Exelon 2014 Annual Report Download - page 140

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
Direct Financing Lease Investments. Direct financing lease investments represent the estimated residual values of leased coal-
fired plants in Georgia. Exelon reviews the estimated residual values of its direct financing lease investments and records an
impairment charge if the review indicates an other than temporary decline in the fair value of the residual values below their carrying
values. See Note 8—Impairment of Long-Lived Assets for additional information.
Derivative Financial Instruments
All derivatives are recognized on the balance sheet at their fair value unless they qualify for certain exceptions, including the normal
purchases and normal sales exception. Additionally, derivatives that qualify and are designated for hedge accounting are classified
as either hedges of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge) or
hedges of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability
(cash flow hedge). For fair value hedges, changes in fair values for both the derivative and the underlying hedged exposure are
recognized in earnings each period. For cash flow hedges, the portion of the derivative gain or loss that is effective in offsetting the
change in the cost or value of the underlying exposure is deferred in accumulated OCI and later reclassified into earnings when the
underlying transaction occurs. Gains and losses from the ineffective portion of any hedge are recognized in earnings immediately.
For derivative contracts intended to serve as economic hedges and that are not designated or do not qualify for hedge accounting or
the normal purchases and normal sales exception, changes in the fair value of the derivatives are recognized in earnings each
period. Amounts classified in earnings are included in revenue, purchased power and fuel, interest expense or other, net on the
Consolidated Statement of Operations based on the activity the transaction is economically hedging. For energy-related derivatives
entered into for proprietary trading purposes, which are subject to Exelon’s Risk Management Policy, changes in the fair value of the
derivatives are recognized in earnings each period. All amounts classified in earnings related to proprietary trading are included in
revenue on the Consolidated Statement of Operations. Cash inflows and outflows related to derivative instruments are included as a
component of operating, investing or financing cash flows in the Consolidated Statements of Cash Flows, depending on the nature of
each transaction.
For commodity derivative contracts Generation no longer utilizes the election provided for by the cash flow hedge designation and
de-designated all of its existing cash flow hedges prior to the Constellation merger. Because the underlying forecasted transactions
remained probable, the fair value of the effective portion of these cash flow hedges was frozen in accumulated OCI and was
reclassified to results of operations when the forecasted purchase or sale of the energy commodity occurred. The effect of this
decision is that all derivatives executed to hedge economic risk related to commodities are recorded at fair value with changes in fair
value recognized through earnings for the combined company.
As part of Generation’s energy marketing business, Generation enters into contracts to buy and sell energy to meet the requirements
of its customers. These contracts include short-term and long-term commitments to purchase and sell energy and energy-related
products in the energy markets with the intent and ability to deliver or take delivery of the underlying physical commodity. Normal
purchases and normal sales are contracts where physical delivery is probable, quantities are expected to be used or sold in the
normal course of business over a reasonable period of time and will not be financially settled. Revenues and expenses on derivative
contracts that qualify, and are designated, as normal purchases and normal sales are recognized when the underlying physical
transaction is completed. While these contracts are considered derivative financial instruments, they are not required to be recorded
at fair value, but rather are recorded on an accrual basis of accounting. See Note 12—Derivative Financial Instruments for additional
information.
Retirement Benefits
Exelon sponsors defined benefit pension plans and other postretirement benefit plans for essentially all Generation, ComEd, PECO,
BGE and BSC employees. Effective July 14, 2014, Exelon became the sponsor of all of CENG’s pension and other postretirement
benefit plans.
The measurement of the plan obligations and costs of providing benefits under these plans involve various factors, including
numerous assumptions and accounting elections. The assumptions are reviewed annually and at any interim remeasurement of the
plan obligations. The impact of assumption changes or experience different from that assumed on pension and other postretirement
benefit obligations is recognized over time rather than immediately recognized in the income statement. Gains or losses in excess of
the greater of ten percent of the projected benefit obligation or the MRV of plan assets are amortized over the expected average
remaining service period of plan participants. See Note 16—Retirement Benefits for additional discussion of Exelon’s accounting for
retirement benefits.
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