ComEd 2006 Annual Report Download - page 73

conditional on a future event is within the scope of SFAS No. 143. Under FIN 47, the Registrants are
required to record a conditional ARO at its estimated fair value if that fair value can be reasonably
estimated.
The adoption of FIN 47 required the Registrants to update an existing inventory, originally created
for the adoption of SFAS No. 143, and to determine which, if any, of the conditional AROs could be
reasonably estimated. The ability to reasonably estimate a conditional ARO was a matter of
management judgment, based upon management’s ability to estimate a settlement date or range of
settlement dates, a method or potential method of settlement and probabilities associated with the
potential dates and methods of settlement of its conditional AROs. In determining whether their
conditional AROs could be reasonably estimated, management considered the Registrants’ past
practices, industry practices, management’s intent and the estimated economic lives of the assets. The
fair values of the conditional AROs were then estimated using an expected present value technique.
Additionally, Exelon, ComEd and PECO assessed the likelihood of recovering these obligations from
customers which led to the recognition of regulatory assets. Changes in management’s assumptions
regarding settlement dates, settlement methods, assigned probabilities or recovery mechanisms could
have a material effect on the liabilities recorded by each Registrant and the associated regulatory
assets recorded at Exelon, ComEd and PECO. The liabilities associated with conditional AROs will be
adjusted on a periodic basis due to the passage of time, new laws and regulations and revisions to
either the timing or amount of the original estimates of undiscounted cash flows. These adjustments
could have a significant impact on the Consolidated Balance Sheets and Consolidated Statements of
Operations of the Registrants. For more information regarding the adoption and ongoing application of
FIN 47, see Notes 1 and 13 of the Combined Notes to Consolidated Financial Statements.
Asset Impairments (Exelon, Generation, ComEd and PECO)
Goodwill (Exelon and ComEd)
Exelon and ComEd have goodwill which relates to the acquisition of ComEd under the PECO/
Unicom Merger. Under the provisions of SFAS No. 142, Exelon and ComEd perform assessments for
impairment of their goodwill at least annually or more frequently if events or circumstances indicate that
it is “more likely than not” that goodwill might be impaired, such as a significant negative regulatory
outcome. Application of the goodwill impairment test requires management’s judgments, including the
identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each reporting unit. See Note 8 of the Combined
Notes to Consolidated Financial Statements for further information.
Due to the significant negative impact of the ICC’s July 26, 2006 order in ComEd’s Rate Case to
the future cash flows and value of ComEd, an interim impairment assessment was completed during
the third quarter of 2006. Based on the results of ComEd’s interim goodwill impairment analysis,
Exelon and ComEd recorded an impairment charge of $776 million associated with the write-off of the
goodwill. Exelon and ComEd performed their annual goodwill impairment assessment in the fourth
quarter of 2006 and determined that goodwill was not further impaired. Future developments relating to
ComEd’s ongoing regulatory and/or legislative items could also be relevant to future goodwill
impairment analyses and may lead to further impairments, which could be material. See Note 4 of the
Combined Notes to Consolidated Financial Statements for further information regarding the Rate Case.
In the assessments, Exelon and ComEd estimated the fair value of the ComEd reporting unit using
a probability-weighted, discounted cash flow model with multiple scenarios. The fair value incorporates
management's assessment of current events and expected future cash flows. Additionally, ComEd’s
estimate of its fair value was compared to a fair value estimate determined by a third-party valuation
firm. Changes in assumptions regarding variables, including post-2006 rate regulatory structure,
ComEd’s capital structure, changing interest rates, utility sector market performance, operating and
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