Duke Energy 2012 Annual Report Download - page 186

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PART II
DUKE ENERGY CORPORATION • DUKE ENERGY CAROLINAS, LLC • PROGRESS ENERGY, INC. • CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY
CAROLINAS, INC. • FLORIDA POWER CORPORATION d/b/a PROGRESS ENERY FLORIDA, INC. • DUKE ENERGY OHIO, INC. • DUKE ENERGY INDIANA, INC.
Combined Notes to Consolidated Financial Statements – (Continued)
12. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following tables present goodwill by reportable operating segment for
Duke Energy and Duke Energy Ohio.
Duke Energy
(in millions) USFE&G
Commercial
Power
International
Energy Total
Balance at December 31, 2011:
Goodwill $ 3,483 $ 940 $297 $ 4,720
Accumulated impairment charges — (871) — (871)
Balance at December 31, 2011,
as adjusted for accumulated
impairment charges 3,483 69 297 3,849
Acquisitions(a) 12,467 — 59 12,526
Foreign exchange and other changes — (7) (3) (10)
Balance at December 31, 2012:
Goodwill 15,950 933 353 17,236
Accumulated impairment charges — (871) — (871)
Balance at December 31, 2012,
as adjusted for accumulated
impairment charges $15,950 $ 62 $ 353 $16,365
(a) USFE&G amount relates to the merger with Progress Energy. International Energy amount relates to the
Ibener acquisition. See Note 2 for further information.
Duke Energy Ohio
(in millions)
Franchised
Electric &
Gas
Commercial
Power Total
Balance at December 31, 2011:
Goodwill $1,137 $ 1,188 $ 2,325
Accumulated impairment charges (216) (1,188) (1,404)
Balance at December 31, 2011, as adjusted for
accumulated impairment charges 921 — 921
Balance at December 31, 2012:
Goodwill 1,137 1,188 2,325
Accumulated impairment charges (216) (1,188) (1,404)
Balance at December 31, 2012, as adjusted for
accumulated impairment charges $ 921 $ — $ 921
Progress Energy had Goodwill of $ 3,655 million as of December 31, 2012
and 2011, for which there are no accumulated impairment charges.
In the fourth quarter of 2012, goodwill for the Renewables reporting unit
within Commercial Power was analyzed for impairment primarily as a result
of changes in the tax benefi ts for renewable projects. Based on results of the
fourth quarter 2012 impairment analysis, the fair value of the Renewables
reporting unit exceeded its carrying value thus no impairment was recorded. The
fair value of the Renewables reporting unit is impacted by a multitude of factors,
including legislative actions related to tax credit extensions, long-term growth
rate assumptions, the market price of power and discount rates. Management
continues to monitor these assumptions for any indicators that the fair value of
the reporting unit could be below the carrying value, and will assess goodwill for
impairment as appropriate.
Midwest Generation Asset Impairment.
In the second quarter of 2010, based on circumstances discussed below,
management determined that it was more likely than not that the fair value
of Commercial Power’s nonregulated Midwest generation reporting unit was
below its respective carrying value. Accordingly, an interim impairment test was
performed for this reporting unit. Determination of reporting unit fair value was
based on a combination of the income approach, which estimates the fair value
of Duke Energy’s reporting units based on discounted future cash fl ows, and
the market approach, which estimates the fair value of Duke Energy’s reporting
units based on market comparables within the utility and energy industries.
Based on completion of step one of the second quarter 2010 impairment
analysis, management determined that the fair value of Commercial Power’s
non regulated Midwest generation reporting unit was less than its carrying value,
which included goodwill of $ 500 million.
Commercial Power’s nonregulated Midwest generation reporting unit
includes nearly 4,000 MW of primarily coal-fi red generation capacity in Ohio
which was dedicated under the ESP through December 31, 2011. Additionally,
this reporting unit has approximately 3,600 MW of gas-fi red generation capacity
in Ohio, Pennsylvania, Illinois and Indiana which provides generation to
unregulated energy markets in the Midwest. The businesses within Commercial
Power’s nonregulated Midwest generation reporting unit operate in unregulated
markets which allow for customer choice among suppliers. As a result, the
operations within this reporting unit are subjected to competitive pressures that
do not exist in any of Duke Energy’s regulated jurisdictions.
Commercial Power’s other businesses, including the renewable generation
assets, are in a separate reporting unit for goodwill impairment testing
purposes. No impairment existed with respect to Commercial Power’s renewable
generation assets.
The fair value of Commercial Power’s nonregulated Midwest generation
reporting unit is impacted by a multitude of factors, including current and
forecasted customer demand, forecasted power and commodity prices,
uncertainty of environmental costs, competition, the cost of capital, valuation
of peer companies and regulatory and legislative developments. Management’s
assumptions and views of these factors continually evolve, and certain views
and assumptions used in determining the fair value of the reporting unit in
the 2010 interim impairment test changed signifi cantly from those used in
the 2009 annual impairment test. These factors had a signifi cant impact
on the valuation of Commercial Power’s nonregulated Midwest generation
reporting unit. More specifi cally, the following factors signifi cantly impacted
management’s valuation of the reporting unit:
• Sustained lower forward power prices — In Ohio, Duke Energy’s
Commercial Power segment provided power to retail customers under
the ESP, which utilizes rates approved by the PUCO through 2011.
These rates in 2010 were above market prices for generation services,
resulting in customers switching to other generation providers. As
discussed in Note 4, Duke Energy Ohio will establish a new SSO for
retail load customers for generation after the current ESP expires on
December 31, 2011. Given forward power prices, which declined from
the time of the 2009 impairment, signifi cant uncertainty existed with
respect to the generation margin that would be earned under the new SSO.