(8)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:


	Original Cost		Accumulated Depreciation		Net Book Value
	*(millions of dollars)*
At December 31, 2015
Generation	$	23	$	19	$	4
Distribution		10,051		3,161		6,890
Transmission		3,554		962		2,592
Gas		546		163		383
Construction work in progress		604		—		604
Non-operating and other property		1,440		609		831

Total	$	16,218	$	4,914	$	11,304

At December 31, 2014
Generation	$	104	$	100	$	4
Distribution		9,527		3,021		6,506
Transmission		3,252		934		2,318
Gas		511		153		358
Construction work in progress		688		—		688
Non-operating and other property		1,383		751		632

Total	$	15,465	$	4,959	$	10,506

The non-operating and other property amounts include balances for general plant, intangible plant, distribution plant and transmission plant held for future use as well as other property held by non-utility subsidiaries. Utility plant is generally subject to a first mortgage lien.

Pepco Holdings’ utility subsidiaries use separate depreciation rates for each electric plant account. The rates vary from jurisdiction to jurisdiction.

Jointly Owned Plant

PHI’s consolidated balance sheets include its proportionate share of assets and liabilities related to jointly owned plant. At December 31, 2015 and 2014, PHI’s subsidiaries had a net book value ownership interest of $16 million and $15 million, respectively, in transmission and other facilities in which various parties also have ownership interests. PHI’s share of the operating and maintenance expenses of the jointly owned plant is included in the corresponding expenses in the consolidated statements of income (loss). PHI is responsible for providing its share of the financing for the above jointly owned facilities.

Capital Leases

Pepco leases its consolidated control center, which is an integrated energy management center used by Pepco to centrally control the operation of its transmission and distribution systems. This lease is accounted for as a capital lease and was initially recorded at the present value of future lease payments, which totaled $152 million. The lease requires semi-annual payments of approximately $8 million over a 25-year period that began in December 1994, and provides for transfer of ownership of the system to Pepco for $1 at the end of the lease term. Under FASB guidance on regulated operations, the amortization of leased assets is modified so that the total interest expense charged on the obligation and amortization expense of the leased asset is equal to the rental expense allowed for rate-making purposes. The amortization expense is included within Depreciation and amortization in the consolidated statements of income (loss). This lease is treated as an operating lease for rate-making purposes.

Capital lease assets recorded within Property, Plant and Equipment at December 31, 2015 and 2014 are comprised of the following:


	Original Cost		Accumulated Amortization		Net Book Value
	*(millions of dollars)*
At December 31, 2015
Transmission	$	76	$	51	$	25
Distribution		76		51		25

Total	$	152	$	102	$	50

At December 31, 2014
Transmission	$	76	$	46	$	30
Distribution		76		46		30

Total	$	152	$	92	$	60

The approximate annual commitments under all capital leases are $15 million in each of the years 2016 through 2018 and $16 million in 2019.

Gains on Sales of Land

Since 2002, Pepco has owned a 3.5 acre parcel of unimproved land (held as non-utility property) in the Buzzard Point area of southeast Washington, D.C. On July 2, 2015, Pepco entered into a purchase and sale agreement with the District of Columbia to sell the 3.5-acre parcel with a carrying value of $2 million at a purchase price of $39 million. The transaction was consummated on November 10, 2015 resulting in a $37 million pre-tax gain ($22 million after-tax) which was recorded in the fourth quarter of 2015.

Since 2003, Pepco has owned a 3.8 acre parcel of unimproved land (held as non-utility property) in the NoMa area of northeast Washington, D.C. On October 16, 2015, Pepco entered into a purchase and sale agreement with a third party to sell a two-acre parcel of the unimproved land with an allocated carrying value of $5 million at a purchase price of $14 million. The transaction was consummated on December 31, 2015 resulting in a $9 million pre-tax gain ($5 million after-tax) which was recorded in the fourth quarter of 2015. The purchase and sale agreement also provided the third party with a 90-day option to purchase the remaining 1.8-acre land parcel with an allocated carrying value of $4 million at a purchase price of $13 million.

