GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill

The following table provides information regarding our goodwill balance, all of which arose in connection with accounting for the Merger. None of the goodwill is being deducted for tax purposes.



Goodwill before impairment charges	$	18,322
Accumulated noncash impairment charges	(15,970		)
Balance at December 31, 2014	2,352
Additional noncash impairment charges in 2015	(1,400		)
Balance at September 30, 2015 (a)	$	952

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(a)	Net of accumulated impairment charges totaling $17.37 billion.

Goodwill Impairments

Goodwill and intangible assets with indefinite useful lives are required to be tested for impairment at least annually (we have selected a December 1 test date) or whenever events or changes in circumstances indicate an impairment may exist.

We perform the following steps in testing goodwill for impairment: first, we estimate the debt-free enterprise value of the business as of the testing date taking into account future estimated cash flows and current securities values of comparable companies; second, we estimate the fair values of the individual assets and liabilities of the business at that date; third, we calculate implied goodwill as the excess of the estimated enterprise value over the estimated value of the net operating assets; and finally, we compare the implied goodwill amount to the carrying value of goodwill and, if the carrying amount exceeds the implied value, we record an impairment charge for the amount the carrying value of goodwill exceeds implied goodwill.

Wholesale electricity prices in the ERCOT market, in which TCEH largely operates, have generally moved with natural gas prices as marginal electricity demand is generally supplied by natural gas fueled generation facilities. Accordingly, the sustained decline in natural gas prices, which we have experienced since mid-2008, negatively impacts our profitability and cash flows and reduces the value of our generation assets, which consist largely of lignite/coal and nuclear fueled facilities. While we had partially mitigated these effects with hedging activities, we are now significantly exposed to this price risk. Because of this market condition, our analyses over the past several years have indicated that the carrying value of TCEH exceeds its estimated fair value (enterprise value). Consequently, we continually monitor trends in electricity prices, natural gas prices, market heat rates, capital spending for environmental and other projects and other operational factors to determine if goodwill impairment testing should be done during the course of a year and not only at the annual December 1 testing date.

During the three months ended September 30, 2015, we experienced an impairment indicator related to decreases in forward wholesale electricity prices when compared to those prices reflected in our March 31, 2015 goodwill impairment testing analysis. As a result, the likelihood of a goodwill impairment had increased, and we initiated further testing of goodwill as of September 30, 2015. We substantially completed our testing of goodwill for impairment during the period and recorded an estimated impairment of $700 million at September 30, 2015.

During the three months ended March 31, 2015, we experienced an impairment indicator related to decreases in forward wholesale electricity prices when compared to those prices reflected in our December 1, 2014 goodwill impairment testing analysis. As a result, the likelihood of a goodwill impairment had increased, and we initiated further testing of goodwill as of March 31, 2015. We completed our testing of goodwill for impairment during the period, which resulted in an impairment of $700 million of goodwill at March 31, 2015.

There was no change to the goodwill balance for the three and nine months ended September 30, 2014.

Key inputs into our goodwill impairment testing at September 30 and March 31, 2015 and December 1, 2014 were as follows:


•	The carrying value (excluding debt) of TCEH exceeded its estimated enterprise value by approximately 50% at September 30, 2015, 34% at March 31, 2015 and by 17% at December 1, 2014.

•

The fair value of TCEH was estimated using a two-thirds weighting of value based on internally developed cash flow projections and a one-third weighting of value using implied cash flow multiples based on current securities values of comparable publicly traded companies. The internally developed cash flow projections reflect annual estimates through a terminal year calculated using a terminal year EBITDA multiple approach.

•

The discount rates applied to internally developed cash flow projections were 6.00%, 6.00% and 6.25% at September 30, 2015, March 31, 2015 and December 1, 2014, respectively. The discount rate represents the weighted average cost of capital consistent with our views of the rate that an expected market participant would utilize for valuation, including the risk inherent in future cash flows, taking into account the capital structure, debt ratings and current debt yields of comparable public companies as well as an estimate of return on equity that reflects historical market returns and current market volatility for the industry.


•	The cash flow projections used in both 2015 and 2014 assume rising wholesale electricity prices, although the forecasted electricity prices are less than those assumed in the cash flow projections used in prior goodwill impairment testing.

