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

Goodwill

Exelon’s, ComEd’s and PHI's gross amount of goodwill, accumulated impairment losses and carrying amount of goodwill for the years ended December 31, 2018 and 2017 were as follows:



	Balance at January 1, 2017		Impairment losses		Balance at December 31, 2017		Impairment losses		Balance at December 31, 2018
Exelon
Gross amount	$	8,660	$	—	$	8,660	$	—	$	8,660
Accumulated impairment loss	1,983		—		1,983		—		1,983
Carrying amount	6,677		—		6,677		—		6,677
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
PHI^(b)
Gross amount	4,005		—		4,005		—		4,005
Carrying amount	4,005		—		4,005		—		4,005

__________


(a)	Reflects goodwill recorded in 2000 from the PECO/Unicom merger (predecessor parent company of ComEd).


(b)	Reflects goodwill recorded in 2016 from the PHI 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 ComEd's and PHI's reporting units below their carrying amounts. 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. ComEd has a single operating segment. PHI's operating segments are Pepco, DPL and ACE. See Note 24 — 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. PHI identified an error related to the allocation of goodwill to its reporting units in 2016 while performing the 2018 annual impairment assessment. As revised in 2018, Exelon's and PHI's $4 billion of goodwill has been assigned to the Pepco, DPL and ACE reporting units in the amounts of $2.1 billion, $1.4 billion and $0.5 billion, respectively, an increase (decrease) of $0.4 billion, $0.3 billion, and $(0.7) billion for Pepco, DPL and ACE, respectively, from the originally reported amounts. This error did not result in a change to the total amount of goodwill recorded at PHI nor would it have resulted in an impairment of PHI's goodwill in 2016 or 2017. Therefore, management has concluded that the error is not material to the previously issued financial statements.

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, ComEd's and PHI'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 authoritative 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 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.

2018 and 2017 Goodwill Impairment Assessment. ComEd and PHI qualitatively determined that it was more likely than not that the fair values of their reporting units exceeded their carrying values and, therefore, did not perform quantitative assessments as of November 1, 2018 and 2017 for ComEd and as of November 1, 2017 for PHI. As part of their qualitative assessments, ComEd and PHI evaluated, among other things, management’s best estimate of projected operating and capital cash flows for their businesses, outcomes of recent regulatory proceedings, 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 as of November 1, 2016.

As a result of the reallocation of goodwill to PHI’s reporting units as discussed above, as of November 1, 2018, PHI performed a quantitative test for its 2018 annual goodwill impairment assessment. The first step of the test comparing the estimated fair values of the Pepco, DPL and ACE reporting units to their carrying values, including goodwill, indicated no impairments of goodwill; therefore, no second step was 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 and PHI’s goodwill, which could be material. Based on the results of the annual goodwill test performed as of November 1, 2016 and November 1, 2018 for ComEd and PHI, respectively, the estimated fair values of the ComEd, Pepco, DPL and ACE reporting units would have needed to decrease by more than 30%, 30%, 20% and 30%, respectively, for ComEd and PHI to fail the first step of their respective impairment tests.

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, 2018 and 2017:



	December 31, 2018									December 31, 2017
	Gross			Accumulated Amortization			Net			Gross			Accumulated Amortization			Net
Generation
Unamortized Energy Contracts^(b)	1,957			(1,588		)	369			1,938			(1,574		)	364
Customer Relationships	325			(162		)	163			305			(133		)	172
Trade Name	243			(171		)	72			243			(148		)	95
ComEd
Chicago Settlement Agreements^(c)	162			(148		)	14			162			(141		)	21
PHI
Unamortized Energy Contracts^(b)	(1,515		)	954			(561		)	(1,515		)	766			(749		)
Exelon Corporate
Software License^(a)	95			(34		)	61			95			(25		)	70
Exelon	$	1,267		$	(1,149	)	$	118		$	1,228		$	(1,255	)	$	(27	)

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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 in Exelon's, Generations and PHI's Consolidated Balance Sheets.


(c)	In March 1999 and February 2003, ComEd entered into separate agreements with the City of Chicago and Midwest Generation, LLC. Under the terms of the settlement, ComEd agreed to make payments to the City of Chicago. 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.

The following table summarizes the estimated future amortization expense related to intangible assets and liabilities as of December 31, 2018:



For the Years Ending December 31,	Exelon			Generation		ComEd		PHI
2019	$	(32	)	$	70	$	7	$	(119	)
2020	(20		)	78		7		(115		)
2021	(4		)	78		—		(92		)
2022	(23		)	56		—		(89		)
2023	(21		)	50		—		(81		)

The following table summarizes the amortization expense related to intangible assets and liabilities for each of the years ended December 31, 2018, 2017 and 2016:



For the Years Ended December 31,	Exelon ^(a)(b)			Generation ^(a)		ComEd		PHI^(b)
2018	$	(109	)	$	63	$	7	$	(188	)
2017	(237		)	83		7		(336		)
2016	(336		)	79		7		(430		)

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(a)	At Exelon and Generation, amortization of unamortized energy contracts totaling $14 million, $35 million and $35 million for the years ended December 31, 2018, 2017 and 2016, respectively, was recorded in Operating revenues or Purchased power and fuel expense in their Consolidated Statements of Operations and Comprehensive Income.


(b)	At Exelon and PHI, amortization of the unamortized energy contract fair value adjustment amounts and the corresponding offsetting regulatory asset and liability amounts are amortized through Purchased power and fuel expense in their Consolidated Statements of Operations and Comprehensive Income.

Acquired Intangible Assets and Liabilities

Business combinations require 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 authoritative 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 Purchased 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 authoritative guidance. Key assumptions include the customer attrition rate and the discount rate. The authoritative 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.

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 authoritative 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, PECO, PHI, DPL and ACE)

Exelon’s, Generation’s, PECO's, PHI's, DPL's and ACE's other intangible assets, included in Other current assets and Other deferred debits and other assets in the Consolidated Balance Sheets, include RECs (Exelon, Generation, PHI, 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 sold to a counterparty under a contract that specifically identifies a power plant is recognized at a point in time when the power is produced. This includes both bundled and unbundled REC sales. Otherwise, the revenue is recognized upon physical transfer of the REC to the customer.

The following table summarizes the current and noncurrent Renewable and Alternative Energy Credits as of December 31, 2018 and 2017:



	As of December 31, 2018
	Exelon		Generation		PECO		PHI		DPL		ACE
Current AEC's	$	2	$	—	$	2	$	—	$	—	$	—
Current REC's	279		270		—		9		8		1
Noncurrent REC's	52		52		—		—		—		—
	As of December 31, 2017
	Exelon		Generation		PECO		PHI		DPL		ACE
Current AEC's	$	1	$	—	$	1	$	—	$	—	$	—
Current REC's	321		312		—		9		8		1
Noncurrent REC's	27		27		—		—		—		—