Intangible Assets (Exelon, Generation, ComEd, PECO, PHI, Pepco, DPL and ACE)

Goodwill

Exelon’s, Generation's, ComEd’s, PHI's, and DPL's gross amount of goodwill, accumulated impairment losses and carrying amount of goodwill for the years ended December 31, 2016 and 2015 were as follows:



	Balance at January 1, 2015		Impairment losses		Balance at December 31, 2015		Goodwill from business combination		Impairment losses		Measurement period adjustments^(b)			Balance at December 31, 2016
Exelon
Gross amount	$	4,655	$	—	$	4,655	$	4,016	$	—	$	(11	)	$	8,660
Accumulated impairment loss	1,983		—		1,983		—		—		—			1,983
Carrying amount	2,672		—		2,672		4,016		—		(11		)	6,677
Generation
Gross amount	47		—		47		—		—		—			47
Carrying amount	47		—		47		—		—		—			47
ComEd^(a)
Gross amount	4,608		—		4,608		—		—		—			4,608
Accumulated impairment loss	1,983		—		1,983		—		—		—			1,983
Carrying amount	2,625		—		2,625		—		—		—			2,625
DPL
Gross amount	8		—		8		—		—		—			8
Carrying amount	8		—		8		—		—		—			8



March 24, 2016 to December 31, 2016	Beginning Balance		Goodwill from business combination		Impairment losses			Measurement period adjustments^(b)			Ending Balance
PHI - Successor
Gross amount	$	—	$	4,016	$	—		$	(11	)	$	4,005
Accumulated impairment loss	—		—		—			—			—
Carrying amount	—		4,016		—			(11		)	4,005

January 1, 2016 to March 23, 2016
PHI - Predecessor
Gross amount	1,418		—		—			—			1,418
Accumulated impairment loss	12		—		—			—			12
Carrying amount	1,406		—		—			—			1,406

For the Year Ended December 31, 2015
PHI - Predecessor
Gross amount	1,425		—		(7		)	—			1,418
Accumulated impairment loss	18		—		(6		)	—			12
Carrying amount	1,407		—		(1		)	—			1,406

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(a)	Reflects goodwill recorded in 2000 from the PECO/Unicom (predecessor parent company of ComEd) merger net of amortization, resolution of tax matters and other non-impairment-related changes as allowed under previous authoritative guidance.


(b)	Represents various measurement period adjustments to the valuation of the fair value of the PHI assets acquired and liabilities assumed as a result of the merger.

Goodwill is not amortized, but is subject to an assessment for impairment at least annually, or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the Exelon, Generation, ComEd, PHI and DPL reporting unit below its carrying amount. Under the authoritative guidance for goodwill, a reporting unit is an operating segment or one level below an operating segment (known as a component) and is the level at which goodwill is tested for impairment. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and its operating results are regularly reviewed by segment management. Generation's operating segments are Mid-Atlantic, Midwest, New England, New York, ERCOT and all other power regions referred to collectively as “Other Power Regions”, PHI's operating segments are Pepco, DPL and ACE, and ComEd and DPL have a single operating segment. See Note 26 — Segment Information for additional information. There is no level below these operating segments for which operating results are regularly reviewed by segment management. Therefore, the ComEd, Pepco, DPL and ACE operating segments are also considered reporting units for goodwill impairment testing purposes. Exelon's and ComEd's $2.6 billion of goodwill has been assigned entirely to the ComEd reporting unit, while Exelon's and PHI's $4 billion of goodwill has been assigned to the Pepco, DPL and ACE reporting units in the amounts of $1.7 billion, $1.1 billion and $1.2 billion, respectively. DPL's $8 million of goodwill is assigned entirely to the DPL reporting unit.

Entities assessing goodwill for impairment have the option of first performing a qualitative assessment to determine whether a quantitative assessment is necessary. In performing a qualitative assessment, entities should assess, among other things, macroeconomic conditions, industry and market considerations, overall financial performance, cost factors and entity-specific events. If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not greater than the carrying amount, no further testing is required.

If an entity bypasses the qualitative assessment or performs the qualitative assessment, but determines that it is more likely than not that its fair value is less than its carrying amount, a quantitative two-step, fair value-based test is performed. Exelon's, Generation's, ComEd's, PHI's and DPL's accounting policy is to perform a quantitative test of goodwill at least once every three years. The first step in the quantitative test compares the fair value of the reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step requires an allocation of fair value to the individual assets and liabilities using purchase price allocation accounting guidance in order to determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying amount, an impairment loss is recorded as a reduction to goodwill and a charge to operating expense.

