Exelon 2014 Annual Report Download - page 200

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
because they trade in a highly liquid and transparent market. The fair values of fixed income securities, excluding U.S. Treasury
securities, are based on evaluated prices that reflect observable market information, such as actual trade information or similar
securities, adjusted for observable differences and are categorized in Level 2. The fair values of private placement fixed income
securities, which are included in Corporate debt, are determined using a third party valuation that contains significant unobservable
inputs and are categorized in Level 3.
Equity, balanced and fixed income commingled funds and fixed income mutual funds are maintained by investment companies and
hold certain investments in accordance with a stated set of fund objectives. The fair values of fixed income commingled and mutual
funds held within the trust funds, which generally hold short-term fixed income securities and are not subject to restrictions regarding
the purchase or sale of shares, are derived from observable prices. The objectives of the remaining equity commingled funds in
which Exelon, Generation, and CENG invest primarily seek to track the performance of certain equity indices by purchasing equity
securities to replicate the capitalization and characteristics of the indices. Commingled and mutual funds are categorized in Level 2
because the fair value of the funds are based on NAVs per fund share (the unit of account), primarily derived from the quoted prices
in active markets on the underlying equity securities.
Middle market lending are investments in loans or managed funds which invest in private companies. Generation elected the fair
value option for its investments in certain limited partnerships that invest in middle market lending managed funds. The fair value of
these loans is determined using a combination of valuation models including cost models, market models, and income models.
Investments in middle market lending are categorized as Level 3 because the fair value of these securities is based largely on inputs
that are unobservable and utilize complex valuation models. Investments in middle market lending typically cannot be redeemed until
maturity of the term loan.
Private equity investments include investments in operating companies that are not publicly traded on a stock exchange. Private
equity valuations are reported by the fund manager and are based on the valuation of the underlying investments, which include
inputs such as cost, operating results, discounted future cash flows and market based comparable data. Since these valuation inputs
are not highly observable, private equity investments have been categorized as Level 3.
As of December 31, 2014, Generation has outstanding commitments to invest in middle market lending, corporate debt securities,
private equity investments, and real estate investments of approximately $290 million. These commitments will be funded by
Generation’s existing nuclear decommissioning trust funds.
See Note 15—Asset Retirement Obligations for further discussion on the NDT fund investments.
Rabbi Trust Investments. The Rabbi trusts were established to hold assets related to deferred compensation plans existing for
certain active and retired members of Exelon’s executive management and directors. The investments in the Rabbi trusts are
included in investments in the Registrants’ Consolidated Balance Sheets and consist primarily of mutual funds. These funds are
maintained by investment companies and hold certain investments in accordance with a stated set of fund objectives, which are
consistent with Exelon’s overall investment strategy. Mutual funds are publicly quoted and have been categorized as Level 1 given
the clear observability of the prices.
Mark-to-Market Derivatives. Derivative contracts are traded in both exchange-based and non-exchange-based markets. Exchange-
based derivatives that are valued using unadjusted quoted prices in active markets are categorized in Level 1 in the fair value
hierarchy. Certain derivatives’ pricing is verified using indicative price quotations available through brokers or over-the-counter, on-
line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask, mid-point prices and are
obtained from sources that the Registrants believe provide the most liquid market for the commodity. The price quotations are
reviewed and corroborated to ensure the prices are observable and representative of an orderly transaction between market
participants. This includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract
duration. The remainder of derivative contracts are valued using the Black model, an industry standard option valuation model. The
Black model takes into account inputs such as contract terms, including maturity, and market parameters, including assumptions of
the future prices of energy, interest rates, volatility, credit worthiness and credit spread. For derivatives that trade in liquid markets,
such as generic forwards, swaps and options, model inputs are generally observable. Such instruments are categorized in Level 2.
The Registrants’ derivatives are predominately at liquid trading points. For derivatives that trade in less liquid markets with limited
pricing information model inputs generally would include both observable and unobservable inputs. These valuations may include an
estimated basis adjustment from an illiquid trading point to a liquid trading point for which active price quotations are available. Such
instruments are categorized in Level 3.
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