Derivative Instruments And Hedging Activities

9 Months Ended

Sep. 30, 2011

Derivative Instruments And Hedging Activities

(13) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivatives are used by the Pepco Energy Services and Power Delivery segments to hedge commodity price risk, as well as by PHI, from time to time, to hedge interest rate risk.

The retail energy supply business of Pepco Energy Services, which is in the process of being wound down, enters into energy commodity contracts in the form of electricity and natural gas futures, swaps, options and forward contracts to hedge commodity price risk in connection with the purchase of physical natural gas and electricity for distribution to customers. The primary risk management objective is to manage the spread between retail sales commitments and the cost of supply used to service those commitments to ensure stable cash flows and lock in favorable prices and margins when they become available.

Pepco Energy Services' commodity contracts that are not designated for hedge accounting, do not qualify for hedge accounting, or do not meet the requirements for normal purchase and normal sale accounting, are marked to market through current earnings. Forward contracts that meet the requirements for normal purchase and normal sale accounting are recorded on an accrual basis.

In the Power Delivery business, DPL uses derivative instruments in the form of swaps and over-the-counter options primarily to reduce gas commodity price volatility and to limit its customers' exposure to increases in the market price of natural gas under a hedging program approved by the DPSC. DPL also manages commodity risk with physical natural gas and capacity contracts that are not classified as derivatives. All premiums paid and other transaction costs incurred as part of DPL's natural gas hedging activity, in addition to all gains and losses related to hedging activities, are deferred under FASB guidance on regulated operations (ASC 980) until recovered from its customers through a fuel adjustment clause approved by the DPSC.

PHI also uses derivative instruments from time to time to mitigate the effects of fluctuating interest rates on debt issued in connection with the operation of their businesses. In June 2002, PHI entered into several treasury rate lock transactions in anticipation of the issuance of several series of fixed-rate debt commencing in August 2002. Upon issuance of the fixed rate-debt in August 2002, the treasury rate locks were terminated at a loss. The loss has been deferred in AOCL and is being recognized in income over the life of the debt issued as interest payments are made. As further described in Note (9), "Debt," $15 million of these pre-tax losses ($9 million after-tax) were reclassified into income in the third quarter of 2010.

The tables below identify the balance sheet location and fair values of derivative instruments as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011
Balance Sheet Caption	Derivatives Designated as Hedging Instruments (a)			Other Derivative Instruments (a)			Gross Derivative Instruments			Effects of Cash Collateral and Netting			Net Derivative Instruments
	(millions of dollars)
Derivative Assets (current assets)	$	22		$	20		$	42		$	(27	)	$	15
Derivative Assets (non-current assets)		—			2			2			(2	)		—
Total Derivative Assets		22			22			44			(29	)		15
Derivative Liabilities (current liabilities)		(72	)		(44	)		(116	)		83			(33	)
Derivative Liabilities (non-current liabilities)		(18	)		(11	)		(29	)		21			(8	)
Total Derivative Liabilities		(90	)		(55	)		(145	)		104			(41	)
Net Derivative (Liability) Asset	$	(68	)	$	(33	)	$	(101	)	$	75		$	(26	)

(a) Amounts included in Derivatives Designated as Hedging Instruments primarily consist of natural gas derivatives that were designated as cash flow hedges prior to the January 1, 2011 election to discontinue cash flow hedge accounting for these derivatives. Amounts included in Other Derivative Instruments primarily consist of gains or losses on natural gas derivatives that are not accounted for as cash flow hedges after the January 1, 2011 election to discontinue cash flow hedge accounting.

	As of December 31, 2010
Balance Sheet Caption	Derivatives Designated as Hedging Instruments			Other Derivative Instruments			Gross Derivative Instruments			Effects of Cash Collateral and Netting			Net Derivative Instruments
	(millions of dollars)
Derivative Assets (current assets)	$	40		$	43		$	83		$	(38	)	$	45
Derivative Assets (non-current assets)		16			3			19			(19	)		—
Total Derivative Assets		56			46			102			(57	)		45
Derivative Liabilities (current liabilities)		(125	)		(63	)		(188	)		122			(66	)
Derivative Liabilities (non-current liabilities)		(68	)		(10	)		(78	)		57			(21	)
Total Derivative Liabilities		(193	)		(73	)		(266	)		179			(87	)
Net Derivative (Liability) Asset	$	(137	)	$	(27	)	$	(164	)	$	122		$	(42	)

Under FASB guidance on the offsetting of balance sheet accounts (ASC 210-20), PHI offsets the fair value amounts recognized for derivative instruments and the fair value amounts recognized for related collateral positions executed with the same counterparty under master netting agreements. The amount of cash collateral that was offset against these derivative positions is as follows:

	September 30, 2011		December 31, 2010
	(millions of dollars)
Cash collateral pledged to counterparties with the right to reclaim (a)	$	75	$	122

(a) Includes cash deposits on commodity brokerage accounts

As of September 30, 2011 and December 31, 2010, all PHI cash collateral pledged related to derivative instruments accounted for at fair value was entitled to offset under master netting agreements.

