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Goodwill, Intangible Assets & Impairments

12 Months Ended

Dec. 31, 2012

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 benefits 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 flows, 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-fired 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-fired 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 significantly from those used in the 2009 annual impairment test. These factors had a significant impact on the valuation of Commercial Power's nonregulated Midwest generation reporting unit. More specifically, the following factors significantly 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, significant uncertainty existed with respect to the generation margin that would be earned under the new SSO.
Potentially more stringent environmental regulations from the U.S. EPA—In May and July of 2010, the EPA issued proposed rules associated with the regulation of CCRs to address risks from the disposal of CCRs (e.g., ash ponds) and to limit the interstate transport of emissions of NOx and SO2. These proposed regulations, along with other pending EPA regulations, could result in significant expenditures for coal fired generation plants, and could result in the early retirement of certain generation assets, which do not currently have control equipment for NOx and SO2, as soon as 2014.
Customer switching — ESP customers have increasingly selected alternative generation service providers, as allowed by Ohio legislation, which further erodes margins on sales. In the second quarter of 2010, Duke Energy Ohio's residential class became the target of an intense marketing campaign offering significant discounts to residential customers that switch to alternate power suppliers. Customer switching levels were at approximately 55% at June 30, 2010 compared to approximately 29% in the third quarter of 2009.

As a result of the factors above, a non-cash goodwill impairment charge of $500 million was recorded during the second quarter of 2010. This impairment charge represented the entire remaining goodwill balance for Commercial Power's non-regulated Midwest generation reporting unit. In addition to the goodwill impairment charge, and as a result of factors similar to those described above, Commercial Power recorded $160 million of pre-tax impairment charges related to certain generating assets and emission allowances primarily associated with these generation assets in the Midwest to write-down the value of these assets to their estimated fair value. The generation assets that were subject to this impairment charge were those coal-fired generating assets that do not have certain environmental emissions control equipment, causing these generation assets to be heavily impacted by the EPA's proposed rules on emissions of NOx and SO2. These impairment charges are recorded in Goodwill and Other Impairment Charges on Duke Energy's Consolidated Statement of Operations.

Intangible Assets

The following tables show the carrying amount and accumulated amortization of intangible assets.

	December 31, 2012
(in millions)		Duke Energy		Duke Energy Ohio		Duke Energy Indiana
Emission allowances	$	80	$	24	$	29
Gas, coal and power contracts		295		272		24
Wind development rights		111		―		―
Other		109		10		―
Total gross carrying amounts		595		306		53
Accumulated amortization - gas, coal and power contracts		(180)		(168)		(12)
Accumulated amortization - wind development rights		(9)		―		―
Accumulated amortization - other		(34)		(9)		―
Total accumulated amortization		(223)		(177)		(12)
Total intangible assets, net	$	372	$	129	$	41

	December 31, 2011
(in millions)		Duke Energy		Duke Energy Ohio		Duke Energy Indiana
Emission allowances	$	66	$	29	$	37
Gas, coal and power contracts		295		271		24
Wind development rights		137		―		―
Other		72		10		―
Total gross carrying amounts		570		310		61
Accumulated amortization - gas, coal and power contracts		(169)		(158)		(11)
Accumulated amortization - wind development rights		(7)		―		―
Accumulated amortization - other		(31)		(9)		―
Total accumulated amortization		(207)		(167)		(11)
Total intangible assets, net	$	363	$	143	$	50

Emission allowances in the tables above for Duke Energy and Duke Energy Ohio include emission allowances acquired by Duke Energy as part of its merger with Cinergy, which were recorded at the then fair value on the date of the merger in April 2006, and emission allowances purchased by Duke Energy Ohio. Additionally, the Duke Energy Registrants are allocated certain zero cost emission allowances on an annual basis.

The following tables show the change in the gross carrying value of emission allowances.

		Year Ended December 31, 2012
(in millions)		Duke Energy		Duke Energy Ohio		Duke Energy Indiana
Gross carrying value at beginning of period	$	66	$	29	$	37
Amounts acquired in Progress Energy merger		29		―
Purchases of emission allowances		―		―		―
Sales and consumption of emission allowances^(a)(b)		(15)		(5)		(8)
Gross carrying value at end of period	$	80	$	24	$	29

		December 31, 2011
(in millions)			Duke Energy		Duke Energy Ohio		Duke Energy Indiana
Gross carrying value at beginning of period		$	175	$	125	$	49
Purchases of emission allowances			4		1		2
Sales and consumption of emission allowances^(a)(b)			(39)		(18)		(21)
Impairment of emission allowances			(79)		(79)		―
Other changes			5		―		7
Gross carrying value at end of period		$	66	$	29	$	37

(a)	Carrying value of emission allowances are recognized via a charge to expense when consumed.
(b)	See Note 2 for additional information regarding gains and losses on sales of emission allowances by USFE&G and Commercial Power.

	The following table presents amortization expense for gas, coal and power contracts, wind development rights and other intangible
assets.
		December 31,
(in millions)			2012		2011		2010
Duke Energy		$	14	$	10	$	24
Duke Energy Ohio			12		8		20
Duke Energy Indiana			1		1		1

The table below shows the expected amortization expense for the next five years for intangible assets as of December 31, 2012. The expected amortization expense includes estimates of emission allowances consumption and estimates of consumption of commodities such as gas and coal under existing contracts, as well as estimated amortization related to the wind development projects. The amortization amounts discussed below are estimates and actual amounts may differ from these estimates due to such factors as changes in consumption patterns, sales or impairments of emission allowances or other intangible assets, delays in the in-service dates of wind assets, additional intangible acquisitions and other events.

(in millions)		2013		2014		2015		2016		2017
Duke Energy	$	45	$	19	$	17	$	16	$	15
Duke Energy Ohio		8		13		10		10		9
Duke Energy Indiana		30		1		1		1		1

Emission Allowance Impairment. On August 8, 2011, the EPA's final rule to replace CAIR was published in the Federal Register. As further discussed in Note 5, the CSAPR established state-level annual SO2 and NOx caps that were required to take effect on January 1, 2012, and state-level ozone-season NOx caps that were to take effect on May 1, 2012. The CSAPR did not utilize CAA emission allowances as the original CAIR provided. Under the CSAPR, the EPA was expected to issue new emission allowances to be used exclusively for purposes of complying with the CSAPR cap-and-trade program. After this ruling was published in 2011, Duke Energy evaluated the effect of the CSAPR on the carrying value of emission allowances recorded at its USFE&G and Commercial Power segments. Based on the provisions of the CSAPR, Duke Energy Ohio had more SO2 allowances than were needed to comply with the continuing CAA acid rain cap-and-trade program (excess emission allowances). Duke Energy Ohio incurred a pre-tax impairment of $79 million in 2011 to write down the carrying value of excess emission allowances held by Commercial Power to fair value. The charge is recorded in Impairment charges on Duke Energy and Duke Energy Ohio's Consolidated Statement of Operations. This amount was based on the fair value of excess allowances held by Commercial Power for compliance under the continuing CAA acid rain cap-and-trade program as of September 30, 2011.

- 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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