Deactivation of Pepco Energy Services’ Generating Facilities

During 2012, Pepco Energy Services deactivated its Buzzard Point and Benning Road oil-fired generation facilities. Pepco Energy Services completed demolition of the Benning Road generation facility in July 2015 and recognized the scrap metal salvage value of the facility as a reduction in its demolition expenses over the life of the project.

Long-Lived Asset Impairment

During 2014, PHI recorded impairment losses of $81 million ($48 million after-tax) at Pepco Energy Services associated with its combined heat and power thermal generating facilities and operations in Atlantic City, which reduced the carrying amount of its long lived assets in Atlantic City from $83 million to $2 million at December 31, 2014. PHI performed long-lived asset impairment tests on asset groups comprising substantially all of the long-lived assets in Atlantic City as a result of significant adverse changes in the financial condition of its customers and the business climate in Atlantic City. The assets were written down to their estimated fair values because the future estimated undiscounted cash flows from the asset groups were significantly lower than their carrying value. PHI estimated the fair values of the asset groups from a market participant’s perspective by calculating the present value of estimated future cash flows over the useful lives of the assets using an appropriate discount rate. Both the estimated future cash flows and the discount rate were based on primarily unobservable, Level 3 inputs. The estimated future cash flows were probability weighted based on several potential outcomes regarding forecasted revenues and expenses associated with each asset group. Forecasted revenues and expenses were, in part, based on estimated future commodity prices from an external valuation specialist. In addition, PHI forecasted customer usage volumes and the associated operations and maintenance expenses and capital expenditures. A 10 percent change in the estimated cash flows would not have a significant impact on the estimated fair value of the assets. PHI also selected a discount rate that would reflect a market return on the estimated cash flows. PHI considered a range of discount rates between 10 percent and 16 percent. A one percent change in the discount rate assumptions would not have a significant impact on the estimated fair value of the assets.

During 2013, PHI recorded impairment losses of $4 million ($3 million after-tax) at Pepco Energy Services associated primarily with its investments in landfill gas-fired electric generation facilities. PHI performed a long-lived asset impairment test on the landfill generation facilities of Pepco Energy Services as a result of a sustained decline in energy prices and recent production levels. The asset value of the facilities was written down to the estimated fair value because the future expected cash flows of the facilities were not sufficient to provide recovery of the facilities’ carrying value. PHI estimated the fair value of the facilities by calculating the present value of expected future cash flows using an appropriate discount rate. Both the expected future cash flows and the discount rate used primarily unobservable inputs.

Asset Retirement Obligations

PHI recognizes liabilities related to the retirement of long-lived assets in accordance with ASC 410. As of December 31, 2015, PHI had an asset retirement obligation of $7 million on its consolidated balance sheet related to the Edge Moor coal ash landfill site. The asset retirement obligation reflects estimates of the costs for PHI to close the landfill and provide post-closure operations, maintenance and monitoring services.

Property, Plant and Equipment

(7)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:


	Original Cost		Accumulated Depreciation		Net Book Value
	*(millions of dollars)*
At December 31, 2015
Distribution	$	5,996	$	2,199	$	3,797
Transmission		1,378		475		903
Construction work in progress		318		—		318
Non-operating and other property		399		125		274

Total	$	8,091	$	2,799	$	5,292


At December 31, 2014
Distribution	$	5,668	$	2,082	$	3,586
Transmission		1,306		463		843
Construction work in progress		312		—		312
Non-operating and other property		478		271		207

Total	$	7,764	$	2,816	$	4,948

The non-operating and other property amounts include balances for general plant, distribution plant and transmission plant held for future use, intangible plant and non-utility property. Utility plant is generally subject to a first mortgage lien.

Capital Leases

Pepco leases its consolidated control center, which is an integrated energy management center used by Pepco to centrally control the operation of its transmission and distribution systems. This lease is accounted for as a capital lease and was initially recorded at the present value of future lease payments, which totalled $152 million. The lease requires semi-annual payments of approximately $8 million over a 25-year period that began in December 1994, and provides for transfer of ownership of the system to Pepco for $1 at the end of the lease term. Under FASB guidance on regulated operations, the amortization of leased assets is modified so that the total interest expense charged on the obligation and amortization expense of the leased asset is equal to the rental expense allowed for rate-making purposes. The amortization expense is included within Depreciation and amortization in the statements of income. This lease is treated as an operating lease for rate-making purposes.

