GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table summarizes the changes in the carrying amount of goodwill, by reportable segment for the years ended December 31, 2013 and 2012.
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| | | | | | | | | | | | | | | | | | | | | | | |
| US | | Andes | | MCAC | | EMEA | | Asia | | Total |
Balance as of December 31, 2011 | | | | | | | | | | | |
Goodwill | $ | 2,672 |
| | $ | 899 |
| | $ | 149 |
| | $ | 180 |
| | $ | 80 |
| | $ | 3,980 |
|
Accumulated impairment losses | (21 | ) | | — |
| | — |
| | (122 | ) | | (17 | ) | | (160 | ) |
Net balance | 2,651 |
| | 899 |
| | 149 |
| | 58 |
| | 63 |
| | 3,820 |
|
Impairment losses | (1,817 | ) | | — |
| | — |
| | — |
| | — |
| | (1,817 | ) |
Goodwill acquired during the year | — |
| | — |
| | — |
| | — |
| | — |
| (1) | — |
|
Foreign currency translation and other | (9 | ) | | — |
| | — |
| | — |
| | 5 |
| | (4 | ) |
Balance as of December 31, 2012 | | | | | | | | | | | |
Goodwill | 2,663 |
| | 899 |
| | 149 |
| | 180 |
| | 68 |
| | 3,959 |
|
Accumulated impairment losses | (1,838 | ) | | — |
| | — |
| | (122 | ) | | — |
| | (1,960 | ) |
Net balance | 825 |
| | 899 |
| | 149 |
| | 58 |
| | 68 |
| | 1,999 |
|
Impairment losses | (314 | ) | | — |
| | — |
| | (58 | ) | | — |
| | (372 | ) |
Goodwill associated with the sale of a business | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Foreign currency translation and other | (5 | ) | | — |
| | — |
| | — |
| | — |
| | (5 | ) |
Balance as of December 31, 2013 | | | | | | | | | | | |
Goodwill | 2,658 |
| | 899 |
| | 149 |
| | 180 |
| | 68 |
| | 3,954 |
|
Accumulated impairment losses | (2,152 | ) | | — |
| | — |
| | (180 | ) | | — |
| | (2,332 | ) |
Net balance | $ | 506 |
| | $ | 899 |
| | $ | 149 |
| | $ | — |
| | $ | 68 |
| | $ | 1,622 |
|
_____________________________
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(1) | Both the gross carrying amount and the accumulated impairment losses of the Asia generation segment have been reduced by $17 million with no impact on the net carrying amount for the segment. This relates to Chigen, which had fully impaired goodwill of $17 million and was sold during the year. |
DP&L—During the fourth quarter of 2013, the Company performed the annual goodwill impairment test at its DP&L reporting unit ("DP&L") and recognized a goodwill impairment expense of $307 million. The reporting unit failed Step 1 as its fair value was less than its carrying amount primarily due to lower estimates of capacity prices in future years as well as lower dark spreads contributing to lower overall operating margins. The fair value of the reporting unit was determined under the income approach using a discounted cash flow valuation model. The significant assumptions included within the discounted cash flow valuation model were capacity price curves, amount of the non-bypassable charge, commodity price curves, dispatching, valuation of regulatory assets and liabilities, discount rates and deferred income taxes. In Step 2, goodwill was determined to have an implied fair value of $316 million after the hypothetical purchase price allocation under the accounting guidance for business combinations. The goodwill associated with the DP&L acquisition is not deductible for tax purposes. Accordingly, there is no financial statement tax benefit related to the impairment. The pretax impairment impacted the Company’s effective tax rate for the year ended December 31, 2013, which was 33%. DP&L is reported in the US SBU reportable segment.
The Company had previously recognized a goodwill impairment expense of $1.82 billion in 2012 at the DP&L reporting unit. During 2012, North American natural gas prices declined significantly compared to the previous year, which exerted downward pressure on wholesale power prices in the Ohio power market. These falling power prices compressed wholesale margins at DP&L and led to increased customer switching from DP&L to other competitive retail electric service (“CRES”) providers, including DPLER, who were offering retail prices lower than DP&L’s standard service offer. In addition, several municipalities in DP&L’s service territory passed ordinances allowing them to become government aggregators and contracted with CRES providers to provide generation service to the customers located within the municipal boundaries, further contributing to the switching trend. CRES providers also became more active in DP&L’s service territory. These developments reduced DP&L’s forecasted profitability, operating cash flows and liquidity. As a result, in September 2012, management reduced its previous forecasts of profitability and operating cash flows. Collectively, these events were considered an interim goodwill impairment indicator at the DP&L reporting unit. There were no interim impairment indicators identified for the goodwill at DPLER. The goodwill associated with the DP&L acquisition is not deductible for tax purposes. Accordingly, there was no financial statement tax benefit related to the impairment. The pretax impairment impacted the Company’s effective tax rate for the year ended December 31, 2012, which was 298%.
