ComEd 2006 Annual Report Download - page 301

Exelon Corporation and Subsidiary Companies
Exelon Generation Company, LLC and Subsidiary Companies
Commonwealth Edison Company and Subsidiary Companies
PECO Energy Company and Subsidiary Companies
Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
Income Taxes
Refund Claims. ComEd and PECO have entered into several agreements with a tax consultant
related to the filing of refund claims with the IRS. The fees for these agreements are contingent upon a
successful outcome of the claims and are based upon a percentage of the refunds recovered from the
IRS, if any. The ultimate net cash impacts to ComEd and PECO related to these agreements will either
be positive or neutral depending upon the outcome of the refund claim with the IRS. These potential
tax benefits and associated fees could be material to the financial position, results of operations and
cash flows of ComEd and PECO. If a settlement is reached, a portion of ComEd’s tax benefits,
including any associated interest for periods prior to the PECO/Unicom Merger, would be recorded as
a reduction of goodwill under the provisions of EITF Issue 93-7, “Uncertainties Related to Income
Taxes in a Purchase Business Combination” (EITF 93-7). Exelon cannot predict the timing of the final
resolution of these refund claims.
In 2006, the Joint Committee on Taxation (Joint Committee) completed its review and granted
approval for PECO’s income tax refund claims for investment tax credits. A majority of the investment
tax credits claimed in the refund related to PECO’s formerly owned generation property. The asset
transfer agreement between PECO and Generation provides that PECO retains all current tax and
interest benefits associated with the refund claims. Thus, as a result of the agreement, PECO recorded
the current tax and interest benefits and Generation recorded the remaining unamortized investment
tax credits and the related future deferred tax effects. As a result, the investment tax credit refund and
associated interest of $19 million (after tax) have been recorded as a credit in Exelon’s and PECO’s
Consolidated Statements of Operations in 2006. Exelon and Generation recorded unamortized
investment tax credits and related tax impacts of $10 million (after tax) as a charge to their
Consolidated Statements of Operations. The unamortized investment tax credit recorded at Exelon,
PECO and Generation will be amortized over the remaining depreciable book lives of the transmission,
distribution and generation property using the deferral method pursuant to APB No. 2, “Accounting for
the ‘Investment Credit’” and APB No. 4, “Accounting for the ‘Investment Credit’.” In addition, as a result
of the approval of the refund claim, Exelon and PECO recorded a consulting expense of $3 million
(after tax) in 2006. The net after-tax result of this settlement and consulting fees was $6 million, $16
million and $(10) million for Exelon, PECO and Generation, respectively.
In 2006, the IRS indicated to PECO that it agreed with a substantial portion of a research and
development refund claim. This refund claim was subject to the approval of the Joint Committee. In
2006, the Joint Committee completed its review and granted approval of the research and
development claim. A majority of the refund claim also related to PECO’s formerly owned generation
property. Consistent with the investment tax credit refund claims, pursuant to the asset transfer
agreement between PECO and Generation, PECO recorded the current tax and interest benefits and
Generation recorded the future deferred tax effects. As a result, a research and development credit
and the associated interest refund of $20 million (after tax) have been recorded as a credit in Exelon’s
and PECO’s Consolidated Statements of Operations in 2006. Exelon and Generation recorded the
future deferred tax impact of $11 million as a charge to their Consolidated Statements of Operations. In
addition, based on the IRS’ indication of its agreement with a portion of the refund claim, PECO
recorded an estimated tax consulting contingent fee of $2 million (after tax) during 2006. The net
after-tax result of this settlement and consulting fees was $7 million, $18 million, and $(11) million for
Exelon, PECO, and Generation respectively.
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