Capital lease assets recorded within Property, plant and equipment at December 31, 2015 and 2014 are comprised of the following:


	Original Cost		Accumulated Amortization		Net Book Value
	*(millions of dollars)*
At December 31, 2015
Transmission	$	76	$	51	$	25
Distribution		76		51		25

Total	$	152	$	102	$	50


At December 31, 2014
Transmission	$	76	$	46	$	30
Distribution		76		46		30

Total	$	152	$	92	$	60

The approximate annual commitments under all capital leases are $15 million in each of the years 2016 through 2018 and $16 million in 2019.

Gains on Sales of Land

Since 2002, Pepco has owned a 3.5 acre parcel of unimproved land (held as non-utility property) in the Buzzard Point area of southeast Washington, D.C. On July 2, 2015, Pepco entered into a purchase and sale agreement with the District of Columbia to sell the 3.5-acre parcel with a carrying value of $2 million at a purchase price of $39 million. The transaction was consummated on November 10, 2015 resulting in a $37 million pre-tax gain ($22 million after-tax) which was recorded in the fourth quarter of 2015.

Since 2003, Pepco has owned a 3.8 acre parcel of unimproved land (held as non-utility property) in the NoMa area of northeast Washington, D.C. On October 16, 2015, Pepco entered into a purchase and sale agreement with a third party to sell a two-acre parcel of the unimproved land with an allocated carrying value of $5 million at a purchase price of $14 million. The transaction was consummated on December 31, 2015 resulting in a $9 million pre-tax gain ($5 million after-tax) which was recorded in the fourth quarter of 2015. The purchase and sale agreement also provided the third party with a 90-day option to purchase the remaining 1.8-acre land parcel with an allocated carrying value of $4 million at a purchase price of $13 million.

Property, Plant and Equipment

(8)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:


	Original Cost		Accumulated Depreciation		Net Book Value
	*(millions of dollars)*
At December 31, 2015
Distribution	$	2,043	$	490	$	1,553
Transmission		1,208		259		949
Gas		546		163		383
Construction work in progress		107		—		107
Non-operating and other property		305		134		171

Total	$	4,209	$	1,046	$	3,163

At December 31, 2014
Distribution	$	1,928	$	489	$	1,439
Transmission		1,107		248		859
Gas		511		153		358
Construction work in progress		125		—		125
Non-operating and other property		275		131		144

Total	$	3,946	$	1,021	$	2,925

The non-operating and other property amounts include balances for general plant, plant held for future use, intangible plant and non-utility property. Utility plant is generally subject to a first mortgage lien.

Property, Plant and Equipment

(7)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:


	Original Cost		Accumulated Depreciation		Net Book Value
	*(millions of dollars)*
At December 31, 2015
Distribution	$	2,012	$	472	$	1,540
Transmission		968		228		740
Construction work in progress		158		—		158
Non-operating and other property		167		64		103

Total	$	3,305	$	764	$	2,541

At December 31, 2014
Generation	$	10	$	9	$	1
Distribution		1,931		450		1,481
Transmission		839		223		616
Construction work in progress		115		—		115
Non-operating and other property		178		78		100

Total	$	3,073	$	760	$	2,313

The non-operating and other property amounts include balances for general plant, plant held for future use, intangible plant and non-utility property. Utility plant is generally subject to a first mortgage lien.

Jointly Owned Plant

ACE’s consolidated balance sheets include its proportionate share of assets and liabilities related to jointly owned plant. At each of December 31, 2015 and 2014, ACE’s subsidiaries had a net book value ownership interest of $11 million in transmission and other facilities in which various parties also have ownership interests. ACE’s share of the operating and maintenance expenses of the jointly owned plant is included in the corresponding expenses in the consolidated statements of income. ACE is responsible for providing its share of the financing for the above jointly owned facilities.