MountainView—During the fourth quarter of 2013, the Company performed the annual goodwill impairment test at its MountainView reporting unit, two wind projects in California with an aggregate generation capacity of 67 MW, and recognized a full impairment of goodwill of $7 million. Factors contributing to impairment were lower forward power prices impacting revenue after the expiration of the current PPA and higher discount rates. In Step 1, the fair value of MountainView was determined under the income approach using a discounted cash flow valuation model. The significant assumptions included within the discounted cash flow valuation model were power price curves, fixed costs, discount rates and income tax attributes associated with the projects. MountainView failed Step 1 and its goodwill was determined to have no value in Step 2. MountainView is reported in the US SBU reportable segment.
Buffalo Gap—During the fourth quarter of 2013, the Company performed the annual goodwill impairment test at its Buffalo Gap reporting unit, three wind projects in Texas with an aggregate generation capacity of 524 MW. The reporting unit failed Step 1 and Step 2 was performed to measure the amount of goodwill impairment. In Step 2, after the hypothetical purchase price allocation under the relevant accounting guidance, the implied fair value of goodwill was greater than its carrying amount. As a result, no impairment was recognized. Buffalo Gap is reported in the US SBU reportable segment.
Ebute—During the third quarter of 2013, the Company performed an interim goodwill impairment test at Ebute, a 294 MW gas-fired plant in Nigeria and recognized the entire goodwill balance of $58 million as goodwill impairment expense. Ebute currently operates on leased land located within the PHCN Egbin Power Station Compound (“Egbin”) in Ijede, Ikorodu, Lagos. A controlling stake in Egbin was sold to a private investor as part of the Nigerian government privatization program in 2007, but the sale transaction did not close until the third quarter of 2013. The Company has been evaluating Ebute's future options for the continuation of the plant operation after the end of the current PPA on an ongoing basis. The viability of a number of such options is subject to the Company's ability to secure among other things long-term land rights, permits, gas transportation and supply agreements, and a new or extended PPA. In this evaluation, the Company has been continually assessing the probability of success of each of these options. Based on communications with the Nigerian government and other power sector stakeholders it interacts with to secure the required key project components and agreements, in September 2013, management determined that the prospects for Ebute's future expansion had significantly reduced. These adverse developments were considered as impairment indicators for Ebute's goodwill and long-lived assets. The long-lived assets were deemed recoverable based on the undiscounted cash flow recoverability analysis. In Step 1, the fair value of Ebute was determined using the income approach based on a discounted cash flow valuation model. The significant assumptions included within the discounted cash flow valuation model were the ability to obtain an extension to the existing land lease, permits, gas transportation and supply agreements, future PPA terms, maintenance and growth capital expenditures, and discount rates. Ebute failed Step 1 and its goodwill was determined to have no value in Step 2. Ebute is reported in the EMEA SBU reportable segment.
Chigen—During the third quarter of 2011, the Company performed an interim impairment test at Chigen, our wholly owned subsidiary that held equity interests in Chinese ventures, and recognized the entire goodwill balance of $17 million as goodwill impairment expense. The Company had identified higher coal prices and the resulting reduced operating margins in China as an impairment indicator. These factors had resulted in a significant downward revision to Chigen's cash flow forecasts. Chigen failed Step 1 and its goodwill was determined to have no value in Step 2. Chigen was reported in the Asia SBU reportable segment.
