ComEd 2003 Annual Report Download - page 68

66 Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXELON CORPORATION AND SUBSIDIARY COMPANIES
subject to change at the time the impairment charge was
recorded. We utilized a discount rate based upon valuations
of the business developed at the purchase date. A change in
our assumptions, including estimated cash flows and the
discount rate, could have had a significant impact on the
amount of the impairment charge recorded.
In 2003, we recorded impairment charges totaling $255
million (before income taxes) associated with a decline in
the fair value of Generation’s investment in Sithe. In reach-
ing that decision, we considered various factors, including
negotiations to sell our investment in Sithe, which indicated
an other-than-temporary decline in fair value.
In 2003, we recorded impairment charges related to in-
vestments held by Enterprises of approximately $54 million
(before income taxes). We had determined that an other-
than-temporary decline in the fair value of these invest-
ments had occurred and considered various factors in our
decision to record an impairment of the investments, includ-
ing recent third-party valuations of the investments. The
other-than-temporary determination was significant be-
cause any increase in fair value of these investments will not
be recoverable until they are sold. Had we determined that
the impairment was temporary, no impairment charge
would have been recorded. The valuations of these invest-
ments, which formed the basis for the impairment charge,
required assumptions regarding the future earnings poten-
tial of these investments. Actual results from these invest-
ments have fluctuated in the past and are expected
to continue.
Goodwill. We have approximately $4.7 billion of goodwill
recorded at December 31, 2003, which relates entirely to the
ComEd goodwill within the Energy Delivery reporting unit.
As described below, we recorded charges of $72 million
(before income taxes) during 2003 to fully impair the good-
will that had been recorded within the Exelon Services and
InfraSource reporting units of our Enterprises segment. We
perform an assessment for impairment of our goodwill at
least annually, or more frequently, if events or circumstances
indicate that goodwill might be impaired. Application of the
goodwill impairment test requires judgment, including the
identification of reporting units, assigning assets and li-
abilities to reporting units, assigning goodwill to reporting
units, and determining the fair value of each reporting unit.
Energy Delivery. Our annual assessment of goodwill impair-
ment at the Energy Delivery reporting unit was performed as
of November 1, 2003 and this assessment determined that
goodwill was not impaired. In our assessment, to estimate
the fair value of the Energy Delivery reporting unit, we used
a probability-weighted, discounted cash flow model with
multiple scenarios. The determination of the fair value is
dependent on many sensitive, interrelated and uncertain
variables including changing interest rates, utility sector
market performance, ComEd’s capital structure, market
power prices, post-2006 rate regulatory structures, operat-
ing and capital expenditure requirements and other factors.
Changes in these variables or in how they interrelate could
result in a future impairment of goodwill at Energy Delivery,
which could be material. Based on Energy Delivery’s ex-
pected cash flows, we do not anticipate a goodwill impair-
ment at Exelon through the end of ComEd’s transition
period in 2006. However, a hypothetical decrease of approx-
imately 15% in Energy Delivery’s expected discounted cash
flows could trigger an impairment of goodwill.
Exelon Services and InfraSource. Our annual assessment of
goodwill impairment at the Exelon Services reporting unit
(within our Enterprises segment) was also performed as of
November 1, 2003. As we are actively negotiating to sell enti-
ties within the Exelon Services reporting unit, we used these
negotiations as the basis for the fair value of the Exelon Serv-
ices reporting unit used in Step I of the analysis. Our
assumptions regarding estimated sales prices are subject to
change as we continue to negotiate these transactions.
The first step of the annual impairment analysis, compar-
ing the fair value of a reporting unit to its carrying value, in-
cluding goodwill, indicated an impairment of the Exelon
Services goodwill. The second step of the analysis, which
compared the implied fair value of Exelon Services’ goodwill
to the carrying value, indicated that the total goodwill of
$24 million recorded at the Exelon Services reporting unit
was impaired.
Due to the sale of certain of our InfraSource businesses,
we performed an interim assessment of the goodwill re-
corded at the InfraSource reporting unit during the second
quarter of 2003 and in advance of the annual assessment,
which would have been performed as of November 1. Based
upon this interim assessment, we recorded an impairment
charge of approximately $48 million (before minority inter-
est and income taxes) to fully impair this goodwill. We pri-
marily considered the negotiated sales price of InfraSource
in determining the need for an interim assessment and the
amount of the goodwill impairment charge.
We recorded our 2003 goodwill impairment charges re-
lated to the Exelon Services and InfraSource reporting units
as operating and maintenance expense within our Con-
solidated Statements of Income. As of December 31, 2003,
there was no goodwill recorded within our Consolidated
Balance Sheets related to the reporting units of the Enter-
prises segment.