Allegheny Power 2011 Annual Report Download - page 87

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units are consistent with its operating segments, and consist of Regulated Distribution, Regulated Independent Transmission and
Competitive Energy Services. Goodwill is allocated to these operating segments based on the original purchase price allocation
for acquisitions within the various reporting units. As of December 31, 2011, goodwill balances for Regulated Distribution and
Competitive Energy Services were $5,551 million and $890 million, respectively. No goodwill has been allocated to the Regulated
Independent Transmission segment.
Annual impairment testing is conducted during the third quarter of each year and for 2011 and 2010 the analysis indicated no
impairment of goodwill. For purposes of annual testing the estimated fair values of Regulated Distribution and Competitive Energy
Services were determined using a discounted cash flow approach.
The discounted cash flow model of the Regulated Distribution and Competitive Energy Services segments reporting units is based
on the forecasted operating cash flow for the current year, projected operating cash flows (determined using forecasted amounts
as well as an estimated growth rate) and a terminal value. Discounted cash flows consist of the operating cash flows for each
reporting unit less an estimate for capital expenditures. The key assumptions incorporated in the discounted cash flow approach
include growth rates, projected operating income, changes in working capital, projected capital expenditures, planned funding of
pension plans, anticipated funding of nuclear decommissioning trusts, expected results of future rate proceedings (applicable to
Regulated Distribution segment only) and a discount rate equal to assumed long-term cost of capital. Cash flows may be adjusted
to exclude certain non-recurring or unusual items. Reporting unit income was the starting point for determining operating cash flow
and there were no non-recurring or unusual items excluded from the calculations of operating cash flow in any of the periods included
in the determination of fair value.
This approach involves management judgment and estimates that are used in relation to changing market conditions and business
environment; unanticipated changes in assumptions could have a significant effect on FirstEnergy's evaluation of goodwill. At the
time FirstEnergy conducted the annual impairment testing in 2011, fair value would have to have declined in excess of 44% and
53% for the Regulated Distribution and Competitive Energy Services segments, respectively, to indicate a potential goodwill
impairment. Fair value would have to have declined by more than 20% for CEI, 16% for TE, 38% for JCP&L, 62% for Met-Ed, 58%
for Penelec and 62% for FES to indicate a potential goodwill impairment.
Total goodwill recognized by segment in FirstEnergy's Consolidated Balance Sheet is as follows:
Goodwill
Balance as of December 31, 2010
Merger with Allegheny
Balance as of December 31, 2011
Regulated
Distribution
$ 5,551
—
$ 5,551
Competitive
Energy
Services
$ 24
866
$ 890
Regulated
Independent
Transmission
$ —
—
$ —
Other/
Corporate
$ —
—
$ —
Consolidated
$ 5,575
866
$ 6,441
Total goodwill recognized by FES and the Utility Registrants are as follows:
Goodwill
Balance as of December 31, 2011 and 2010
FES
$ 24
CEI
$ 1,689
TE
$ 501
JCP&L
$ 1,811
Met-Ed
$ 416
Penelec
$ 769
FirstEnergy, FES and the Utility Registrants, with the exception of Met-Ed, have no accumulated impairment charge as of
December 31, 2011. Met-Ed has an accumulated impairment charge of $355 million, which was recorded in 2006.
Investments
At the end of each reporting period, FirstEnergy evaluates its investments for impairment. Investments classified as available-for-
sale securities are evaluated to determine whether a decline in fair value below the cost basis is other than temporary. FirstEnergy
first considers its intent and ability to hold the investment until recovery and then considers, among other factors, the duration and
the extent to which the security’s fair value has been less than its cost and the near-term financial prospects of the security issuer
when evaluating investments for impairment. If the decline in fair value is determined to be other than temporary, the cost basis of
the investment is written down to fair value. FirstEnergy recognizes in earnings the unrealized losses on available-for-sale securities
held in its nuclear decommissioning trusts since the trust arrangements, as they are currently defined, do not meet the required
ability and intent to hold criteria in consideration of other-than-temporary impairment. In 2011, 2010 and 2009, FirstEnergy recognized
$19 million, $33 million and $62 million, respectively, of other-than-temporary impairments. The fair values of FirstEnergy’s
investments are disclosed in Note 9, Fair Value Measurements.
ACCUMULATED OTHER COMPREHENSIVE INCOME
AOCI, net of tax, included on FirstEnergy’s, FES’ and the Utility Registrants’ Consolidated Balance Sheets as of December 31,
2011 and 2010, is comprised of the following: