ComEd 2013 Annual Report Download - page 179

Theinputslistedabovewouldhaveadirectimpactonthefairvaluesoftheaboveinstrumentsiftheywere adjusted. Thesignificant
unobservable inputsusedinthefairvalue measurement ofGeneration’s commodityderivativesare forwardcommoditypricesand
for optionsisvolatility. Increases(decreases) intheforwardcommoditypriceinisolation wouldresult insignificantly higher (lower)
fairvaluesfor longpositions(contractsthat giveGeneration theobligation or option to purchaseacommodity), withoffsetting
impactsto short positions(contractsthat giveGeneration theobligation or righttosell a commodity). Increases(decreases) in
volatilitywouldincrease(decrease)thevalue for theholder ofthe option (writer ofthe option). Generally, achangeintheestimate of
forwardcommoditypricesisunrelatedto a changeintheestimate ofvolatilityofprices. An increasetothereserveslistedabove
woulddecreasethefairvalue ofthepositions. An increasetotheheat rate or renewable factorswouldincreasethefairvalue
accordingly. Generally, interrelationshipsexistbetween market pricesofnatural gasandpower.Assuch, an increasein natural gas
pricingwouldpotentiallyhaveasimilar impactonforwardpower markets.
Nuclear Decommissioning Trust Fund Investments and Pledged Assets for Zion Station Decommissioning For middle market
lending, certaincorporate debtsecurities, andprivate equityinvestmentsthefairvalue is determinedusingacombination of
valuation modelsincludingcostmodels, market modelsandincomemodels. Thevaluation estimatesare basedon valuationsof
comparable companies, discountingtheforecastedcash flows ofthe portfoliocompany, estimatingtheliquidation or collateral value
ofthe portfoliocompanyor itsassets, consideringoffersfromthirdpartiesto buythe portfoliocompany, its historical andprojected
financial results, aswell asother factorsthat mayimpactvalue. Significant judgment is requiredinthe application of discountsor
premiums appliedto thepricesofcomparable companiesfor factorssuch as size,marketability, creditrisk andrelative
performance.
BecauseGeneration relieson third-partyfundmanagersto develop thequantitative unobservable inputswithout adjustment for the
valuationsofits’ Level 3 investments, quantitativeinformation about significant unobservable inputsusedinvaluingthese
investmentsisnot reasonablyavailable to Generation. This includesinformation regardingthesensitivityofthefairvaluesto
changesinthe unobservable inputs. Generation gainsan understandingofthefundmanagers’ inputsandassumptionsusedin
preparingthevaluations. Generation performedproceduresto assess the reasonableness ofthevaluations. For a sample ofits’
Level 3 investments, Generation reviewedindependent valuationsandreviewedtheassumptionsinthedetailedpricingmodelsused
by thefundmanagers.
AsofDecember 31,2013,Generation hasoutstandingcommitmentsto investinmiddle market lending, corporate debtsecurities,
andprivate equityinvestmentsofapproximately $448 million.Thesecommitmentswill befundedbyGeneration’s existingnuclear
decommissioningtrustfunds.
12. Derivative Financial Instruments
TheRegistrantsare exposedto certainrisks relatedto ongoingbusiness operations. Theprimaryrisks managedbyusingderivative
instrumentsare commoditypricerisk andinterest rate risk.
Commodity Price Risk
Totheextent theamount ofenergy Exelon generates differsfromtheamount ofenergy ithascontractedto sell,theRegistrantsare
exposedto market fluctuationsinthepricesofelectricity, fossilfuelsandother commodities. TheRegistrantsemployestablished
policiesandproceduresto managetheirrisks associatedwithmarket fluctuationsbyenteringinto physical andfinancial derivative
contracts, includingswaps, futures, forwards, optionsandshort-termandlong-termcommitmentsto purchaseandsell energy and
energy-relatedproducts. TheRegistrantsbelievetheseinstruments, which are classifiedaseither economic hedgesor non-
derivatives, mitigate exposure to fluctuationsincommodityprices.
Derivativeaccountingguidancerequiresthat derivativeinstrumentsberecognizedaseither assetsor liabilitiesat fairvalue,with
changesinfairvalue ofthederivativerecognizedin earnings each period. Other accountingtreatmentsare available through special
election anddesignation,providedtheymeet specific, restrictivecriteriabothat thetimeofdesignation andon an ongoingbasis.
These alternative permissible accountingtreatmentsinclude normal purchase normal sale (NPNS), cash flowhedge,andfairvalue
hedge.For commoditytransactions, effectivewiththedate ofmerger withConstellation,Generation no longer utilizesthespecial
election providedfor by thecash flowhedgedesignation andde-designatedall ofitsexistingcash flowhedgesprior to themerger.
Becausetheunderlyingforecastedtransactionsremain at least reasonablypossible,thefairvalue oftheeffective portion ofthese
cash flowhedgeswasfrozen inaccumulated OCI andreclassifiedto resultsofoperationswhen theforecastedpurchaseorsale of
the energy commodityoccurs, or becomesprobable ofnot occurring. None ofConstellation’s designatedcash flowhedgesfor
commoditytransactionsprior to themerger were re-designatedascash flowhedges. Theeffectofthis decision is that all derivative
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