Asset Impairments

6 Months Ended

Jun. 30, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

ASSET IMPAIRMENTS

Competitive Generation Asset Sale

As disclosed in Note 1, "Organization and Basis of Presentation," FirstEnergy announced in January 2017 that AE Supply and AGC had entered into an asset purchase agreement to sell four of AE Supply’s natural gas generating plants and approximately 59% of AGC’s interest in the Bath County pumped hydro facility (1,572 MWs of combined capacity) to a subsidiary of LS Power for an all-cash purchase price of $925 million, subject to customary and other closing conditions, including receipt of regulatory approvals from FERC and the VSCC, as applicable, third party consents, and the satisfaction and discharge of $305 million of AE Supply senior notes, which would require the payment of a “make-whole” premium estimated to be approximately $100 million based on current interest rates. Additionally, as a further condition to closing, FE will provide the purchaser two limited guarantees of certain obligations of AE Supply and AGC arising under the purchase agreement. On February 17, 2017, AE Supply and AGC submitted a filing with FERC and on June 13, 2017, FERC issued an order authorizing the transaction as requested. The parties will also file a request for authorization to transfer the hydroelectric license under Part I of the FPA. Additional filings have been submitted to FERC for the purpose of amending affected FERC-jurisdictional rates and implementing the transaction once all regulatory approvals are obtained. Additionally, the consent of VEPCO is needed for the sale of AGC’s interest in the Bath County pumped hydro facility, as well as agreement among AGC, LS Power and VEPCO with respect to certain amendments to the Bath County project agreements. On May 24, 2017, AE Supply and AGC and LS Power exercised a provision in the purchase agreement that allows either party to terminate the purchase agreement without penalty after June 23, 2017. All parties continue to negotiate, including consideration of various alternative structures regarding pricing and closing, and neither party has elected its termination rights under the provisions of the purchase agreement. As a result of the status of these ongoing negotiations regarding the asset purchase agreement and reflecting the impact of prevailing market conditions, CES recorded a non-cash pre-tax impairment charge of $131 million in the second quarter of 2017. FirstEnergy is targeting to close the transaction with revised terms in the second half of 2017, subject to satisfaction of various customary and other closing conditions, including without limitation, receipt of regulatory approvals and third party consents. There can be no assurance that any such approvals will be obtained and/or any such conditions will be satisfied or that such sale will be consummated.

Assets held for sale as of June 30, 2017 include property, plant and equipment (net of accumulated provision for depreciation) of $792 million, investments of $20 million, materials and supplies inventory of $4 million, and AROs of approximately $1 million.

Competitive Generation Deactivations and Other Exit Activities

On July 22, 2016, FirstEnergy and FES announced their intent to exit operations of the Bay Shore Unit 1 generating station (136 MWs) by October 1, 2020, through either sale or deactivation and to deactivate Units 1-4 of the W.H. Sammis generating station (720 MWs) 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. PJM and the Independent Market Monitor have approved the W.H. Sammis Units 1-4 and Bay Shore Unit 1 deactivations. 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, which is included in the caption of Fuel in the Consolidated Statement of Income (Loss).

Goodwill

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:

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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).

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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