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

Pepco Energy Services

For energy commodity contracts that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCL and is reclassified into income in the same period or periods during which the hedged transactions affect income. Gains and losses on the derivative that are related to hedge ineffectiveness or the forecasted hedged transaction being probable not to occur, are recognized in income. Effective January 1, 2011, Pepco Energy Services elected to no longer apply cash flow hedge accounting to its natural gas derivatives. Amounts included in AOCL for natural gas cash flow hedges as of September 30, 2011 represent net losses on derivatives prior to the January 1, 2011 election to discontinue cash flow hedge accounting less amounts reclassified into income as the hedged transactions occur or because the hedged transactions were probable not to occur. Gains or losses on these natural gas derivatives after January 1, 2011 are recognized directly in income.

Cash flow hedge activity during the three and nine months ended September 30, 2011 and 2010 is provided in the tables below:

	Three Months  Ended September 30,					Nine Months  Ended September 30,
	2011		2010			2011		2010
	(millions of dollars)
Amount of net pre-tax (loss) gain arising during the period included in accumulated other comprehensive loss	$	—	$	(38	)	$	2	$	(116	)
Amount of net pre-tax loss reclassified into income:
Effective portion:
Fuel and Purchased Energy		15		23			61		108
Ineffective portion: (a)
Revenue		1		—			1		2
Total net pre-tax loss reclassified into income		16		23			62		110
Net pre-tax gain (loss) on commodity derivatives included in accumulated other comprehensive loss	$	16	$	(15	)	$	64	$	(6	)

(a) For the three and nine months ended September 30, 2011, $1 million was reclassified from AOCL to income because the forecasted hedged transactions were deemed probable not to occur. For the three and nine months ended September 30, 2010, no amounts were reclassified from AOCL to income because the forecasted hedged transactions were deemed probable not to occur.

As of September 30, 2011 and December 31, 2010, Pepco Energy Services had the following types and quantities of outstanding energy commodity contracts employed as cash flow hedges of forecasted purchases and forecasted sales.

	Quantities
Commodity	September 30, 2011		December 31, 2010
Forecasted Purchases Hedges
Natural gas (One Million British Thermal Units (MMBtu))		—		8,597,106
Electricity (Megawatt hours (MWh))		1,879,840		2,677,640
Electricity Capacity (MW-Days)		—		34,730
Forecasted Sales Hedges
Electricity (MWh)		991,840		2,517,200

Power Delivery

All premiums paid and other transaction costs incurred as part of DPL's natural gas hedging activity, in addition to all of DPL's gains and losses related to hedging activities, are deferred under FASB guidance on regulated operations until recovered from customers based on the fuel adjustment clause approved by the DPSC. The following table indicates the amount of the net unrealized derivative losses arising during the period included in regulatory assets and the realized losses recognized in the Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010 associated with cash flow hedges:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(millions of dollars)
Net Unrealized Losses arising during the period included in Regulatory Assets	$	(1	)	$	(3	)	$	(1	)	$	(9	)
Net Realized Losses Recognized in Fuel and Purchased Energy Expense		(2	)		(4	)		(5	)		(10	)

As of September 30, 2011 and December 31, 2010, DPL had the following outstanding commodity forward contracts that were entered into to hedge forecasted transactions:

	Quantities
Commodity	September 30, 2011		December 31, 2010
Forecasted Purchases Hedges
Natural Gas (MMBtu)		942,500		1,670,000

Effective October 1, 2011, DPL elected to no longer apply cash flow hedge accounting to its natural gas derivatives. These derivatives will continue to be employed as part of DPL's natural gas hedging activities under the hedging program approved by the DPSC, and their dedesignation as cash flow hedges will not result in a change to the financial statement presentation because all of DPL's gains and losses on these derivatives are recoverable from customers through the fuel adjustment clause approved by the DPSC.

