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Goodwill Impairment Goodwill Impairment
9 Months Ended
Sep. 30, 2013
Goodwill Impairment [Abstract]  
GOODWILL IMPAIRMENT
GOODWILL IMPAIRMENT
Ebute—During the third quarter of 2013, the Company performed an interim goodwill impairment test at the Ebute reporting unit, a 294 MW gas-fired plant in Nigeria. 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 amongst 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 to and from 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 have 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 as the carrying amount of the reporting unit exceeded its fair value. Consequently, a preliminary Step 2 was performed to measure the goodwill impairment expense. In the preliminary Step 2, the fair value of the reporting unit was allocated to its identifiable assets and liabilities in accordance with the relevant accounting guidance and Ebute's goodwill did not have any value. Therefore, the entire goodwill balance of $58 million was recognized as goodwill impairment expense. At this time, management is continuing its review of the preliminary Step 2 calculations including the valuation report from an independent valuation firm. If necessary, management will record an adjustment in the fourth quarter of 2013 to finalize this estimate. Ebute is reported in EMEA Generation segment.
DPL—In connection with its acquisition of DPL in 2011, the Company recognized goodwill of approximately $2.6 billion which was allocated between the two reporting units identified during the purchase price allocation: The Dayton Power and Light Company (“DP&L”, DPL’s regulated utility in Ohio) and DPL Energy Resources, Inc. (“DPLER”, DPL’s wholly-owned competitive retail electric service provider). Of the total goodwill, approximately $2.4 billion was allocated to DP&L and the remainder was allocated to DPLER.
On October 5, 2012, DP&L filed an Electric Security Plan (“ESP”) for approval with the Public Utility Commission of Ohio (“PUCO”). 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. Furthermore, these lower power prices led to increased switching from DP&L to other competitive retail electric service (“CRES”) providers, including DPLER, who were offering retail prices lower than DP&L’s current standard service offer. Also, several municipalities in DP&L’s service territory passed ordinances allowing them to become government aggregators and some municipalities 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. In September 2012, management revised its cash flow forecasts based on these developments and forecasted lower profitability and operating cash flows than previously prepared forecasts. These developments reduced DP&L’s forecasted profitability, operating cash flows and liquidity. Collectively, in the third quarter of 2012, these events were considered an interim impairment indicator for DPL’s goodwill at the DP&L reporting unit. There were no interim impairment indicators identified for the goodwill at DPLER.
The Company performed an interim impairment test on the $2.4 billion of goodwill at the DP&L reporting unit level during the third quarter of 2012. In the preliminary Step 1 of the goodwill impairment test, the fair value of the reporting unit was determined under the income approach using a discounted cash flow valuation model. The material assumptions included within the discounted cash flow valuation model were customer switching and aggregation trends, capacity price curves, energy price curves, amount of the nonbypassable charge, commodity price curves, dispatching, transition period for the conversion to a wholesale competitive bidding structure, amount of the standard service offer charge, valuation of regulatory assets and liabilities, discount rates and deferred income taxes. The reporting unit failed the preliminary Step 1 test and a preliminary Step 2 of the goodwill impairment test was performed. For the three months ended September 30, 2012, the Company recognized a goodwill impairment expense of $1.85 billion, which represented its best estimate of the impairment loss based on the latest information then available and the results of the preliminary Step 1 and Step 2 tests. DPL is reported in the US Utilities segment.
The goodwill associated with the DPL acquisition is not deductible for tax purposes. Accordingly, there was no cash tax or financial statement tax benefit related to the impairment. The Company’s effective tax rates were impacted by the pretax impairment, however. The Company’s effective tax rates were (13)% and (167)% for the three months and nine months ended September 30, 2012. In both of these periods, the Company had worldwide tax expense on a loss from continuing operations.