Exelon 2014 Annual Report Download - page 188

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
ComEd’s valuation approach is based on a market participant view, pursuant to authoritative guidance for fair value measurement,
and utilizes a weighted combination of a discounted cash flow analysis and a market multiples analysis. The discounted cash flow
analysis relies on a single scenario reflecting “base case” or “best estimate” projected cash flows for ComEd’s business and includes
an estimate of ComEd’s terminal value based on these expected cash flows using the generally accepted Gordon Dividend Growth
formula, which derives a valuation using an assumed perpetual annuity based on the entity’s residual cash flows. The discount rate
is based on the generally accepted Capital Asset Pricing Model and represents the weighted average cost of capital of comparable
companies. The market multiples analysis utilizes multiples of business enterprise value to earnings, before interest, taxes,
depreciation and amortization (EBITDA) of comparable companies in estimating fair value. Significant assumptions used in
estimating the fair value include discount and growth rates, utility sector market performance and transactions, projected operating
and capital cash flows from ComEd’s business and the fair value of debt. Management performs a reconciliation of the sum of the
estimated fair value of all Exelon reporting units to Exelon’s enterprise value based on its trading price to corroborate the results of
the discounted cash flow analysis and the market multiple analysis.
2014 Goodwill Impairment Assessment. Pursuant to authoritative guidance, ComEd is required to test its goodwill for impairment
annually and more frequently if an event occurs or circumstances change that suggest an impairment is more likely than not. ComEd
performed a qualitative assessment as of November 1, 2014, for its 2014 annual goodwill impairment assessment and determined that its
fair value was not more likely than not less than its carrying value. Therefore, ComEd did not perform a quantitative assessment. As part
of its qualitative assessment, ComEd evaluated, among other things, management’s best estimate of projected operating and capital
cash flows for ComEd’s business as well as changes in certain market conditions, including the discount rate and EBITDA multiples, while
also considering the passing margin from its last quantitative assessment performed as of November 1, 2013.
Prior Goodwill Impairment Assessments. Management concluded the remeasurement of the like-kind exchange position and the
charge to ComEd’s earnings in the first quarter of 2013 triggered an interim goodwill impairment assessment and, as a result,
ComEd tested its goodwill for impairment as of January 31, 2013. The first step of the interim impairment assessment comparing the
estimated fair value of ComEd to its carrying value, including goodwill, indicated no impairment of goodwill; therefore, the second
step was not required.
ComEd performed a quantitative assessment as of November 1, 2013, for its 2013 annual goodwill impairment assessment. The first
step of the annual impairment assessment comparing the estimated fair value of ComEd to its carrying value, including goodwill,
indicated no impairment of goodwill; therefore, the second step was not required.
In both the interim and annual assessments, the discounted cash flow analysis reflected Exelon’s indemnity to hold ComEd harmless
from any unfavorable impacts of the after-tax interest amounts related to the like-kind exchange position on ComEd’s equity. While
neither the interim nor the annual assessments indicated an impairment of ComEd’s goodwill, certain assumptions used to estimate
the fair value of ComEd are highly sensitive to changes. Adverse regulatory actions, such as early termination of EIMA, or changes
in significant assumptions, including discount and growth rates, utility sector market performance and transactions, projected
operating and capital cash flows from ComEd’s business, and the fair value of debt could potentially result in a future impairment of
ComEd’s goodwill, which could be material. Based on the results of the annual goodwill test performed as of November 1, 2013, the
estimated fair value of ComEd would have needed to decrease by more than 10% for ComEd to fail the first step of the impairment
test.
Management concluded that the May 2012 ICC final Order in ComEd’s 2011 formula rate proceeding triggered an interim goodwill
impairment assessment and, as a result, ComEd tested its goodwill for impairment as of May 31, 2012. The first step of the interim
impairment assessment comparing the estimated fair value of ComEd to its carrying value, including goodwill, indicated no
impairment of goodwill; therefore, the second step was not required. ComEd performed a qualitative assessment as of November 1,
2012, for its 2012 annual goodwill impairment assessment and determined that its fair value was not more likely than not less than
its carrying value. Therefore, ComEd did not perform a quantitative assessment. As part of its qualitative assessment, ComEd
evaluated, among other things, management’s best estimate of projected operating and capital cash flows for ComEd’s business
(including the impacts of the May 2012 Order) as well as changes in certain other market conditions, such as the discount rate and
EBITDA multiples.
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