ComEd 2015 Annual Report Download - page 110

Table of Contents
Discount Rates. The probability-weighted estimated future cash flows using these various scenarios are discounted using credit-adjusted,
risk-free rates (CARFR) applicable to the various businesses in which each of the nuclear units originally operated. The accounting guidance
required Generation to establish an ARO at fair value at the time of the initial adoption of the current accounting standard. Subsequent to the initial
adoption, the ARO is adjusted for changes to estimated costs, timing of future cash flows and modifications to decommissioning assumptions, as
described above. Increases in the ARO as a result of upward revisions in estimated undiscounted cash flows are considered new obligations and
are measured using a current CARFR as the increase creates a new cost layer within the ARO. Any decrease in the estimated undiscounted future
cash flows relating to the ARO are treated as a modification of an existing ARO and, therefore, are measured using the average historical CARFR
rates used in creating the initial ARO cost layers.
Under the current accounting framework, the ARO is not required or permitted to be re-measured for changes in the CARFR that occur in
isolation. This differs from the accounting requirements for other long-dated obligations, such as pension and other post-employment benefits that
are required to be re-measured as and when corresponding discount rates change. If Generation’s future nominal cash flows associated with the
ARO were to be discounted at current prevailing CARFRs, the obligation would increase from approximately $8.2 billion to approximately $8.5
billion. The ultimate decommissioning obligation will be funded by the NDTs. The NDTs are recorded on Exelon’s and Generation’s Consolidated
Balance Sheets at December 31, 2015 at fair value of approximately $10.3 billion and have an estimated targeted annual pre-tax return of 6.1% to
6.3%.
To illustrate the significant impact that changes in the CARFR, when combined with changes in projected amounts and expected timing of
cash flows, can have on the valuation of the ARO: i) had Generation used the 2014 CARFRs rather than the 2015 CARFRs in performing its third
quarter 2015 ARO update, Generation would have increased the ARO by approximately $940 million as compared to the actual increase to the
ARO of $831 million; and ii) if the CARFR used in performing the third quarter 2015 ARO update (which also reflected increases in the amounts
and changes to the timing of projected cash flows) was increased by 100 basis points or decreased by 50 basis points, the ARO would have
increased by $100 million and $1.2 billion, respectively, as compared to the actual increase of $831 million.
ARO Sensitivities. Changes in the assumptions underlying the foregoing items could materially affect the decommissioning obligation. The
impact to the ARO of a change in any one of these assumptions is highly dependent on how the other assumptions will change as well.
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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