Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes

6. Income Taxes

The following table details the effective tax rates for the three and nine months ended September 30, 2011 and 2010.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
DPL	29.9	%	31.9	%	32.9	%	32.8	%
DP&L	29.6	%	32.1	%	32.0	%	32.8	%

Income tax expenses for the three and nine months ended September 30, 2011 and 2010 were calculated using the estimated annual effective income tax rates for 2011 and 2010 and reflect estimated annual effective income tax rates of 33.2% and 32.6%, respectively. Management estimates the annual effective tax rate based upon its forecast of annual pre-tax income. To the extent that actual pre-tax

results for the year differ from the forecasts applied to the most recent interim period, the rates estimated could be materially different from the actual effective tax rates recognized.

For the three and nine months ended September 30, 2011, DPL's current period effective tax is less than the estimated annual effective tax rate due to certain current period tax adjustments including a revision to the estimated annual effective tax rate.  These current period adjustments resulted in DPL's tax expense be reduced by $2.6 million and $0.7 million for the three and nine months ended September 30, 2011, respectively.  The current period adjustments are primarily due to the effect of estimate-to-actual income tax provision adjustments related to the Internal Revenue Code Section 199 Domestic Production Deduction, ESOP related deductions and flow-through related deductions. For the nine months ended September 30, 2011, the reductions to the current period effective tax rate are partially offset increased state income taxes of $2.0 million recorded as a result of the acquisition of MC Squared.

For the three and nine months ended September 30, 2011, DP&L's current period effective tax rate is less than the estimated annual effective tax rate due to certain current period tax adjustments including a revision to the estimated annual effective tax rate.  These current period adjustments resulted in DP&L's tax expense being reduced by $2.6 and $2.2 million for the three and nine months ended September 30, 2011, respectively.  The current period adjustments are primarily due to the effect of the estimate-to-actual income tax provision adjustment related to the Section 199 Domestic Production Deduction, ESOP related deductions and flow-through related deductions..

For the nine months ended September 30, 2011, the increase in DPL's current period effective tax rate compared to the same period in 2010 reflects the estimate-to-actual income tax provision adjustments which are more than offset by decreased benefits from the Section 199 Domestic Production Deduction due to the election of bonus depreciation and increased state income tax expense due to the acquisition of MC Squared. The decrease in DP&L's current period effective tax rate primarily reflects the estimate-to-actual income tax provision adjustments offset by decreased benefits from the Section 199 Domestic Production Deduction.

Deferred tax liabilities for both DPL and DP&L increased by approximately $38.8million and $56.0 million, respectively, during the nine months ended September 30, 2011. These increases were related to depreciation, a pension contribution, financial transaction losses and other temporary differences arising from routine changes in balance sheet accounts giving rise to deferred taxes.

The Internal Revenue Service began an examination of our 2008 Federal income tax return during the second quarter of 2010 continuing through the current quarter. We do not expect the results of this examination to have a material impact on our financial statements.

As of September 30, 2011, DPL has incurred approximately $8.9 million in certain costs that are directly associated with the Proposed Merger, which may be deemed as non-deductible, resulting in approximately $3.1 million of additional tax expense for the period in which the transaction  occurs.

DP&L [Member]

Income Taxes

6. Income Taxes

The following table details the effective tax rates for the three and nine months ended September 30, 2011 and 2010.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
DPL	29.9	%	31.9	%	32.9	%	32.8	%
DP&L	29.6	%	32.1	%	32.0	%	32.8	%

Income tax expenses for the three and nine months ended September 30, 2011 and 2010 were calculated using the estimated annual effective income tax rates for 2011 and 2010 and reflect estimated annual effective income tax rates of 33.2% and 32.6%, respectively. Management estimates the annual effective tax rate based upon its forecast of annual pre-tax income. To the extent that actual pre-tax

results for the year differ from the forecasts applied to the most recent interim period, the rates estimated could be materially different from the actual effective tax rates recognized.

For the three and nine months ended September 30, 2011, DPL's current period effective tax is less than the estimated annual effective tax rate due to certain current period tax adjustments including a revision to the estimated annual effective tax rate. These current period adjustments resulted in DPL's tax expense be reduced by $2.6 million and $0.7 million for the three and nine months ended September 30, 2011, respectively. The current period adjustments are primarily due to the effect of estimate-to-actual income tax provision adjustments related to the Internal Revenue Code Section 199 Domestic Production Deduction, ESOP related deductions and flow-through related deductions. For the nine months ended September 30, 2011, the reductions to the current period effective tax rate are partially offset increased state income taxes of $2.0 million recorded as a result of the acquisition of MC Squared.

For the three and nine months ended September 30, 2011, DP&L's current period effective tax rate is less than the estimated annual effective tax rate due to certain current period tax adjustments including a revision to the estimated annual effective tax rate. These current period adjustments resulted in DP&L's tax expense being reduced by $2.6 and $2.2 million for the three and nine months ended September 30, 2011, respectively. The current period adjustments are primarily due to the effect of the estimate-to-actual income tax provision adjustment related to the Section 199 Domestic Production Deduction, ESOP related deductions and flow-through related deductions..

For the nine months ended September 30, 2011, the increase in DPL's current period effective tax rate compared to the same period in 2010 reflects the estimate-to-actual income tax provision adjustments which are more than offset by decreased benefits from the Section 199 Domestic Production Deduction due to the election of bonus depreciation and increased state income tax expense due to the acquisition of MC Squared. The decrease in DP&L's current period effective tax rate primarily reflects the estimate-to-actual income tax provision adjustments offset by decreased benefits from the Section 199 Domestic Production Deduction.

Deferred tax liabilities for both DPL and DP&L increased by approximately $38.8million and $56.0 million, respectively, during the nine months ended September 30, 2011. These increases were related to depreciation, a pension contribution, financial transaction losses and other temporary differences arising from routine changes in balance sheet accounts giving rise to deferred taxes.

The Internal Revenue Service began an examination of our 2008 Federal income tax return during the second quarter of 2010 continuing through the current quarter. We do not expect the results of this examination to have a material impact on our financial statements.

As of September 30, 2011, DPL has incurred approximately $8.9 million in certain costs that are directly associated with the Proposed Merger, which may be deemed as non-deductible, resulting in approximately $3.1 million of additional tax expense for the period in which the transaction occurs.