ComEd 2015 Annual Report Download - page 310

Table of Contents
Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
information is available and its operating results are regularly reviewed by segment management. ComEd has a single operating segment for its
combined business. There is no level below this operating segment for which operating results are regularly reviewed by segment management.
Therefore, ComEd’s operating segment is considered its only reporting unit.
Entities assessing goodwill for impairment have the option of first performing a qualitative assessment before calculating the fair value of the
reporting unit (i.e., step one of the two-step fair value based impairment test). If an entity determines, on the basis of qualitative factors, that the
fair value of the reporting unit is more likely than not less than the carrying amount, the two-step fair value based impairment test is required.
Otherwise, no further testing is required.
If an entity bypasses the qualitative assessment or performs the qualitative assessment, but determines that it is more likely than not that
its fair value is less than its carrying amount, a quantitative two-step, fair value based test is performed. The first step compares the fair value of
the reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step is
performed. The second step requires an allocation of fair value to the individual assets and liabilities using purchase price allocation in order to
determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying amount, an impairment loss is recorded as
a reduction to goodwill and a charge to operating expense. Any goodwill impairment charge at ComEd will affect Exelon’s consolidated results of
operations.
ComEd’s valuation approach is based on a market participant view, pursuant to authoritative guidance for fair value measurement, and
utilizes a weighted combination of a discounted cash flow analysis and a market multiples analysis. The discounted cash flow analysis relies on a
single scenario reflecting “base case” or “best estimate” projected cash flows for ComEd’s business and includes an estimate of ComEd’s terminal
value based on these expected cash flows using the generally accepted Gordon Dividend Growth formula, which derives a valuation using an
assumed perpetual annuity based on the entity’s residual cash flows. The discount rate is based on the generally accepted Capital Asset Pricing
Model and represents the weighted average cost of capital of comparable companies. The market multiples analysis utilizes multiples of business
enterprise value to earnings, before interest, taxes, depreciation and amortization (EBITDA) of comparable companies in estimating fair value.
Significant assumptions used in estimating the fair value include discount and growth rates, utility sector market performance and transactions,
projected operating and capital cash flows from ComEd’s business and the fair value of debt. Management performs a reconciliation of the sum of
the estimated fair value of all Exelon reporting units to Exelon’s enterprise value based on its trading price to corroborate the results of the
discounted cash flow analysis and the market multiple analysis.
2015 and 2014 Goodwill Impairment Assessment. Pursuant to authoritative guidance, ComEd is required to test its goodwill for
impairment annually and more frequently if an event occurs or circumstances change that suggest an impairment is more likely than not. ComEd
performs its assessment as of November 1, of each year. For its 2015 and 2014 annual goodwill impairment assessments, ComEd qualitatively
determined that its fair value was not more likely than not less than its carrying value. Therefore, ComEd did not perform quantitative
assessments. As part of its qualitative assessments, ComEd evaluated, among other things, management’s best estimate of projected operating
and capital cash flows for ComEd’s business, as well as, changes in certain market conditions, including the discount rate and regulated utility
peer company EBITDA multiples, while also considering the passing margin from its last quantitative assessment performed as of November 1,
2013.
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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