Exelon 2002 Annual Report Download - page 31

Our ability to successfully manage the end of the transition
period may affect our capital structure.
ComEd has approximately $4.9 billion of goodwill recorded at
December 31, 2002. This goodwill was recognized and recorded
in connection with the Merger. Under Generally Accepted
Accounting Principles (GAAP), the goodwill will remain at its
recorded amount unless it is determined to be impaired,which
is based upon an analysis of ComEd’s cash flows. If an impair-
ment is determined at ComEd, the amount of the impaired
goodwill will be written-off and expensed at ComEd.However,a
goodwill impairment charge at ComEd may not affect Exelon’s
results of operations. Exelon’s goodwill impairment test would
include assessing the cash flows of the entire Energy Delivery
business segment (a single Reporting Unit,which includes PECO,
as defined under current accounting guidance),not just ComEd’s
cash flows. Presently, ComEd has sufficient cash flows to sup-
port the recorded amount of goodwill and thus,no impairment
has been recorded. For a further discussion on this subject, see
the Asset Impairment discussion in Critical Accounting Estimates.
ComEd’s cash flows include CTCs, which will cease at the end of
2006, unless there is a legislative or regulatory change and
collections from traditional bundled customers at tariffed rates.
Absent another source of revenues to replace the loss of the CTC
revenue,all or a portion of the goodwill may become impaired.
ComEd currently believes that there are a number of alterna-
tives that could provide cash flows to support the goodwill.
Under current regulations, a significant goodwill impairment
may restrict ComEd’s ability to pay dividends (see Credit Issues
in Liquidity and Capital Resources). We are pursuing various
solutions to address ComEd’s ability to pay dividends if a signif-
icant goodwill impairment exists. However, based on Illinois
legislation, goodwill impairments are excluded from determin-
ing whether or not the earnings cap amount has been met or
exceeded (see Energy Delivery—Equity Return Limitations).
Weather affects electricity and gas usage and, consequently,
Energy Delivery’s results of operations.
Temperatures above normal levels in the summer tend to
further increase summer cooling electricity demand and reven-
ues, and temperatures below normal levels in the winter tend
to further increase winter heating electricity and gas demand
and revenues.Because of seasonal pricing differentials,coupled
with higher consumption levels, we typically report higher rev-
enues in the third quarter of our fiscal year. However, extreme
summer conditions or storms may stress our transmission
and distribution systems, resulting in increased maintenance
costs and limiting our ability to bring power in to meet peak
customer demand. These extreme conditions may have detri-
mental effects on our operations.
Economic conditions and activity in Energy Delivery’s service
territories directly affect the demand for electricity.
Higher levels of development and business activity generally
increase the number of customers and their use of energy.Sales
growth on an annual basis is expected to be 1.5% and 0.6% in
ComEd’s and PECO’s service territories, respectively. In the long-
term, output growth for electricity is expected to be 1.2% per
year for Energy Delivery. However, there is continued economic
uncertainty. Recessionary economic conditions, and the associ-
ated reduced economic activity,may adversely affect our results
of operations.
Our business is affected by the restructuring of the energy industry.
The electric utility industry in the United States is in transition.
As a result of both legislative initiatives as well as competitive
pressures, the industry has been moving from a fully regulated
industry, consisting primarily of vertically integrated companies
that combine generation, transmission and distribution, to a
partially restructured industry, consisting of competitive whole-
sale generation markets and continued regulation of transmis-
sion and distribution.These developments have been somewhat
uneven across the states as a result of the reaction to the prob-
lems experienced in California in 2000 and the more recently
publicized problems of some energy companies.Both Illinois and
Pennsylvania have adopted restructuring legislation designed
to foster competition in the retail sale of electricity. A large
number of states have not changed their regulatory structures.
Regional Transmission Organizations / Standard Market Design.
To facilitate wholesale competition in the electric industry, FERC
has required jurisdictional utilities to provide open access to
their transmission systems. To foster the development of large
regional wholesale markets, FERC issued Order 2000,encourag-
ing the development of regional transmission organizations
(RTOs) and the elimination of trade barriers between regions.
FERC has also proposed rulemakings to mandate a standard
market design (SMD) for the wholesale markets. Order 2000
and the proposed SMD rule contemplate that the jurisdictional
transmission owners in a region will turn over operating
authority over their transmission facilities to an RTO or other
independent entity for the purpose of providing open trans-
mission access. As a result, the independent entity will become
the provider of the transmission service and the transmission
owners will recover their revenue requirements through the
independent entity. The transmission owners will remain
responsible for maintaining and physically operating their
transmission facilities. The SMD rulemaking proposal would
also require RTOs to operate an organized bid-based wholesale
market for those who wish to sell their generation through the
Management’s Discussion and Analysis of Financial Condition and Results of Operations
exelon corporation and subsidiary companies
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