Exelon 2003 Annual Report Download - page 67

65Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXELON CORPORATION AND SUBSIDIARY COMPANIES
current period earnings. A write-off of regulatory assets
could impact our ability to pay dividends under PUHCA and
state law.
Nuclear Decommissioning
We account for our obligation to decommission our nuclear
generating plants under SFAS No. 143, “Asset Retirement
Obligations” (SFAS No. 143), which requires that we make
significant estimates of decommissioning costs to be in-
curred in future periods. We adopted SFAS No. 143 on Jan-
uary 1, 2003 and recorded income of $112 million (net of
income taxes) as a cumulative effect of a change in account-
ing principle. For more information regarding the adoption
and ongoing application of SFAS No. 143, see Note 1 and Note
13 of the Notes to Consolidated Financial Statements.
Upon the adoption of SFAS No. 143, we were required to
estimate the fair value of our obligation for the future de-
commissioning of our nuclear generating plants. To esti-
mate the fair value of the decommissioning obligation, we
used a probability-weighted, discounted cash flow model
with multiple scenarios. Key assumptions used in the
determination of fair value included the following:
Decommissioning Cost Studies. We used decommissioning
cost studies prepared by a third party to provide a market-
place assessment of costs and the timing of retirement
activities validated by comparison to current decommission-
ing projects and other third-party estimates.
Annual Cost Escalation Studies. Annual cost escalation stud-
ies were used to determine escalation factors based on in-
flation indices for labor, equipment and materials, energy,
and low-level radioactive waste disposal costs.
Probabilistic Cash Flow Models. Our probabilistic cash flow
models included the assignment of probabilities to various
cost levels and various timing scenarios. The probability of
various timing scenarios incorporated the factors of current
license lives and life extensions and the timing of Depart-
ment of Energy (DOE) acceptance for disposal of spent nu-
clear fuel.
Discount Rates. The estimated probability-weighted cash
flows using these various scenarios were discounted using
credit-adjusted, risk-free rates applicable to the various
businesses.
Changes in the assumptions underlying the items dis-
cussed above could have materially affected the decom-
missioning obligation recorded upon the adoption of SFAS
No. 143 and could affect future costs related to decom-
missioning recorded in our consolidated financial state-
ments. Under SFAS No. 143, the fair value of the nuclear
decommissioning obligation is adjusted on an ongoing basis
as the model input factors change.
Depreciable Lives of Property, Plant and Equipment
We have a significant investment in electric generation as-
sets and electric and natural gas transmission and dis-
tribution assets. Depreciation of these assets is generally
provided over their estimated service lives on a straight-line
basis using the composite method. The estimation of service
lives requires management judgment regarding the period
of time that the assets will be in use. As circumstances war-
rant, depreciation estimates are reviewed to determine if
any changes are needed. Effective July 1, 2002, ComEd de-
creased its depreciation rates based on a depreciation study,
resulting in an annualized reduction in depreciation ex-
pense of $96 million. Effective April 1, 2001 and July 1, 2001,
Generation extended the estimated service lives of certain
non-AmerGen generating stations primarily based on service
life extensions applied for with regulatory agencies, result-
ing in an annualized reduction in depreciation expense of
$132 million. We anticipate extending the depreciable lives of
the AmerGen stations beginning in January 2004 concurrent
with our initial full month of 100% ownership. Additional
changes to depreciation estimates in future periods could
have a significant impact on the amount of depreciation
charged to the financial statements. Depreciation expense
for the year ended December 31, 2003 was $667 million.
Asset Impairments
Long-Lived Assets and Investments. We evaluate the carrying
value of our long-lived assets, excluding goodwill, when cir-
cumstances indicate the carrying value of those assets may
not be recoverable. The review of assets for impairment re-
quires significant assumptions about operating strategies
and estimates of future cash flows. A variation in an
assumption could result in a different conclusion regarding
the realizability of the asset. The potential impact of
recognizing an impairment of the assets reported within our
Consolidated Balance Sheets, as well as on net income, could
be and has been material to our consolidated financial
statements.
In 2003, we recorded an impairment charge of $945 mil-
lion (before income taxes) related to the long-lived assets of
Boston Generating, an indirect wholly owned subsidiary of
Generation, due to our decision to transition out of our
ownership of Boston Generating. See Note 2 of the Notes to
Consolidated Financial Statements for further information.
In determining the amount of the impairment charge, we
compared the carrying value of Boston Generating’s long-
lived assets to their estimated fair value. The fair value was
determined using estimated future discounted cash flows
from those assets, which incorporated assumptions relative
to the period of time that we will continue to own and oper-
ate Boston Generating. The time required to fully transition
out of ownership of Boston Generating was uncertain and