Cash Flow Hedges Included in Accumulated Other Comprehensive Loss

The tables below provide details regarding effective cash flow hedges included in PHI's Consolidated Balance Sheet as of September 30, 2011 and 2010. Cash flow hedges are marked to market on the balance sheet with corresponding adjustments to AOCL for effective cash flow hedges. As of September 30, 2011, $31 million of the losses in AOCL were associated with natural gas derivatives that Pepco Energy Services previously designated as cash flow hedges. Although Pepco Energy Services no longer designates its natural gas derivatives as cash flow hedges effective January 1, 2011, gains or losses previously deferred in AOCL as of December 31, 2010 will remain in AOCL until the hedged forecasted transaction occurs unless it is probable that the hedged forecasted transaction will not occur. The data in the tables indicate the cumulative net loss after-tax related to effective cash flow hedges by contract type included in AOCL, the portion of AOCL expected to be reclassified to income during the next 12 months, and the maximum hedge or deferral term:

	As of September 30, 2011
Contracts	Accumulated Other Comprehensive  Loss After-tax (a)		Portion Expected to be Reclassified to Income during the Next 12 Months		Maximum Term
	(millions of dollars)
Energy Commodity (b)	$	40	$	28		32 months
Interest Rate		10		1		251 months
Total	$	50	$	29

(a) AOCL on PHI's Consolidated Balance Sheet as of September 30, 2011, includes a $21 million balance related to minimum pension liability. This balance is not included in this table as the minimum pension liability is not a cash flow hedge.

(b) The unrealized energy commodity derivative losses recorded in AOCL are largely offset by forecasted natural gas and electricity physical purchases for delivery to retail customers that are in gain positions and subject to accrual accounting. These forward purchase contracts are exempted from mark-to-market accounting because they either qualify as normal purchases under FASB guidance on derivatives and hedging or they are not derivative contracts. Under accrual accounting, no asset is recorded on the balance sheet for these contracts, and the purchase cost is not recognized until the period of distribution.

	As of September 30, 2010
Contracts	Accumulated Other Comprehensive Loss After-tax (a)		Portion Expected to be Reclassified to Income during the Next 12 Months		Maximum Term
	(millions of dollars)
Energy Commodity (b)	$	102	$	63		44 months
Interest Rate		11		1		263 months
Total	$	113	$	64

(a) AOCL on PHI's Consolidated Balance Sheet as of September 30, 2010, includes a $15 million balance related to minimum pension liability and a $20 million balance related to Conectiv Energy. These balances are not included in this table as the minimum pension liability is not a cash flow hedge and Conectiv Energy is reported as a discontinued operation.

(b) The unrealized derivative losses recorded in AOCL are largely offset by forecasted natural gas and electricity physical purchases for delivery to retail customers that are in gain positions and subject to accrual accounting. These forward purchase contracts are exempted from mark-to-market accounting because they either qualify as normal purchases under FASB guidance on derivatives and hedging or they are not derivative contracts. Under accrual accounting, no asset is recorded on the balance sheet for these contracts, and the purchase cost is not recognized until the period of distribution.

Other Derivative Activity

Pepco Energy Services

Pepco Energy Services holds certain derivatives that are not in hedge accounting relationships nor are they designated as normal purchases or normal sales. These derivatives are recorded at fair value on the balance sheet with changes in fair value recorded through income.

For the three and nine months ended September 30, 2011 and 2010, the amount of the derivative gain (loss) for Pepco Energy Services recognized in income is provided in the table below:

	Three Months Ended September 30, 2011								Three Months Ended September 30, 2010
	Revenue			Fuel and Purchased Energy Expense		Total			Revenue		Fuel and Purchased Energy Expense		Total
	(millions of dollars)
Realized mark-to-market gains	$	1		$	—	$	1		$	1	$	—	$	1
Unrealized mark-to-market losses		(5	)		—		(5	)		—		—		—
Total net mark-to-market (losses) gains	$	(4	)	$	—	$	(4	)	$	1	$	—	$	1

	Nine Months Ended September 30, 2011								Nine Months Ended September 30, 2010
	Revenue			Fuel and Purchased Energy Expense		Total			Revenue		Fuel and Purchased Energy Expense		Total
	(millions of dollars)
Realized mark-to-market (losses) gains	$	(1	)	$	—	$	(1	)	$	2	$	—	$	2
Unrealized mark-to-market losses		(10	)		—		(10	)		—		—		—
Total net mark-to-market (losses) gains	$	(11	)	$	—	$	(11	)	$	2	$	—	$	2

