Exelon 2014 Annual Report Download - page 203

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
Type of trade
Fair Value at
December 31, 2013
Valuation
Technique
Unobservable
Input Range
Mark-to-market derivatives—Economic hedges (Generation)
(a)(c) ..................................................
$ 488 Discounted
Cash Flow
Forward power
price
$ 8 - $176(d)
Forward gas
price
Volatility
$2.98 - $16.63(d)
Option Model percentage 15% - 142%
Mark-to-market derivatives—Proprietary trading
(Generation) (a)(c) .......................................
$ 3 Discounted
Cash Flow
Forward power
price
$ 10 - $176(d)
Mark-to-market derivatives (ComEd) ........................ $(193) Discounted
Cash Flow
Forward heat
rate(b)
8x - 9x
Marketability
reserve
3.5% - 8%
Renewable
factor
84% - 128%
(a) The valuation techniques, unobservable inputs and ranges are the same for the asset and liability positions.
(b) Quoted forward natural gas rates are utilized to project the forward power curve for the delivery of energy at specified future dates. The natural gas curve is
extrapolated beyond its observable period to the end of the contract’s delivery.
(c) The fair values do not include cash collateral held on level three positions of $26 million as of December 31, 2013
(d) The upper ends of the ranges are driven by the winter power and gas prices in the New England region. Without the New England region, the upper ends of the
ranges for power and gas would be approximately $100 and $5.70, respectively.
The inputs listed above would have a direct impact on the fair values of the above instruments if they were adjusted. The significant
unobservable inputs used in the fair value measurement of Generation’s commodity derivatives are forward commodity prices and
for options is price volatility. Increases (decreases) in the forward commodity price in isolation would result in significantly higher
(lower) fair values for long positions (contracts that give Generation the obligation or option to purchase a commodity), with offsetting
impacts to short positions (contracts that give Generation the obligation or right to sell a commodity). Increases (decreases) in
volatility would increase (decrease) the value for the holder of the option (writer of the option). Generally, a change in the estimate of
forward commodity prices is unrelated to a change in the estimate of volatility of prices. An increase to the reserves listed above
would decrease the fair value of the positions. An increase to the heat rate or renewable factors would increase the fair value
accordingly. Generally, interrelationships exist between market prices of natural gas and power. As such, an increase in natural gas
pricing would potentially have a similar impact on forward power markets.
Nuclear Decommissioning Trust Fund Investments and Pledged Assets for Zion Station Decommissioning (Exelon and
Generation). For middle market lending, certain corporate debt securities, and private equity investments the fair value is determined
using a combination of valuation models including cost models, market models and income models. The valuation estimates are
based on valuations of comparable companies, discounting the forecasted cash flows of the portfolio company, estimating the
liquidation or collateral value of the portfolio company or its assets, considering offers from third parties to buy the portfolio company,
its historical and projected financial results, as well as other factors that may impact value. Significant judgment is required in the
application of discounts or premiums applied to the prices of comparable companies for factors such as size, marketability, credit risk
and relative performance.
Because Generation relies on third-party fund managers to develop the quantitative unobservable inputs without adjustment for the
valuations of its Level 3 investments, quantitative information about significant unobservable inputs used in valuing these
investments is not reasonably available to Generation. This includes information regarding the sensitivity of the fair values to
changes in the unobservable inputs. Generation gains an understanding of the fund managers’ inputs and assumptions used in
preparing the valuations. Generation performed procedures to assess the reasonableness of the valuations. For a sample of its
Level 3 investments, Generation reviewed independent valuations and reviewed the assumptions in the detailed pricing models used
by the fund managers.
12. Derivative Financial Instruments
The Registrants use derivative instruments to manage commodity price risk and interest rate risk related to ongoing business
operations.
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