Exelon 2001 Annual Report Download - page 62

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60
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Exelon evaluates the carrying value of property, plant and equipment and
other long-term assets based upon current and anticipated undiscounted cash flows, and recognizes an impairment when it
is probable that such estimated cash flows will be less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and fair value. The cost of maintenance, repairs and
minor replacements of property are charged to maintenance expense as incurred.
Upon retirement, the cost of regulated property plus removal costs less salvage value, are charged to accumulated
depreciation by the regulated subsidiaries in accordance with regulatory practices. For unregulated property, the cost and
accumulated depreciation of property, plant and equipment retired or otherwise disposed of are removed from the related
accounts and included in the determination of the gain or loss on disposition.
Capitalized Software Costs
Costs incurred during the application development stage of software projects for software which is developed or obtained
for internal use are capitalized. At December 31, 2001 and 2000, capitalized software costs totaled $240 million and $285
million, respectively, net of $85 million and $53 million accumulated amortization, respectively. Such capitalized amounts
are amortized ratably over the expected lives of the projects when they become operational,not to exceed ten years. Certain
capitalized software is being amortized over fifteen years pursuant to regulatory approval.
Derivative Financial Instruments
Exelon accounts for derivative financial instruments under SFAS No. 133 “Accounting for Derivatives and Hedging Activities”
(SFAS No. 133). Under the provisions of SFAS No. 133, all derivatives are recognized on the balance sheet at their fair value
unless they qualify for a normal purchases and normal sales exception. Changes in the fair value of the derivative financial
instruments are recognized in earnings unless specific hedge accounting criteria are met. A derivative financial instrument
can be designated as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair
value hedge), or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge). Changes in the fair value of a derivative that is highly effective as, and is
designated and qualifies as, a fair value hedge, along with the gain or loss on the hedged asset or liability that is
attributable to the hedged risk, are recorded in earnings. Changes in the fair value of a derivative that is highly effective as,
and is designated as and qualifies as a cash flow hedge are recorded in other comprehensive income, until earnings are
affected by the variability of cash flows being hedged.
In connection with Exelon’s Risk Management Policy (RMP), Exelon enters into derivatives to manage its exposure to
fluctuation in interest rates related to its variable rate debt instruments, changes in interest rates related to planned future
debt issuances prior to their actual issuance and changes in the fair value of outstanding debt which is planned for early
retirement. As it relates to energy transactions, Exelon utilizes derivatives to manage the utilization of its available
generating capability and provisions of wholesale energy to its affiliates. Exelon also utilizes energy option contracts and
energy financial swap arrangements to limit the market price risk associated with forward energy commodity contracts.
Additionally, Exelon enters into certain energy related derivatives for trading or speculative purposes.
As part of Exelon’s energy marketing business, Exelon enters into contracts to buy and sell energy to meet the
requirements of its customers.These contracts include short-term and long-term commitments to purchase and sell energy
and energy related products in the retail and wholesale markets with the intent and ability to deliver or take delivery. While
these contracts are considered derivative financial instruments under SFAS No. 133, the majority of these transactions have
been designated as “normal purchases” and “normal sales” and are not subject to the provisions of SFAS No. 133. Normal
purchases and normal sales are contracts where physical delivery is probable, quantities are expected to be used or sold in
the normal course of business over a reasonable period of time, and price is not tied to an unrelated underlying derivative.
Under these contracts Exelon recognizes gains or losses when the underlying physical transaction affects earnings.
Revenues and expenses associated with market price risk management contracts are amortized over the terms of such
contracts. Commitments under these contracts are discussed in Note 20—Commitments and Contingencies.The remainder