Exelon 2015 Annual Report Download - page 114

Table of Contents
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.
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 (Exelon, Generation, ComEd, PECO and BGE)
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 if an event, regulatory 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 2015, which resulted in the implementation of new depreciation
rates effective January 1, 2015.
ComEd is required to file a depreciation rate study at least every five years with the ICC. ComEd completed a depreciation study and filed
the updated depreciation rates with both FERC and the ICC in January 2014. This resulted in the implementation of new depreciation rates
effective first quarter 2014.
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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