Fixed Asset Impairment

12 Months Ended

Dec. 31, 2014

Fixed-asset Impairment

Note 15  – Fixed-asset Impairment

During the first quarter of 2014, DP&L tested the recoverability of long-lived assets at East Bend, a 186 MW coal-fired plant in Kentucky jointly-owned by DP&L.  Indications during that quarter that the fair value of the asset group was less than its carrying amount were determined to be impairment indicators given how narrowly these long-lived assets had passed the recoverability test during the fourth quarter of 2013.  DP&L performed a long-lived asset impairment test and determined that the carrying amount of the asset group was not recoverable. The East Bend asset group was determined to have a fair value of $2.7 million using the market approach.  As a result, we recognized an asset impairment expense of $11.5 million.  East Bend is reported in the Utility segment, however, this impairment is shown within Other in Business Segments (Note 14) due to acquisition adjustments at DPL which were not pushed down to the utility segment..  In May 2014, an agreement was signed for the sale of DP&L’s interest in the generating assets at East Bend.  This transaction closed on December 30, 2014.

During the fourth quarter of 2013, the Company tested the recoverability of the long-lived assets at Conesville, a129MW coal-fired station in Ohio jointly-owned by DP&L.  Gradual decreases in power prices as well as lower estimates of future capacity prices in conjunction with the DP&L reporting unit failing step 1 of the annual goodwill impairment test were determined to be an impairment indicator for long-lived assets.  The Company performed a long-lived asset impairment test and determined that the carrying amount of the asset group was not recoverable.  The long-lived asset group subject to the impairment evaluation was determined to be each individual station of DP&L.  This determination was based on the assessment of the stations’ ability to generate independent cash flows. The Conesville asset group was determined to have zero fair value using discounted cash flows under the income approach.  As a result, the Company recognized an asset impairment expense of $26.2 million. Conesville is reported in the Utility segment.

DP&L [Member]

Fixed-asset Impairment

Note 13  –Fixed-asset Impairment

During the fourth quarter of 2013, the Company tested the recoverability of long-lived assets at Conesville, a 129 MW coal-fired station in Ohio, and East Bend, a 186 MW coal-fired station in Kentucky jointly-owned by DP&L.  Gradual decreases in power prices, as well as lower estimates of future capacity prices in conjunction with the DP&L reporting unit of DPL failing step 1 of the annual goodwill impairment test were collectively determined to be an impairment indicator for the DP&L long-lived assets.  The Company performed a long-lived asset impairment test and determined that the carrying amounts of the asset groups were not recoverable. The long-lived asset group subject to the impairment evaluation was determined to be each individual station of DP&L. This determination was based on the assessment of the stations’ ability to generate independent cash flows.  The Conesville and East Bend asset groups were each determined to have a zero fair value using discounted cash flows under the income approach.  As a result, the Company recognized an asset impairment expense of $10.0 million and $76.0 million for Conesville and East Bend, respectively.

On October 5, 2012, DP&L filed for approval an ESP with the PUCO which reflected a shift in our outlook for the regulatory environment. Within the ESP filing, DP&L agreed to request a separation of its generation assets from its transmission and distribution assets in recognition that a restructuring of DP&L operations will be necessary, in compliance with Ohio law.  Also, during 2012, North American natural gas prices fell significantly from the previous year, exerting downward pressure on wholesale electricity prices in the Ohio power market.  Falling power prices compressed wholesale margins at DP&L’s generating stations.  Furthermore, these lower power prices led to increased customer switching from DP&L to CRES providers, who were offering retail prices lower than DP&L’s standard service offer.  Also, several municipalities in DP&L’s service territory have passed ordinances allowing them to become government aggregators with some having already contracted with CRES providers, further contributing to the switching trend.  In September 2012, management revised its cash flow forecasts based on these developments as part of its annual budgeting process and forecasted lower operating cash flows than in prior reporting periods.  Collectively, in the third quarter of 2012, these events were considered to be an impairment indicator for the long-lived asset group as management believed that these developments represent a significant adverse change in the business climate that could affect the value of the long-lived asset group.

The long-lived asset group subject to the impairment evaluation was determined to be each individual station of DP&L. This determination was based on the assessment of the stations’ ability to generate independent cash flows.  When the recoverability test of the long-lived asset group was performed, management concluded that, on an undiscounted cash flow basis, the carrying amount of two stations, Conesville and Hutchings, were not recoverable.

The fair value using the income approach was considered the most appropriate and resulted in a $25.0 million fair value for the Conesville Station.  The carrying value of the Conesville station prior to the impairment was $97.5 million.   Accordingly, the Conesville station was considered impaired and $72.5 million of impairment expense was recognized in the third quarter of 2012. 

The fair value using the income approach was considered the most appropriate and resulted in a zero fair value for the Hutchings Station.  The carrying value of the Hutchings Station prior to the impairment was $8.3 million.   Accordingly, the Hutchings Station was considered impaired and $8.3 million of impairment expense was recognized in the third quarter of 2012.