ComEd 2013 Annual Report Download - page 164

which, when combinedwiththen current market conditions, madethe projectsnot economicallyviable.Additionally, themarket
conditionspromptedGeneration to cancel the previouslydeferredextendedpower uprate projectsat theLaSalle and Limerick
nuclear stations. During2013,Generation recordeda pre-taxcharge to operatingandmaintenanceexpenseandinterestexpenseof
approximately$111 million and$8million,respectively, to accrue remainingcostsandreversethe previouslycapitalizedcosts.
Like-Kind Exchange Transaction
Prior to thePECO/UnicomMerger inOctober 2000, UII, LLC (formerlyUnicomInvestments, Inc.) (UII), awhollyownedsubsidiaryof
Exelon,enteredinto a like-kindexchange transaction pursuant to which approximately$1.6 billion wasinvestedincoal-fired
generatingstation leaseslocatedinGeorgiaandTexaswithtwoseparate entitiesunrelatedto Exelon.Thegeneratingstationswere
leasedback to such entitiesaspart ofthe transaction.See Note 14—IncomeTaxesfor further information.For financial accounting
purposes, theinvestmentsare accountedfor asdirectfinancingleaseinvestments. UII holds the leaseholdinterestsinthe
generatingstationsinseveral separate bankruptcy remote,special purposecompaniesitdirectlyor indirectlywhollyowns. The lease
agreementsprovidethelesseeswith fixedpurchase optionsat theendofthe lease terms. If thelesseesdo not exercisethefixed
purchase options, Exelon hastheabilityto require thelesseesto return the leaseholdinterestsor to arrangefor a third-partyto bid
on a servicecontractfor a periodfollowingthe lease term. If Exelon choosestheservicecontract option,the leaseholdinterestswill
be returnedto Exelon at theendofthe termoftheservicecontract.Inanyevent,Exelon will besubjecttoresidual value risk if the
lesseesdo not exercisethefixedpurchase options. This risk is partiallymitigatedbythefairvalue ofthescheduledpaymentsunder
theservicecontract.However,such paymentsare not guaranteed. Further,the termoftheservicecontractis less than theexpected
remaininguseful lifeofthe plantsand, therefore,Exelon’s exposure to residual value risk will not bemitigatedbypaymentsunder
theservicecontractinthis remainingperiod. Inthefourthquarter of2000,under the terms ofthe leaseagreements, UII receiveda
prepayment of$1.2billion for all rent, which reducedtheinvestment inthe leases. There are no minimum scheduledleasepayments
to bereceivedover theremainingtermofthe leases.
Pursuant to the applicable accountingguidance,Exelon is requiredto reviewtheestimatedresidual valuesofitsdirectfinancing
leaseinvestmentsat least annuallyandrecordan impairment chargeif thereviewindicatesan other than temporarydecline inthe
fairvalue oftheresidual valuesbelowtheircarryingvalues. Exelon estimatesthefairvalue oftheresidual valuesofitsdirect
financingleaseinvestmentsunder theincome approach, which usesadiscountedcash flowanalysis, which takesinto consideration
significant unobservable inputs(Level 3)includingtheexpectedrevenuesto begeneratedandcoststo beincurredto operate the
plantsover theirremaininguseful livessubsequent to the leaseenddates. Significant assumptionsusedinestimatingthefairvalue
includefundamental energy andcapacityprices, fixedandvariable costs, capital expenditure requirements, discount rates, taxrates,
andtheestimatedremaininguseful livesofthe plants. Theestimatedfairvaluesalsoreflectthecash flows associatedwiththe
servicecontract option discussedabovegiven that a market participant wouldtakeinto consideration all ofthe terms andconditions
containedinthe leaseagreements.
Basedon thereviewperformedinthesecondquarter of2013,theestimatedresidual value ofone ofExelon’s directfinancingleases
experiencedan other than temporarydecline given reducedlong-termenergy andcapacitypriceexpectations. Asaresult,Exelon
recordeda$14million pre-taximpairment chargeinthesecondquarter of2013, which wasrecordedininvestmentsandoperating
andmaintenanceexpenseintheConsolidatedBalanceSheet andtheConsolidatedStatement ofOperations, respectively. Changes
intheassumptionsdescribedabovecouldpotentiallyresult infuture impairmentsofExelon’s directfinancingleaseinvestments,
which couldbematerial.Through December 31,2013,no eventshaveoccurredthat wouldrequire Exelon to reviewtheestimated
residual valuesofitsdirectfinancingleaseinvestmentssubsequent to thereviewperformedinthesecondquarter of2013.
AsofDecember 31,2012,Exelon concludedthat theestimatedfairvaluesoftheresidual valuesat theendofthe lease terms
exceededtheresidual valuesestablishedat the leasedates.
At December 31,2013 andDecember 31,2012,thecomponentsofthe net investment in long-termleaseswere asfollows:
December 31, 2013 December 31, 2012
Estimatedresidual value ofleasedassets ......................................... $1,465 $1,492
Less: unearnedincome........................................................ 767 807
Net investment in long-termleases ............................................... $ 698 $ 685
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