Intangible Assets
The following tables summarize the balances comprising other intangible assets in the accompanying Consolidated Balance Sheets as of December 31, 2013 and 2012:
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| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2013 | | December 31, 2012 |
| Gross Balance | | Accumulated Amortization | | Net Balance | | Gross Balance | | Accumulated Amortization | | Net Balance |
| (in millions) | | (in millions) |
Subject to Amortization | | | | | | | | | | | |
Project development rights(1) | $ | 31 |
| | $ | (1 | ) | | $ | 30 |
| | $ | 32 |
| | $ | (1 | ) | | $ | 31 |
|
Sales concessions(2) | 95 |
| | (45 | ) | | 50 |
| | 108 |
| | (49 | ) | | 59 |
|
Contractual payment rights(3) | 74 |
| | (33 | ) | | 41 |
| | 72 |
| | (23 | ) | | 49 |
|
Management rights | 37 |
| | (13 | ) | | 24 |
| | 40 |
| | (14 | ) | | 26 |
|
Emission allowances | 4 |
| | — |
| | 4 |
| | 5 |
| | — |
| | 5 |
|
Electric security plan | — |
| | — |
| | — |
| | 87 |
| | (87 | ) | | — |
|
Contracts | 46 |
| | (24 | ) | | 22 |
| | 44 |
| | (20 | ) | | 24 |
|
Customer contracts and relationships | 63 |
| | (34 | ) | | 29 |
| | 66 |
| | (26 | ) | | 40 |
|
Other(4) | 20 |
| | (3 | ) | | 17 |
| | 13 |
| | (2 | ) | | 11 |
|
Subtotal | 370 |
| | (153 | ) | | 217 |
| | 467 |
| | (222 | ) | | 245 |
|
Indefinite-Lived Intangible Assets | | | | | | | | | | | |
Land use rights | 46 |
| | — |
| | 46 |
| | 50 |
| | — |
| | 50 |
|
Water rights | 20 |
| | — |
| | 20 |
| | 18 |
| | — |
| | 18 |
|
Trademark/Trade name | 5 |
| | — |
| | 5 |
| | 6 |
| | — |
| | 6 |
|
Other | 9 |
| | — |
| | 9 |
| | 5 |
| | — |
| | 5 |
|
Subtotal | 80 |
| | — |
| | 80 |
| | 79 |
| | — |
| | 79 |
|
Total | $ | 450 |
| | $ | (153 | ) | | $ | 297 |
| | $ | 546 |
| | $ | (222 | ) | | $ | 324 |
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(1) | Represent development rights, including but not limited to, land control, various permits and right to acquire equity interests in development projects resulting from asset acquisitions by our wind operations in the U.K. The balance excludes project development rights of $70 million relating to our Poland wind operations that were fully impaired in the third quarter of 2013 and subsequently sold in November 2013. See Note 23—Discontinued Operations and Held for Sale Businesses for further information. |
| |
(2) | Excludes net balance of sales concessions of $32 and $34 million as of December 31, 2013 and 2012, respectively, relating to our utility businesses in Cameroon that have been included in noncurrent assets of Discontinued Operations and Held for Sale Businesses. See Note 23—Discontinued Operations and Held for Sale Businesses for further information. |
| |
(3) | Represent legal rights to receive system reliability payments from the regulator. |
| |
(4) | Includes renewable energy certificates, land use rights and various other intangible assets none of which is individually significant. |
The following table summarizes, by category, intangible assets acquired during the years ended December 31, 2013 and 2012:
|
| | | | | | | | | |
| December 31, 2013 |
| Amount | | Subject to Amortization/ Indefinite-Lived | | Weighted Average Amortization Period | | Amortization Method |
| (in millions) | | | | (in years) | | |
Renewable energy certificates | $ | 3 |
| | Subject to amortization | | Various | | As utilized |
Other | 2 |
| | Various | | N/A | | N/A |
Total | $ | 5 |
| | | | | | |
|
| | | | | | | | | |
| December 31, 2012 |
| Amount | | Subject to Amortization/ Indefinite-Lived | | Weighted Average Amortization Period | | Amortization Method |
| (in millions) | | | | (in years) | | |
Renewable energy certificates | $ | 5 |
| | Subject to amortization | | Various | | As utilized |
Water rights | 13 |
| | Indefinite-lived | | N/A | | N/A |
Other | 1 |
| | Various | | N/A | | N/A |
Total | $ | 19 |
| | | | | | |
The following table summarizes the estimated amortization expense, by intangible asset category, for 2014 through 2018:
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| | | | | | | | | | | | | | | | | | | |
| Estimated amortization expense |
| 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| (in millions) |
Customer relationships & contracts | $ | 5 |
| | $ | 3 |
| | $ | 3 |
| | $ | 3 |
| | $ | 3 |
|
Sales concessions | 4 |
| | 4 |
| | 4 |
| | 3 |
| | 3 |
|
Contractual payment rights | 2 |
| | 2 |
| | 2 |
| | 2 |
| | 2 |
|
All other | 5 |
| | 5 |
| | 5 |
| | 5 |
| | 4 |
|
Total | $ | 16 |
| | $ | 14 |
| | $ | 14 |
| | $ | 13 |
| | $ | 12 |
|
Intangible asset amortization expense was $29 million, $115 million and $20 million for the years ended December 31, 2013, 2012 and 2011, respectively.
