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Asset Impairments
 9 Months Ended
Sep. 30, 2016
Goodwill and Intangible Assets Disclosure [Abstract]  
Asset Impairments
ASSET IMPAIRMENTS

Plant Impairments

FirstEnergy reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The recoverability of a long-lived asset is measured by comparing its carrying value to the sum of undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is greater than the undiscounted cash flows, an impairment exists and a loss is recognized for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. FirstEnergy utilizes the income approach, based upon discounted cash flows to estimate fair value.

On July 19, 2016, FirstEnergy and FES committed to exit operations of the Bay Shore Unit 1 generating station (136 MW) by October 1, 2020, through either sale or deactivation and to deactivate Units 1-4 of the W. H. Sammis generating station (720 MW) by May 31, 2020. As a result, FirstEnergy recorded a non-cash pre-tax impairment charge of $647 million ($517 million - FES) in the second quarter of 2016, which is included in Impairment of assets on the Consolidated Statement of Income (Loss) and included within the results of the CES segment. PJM has approved the W.H Sammis Units 1-4 and Bay Shore Unit 1 deactivations pending review by the Independent Market Monitor. In addition, FirstEnergy and FES recorded termination and settlement costs on fuel contracts of approximately $58 million (pre-tax) in the second quarter of 2016 resulting from plant retirements and deactivations.

During the first nine months of 2015, FirstEnergy and FES recognized impairment charges of $24 million and $16 million, respectively, associated with certain transportation equipment and facilities. In order to conform to current year presentation, the charge was reclassified from Other operating expenses in the Consolidated Statement of Income (Loss) to Impairment of assets.
Goodwill

In a business combination, the excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. FirstEnergy's reporting units are consistent with its reportable segments and consist of Regulated Distribution, Regulated Transmission, and CES. The following table presents the changes in the carrying value of goodwill for the nine months ended September 30, 2016:
Goodwill
 
Regulated Distribution
 
Regulated Transmission
 
Competitive Energy Services
 
Consolidated
 
 
(In millions)
Balance as of December 31, 2015
 
$
5,092

 
$
526

 
$
800

 
$
6,418

Impairment
 
—

 
—

 
(800
)
 
(800
)
Balance as of September 30, 2016
 
$
5,092

 
$
526

 
$
—

 
$
5,618



FirstEnergy tests goodwill for impairment annually as of July 31 and considers more frequent testing if indicators of potential impairment arise.

As a result of low capacity prices associated with the 2019/2020 PJM Base Residual Auction in May 2016, as well as its annual update to its fundamental long-term capacity and energy price forecast, FirstEnergy determined that an interim impairment analysis of the CES reporting unit’s goodwill was necessary during the second quarter of 2016.

Consistent with FirstEnergy’s annual goodwill impairment test, a discounted cash flow analysis was used to determine the fair value of the CES reporting unit for purposes of step one of the interim goodwill impairment test. Key assumptions incorporated into the CES discounted cash flow analysis requiring significant management judgment included the following:

•
Future Energy and Capacity Prices: Observable market information for near-term forward power prices, PJM auction results for near term capacity pricing, and a longer-term fundamental pricing model for energy and capacity that considered the impact of key factors such as load growth, plant retirements, carbon and other environmental regulations, and natural gas pipeline construction, as well as coal and natural gas pricing.
•
Retail Sales and Margin: CES' current retail targeted portfolio to estimate future retail sales volume as well as historical financial results to estimate retail margins.
•
Operating and Capital Costs: Estimated future operating and capital costs, including the estimated impact on costs of pending carbon and other environmental regulations, as well as costs associated with capacity performance reforms in the PJM market.
•
Discount Rate: A discount rate of 9.50%, based on selected comparable companies' capital structure, return on debt and return on equity.
•
Terminal Value: A terminal value of 7.0x earnings before interest, taxes, depreciation and amortization based on consideration of peer group data and analyst consensus expectations.

Based on the impairment analysis, FirstEnergy determined that the carrying value of goodwill exceeded its fair value and recognized a non-cash pre-tax impairment charge of $800 million ($23 million - FES) in the second quarter of 2016, which is included within the caption Impairment of assets in the Consolidated Statement of Income (Loss).

As of July 31, 2016, FirstEnergy performed a qualitative assessment of the Regulated Distribution and Regulated Transmission reporting units' goodwill, assessing economic, industry and market considerations in addition to the reporting units' overall financial performance. It was determined that the fair value of these reporting units were, more likely than not, greater than their carrying value and a quantitative analysis was not necessary.
Termination of Customer Contract

During the third quarter of 2016, FES recorded a pre-tax charge of $32 million associated with the termination of a customer contract, which is included in Other operating expenses in the Consolidated Statement of Income (Loss).