ComEd 2003 Annual Report Download - page 69

67Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXELON CORPORATION AND SUBSIDIARY COMPANIES
Severance Accounting
As part of the implementation of The Exelon Way, we identi-
fied approximately 1,500 positions for elimination by the end
of 2004 and we are considering whether there are additional
positions for elimination in 2005 and 2006. We provide
severance benefits to terminated employees pursuant to
pre-existing severance plans primarily based upon each in-
dividual employee’s years of service with us and compensa-
tion level. We recorded charges in 2003 related to severance
benefits that were considered probable and could be
reasonably estimated in accordance with SFAS No. 112,
“Employer’s Accounting for Postemployment Benefits, an
amendment of FASB Statements No. 5 and 43” (SFAS No. 112).
A significant assumption in calculating the severance charge
was the determination of the number of positions to
be eliminated. We based our estimates on our current
plans and our ability to determine the appropriate staffing
levels to effectively operate the businesses. We may incur
further severance costs associated with The Exelon Way if
additional positions are identified for elimination. These
costs will be recorded in the period in which the costs can be
reasonably estimated.
Defined Benefit Pension and Other
Postretirement Welfare Benefits
We sponsor defined benefit pension plans and postretire-
ment welfare benefit plans applicable to essentially all
ComEd, PECO, Generation and BSC employees and certain
Enterprises employees. See Note 14 of the Notes to Con-
solidated Financial Statement for further information regard-
ing the accounting for our defined benefit pension plans and
postretirement welfare benefit plans.
The costs of providing benefits under these plans are
dependent on historical information such as employee age,
length of service and level of compensation, and the actual
rate of return on plan assets. Also, we utilize assumptions
about the future, including the expected rate of return on
plan assets, the discount rate applied to benefit obligations,
rate of compensation increase and the anticipated rate of
increase in health care costs.
The selection of key actuarial assumptions utilized in the
measurement of the plan obligations and costs drives the
results of the analysis and the resulting charges. The long-
term expected rate of return on plan assets (EROA) assump-
tion used in calculating 2003 pension cost was 9.00%
compared to 9.50% for 2002 and 2001. The weighted average
EROA assumption used in calculating 2003 other
postretirement benefit costs was 8.40% compared to 8.80%
for 2002 and 2001. A lower EROA is used in the calculation of
other postretirement benefit costs, as the other postretire-
ment benefit trust activity is partially taxable while the pen-
sion trust activity is non-taxable. The Moody’s Aa Corporate
Bond Index was used as the basis in selecting the discount
rate for determining the plan obligations, using 6.25% at
December 31, 2003 compared to 6.75% at December 31, 2002
and 7.35% at December 31, 2001. The reduction in discount
rate is due to the decline in Moody’s Aa Corporate Bond In-
dex in 2003 and 2002.
The following tables illustrate the effects of changing the major actuarial assumptions discussed above:
Change in Actuarial Assumption
Impact on
Projected Benefit
Obligation at
December 31, 2003
Impact on
Pension Liability at
December 31, 2003
Impact on
2004
Pension Cost
Pension benefits
Decrease discount rate by 0.5% $548 $481 $ 37
Decrease rate of return on plan assets by 0.5% – – 34
Change in Actuarial Assumption
Impact on
Other Postretirement
Benefit Obligation at
December 31, 2003
Impact on
Postretirement
Benefit Liability at
December 31, 2003
Impact on 2004
Postretirement
Benefit Cost
Postretirement benefits
Decrease discount rate by 0.5% $ 178 $ – $20
Decrease rate of return on plan assets by 0.5% – – 5
The assumptions are reviewed at the beginning of each year
during our annual review process and at any interim re-
measurement of the plan obligations. The impact of
assumption changes is reflected in the recorded pension
amounts as they occur, or over a period of time if allowed
under applicable accounting standards. As these assump-
tions change from period to period, recorded pension
amounts and funding requirements could also change.
We incurred approximately $320 million in costs in 2003
associated with our pension and postretirement benefit
plans, inclusive of curtailment costs of $80 million asso-
ciated with The Exelon Way. Although 2004 pension and
postretirement benefit costs will depend on market con-
ditions, our estimate is that our pension and postretirement
benefit costs will not change significantly in 2004 as com-
pared to 2003.