As of September 30, 2011 and December 31, 2010, Pepco Energy Services had the following net outstanding commodity forward contract quantities and net position on derivatives that did not qualify for hedge accounting:

	September 30, 2011				December 31, 2010
Commodity	Quantity		Net Position		Quantity		Net Position
Financial transmission rights (MWh)		432,399		Long		381,215		Long
Electric Capacity (MW—Days)		20,740		Long		2,265		Long
Electric (MWh)		814,776		Long		1,455,800		Long
Natural gas (MMBtu)		33,695,858		Long		45,889,486		Long

Power Delivery

DPL holds certain derivatives that are not in hedge accounting relationships nor are they designated as normal purchases or normal sales. These derivatives are recorded at fair value on the Consolidated Balance Sheets with the gain or loss for the change in fair value recorded in income. In accordance with FASB guidance on regulated operations, offsetting regulatory liabilities or regulatory assets are recorded on the Consolidated Balance Sheets and the recognition of the derivative gain or loss is deferred because of the DPSC-approved fuel adjustment clause. For the three and nine months ended September 30, 2011 and 2010, the net unrealized derivative losses arising during the period included in regulatory assets and the net realized losses recognized in the Consolidated Statements of Income are provided in the table below:

	Three Months  Ended September 30,						Nine Months  Ended September 30,
	2011			2010			2011			2010
	(millions of dollars)
Net Unrealized Losses arising during the period included in Regulatory Assets	$	(4	)	$	(9	)	$	(6	)	$	(21	)
Net Realized Losses Recognized in Fuel and Purchased Energy Expense		(3	)		(5	)		(14	)		(18	)

As of September 30, 2011 and December 31, 2010, DPL had the following net outstanding natural gas commodity forward contracts that did not qualify for hedge accounting:

	September 30, 2011				December 31, 2010
Commodity	Quantity		Net Position		Quantity		Net Position
Natural Gas (MMBtu)		5,433,500		Long		7,827,635		Long

Contingent Credit Risk Features

The primary contracts used by the Pepco Energy Services and Power Delivery segments for derivative transactions are entered into under the International Swaps and Derivatives Association Master Agreement (ISDA) or similar agreements that closely mirror the principal credit provisions of the ISDA. The ISDAs include a Credit Support Annex (CSA) that governs the mutual posting and administration of collateral security. The failure of a party to comply with an obligation under the CSA, including an obligation to transfer collateral security when due or the failure to maintain any required credit support, constitutes an event of default under the ISDA for which the other party may declare an early termination and liquidation of all transactions entered into under the ISDA, including foreclosure against any collateral security. In addition, some of the ISDAs have cross default provisions under which a default by a party under another commodity or derivative contract, or the breach by a party of another borrowing obligation in excess of a specified threshold, is a breach under the ISDA.

Under the ISDA or similar agreements, the parties establish a dollar threshold of unsecured credit for each party in excess of which the party would be required to post collateral to secure its obligations to the other party. The amount of the unsecured credit threshold varies according to the senior, unsecured debt rating of the respective parties or that of a guarantor of the party's obligations. The fair values of all transactions between the parties are netted under the master netting provisions. Transactions may include derivatives accounted for on-balance sheet as well as those designated as normal purchases and normal sales that are accounted for off-balance sheet. If the aggregate fair value of the transactions in a net loss position exceeds the unsecured credit threshold, then collateral is required to be posted in an amount equal to the amount by which the unsecured credit threshold is exceeded. The obligations of Pepco Energy Services are usually guaranteed by PHI. The obligations of DPL are stand-alone obligations without the guaranty of PHI. If PHI's or DPL's credit rating were to fall below "investment grade," the unsecured credit threshold would typically be set at zero and collateral would be required for the entire net loss position. Exchange-traded contracts are required to be fully collateralized without regard to the credit rating of the holder.

The gross fair value of PHI's derivative liabilities, excluding the impact of offsetting transactions or collateral under master netting agreements, with credit risk-related contingent features on September 30, 2011 and December 31, 2010, was $74 million and $156 million, respectively, before giving effect to the impact of a credit rating downgrade that would increase these amounts or offsetting transactions that are encompassed within master netting agreements that would alter these amounts. As of September 30, 2011, PHI had posted cash collateral of $5 million against the gross derivative liability resulting in a net liability of $69 million. As of December 31, 2010, PHI had not posted any cash collateral against the gross derivative liability. PHI's net settlement amount in the event of a downgrade of PHI's and DPL's senior unsecured debt rating to below "investment grade" as of September 30, 2011 and December 31, 2010, would have been approximately $129 million and $182 million, respectively, after taking into consideration the master netting agreements. At September 30, 2011 and December 31, 2010, normal purchase and normal sale contracts in a loss position increased PHI's obligation.