Application of the goodwill impairment test requires management judgment, including the identification of reporting units and determining the fair value of the reporting unit, which management estimates using a weighted combination of a discounted cash flow analysis and a market multiples analysis. Significant assumptions used in these fair value analyses include discount and growth rates, utility sector market performance and transactions, projected operating and capital cash flows for Generation's, ComEd's, Pepco's, DPL's and ACE's businesses and the fair value of debt. In applying the second step (if needed), management must estimate the fair value of specific assets and liabilities of the reporting unit.

2016 and 2015 Goodwill Impairment Assessment. Generation performed a qualitative test as of November 1, 2016, for its 2016 annual goodwill impairment assessment. Generation previously completed its last quantitative assessment in the first quarter of 2015, and updated its qualitative assessment as of November 1, 2015. Based on the qualitative factors above, Generation concluded that the fair value of the reporting unit is more likely than not greater than the carrying amount, and no further testing was required.

Exelon, ComEd, PHI, and DPL performed quantitative tests as of November 1, 2016, for their 2016 annual goodwill impairment assessments. The first step of the tests comparing the estimated fair values of the ComEd, Pepco, DPL, and ACE reporting units to their carrying values, including goodwill, indicated no impairments of goodwill; therefore, no second steps were required.

While the annual assessments indicated no impairments, certain assumptions used to estimate reporting unit fair values are highly sensitive to changes. Adverse regulatory actions or changes in significant assumptions could potentially result in future impairments of Exelon’s, ComEd's, PHI’s or DPL’s goodwill, which could be material. Based on the results of the annual goodwill test performed as of November 1, 2016, the estimated fair values of the ComEd, Pepco, DPL and ACE reporting units would have needed to decrease by more than 30%, 10%, 10% and 10%, respectively, for Exelon, ComEd and PHI to fail the first step of their respective impairment tests. The $8 million of goodwill recorded at DPL is related to DPL’s 1995 acquisition of the Conowingo Power Company and the fair value of the DPL reporting unit would have needed to decrease by more than 50% for DPL to fail the first step of the impairment test.

As of November 1, 2015, Exelon, ComEd, and PHI qualitatively determined that the fair value of their reporting units was not more likely than not less than their carrying value and, therefore, did not perform quantitative assessments. As part of their qualitative assessments, Exelon, ComEd and PHI evaluated, among other things, management’s best estimate of projected operating and capital cash flows for their respective business, as well as, changes in certain market conditions, including the discount rate and regulated utility peer company EBITDA multiples, while also considering, the passing margin from their last quantitative assessments.

Other Intangible Assets and Liabilities

Exelon’s, Generation’s, ComEd’s and PHI's other intangible assets and liabilities, included in Unamortized energy contract assets and liabilities and Other deferred debits and other assets in their Consolidated Balance Sheets, consisted of the following as of December 31, 2016:



	Weighted Average Amortization Years ^(l)										Estimated amortization expense
		Gross			Accumulated Amortization			Net			2017			2018			2019			2020			2021
Exelon
Software License Agreement ^(a)	10.0	$	95		$	(15	)	$	80		$	10		$	10		$	10		$	10		$	10
Generation
Unamortized Energy Contracts ^(b)
Exelon Wind ^(c)	18.0	224			(83		)	141			14			14			14			10			10
Antelope Valley^(d)	25	190			(28		)	162			8			8			8			8			8
Constellation ^(e)	1.5	1,499			(1,440		)	59			(21		)	11			8			10			10
CENG ^(f)	1.7	(97		)	59			(38		)	(15		)	(18		)	(15		)	(8		)	(4		)
Integrys ^(g)	2.4	5			(3		)	2			1			1			—			—			—
ConEdison ^(h)	1.5	100			(53		)	47			37			7			2			1			—
Service Contract Backlog
PES ^(h)	1.0	9			(7		)	2			2			—			—			—			—
Customer Relationships ⁽ⁱ⁾
Constellation ^(e)	12.4	214			(94		)	120			18			18			17			17			17
Integrys ^(g)	10.0	50			(11		)	39			5			5			5			5			5
PES ^(h)	15.0	12			(1		)	11			1			1			1			1			1
ConEdison ^(h)	10.0	9			—			9			1			1			1			1			1
Trade Names
Constellation ^(e)	10.0	243			(125		)	118			23			23			23			23			23
ComEd
Chicago settlement—1999 agreement ^(j)	21.8	100			(86		)	14			3			3			3			3			—
Chicago settlement—2003 agreement ^(k)	17.9	62			(47		)	15			4			4			4			4			—
PHI
Unamortized Energy Contracts^(h)	6.8	(1,515		)	430			(1,085		)	(335		)	(189		)	(119		)	(115		)	(92		)
Pepco
DC Sponsorship Agreement ^(m)	0	25			—			25			—			—			—			—			—

Total		$	1,225		$	(1,504	)	$	(279	)	$	(244	)	$	(101	)	$	(38	)	$	(30	)	$	(11	)

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(a)	On May 31, 2015, Exelon entered into a long-term software license agreement. Exelon is required to make payments starting August 2015 through May 2024. The intangible asset recognized as a result of these payments is being amortized on a straight-line basis over the contract term.