The impairment determinations involved significant assumptions and judgments. The calculations supporting the estimates of the fair value of our business and the fair values of its assets and liabilities utilized models that take into consideration multiple inputs, including commodity prices, operating parameters, discount rates, capital expenditures, the effects of proposed and final environmental regulations, securities prices of comparable publicly traded companies and other inputs. Assumptions regarding each of these inputs could have a significant effect on the related valuations. In performing these calculations, we also take into consideration assumptions on how current market participants would value TCEH and its operating assets and liabilities. Changes to assumptions that reflect the views of current market participants can also have a significant effect on the related valuations. The fair value measurements resulting from these models are classified as non-recurring Level 3 measurements consistent with accounting standards related to the determination of fair value (see Note 12). Because of the volatility of these factors, we cannot predict the likelihood of any future impairment.

Identifiable Intangible Assets

Identifiable intangible assets, including amounts that arose in connection with accounting for the Merger, are comprised of the following:



	September 30, 2015						December 31, 2014
Identifiable Intangible Asset	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
Retail customer relationship	$	463	$	438	$	25	$	463	$	425	$	38
Software and other technology-related assets	375		218		157		369		202		167
Other identifiable intangible assets (a)	58		27		31		460		291		169
Total identifiable intangible assets subject to amortization	$	896	$	683	213		$	1,292	$	918	374
Retail trade name (not subject to amortization)					955						955
Mineral interests (not currently subject to amortization)					6						7
Total identifiable intangible assets					$	1,174					$	1,336

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(a)	See discussion below regarding impairment charges recorded in the three and nine months ended September 30, 2015 related to other identifiable intangible assets.

At September 30, 2015 and December 31, 2014, amounts related to fully amortized assets that are expired or of no economic value, have been excluded from both the gross carrying and accumulated amortization amounts in the table above.

Amortization expense related to finite-lived identifiable intangible assets (including the condensed statements of consolidated income (loss) line item) consisted of:



Identifiable Intangible Asset	Condensed Statement of Consolidated Income (Loss) Line	Three Months Ended September 30,				Nine Months Ended September 30,
Identifiable Intangible Asset	Condensed Statement of Consolidated Income (Loss) Line	2015		2014		2015		2014
Retail customer relationship	Depreciation and amortization	$	4	$	6	$	13	$	17
Software and other technology-related assets	Depreciation and amortization	17		15		45		45
Other identifiable intangible assets	Operating revenues/fuel, purchased power costs and delivery fees/depreciation and amortization	9		19		21		56
Total amortization expense (a)		$	30	$	40	$	79	$	118

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(a)	Amounts recorded in depreciation and amortization totaled $24 million and $29 million for the three months ended September 30, 2015 and 2014, respectively, and $64 million and $87 million for the nine months ended September 30, 2015 and 2014, respectively.

Intangible Impairments

The impairments of our generation facilities in March and September 2015 (see Note 5) resulted in the impairment of the SO₂ allowances under the Clean Air Act's acid rain cap-and-trade program that are associated with those facilities to the extent they are not projected to be used at other sites. The fair market values of the SO₂ allowances were estimated to be de minimis based on Level 3 fair value estimates (see Note 12). We also impaired certain of our SO₂allowances under the Cross-State Air Pollution Rule (CSAPR) related to the impaired generation facilities. Accordingly, in the three and nine months ended September 30, 2015 we recorded noncash impairment charges of $4 million and $55 million (before deferred income tax benefit) in other deductions related to our existing environmental allowances and credits intangible asset. SO₂ emission allowances granted to us under the acid rain cap-and-trade program were recorded as intangible assets at fair value in connection with purchase accounting related to the Merger in 2007. Additionally, the impairments of our generation and related mining facilities in September 2015 resulted in our recording noncash impairment charges of $19 million (before deferred income tax benefit) in other deductions related to mine development costs (included in other identifiable intangible assets in the table above) at the facilities.

During the three months ended March 31, 2015, we determined that certain intangible assets related to favorable power purchase contracts should be evaluated for impairment. That conclusion was based on further declines in wholesale electricity prices in ERCOT experienced during the three months ended March 31, 2015. Our fair value measurement was based on a discounted cash flow analysis of the contracts that compared the contractual price and terms of the contract to forecasted wholesale electricity and renewable energy credit prices in ERCOT. As a result of the analysis, we recorded a noncash impairment charge of$8 million (before deferred income tax benefit) in other deductions (see Note 15).

Estimated Amortization of Identifiable Intangible Assets

The estimated aggregate amortization expense of identifiable intangible assets for each of the next five fiscal years is as follows:



Year	Estimated Amortization Expense
2015	$	96
2016	$	66
2017	$	53
2018	$	30
2019	$	16