Exelon 2015 Annual Report Download - page 116

Table of Contents
fixed income securities and alternative investments within the pension asset portfolio in order to achieve a balanced portfolio of liability hedging
and return-generating assets. See Note 17—Retirement Benefits of the Combined Notes to Consolidated Financial Statements for additional
information regarding Exelon’s asset allocations. Exelon used an EROA of 7.00% and 6.71% to estimate its 2016 pension and other
postretirement benefit costs, respectively.
Exelon calculates the expected return on pension and other postretirement benefit plan assets by multiplying the EROA by the MRV of plan
assets at the beginning of the year, taking into consideration anticipated contributions and benefit payments to be made during the year. In
determining MRV, the authoritative guidance for pensions and postretirement benefits allows the use of either fair value or a calculated value that
recognizes changes in fair value in a systematic and rational manner over not more than five years. For the majority of pension plan assets,
Exelon uses a calculated value that adjusts for 20% of the difference between fair value and expected MRV of plan assets. Use of this calculated
value approach enables less volatile expected asset returns to be recognized as a component of pension cost from year to year. For other
postretirement benefit plan assets and certain pension plan assets, Exelon uses fair value to calculate the MRV.
Actual asset returns have an impact on the costs reported for the Exelon-sponsored pension and other postretirement benefit plans. The
actual asset returns across the Registrants’ pension and other postretirement benefit plans for the year ended December 31, 2015 were 0.29% and
0.80%, respectively, compared to an expected long-term return assumption of 7.00% and 6.46%, respectively.
Discount Rate. The discount rate used to determine the majority of pension and other postretirement benefit obligations was 4.29% at
December 31, 2015. The discount rates at December 31, 2015 represent weighted-average rates for the majority of pension and other
postretirement benefit plans. At December 31, 2015 and 2014, the discount rates were determined by developing a spot rate curve based on the
yield to maturity of a universe of high-quality non-callable (or callable with make whole provisions) bonds with similar maturities to the related
pension and other postretirement benefit obligations. The spot rates are used to discount the estimated distributions under the pension and other
postretirement benefit plans. The discount rate is the single level rate that produces the same result as the spot rate curve. Exelon utilizes an
analytical tool developed by its actuaries to determine the discount rates.
The discount rate assumptions used to determine the obligation at year end are used to determine the cost for the following year. Exelon
used discount rates ranging from 3.68% to 4.43% to estimate its 2016 pension and other postretirement benefit costs.
Health Care Reform Legislation. In March 2010, the Health Care Reform Acts were signed into law, which contain a number of provisions
that impact retiree health care plans provided by employers, including a provision that imposes an excise tax on certain high-cost plans whereby
premiums paid over a prescribed threshold will be taxed at a 40% rate. Additional legislation was passed in December 2015 that made some
changes to the law, including moving the implementation date of the excise tax from 2018 to 2020. Although the excise tax does not go into effect
until 2020, accounting guidance requires Exelon to incorporate the estimated impact of the excise tax in its annual actuarial valuation. The
application of the legislation is still unclear and Exelon continues to monitor the Department of Labor and IRS for additional guidance. Certain key
assumptions are required to estimate the impact of the excise tax on Exelon’s other postretirement benefit obligation, including projected inflation
rates (based on the CPI). Exelon reflected its best estimate of the expected impact in its annual actuarial valuation.
Health Care Cost Trend Rate. Assumed health care cost trend rates impact the costs reported for Exelon’s other postretirement benefit
plans for participant populations with plan designs that do not
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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