ComEd 2015 Annual Report Download - page 306

Table of Contents
Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
Like-Kind Exchange Transaction (Exelon)
Prior to the PECO/Unicom Merger in October 2000, UII, LLC (formerly Unicom Investments, Inc.) (UII), a wholly owned subsidiary of Exelon,
entered into a like-kind exchange transaction pursuant to which approximately $1.6 billion was invested in coal-fired generating station leases
located in Georgia and Texas with two separate entities unrelated to Exelon. The generating stations were leased back to such entities as part of
the transaction. See Note 15—Income Taxes for further information. For financial accounting purposes, the investments are accounted for as
direct financing lease investments. UII holds the leasehold interests in the generating stations in several separate bankruptcy remote, special
purpose companies it directly or indirectly wholly owns. The lease agreements provide the lessees with fixed purchase options at the end of the
lease terms. If the lessees do not exercise the fixed purchase options, Exelon has the ability to operate the stations and keep or market the power
itself or require the lessees to arrange for a third-party to bid on a service contract for a period following the lease term. In any event, Exelon will
be subject to residual value risk if the lessees do not exercise the fixed purchase options. This risk is partially mitigated by the fair value of the
scheduled payments under the service contract. However, such payments are not guaranteed. Further, the term of the service contract is less
than the expected remaining useful life of the plants and, therefore, Exelon’s exposure to residual value risk will not be mitigated by payments
under the service contract in this remaining period. In 2000, under the terms of the lease agreements, UII received a prepayment of $1.2 billion for
all rent, which reduced the investment in the leases. There are no minimum scheduled lease payments to be received over the remaining term of
the leases.
On February 26, 2014, UII and the City Public Service Board of San Antonio, Texas (CPS) finalized an agreement to terminate the leases on
the generating station located in Texas, as described above, prior to its expiration dates. As a result of the lease termination, UII received a net
early termination amount of $335 million from CPS and wrote down the net investment in the CPS long-term lease of $336 million in Investments in
Exelon’s Consolidated Balance Sheets in 2014; resulting in a pre-tax loss of $1 million being reflected in Operating and maintenance expense in
the Consolidated Statements of Operations and Comprehensive Income in 2014.
Pursuant to the applicable accounting guidance, Exelon is required to review the estimated residual values of its direct financing lease
investments at least annually and record an impairment charge if the review indicates an other than temporary decline in the fair value of the
residual values below their carrying values. Exelon estimates the fair value of the residual values of its direct financing lease investments under
the income approach, which uses a discounted cash flow analysis, which takes into consideration significant unobservable inputs (Level 3)
including the expected revenues to be generated and costs to be incurred to operate the plants over their remaining useful lives subsequent to the
lease end dates. Significant assumptions used in estimating the fair value include fundamental energy and capacity prices, fixed and variable
costs, capital expenditure requirements, discount rates, tax rates, and the estimated remaining useful lives of the plants. The estimated fair values
also reflect the cash flows associated with the service contract option discussed above given that a market participant would take into
consideration all of the terms and conditions contained in the lease agreements.
Based on the annual reviews performed in the second quarters of 2015 and 2014, the estimated residual value of Exelon’s direct financing
leases for the Georgia generating stations experienced other than temporary declines given increases in estimated long-term operating and
maintenance costs in the 2015 annual review and reduced long-term energy and capacity price expectations in the 2014 annual review. As a
result, Exelon recorded $24 million pre-tax impairment charges in both 2015 and
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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