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Goodwill Impairment | 3 Months Ended
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Sep. 30, 2012
GOODWILL | 15. GOODWILL IMPAIRME N T In connection with its acquisition of DPL, the Company recognized goodwill of approximately $2.6 billion, which was allocated between the two reporting units identified during the purchase price allocation: The Dayton Power and Light Company (“DP&L”, DPL's regulated utility in Ohio) and DPL Energy Resources, Inc. (“DPLER”, DPL's wholly-owned competitive retail electric service provider). Of the total goodwill, approximately $2.4 billion was allocated to DP&L and the remainder was allocated to DPLER. O n October 5, 2012, DP&L filed for approval an Electric Security Plan (“ESP”) with the Public Utility Commission of Ohio (“PUCO”). Within the ESP filing, DP&L has agreed to request a separation of its generation assets from its transmission and distribution assets in recognition that a restructuring of DP&L operations will be necessary, in compliance with Ohio law. Also, d uring 2012, North American natural gas prices fell significantly from the previous year exerting downward pressure on wholesale electricity prices in the Ohio power market. Falling power prices compressed wholesale margins at DP&L. Furthermore, these lower power prices have led to increased switching from DP&L to other competitive retail electric service (“CRES”) providers, including DPLER, who are offering retail prices lower than DP&L's current standard service offer. Also, several municipalities in DP&L's service territory have passed ordinances allowing them to become government aggregators and some municipalities have contracted with CRES providers to provide generation service to the customers located within the municipal boundaries, further contributing to the switching trend. CRES providers have also become more active in DP&L's serv ice territory. In September 2012, management revised its cash flow forecasts based on these new developments and forecasted lower profitability and operating cash flows than previously prepared forecasts. These new developments have reduced DP&L's forecasted profitability, operating cash flows, liquidity and may impact DPL and DP&L's ability to access the capital markets and maintain their current credit ratings in the future. Collectively, in the third quarter of 2012, these events were considered an interim impairment indicator for DPL's goodwill at the DP&L reporting unit. There were no interim impairment indicators identified for the goodwill at DPLER. The Company performed an interim impairment test on the $2.4 billion of goodwill at the DP&L reporting unit level. In the preliminary Step 1 of the goodwill impairment test, the fair value of the reporting unit was determined under the income approach using a discounted cash flow valuation model. The material assumptions included within the discounted cash flow valuation model were customer switching and aggregation trends, capacity price curves, energy price curves, amount of the non-bypassable charge, commodity price curves, dispatching, transition period for the conversion to a wholesale competitive bidding structure, amount of the standard service offer charge, valuation of regulatory assets and liabilities, discount rates and deferred income taxes. Further refinement to these assumptions as part of the completion of the preliminary Step 1 and Step 2 tests could have a significant impact on the enterprise value and the implied fair value of goodwill. The reporting unit failed the preliminary Step 1 and a preliminary Step 2 of the goodwill impairment test was performed. For the three months ended September 30, 2012, the Company has recognized a good will impairment expense of $1.85 b illion, which represents its best estimate of the impairment loss based on the latest information available and the results of the preliminary Step 1 and Step 2 test s. The Company estimates the final goodwill impairment expense will be in the range of $1.7 billion to $2 b illion. In the fourth quarter of 2012, the Company expects to conclude the interim impairment test of goodwill and finalize the estimation of the impairment charge. The Company was not able to finalize the Step 1 and Step 2 test s by the filing date of this Form 10-Q due to the significant amount of work required to calculate the implied fair value of goodwill for a complex, regulated utility such as DP&L and due to the timing of the identification of the interim impairment indicator. Actual goodwill impairment loss could be significantly different from the estimated impairment loss recognized. DPL is reported in the North America Utilities segment. The goodwill associated with the DPL acquisition is not deductible for tax purposes. Accordingly, there is no cash tax or financial statement tax benefit related to the impairment. The C ompany's effective tax rates were impacted by the pretax impairment, however. The Company's effective tax rates were (14%) and (187%) for the three months and nine months ended September 30, 2012. In both of these periods, the Company had worldwide tax expense on a loss from continuing operations.

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- Definition The entire disclosure for goodwill. + References No definition available. + Details
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