(b)

Includes unamortized energy contract assets and liabilities on Exelon's and Generation's Consolidated Balance Sheets. Excludes $10 million of other miscellaneous unamortized energy contracts that have been acquired at various points in time. The estimated amortization for these miscellaneous unamortized energy contracts is $(9) million, $(7) million, $(6) million, $(2) million and $4 million for 2017, 2018, 2019, 2020 and 2021, respectively.


(c)	In December 2010, Generation acquired all of the equity interests of John Deere Renewables, LLC (later named Exelon Wind), adding 735 MWs of installed, operating wind capacity located in eight states.


(d)	In September 2011, Generation acquired all of the interest in Antelope Valley Solar Ranch One, a 242 MW solar project in northern Los Angeles County, CA from First Solar, Inc.


(e)	On March 12, 2012, Constellation merged into Exelon with Exelon continuing as the surviving corporation pursuant to the transactions contemplated by the Agreement and Plan of Merger. Since the merger transaction, Generation includes the former Constellation generation and customer supply operations.


(f)	See Note 5—Investment in Constellation Energy Nuclear Group, LLC for additional information.


(g)	On November 1, 2014, Generation acquired the competitive retail electric and natural gas business activities of Integrys Energy Group, Inc.


(h)	See Note 4—Mergers, Acquisitions, and Dispositions for additional information.


(i)	Excludes $11 million of other miscellaneous customer relationships that have been acquired. The estimated amortization for these miscellaneous customer relationships is $1 million in each of the years from 2017 to 2021.

(j)

In March 1999, ComEd entered into a settlement agreement with the City of Chicago associated with ComEd’s franchise agreement. Under the terms of the settlement, ComEd agreed to make payments to the City of Chicago each year from 1999 to 2002. The intangible asset recognized as a result of these payments is being amortized ratably over the remaining term of the franchise agreement, which ends in 2020.

(k)

In February 2003, ComEd entered into separate agreements with the City of Chicago and with Midwest Generation, LLC (Midwest Generation). Under the terms of the settlement agreement with the City of Chicago, ComEd agreed to pay the City of Chicago a total of $60 million over a ten-year period, beginning in 2003. The intangible asset recognized as a result of the settlement agreement is being amortized ratably over the remaining term of the City of Chicago franchise agreement, which ends in 2020. As required by the settlement, ComEd also made a payment of $2 million to a third-party on the City of Chicago’s behalf. Under the terms of the agreement with Midwest Generation, ComEd received payments of $32 million from Midwest Generation to relieve Midwest Generation’s obligation under the 1999 fossil sale agreement with ComEd to build the generation facility in the City of Chicago. The payments received by ComEd, which have been recorded in Other deferred credits and other liabilities, and other long-term liabilities on Exelon's and ComEd's Consolidated Balance Sheets are being recognized ratably (approximately $2 million annually) as an offset to amortization expense over the remaining term of the franchise agreement.


(l)	Weighted-average amortization period was calculated at the date of a) acquisition for acquired assets or b) settlement agreement.


(m)	In the third quarter of 2015, Pepco entered into a sponsorship agreement with the District of Columbia for future naming rights associated with public property within the District of Columbia to be determined over time through future negotiations. Amortization of the intangible asset will begin once the terms of the naming rights are defined.

The following table summarizes the amortization expense related to intangible assets and liabilities for each of the years ended December 31, 2016, 2015 and 2014:




For the Year Ended December 31,	Exelon ^(a)		Generation ^(a)		ComEd
2016	$	87	$	79	$	7
2015	76		69		7
2014	179		179		7

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(a) At Exelon, amortization of unamortized energy contracts totaling $35 million, $22 million and $135 million for the years ended December 31, 2016, 2015 and 2014, respectively, was recorded in Operating revenues or Purchase power and fuel expense within Exelon’s Consolidated Statements of Operations and Comprehensive Income. At Generation, amortization of unamortized energy contracts totaling $35 million, $22 million and $135 million for the years ended December 31, 2016, 2015 and 2014, respectively, was recorded in Operating revenues or Purchase power and fuel expense within Generation’s Consolidated Statements of Operations and Comprehensive Income

Acquired Intangible Assets and Liabilities

Accounting guidance for business combinations requires the acquirer to separately recognize identifiable intangible assets in the application of purchase accounting.

