Exelon 2002 Annual Report Download - page 65

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Asset Impairments
Long-Lived Assets and Investments. SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144),
establishes accounting and reporting standards for both the
impairment and disposal of long-lived assets. SFAS No. 144 con-
tinues the FASB requirements that:
– an impairment loss be recognized if the carrying amount of an
asset is not recoverable from its undiscounted cash flows, and
– the impairment loss be measured as the difference between
the carrying amount and the fair value of the asset.
Accounting Principles Board Opinion No. 18,“The Equity Method
of Accounting for Investment in Common Stock,” requires that
an impairment loss be recognized for an investment if the
investment declines in fair value below its amortized cost basis,
and this decline is judged to be other-than-temporary.
We continually monitor our investments and businesses
and the markets in which these businesses operate in order to
determine events that may trigger an impairment. We have
tested our businesses and investments for recoverability when-
ever events or changes in circumstances indicate that their car-
rying amounts may not be recoverable. Such triggering events
may include a current expectation that there is a likelihood of
50% or greater that a long-lived asset will be sold, competitors’
technological advancement, accelerated distributions of public
holdings at a loss,lack of achievability of financial results versus
plan, limited access to capital, or the loss of a major customer,
among others. The analysis of impairment for long-lived and
intangible assets is subject to an undiscounted cash flow analy-
sis that requires significant assumptions.
In 2002, we did not identify factors through our review
process that indicated potential impairment of property, plant
and equipment or other long-lived assets with the exception of
investments at our Enterprises business unit.Enterprises wrote
down $41 million of investments in 2002 when we discovered
certain triggering events, such as those described above.
Goodwill. Under SFAS No. 142, goodwill is also subject to an
assessment for impairment using a two-step fair value based
test,the firststep of which mustbe performed at leastannually,
or more frequently if events or circumstances indicate that
goodwill might be impaired.The reporting units of Exelon that
were determined to have had goodwill allocated to them were
Energy Delivery, Exelon’s infrastructure services business
(InfraSource),the energy services business (Exelon Services) and
the competitive retail energy sales business (Exelon Energy). All
of Energy Delivery’s goodwill is at ComEd. If an impairment is
determined at ComEd, the amount of the impaired goodwill
will be written-off and expensed at ComEd. However, under
current accounting guidance, 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.
We performed the first step of the SFAS No. 142 impairment
analysis, comparing the fair value of a reporting unit to its
carrying amount,including goodwill,as of January 1,2002,upon
adoption of SFAS No. 142. That first step indicated no impair-
ment of ComEd’s goodwill but showed an impairment of the
goodwill recorded in Enterprises’reporting units.In performing
the Step I tests as prescribed in SFAS No. 142, ComEd and
Enterprises determined that discounted cash flow models
would provide the most appropriate measure to determine
Step I fair value. Consistent with the guidance in SFAS No. 142,
ComEd and Enterprises prepared multiple scenario discounted
cash flow models in order to determine the value for Step I of
SFAS No.142.These models use multiple assumptions including
revenue growth rates,general expense escalation rates,allowed
return on equity, a risk-adjusted discount rate and long-term
earnings multiples of comparable companies.In addition to the
above-noted assumptions, ComEd’s model included varying
assumptions regarding:
– The timing of future rate case filings to establish new rates for
bundled service after the then scheduled 2004 expiration of
the rate freeze period,which has subsequently been extended
to 2006 by Illinois law.Rate changes were assumed to occur at
various points in 2005 through 2007 in the different scenarios.
– The cash flow impact of the expiration of the rate freeze and
the resolution of uncertainties regarding future commodity
risk at the expiration of the current purchase power agree-
ments, the resolution of ComEd’s POLR obligation and various
other risks and uncertainties.
The results of the Step I analysis for ComEd showed a weighted
average probabilistic valuation of the multiple scenario dis-
counted cash flows in excess of ComEd’s book carrying amount,
including goodwill, at December 31, 2001. Since the Step I calcu-
lated fair value was in excess of book value, we could conclude
that ComEd’s goodwill of $4.9 billion was not impaired. The
Management’s Discussion and Analysis of Financial Condition and Results of Operations
exelon corporation and subsidiary companies