PHI's primary sources for posting cash collateral or letters of credit are its credit facilities. At September 30, 2011 and December 31, 2010, the aggregate amount of cash plus borrowing capacity under the credit facilities available to meet the future liquidity needs of PHI and its subsidiaries totaled $1.4 billion and $1.2 billion, respectively, of which $547 million and $728 million, respectively, was available to Pepco Energy Services.

Delmarva Power & Light Co/De [Member]

Derivative Instruments And Hedging Activities

(10) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DPL uses derivative instruments in the form of swaps and over-the-counter options primarily to reduce natural gas commodity price volatility and to limit its customers' exposure to increases in the market price of natural gas under a hedging program approved by the DPSC. DPL also manages commodity risk with physical natural gas and capacity contracts that are not classified as derivatives. All premiums paid and other transaction costs incurred as part of DPL's natural gas hedging activity, in addition to all gains and losses related to hedging activities, are deferred under FASB guidance on regulated operations (ASC 980) until recovered from its customers through a fuel adjustment clause approved by the DPSC.

The tables below identify the balance sheet location and fair values of derivative instruments as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011
Balance Sheet Caption	Derivatives Designated as Hedging Instruments			Other Derivative Instruments			Gross Derivative Instruments			Effects of Cash Collateral and Netting		Net Derivative Instruments
	(millions of dollars)
Derivative Liabilities (current liabilities)	$	(2	)	$	(13	)	$	(15	)	$	2	$	(13	)
Derivative Liabilities (non-current liabilities)		—			(5	)		(5	)		—		(5	)
Total Derivative Liabilities		(2	)		(18	)		(20	)		2		(18	)
Net Derivative (Liability) Asset	$	(2	)	$	(18	)	$	(20	)	$	2	$	(18	)

	As of December 31, 2010
Balance Sheet Caption	Derivatives Designated as Hedging Instruments			Other Derivative Instruments			Gross Derivative Instruments			Effects of Cash Collateral and Netting		Net Derivative Instruments
	(millions of dollars)
Derivative Liabilities (current liabilities)	$	(6	)	$	(15	)	$	(21	)	$	6	$	(15	)
Derivative Liabilities (non-current liabilities)		—			(8	)		(8	)		—		(8	)
Total Derivative Liabilities		(6	)		(23	)		(29	)		6		(23	)
Net Derivative (Liability) Asset	$	(6	)	$	(23	)	$	(29	)	$	6	$	(23	)

DPL

Under FASB guidance on the offsetting of balance sheet accounts (ASC 210), DPL offsets the fair value amounts recognized for derivative instruments and fair value amounts recognized for related collateral positions executed with the same counterparty under master netting agreements. The amount of cash collateral that was offset against these derivative positions is as follows:

	September 30, 2011		December 31, 2010
	(millions of dollars)
Cash collateral pledged to counterparties with the right to reclaim	$	2	$	6

As of September 30, 2011 and December 31, 2010, all DPL cash collateral pledged related to derivative instruments accounted for at fair value was entitled to be offset under master netting agreements.

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

All premiums paid and other transaction costs incurred as part of DPL's natural gas hedging activity, in addition to all of DPL's gains and losses related to hedging activities, are deferred under FASB guidance on regulated operations until recovered from customers based on the fuel adjustment clause approved by the DPSC. The following table indicates the net unrealized derivative losses arising during the period included in regulatory assets and the realized losses recognized in the Statements of Income for the three and nine months ended September 30, 2011 and 2010 associated with cash flow hedges:

	Three Months  Ended September 30,						Nine Months  Ended September 30,
	2011			2010			2011			2010
	(millions of dollars)
Net Unrealized Losses arising during the period included in Regulatory Assets	$	(1	)	$	(3	)	$	(1	)	$	(9	)
Net Realized Losses Recognized in Purchased Energy or Gas Purchased		(2	)		(4	)		(5	)		(10	)

As of September 30, 2011 and December 31, 2010, DPL had the following outstanding commodity forward contracts that were entered into to hedge forecasted transactions:

	Quantities
Commodity	September 30, 2011		December 31, 2010
Forecasted Purchases Hedges
Natural Gas (One Million British Thermal Units (MMBtu))		942,500		1,670,000

Effective October 1, 2011, DPL elected to no longer apply cash flow hedge accounting to its natural gas derivatives. These derivatives will continue to be employed as part of DPL's natural gas hedging activities under the hedging program approved by the DPSC, and their dedesignation as cash flow hedges will not result in a change to the financial statement presentation because all of DPL's gains and losses on these derivatives are recoverable from customers through the fuel adjustment clause approved by the DPSC.

