reclassified from Regulatory liabilities to Other deferred credits. The balance of deferred SECA revenue at September 30, 2011 and December 31, 2010 was $14.1 million and $15.4 million, respectively. The FERC-approved SECA billings are unearned revenue where the earnings process is not complete and do not represent a potential overpayment by retail ratepayers or potential refunds of costs that had been previously charged to retail ratepayers through rates. Therefore, any amounts that are ultimately collected related to these charges would not be a reduction to future rates charged to retail ratepayers and therefore do not meet the criteria for recording as a regulatory liability under GAAP. Refer to Note 14 of Notes to Condensed Consolidated Financial Statements for more information relating to SECA.

All material intercompany accounts and transactions are eliminated in consolidation.

These financial statements have been prepared in accordance with GAAP for interim financial statements and with 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

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, 2011; our results of operations for the three and nine months ended September 30, 2011; and our cash flows for the nine months ended September 30, 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, 2011 may not be indicative of our results that will be realized for the full year ending December 31, 2011.

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. Capitalization of AFUDC ceases at either

project completion or at the date specified by regulators. AFUDC capitalized during the three and nine months ended September 30, 2011 and 2010 was not material.

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.

At September 30, 2011, neither DPL nor DP&L had any material plant acquisition adjustments or other plant-related adjustments.

Depreciation Study – Change in Estimate

Depreciation expense is calculated using the straight-line method, which allocates the cost of property over its estimated useful life. For DPL's generation, transmission and distribution assets, straight-line depreciation is applied monthly on an average composite basis using group rates. In July 2010, DPL completed a depreciation rate study for non-regulated generation property based on its property, plant and equipment balances at December 31, 2009, with certain adjustments for subsequent property additions. The results of the depreciation study concluded that many of DPL's composite depreciation rates should be reduced due to projected useful asset lives which are longer than those previously estimated. DPL adjusted the depreciation rates for its non-regulated generation property effective July 1, 2010, resulting in a net reduction of depreciation expense. For the nine months ended September 30, 2011, the reduction was $4.8 million ($3.1 million, net of tax) and increased diluted EPS by approximately $0.03 per share. The net reduction in depreciation expense for the twelve months ended September 30, 2011 was $7.2 million ($4.7 million net of tax) or $0.04 per diluted share

Short-Term Investments

DPL utilizes VRDNs as part of its short-term investment strategy. The VRDNs are of high credit quality and are secured by irrevocable letters of credit from major financial institutions. VRDN investments have variable rates tied to short-term interest rates. Interest rates are reset every seven days and these VRDNs can be tendered for sale back to the financial institution upon notice. Although DPL's VRDN investments have original maturities over one year, they are frequently re-priced and trade at par. We account for these VRDNs as available-for-sale securities and record them as short-term investments at fair value, which approximates cost, since they are highly liquid and are readily available to support DPL's current operating needs.

DPL also utilizes investment-grade fixed income corporate securities in its short-term investment portfolio. These securities are accounted for as held-to-maturity investments.

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. DP&L's excise taxes are accounted for on a gross basis and recorded as revenues and general taxes in the accompanying Condensed Statements of Results of Operations as follows:


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
$ in millions		2011		2010		2011		2010
State/Local excise taxes	$	14.3	$	14.6	$	39.9	$	40.1

Related Party Transactions

In the normal course of business, DP&L enters into transactions with other subsidiaries of DPL. All material intercompany accounts and transactions are eliminated in DPL's Condensed Consolidated Financial Statements. The following table provides a summary of these transactions:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
$ in millions		2011			2010			2011			2010

DP&L Revenues:
Sales to DPLER (a)	$	90.2		$	75.9		$	246.3		$	165.9

DP&L Operation & Maintenance Expenses:
Premiums paid for insurance services provided by MVIC (b)	$	(0.8	)	$	(0.8	)	$	(2.4	)	$	(2.5	)
Expense recoveries for services provided to DPLER (c)	$	1.1		$	1.6		$	2.8		$	4.0

(a)	*DP&L* sells power to DPLER in Ohio to satisfy the electric requirements of its retail customers. The revenues associated with sales to DPLER are recorded as wholesale sales in *DP&L's* Condensed Financial Statements. The increase in *DP&L's* sales to DPLER in Ohio during the three and nine months ended September 30, 2011 compared to the similar periods in 2010 is primarily due to an increase in customers electing to switch their generation service from *DP&L* to DPLER. *DP&L* did not sell any physical power to MC Squared during either of these periods.
(b)	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.
(c)	In the normal course of business *DP&L* incurs and records expenses on behalf of DPLER (including MC Squared). Such expenses include but are not limited to employee-related expenses, accounting, information technology, payroll, legal and other administration 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

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 expect to adopt this ASU on January 1, 2012. This standard updates FASC Topic 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. We do not expect these new rules to have a material impact 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 expect to adopt this ASU on January 1, 2012. This standard updates FASC Topic 220, "Comprehensive Income." ASU 2011-05 and 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. We do not expect these new rules to have a material impact 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 expect to adopt this ASU on January 1, 2012. This standard updates FASC Topic 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, then the two-step impairment test is not performed. We do not expect these new rules to have a material impact on our overall results of operations, financial position or cash flows.

DP&L [Member]