Exelon 2003 Annual Report Download - page 31

29Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXELON CORPORATION AND SUBSIDIARY COMPANIES
By the end of 2010, PECO will have fully recovered all of the
stranded costs authorized by the PUC. As a result, PECO ex-
pects that both its revenues and expenses will decrease in
2011. The end of the transition period involves uncertainties,
including the nature of PECO’s POLR obligations and the
source and pricing of generation services to be provided by
PECO. PECO expects to pursue resolution of these un-
certainties during the remaining transition period.
Our ability to successfully manage the end of the transition
period may affect our capital structure.
ComEd has approximately $4.7 billion of goodwill recorded at
December 31, 2003. This goodwill was recognized and re-
corded in connection with the Merger. Under accounting
principles generally accepted in the Unites States (GAAP), the
goodwill will remain at its recorded amount unless it is de-
termined to be impaired, which is based upon an annual
analysis prescribed by SFAS No. 142, “Goodwill and Other In-
tangible Assets” (SFAS No. 142) that compares the implied
fair value of the goodwill to its carrying value. If an impair-
ment is determined at ComEd, the amount of the impaired
goodwill will be written off and expensed at ComEd. Under
Illinois statute, any impairment of goodwill has no impact
on the determination of ComEd’s rate cap through the tran-
sition period.
ComEd’s goodwill has not been impaired to date. How-
ever, based on certain anticipated reductions to cash flows
(primarily CTCs) subsequent to ComEd’s regulatory tran-
sition period, we believe there is a reasonable possibility that
goodwill will be impaired at ComEd in 2004 or later periods.
The actual timing and amounts of any goodwill impair-
ments in future years, if any, will depend on many sensitive,
interrelated and uncertain variables, including changing in-
terest rates, utility sector market performance, ComEd’s
capital structure, market power prices, post-2006 rate regu-
latory structures, operating and capital expenditure
requirements and other factors, some not yet known. A
goodwill impairment charge at ComEd may not affect Ex-
elon’s results of operations as the goodwill impairment test
for Exelon would consider cash flows of the entire Energy
Delivery business segment, including both ComEd and PECO,
and not just of ComEd. See Critical Accounting Policies and
Estimates for further discussion on goodwill impairments.
We are and will continue to be involved in regulatory proceed-
ings as a part of the process of establishing the terms and
rates for Energy Delivery’s services.
These regulatory proceedings typically involve multiple par-
ties, including governmental bodies, consumer advocacy
groups and various consumers of energy, who have differing
concerns but who have the common objective of limiting
rate increases or even reducing rates. The proceedings also
involve various contested issues of law and fact and have a
bearing upon the recovery of Energy Delivery’s costs through
regulated rates. During the course of the proceedings, we
look for opportunities to resolve contested issues in a man-
ner that grants some certainty to all parties to the proceed-
ings as to rates and energy costs.
We must maintain the availability and reliability of Energy
Delivery’s delivery systems to meet customer expectations.
Increases in both customers and the demand for energy re-
quire expansion and reinforcement of delivery systems to
increase capacity and maintain reliability. Failures of the
equipment or facilities used in those delivery systems could
potentially interrupt energy delivery services and related
revenues and increase repair expenses and capital ex-
penditures. Such failures, including prolonged or repeated
failures, also could affect customer satisfaction and may in-
crease regulatory oversight and the level of our maintenance
and capital expenditures. We cannot predict what impact
these failures, or failures that impact other utilities such as
the August Blackout, will have on our anticipated capital
expenditures.
Although neither ComEd nor PECO was directly affected
by the August Blackout, we may be indirectly affected going
forward. Regulated utilities that are required to provide serv-
ice to all customers within their service territory have gen-
erally been afforded liability protections against claims by
customers relating to failure of service. Following the August
Blackout, significant claims have been asserted against vari-
ous other utilities on behalf of both customers and non-
customers for damages resulting from the blackout. We
cannot predict whether these claims will be upheld or
whether they or legislative or regulatory initiatives in re-
sponse to the August Blackout will change the traditional
liability protections of utilities in providing regulated service.
In addition, under Illinois law, ComEd can be required to pay
damages to its customers in the event of extended outages
affecting large numbers of its customers.
Energy Delivery has lost and may continue to lose energy cus-
tomers to other generation suppliers, although it continues
to provide delivery services and may have an obligation to
provide generation service to those customers.
The revenues of our energy delivery business will vary because
of customer choice of generation suppliers. As a result of re-
structuring initiatives in Illinois and Pennsylvania, all of En-
ergy Delivery’s retail electric customers may purchase their
generation supply from alternative electric generation sup-
pliers. In addition, since market share thresholds (MST) for
customers taking service from alternative generation
suppliers agreed to by PECO were not met, PECO has been
required to assign both commercial and residential custom-
ers to alternative generation suppliers. ComEd and PECO are
each generally obligated to provide generation and delivery