Other Derivative Activity

DPL holds certain derivatives that are not in hedge accounting relationships nor are they designated as normal purchases or normal sales. These derivatives are recorded at fair value on the Balance Sheets with changes in the fair value recorded in income. In accordance with FASB guidance on regulated operations, offsetting regulatory liabilities or regulatory assets are recorded on the Balance Sheets and the recognition of the

derivative gain or loss is deferred because of the DPSC-approved fuel adjustment clause. For the three and nine months ended September 30, 2011 and 2010, the net unrealized derivative losses arising during the period included in regulatory assets and the net realized losses recognized in the Statements of Income are provided in the table below:

	Three Months  Ended September 30,						Nine Months  Ended September 30,
	2011			2010			2011			2010
	(millions of dollars)
Net Unrealized Losses arising during the period included in Regulatory Assets	$	(4	)	$	(9	)	$	(6	)	$	(21	)
Net Realized Losses Recognized in Purchased Energy or Gas Purchased		(3	)		(5	)		(14	)		(18	)

As of September 30, 2011 and December 31, 2010, DPL had the following net outstanding natural gas commodity forward contracts that did not qualify for hedge accounting:

	September 30, 2011				December 31, 2010
Commodity	Quantity		Net Position		Quantity		Net Position
Natural Gas (MMBtu)		5,433,500		Long		7,827,635		Long

Contingent Credit Risk Features

The primary contracts used by DPL for derivative transactions are entered into under the International Swaps and Derivatives Association Master Agreement (ISDA) or similar agreements that closely mirror the principal credit provisions of the ISDA. The ISDAs include a Credit Support Annex (CSA) that governs the mutual posting and administration of collateral security. The failure of a party to comply with an obligation under the CSA, including an obligation to transfer collateral security when due or the failure to maintain any required credit support, constitutes an event of default under the ISDA for which the other party may declare an early termination and liquidation of all transactions entered into under the ISDA, including foreclosure against any collateral security. In addition, some of the ISDAs have cross default provisions under which a default by a party under another commodity or derivative contract, or the breach by a party of another borrowing obligation in excess of a specified threshold, is a breach under the ISDA.

Under the ISDA or similar agreements, the parties establish a dollar threshold of unsecured credit for each party in excess of which the party would be required to post collateral to secure its obligations to the other party. The amount of the unsecured credit threshold varies according to the senior, unsecured debt rating of the respective parties or that of a guarantor of the party's obligations. The fair values of all transactions between the parties are netted under the master netting provisions. Transactions may include derivatives accounted for on-balance sheet as well as those designated as normal purchases and normal sales that are accounted for off-balance sheet. If the aggregate fair value of the transactions in a net loss position exceeds the unsecured credit threshold, then collateral is required to be posted in an amount equal to the amount by which the unsecured credit threshold is exceeded. The obligations of DPL are stand-alone obligations without the guaranty of PHI. If DPL's credit rating were to fall below "investment grade," the unsecured credit threshold would typically be zero and collateral would be required for the entire net loss position. Exchange-traded contracts are required to be fully collateralized without regard to the credit rating of the holder.

The gross fair value of DPL's derivative liabilities, excluding the impact of offsetting transactions or collateral under master netting agreements, with credit-risk-related contingent features on September 30, 2011 and December 31, 2010, was $18 million and $23 million, respectively, before giving effect to the impact of a credit rating downgrade that would increase this amount or offsetting transactions that are encompassed within master netting agreements that would alter these amounts. As of those dates, DPL had not posted any

DPL

cash collateral against the gross derivative liability. DPL's net settlement amount in the event of a downgrade of DPL's senior unsecured debt rating to below "investment grade" as of September 30, 2011 and December 31, 2010, would have been approximately $18 million and $37 million, respectively, after taking into account the master netting agreements.

DPL's primary source for posting cash collateral or letters of credit are PHI's credit facilities. At September 30, 2011 and December 31, 2010, the aggregate amount of cash plus borrowing capacity under the PHI credit facilities available to meet the liquidity needs of PHI's utility subsidiaries was $831 million and $462 million, respectively.