Allegheny Power 2014 Annual Report Download - page 85

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On October 9, 2013, MP sold its approximate 8% share of Pleasants at its fair market value of $73 million to AE Supply, and AE
Supply sold its approximate 80% share of Harrison to MP at its book value of $1.2 billion. The transaction resulted in AE Supply
receiving net consideration of $1.1 billion and MP's assumption of a $73.5 million pollution control note. In connection with the
closing, in the fourth quarter of 2013, MP recorded a pre-tax impairment charge of approximately $322 million to reduce the net
book value of the Harrison Power Station to the amount that was permitted to be included in jurisdictional rate base. Additionally,
MP recognized a regulatory liability of approximately $23 million in the fourth quarter of 2013 representing refunds to customers
associated with the excess purchase price received by MP above the net book value of MP's minority interest in the Pleasants
Power Station. The impairment charge is included within the results of the Regulated Distribution segment.
On July 8, 2013, officers of FirstEnergy and AE Supply committed to deactivating the Hatfield's Ferry, generating Units 1-3, and
Mitchell, generating units 2-3. As a result of this decision, in the second quarter of 2013, FirstEnergy recorded a pre-tax impairment
of approximately $473 million to continuing operations, which also includes pre-tax impairments of $13 million related to excessive
inventory at these facilities. The impairment charge is included within the results of the CES segment. On October 9, 2013, Hatfield's
Ferry Units 1-3 and Mitchell Units 2-3 were deactivated.
Goodwill
In a business combination, the excess of the purchase price over the estimated fair values of the assets acquired and liabilities
assumed is recognized as goodwill. FirstEnergy evaluates goodwill for impairment annually on July 31 and more frequently if
indicators of impairment arise.
FirstEnergy's reporting units are consistent with its reportable segments and consist of Regulated Distribution, Regulated
Transmission, and CES. The following table presents goodwill by reporting unit:
Goodwill Regulated Distribution Regulated Transmission
Competitive
Energy
Services Consolidated
(In millions)
Balance as of December 31, 2014 $ 5,092 $ 526 $ 800 $ 6,418
There were no changes in goodwill for any reporting unit during 2014. As of December 31, 2014 and 2013, total goodwill recognized
by FES was $23 million. Neither FirstEnergy nor FES has accumulated impairment charges as of December 31, 2014.
Annual impairment testing is conducted as of July 31 of each year and for 2014, 2013 and 2012, the analysis indicated no impairment
of goodwill. FirstEnergy performed a quantitative assessment for the Regulated Distribution, Regulated Transmission and CES
reporting units as of July 31, 2014. The fair values for each of the reporting units were calculated using a discounted cash flow
analysis and indicated no impairment of goodwill.
The fair value of the CES reporting unit exceeded its carrying value by approximately 10%, impacted by near term weak economic
conditions and low energy and capacity prices. Key assumptions incorporated into the CES discounted cash flow analysis requiring
significant management judgment included: discount rates, future energy and capacity pricing, projected operating income, capital
expenditures, including the impact of pending carbon pollution and other environmental regulation, and terminal multiples. The July
31, 2014 assessment for this reporting unit included a discount rate of 8.5% and a terminal multiple of 7.0x earnings before, interest,
taxes, depreciation, and amortization. Continued weak economic conditions, lower than forecasted power and capacity prices, and
revised environmental requirements could have a negative impact on future goodwill assessments.
Key assumptions incorporated in the Regulated Distribution and Regulated Transmission discounted cash flow analysis requiring
significant management judgment included: discount rates, growth rates, projected operating income, changes in working capital,
projected capital expenditures, projected funding of pension plans, expected results of future rate proceedings, and terminal
multiples.
Investments
At the end of each reporting period, FirstEnergy evaluates its investments for OTTI. Investments classified as AFS 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 an equity security 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
an investment for impairment. For debt securities, FirstEnergy considers its intent to hold the securities, the likelihood that it will be
required to sell the securities before recovery of its cost basis and the likelihood of recovery of the securities' entire amortized cost
basis. If the decline in fair value is determined to be other than temporary, the cost basis of the securities is written down to fair
value.
Unrealized gains and losses on AFS securities are recognized in AOCI. However, unrealized losses held in the NDTs of FES, OE
and TE are recognized in earnings since the trust arrangements, as they are currently defined, do not meet the required ability and