Exelon 2014 Annual Report Download - page 64

projected capital, and maintenance expenditures and discount rates, as well as information from various public, financial and
industry sources. An impairment determination would require the affected Registrant to reduce the value of either the long-lived
asset or asset group, including any associated intangible contract assets and liabilities, as well as current period earnings by the
amount of the impairment.
Generation evaluates natural gas and oil Upstream properties at least annually to determine if they are impaired. Impairment for
natural gas and oil Upstream properties occurs if there are no firm plans to continue drilling, lease expiration is at risk, historical
experience indicates a decline in carrying value below fair value or the price of the underlying commodity significantly declines.
Exelon holds investments in coal-fired plants in Georgia subject to long-term leases. The investments are accounted for as direct
financing lease investments. The investments represent the estimated residual values of the leased assets at the end of the
respective lease terms. On an annual basis, Exelon reviews the estimated residual values of its direct financing lease investments
and records an impairment charge if the review indicates an other than temporary decline in the fair value of the residual values
below their carrying values. Exelon estimates the fair value of the residual values of its direct financing lease investments under the
income approach, which uses a discounted cash flow analysis, that takes into consideration significant unobservable inputs (Level 3)
including the expected revenues to be generated and costs to be incurred to operate the plants over their remaining useful lives
subsequent to the lease end dates. Significant assumptions used in estimating the fair value include fundamental energy and
capacity prices, fixed and variable costs, capital expenditure requirements, discount rates, tax rates, and the estimated remaining
useful lives of the plants. The estimated fair values also reflect the cash flows associated with the service contracts associated with
the plants given that a market participant would take into consideration all of the terms and conditions contained in the lease
agreements.
Generation also evaluates its equity method investments to determine whether or not they are impaired based on whether the
investment has experienced a decline in value that is not temporary in nature. Additionally, if one of Generation’s equity method
investments recognizes an impairment, Generation would record its proportionate share of that impairment loss through its equity
earnings (losses) of unconsolidated affiliates.
See Note 8—Impairment of Long-Lived Assets of the Combined Notes to Consolidated Financial Statements for a discussion of
asset impairment evaluations made by Exelon.
Depreciable Lives of Property, Plant and Equipment
The Registrants have significant investments in electric generation assets and electric and natural gas transmission and distribution
assets. Depreciation of these assets is generally provided over their estimated service lives on a straight-line basis using the
composite method. The Registrants complete depreciation studies every five years, or more frequently in an event, regulation action,
or change in retirement patterns indicate an update is necessary. The estimation of service lives requires management judgment
regarding the period of time that the assets will be in use. As circumstances warrant, the estimated service lives are reviewed to
determine if any changes are needed. Depreciation rates incorporate assumptions on interim retirements based on actual historical
retirement experience. To the extent interim retirement patterns change, this could have a significant impact on the amount of
depreciation expense recorded in the income statement. Changes to depreciation estimates resulting from a change in the estimated
end of service lives could have a significant impact on the amount of depreciation expense recorded in the income statement. See
Note 1—Significant Accounting Policies of the Combined Notes to Consolidated Financial Statements for information regarding
depreciation and estimated service lives of the property, plant and equipment of the Registrants.
The estimated service lives of the nuclear generating facilities are based on the estimated useful lives of the stations, which assume
a 20-year license renewal extension of the operating licenses for all of Generation’s operating nuclear generating stations except for
Oyster Creek. While Generation has received license renewals for certain facilities, and has applied for or expects to apply for and
obtain approval of license renewals for the remaining facilities, circumstances may arise that would prevent Generation from
obtaining additional license renewals. Generation also evaluates annually the estimated service lives of its generating facilities based
on feasibility assessments as well as economic and capital requirements. The estimated service lives of hydroelectric facilities are
based on the remaining useful lives of the stations, which assume a license renewal extension of the Conowingo and Muddy Run
operating licenses. A change in depreciation estimates resulting from Generation’s extension or reduction of the estimated service
lives could have a significant effect on Generation’s results of operations.
Generation completed a depreciation rate study during the first quarter of 2010, which resulted in the implementation of new
depreciation rates effective January 1, 2010. Constellation completed a depreciation rate study during the fourth quarter of 2010,
which resulted in the implementation of new depreciation rates effective during the fourth quarter of 2010.
60