Unamortized Energy Contracts. Unamortized energy contract assets and liabilities represent the remaining unamortized fair value of non-derivative energy contracts that Exelon and Generation have acquired. The valuation of unamortized energy contracts was estimated by applying either the market approach or the income approach depending on the nature of the underlying contract. The market approach was utilized when prices and other relevant information generated by market transactions involving comparable transactions were available. Otherwise, the income approach, which is based upon discounted projected future cash flows associated with the underlying contracts, was utilized. The fair value is based upon certain unobservable inputs, which are considered Level 3 inputs, pursuant to applicable accounting guidance. Key estimates and inputs include forecasted power and fuel prices and the discount rate. The Exelon Wind unamortized energy contracts are amortized on a straight line basis over the period in which the associated contract revenues are recognized as a decrease in Operating revenues within Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income. In the case of Antelope Valley, Constellation, CENG, Integrys and ConEdison, the fair value amounts are amortized over the life of the contract in relation to the present value of the underlying cash flows as of the acquisition dates through either Operating revenues or Purchase power and fuel expense within Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income. At PHI, offsetting regulatory assets or liabilities were also recorded. The unamortized energy contract assets and liabilities and any corresponding regulatory assets or liabilities, respectively, are amortized over the life of the contract in relation to the expected realization of the underlying cash flows.

Customer Relationships. The customer relationship intangibles were determined based on a “multi-period excess method” of the income approach. Under this method, the intangible asset’s fair value is determined to be the estimated future cash flows that will be earned on the current customer base, taking into account expected contract renewals based on customer attrition rates and costs to retain those customers. The fair value is based upon certain unobservable inputs, which are considered Level 3 inputs, pursuant to applicable accounting guidance. Key assumptions include the customer attrition rate and the discount rate. The accounting guidance requires that customer-based intangibles be amortized over the period expected to be benefited using the pattern of economic benefit. The amortization of the customer relationships recorded in Depreciation and amortization expense within Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income.

Service Contract Backlog. The service contract backlog intangibles were determined based on a “multi-period excess method” of the income approach. Under this method, the intangible asset’s fair value is determined to be the estimated future cash flows that will be earned on the contracts. The fair value is based upon certain unobservable inputs, which are considered Level 3 inputs, pursuant to applicable accounting guidance. Key assumptions include estimated revenues and expenses to complete the contracts as well as the discount rate. The accounting guidance requires that customer-based intangibles be amortized over the period expected to be benefited using the pattern of economic benefit. The amortization of the service contract backlog is recorded in Depreciation and amortization expense within Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income.

Trade Name. The Constellation trade name intangible was determined based on the relief from royalty method of income approach whereby fair value is determined to be the present value of the license fees avoided by owning the assets. The fair value is based upon certain unobservable inputs, which are considered Level 3 inputs, pursuant to applicable accounting guidance. Key assumptions include the hypothetical royalty rate and the discount rate. The Constellation trade name intangible is amortized on a straight-line basis over a period of 10 years. The amortization of the trade name is recorded in Depreciation and amortization expense within Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income.

Renewable Energy Credits and Alternative Energy Credits (Exelon, Generation, ComEd, PECO, DPL and ACE)

Exelon’s, Generation’s, ComEd’s, PECO's, DPL's and ACE's other intangible assets, included in Other current assets and Other deferred debits and other assets on the Consolidated Balance Sheets, include RECs (Exelon, Generation, ComEd, DPL and ACE) and AECs (Exelon and PECO). Purchased RECs are recorded at cost on the date they are purchased. The cost of RECs purchased on a stand-alone basis is based on the transaction price, while the cost of RECs acquired through PPAs represents the difference between the total contract price and the market price of energy at contract inception. Generally, revenue for RECs that are part of a bundled power sale is recognized when the power is produced and delivered to the customer, otherwise, the revenue is recognized upon physical transfer of the REC. As of December 31, 2016, and 2015, PECO had current AECs of $1 million and $2 million, respectively. PECO had no noncurrent AECs as of December 31, 2016 and 2015. As of December 31, 2016, and 2015, Generation had current RECs of $317 million and $251 million, respectively, and $29 million and $56 million of noncurrent REC's, respectively. ComEd had no current RECs as of December 31, 2016 and $5 million as of December 31, 2015. ComEd had no noncurrent RECs as of December 31, 2016 and 2015. As of December 31, 2016 and 2015, DPL had current RECs of $11 million and $9 million, respectively. DPL had no noncurrent RECs as of December 31, 2016 and 2015. As of December 31, 2016 and 2015, ACE had current RECs of $1 million. ACE had no noncurrent RECs as of December 31, 2016 and 2015. See Note 3—Regulatory Matters and Note 24—Commitments and Contingencies for additional information on RECs and AECs.