Exelon 2014 Annual Report Download - page 185

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
In 2012, a subsidiary of Generation sold three Maryland generating stations in connection with the Constellation merger. As a result
of the transaction, Exelon recorded a pre-tax impairment charge of $272 million to reflect the difference between the sales price and
the carrying value of the generating stations, which was included in Operating and maintenance expense in Exelon’s Consolidated
Statements of Operations and Comprehensive Income.
See Note 4—Mergers, Acquisitions, and Dispositions for further information on asset sales.
In the fourth quarter of 2014, a significant decline in oil prices suggested that the carrying value of certain Upstream assets may be
impaired. Generation concluded that the estimated undiscounted future cash flows and fair value of various Upstream properties,
primarily located in Oklahoma and Texas, were less than their respective carrying values at December 31, 2014. As a result, long-
lived assets with a combined net book value of approximately $163 million were written down to their fair value of $39 million and a
pre-tax impairment charge of $124 million was recorded in Operating and maintenance expense in Exelon’s Consolidated
Statements of Operations and Comprehensive Income. After reflecting the impairment, Exelon has $189 million of Upstream assets
remaining on its Consolidated Balance Sheets at December 31, 2014. Further declines in commodity prices could potentially result in
future impairments of the Upstream assets.
The fair value analysis used in the above impairments was primarily based on the income approach using significant unobservable
inputs (Level 3) including revenue, generation and production forecasts, projected capital and maintenance expenditures and
discount rates. Changes in the assumptions described above could potentially result in future impairments of Exelon’s long-lived
assets, which could be material.
Nuclear Uprate Program
Generation is engaged in individual projects as part of a planned power uprate program across its nuclear fleet. When economically
viable, the projects take advantage of new production and measurement technologies, new materials and application of expertise
gained from a half-century of nuclear power operations. Based on ongoing reviews, the nuclear uprate implementation plan was
adjusted during 2013 to cancel certain projects. The Measurement Uncertainty Recapture (MUR) uprate projects at the Dresden and
Quad Cities nuclear stations were cancelled as a result of the cost of additional plant modifications identified during final design work
which, when combined with then current market conditions, made the projects not economically viable. Additionally, the market
conditions prompted Generation to cancel the previously deferred extended power uprate projects at the LaSalle and Limerick
nuclear stations. During 2013, Generation recorded a pre-tax charge to Operating and maintenance expense and Interest expense
of approximately $111 million and $8 million, respectively, to accrue remaining costs and reverse the previously capitalized costs.
Like-Kind Exchange Transaction
Prior to the PECO/Unicom Merger in October 2000, UII, LLC (formerly Unicom Investments, Inc.) (UII), a wholly owned subsidiary of
Exelon, entered into a like-kind exchange transaction pursuant to which approximately $1.6 billion was invested in coal-fired
generating station leases located in Georgia and Texas with two separate entities unrelated to Exelon. The generating stations were
leased back to such entities as part of the transaction. See Note 14—Income Taxes for further information. For financial accounting
purposes, the investments are accounted for as direct financing lease investments. UII holds the leasehold interests in the
generating stations in several separate bankruptcy remote, special purpose companies it directly or indirectly wholly owns. The lease
agreements provide the lessees with fixed purchase options at the end of the lease terms. If the lessees do not exercise the fixed
purchase options, Exelon has the ability to operate the stations and keep or market the power itself or require the lessees to arrange
for a third-party to bid on a service contract for a period following the lease term. In any event, Exelon will be subject to residual
value risk if the lessees do not exercise the fixed purchase options. This risk is partially mitigated by the fair value of the scheduled
payments under the service contract. However, such payments are not guaranteed. Further, the term of the service contract is less
than the expected remaining useful life of the plants and, therefore, Exelon’s exposure to residual value risk will not be mitigated by
payments under the service contract in this remaining period. In 2000, under the terms of the lease agreements, UII received a
prepayment of $1.2 billion for all rent, which reduced the investment in the leases. There are no minimum scheduled lease payments
to be received over the remaining term of the leases.
On February 26, 2014, UII and the City Public Service Board of San Antonio, Texas (CPS) finalized an agreement to terminate the
leases on the generating station located in Texas, as described above, prior to its expiration dates. As a result of the lease
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