Exelon 2015 Annual Report Download - page 120

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Constellation’s designated cash flow hedges for commodity transactions prior to the Constellation merger were re-designated as cash flow hedges.
The effect of this decision is that all economic hedges for commodities are recorded at fair value through earnings for the combined company. In
addition, for energy-related derivatives entered into for proprietary trading purposes, changes in the fair value of the derivatives are recognized in
earnings each period. For economic hedges that are not designated for hedge accounting for ComEd, PECO and BGE, changes in the fair value
each period are recorded as a regulatory asset or liability.
Normal Purchases and Normal Sales Exception. 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 retail and wholesale markets with the intent and ability to deliver or take delivery. While some of
these contracts are considered derivative financial instruments under the authoritative guidance, certain of these qualifying transactions have been
designated as normal purchases and normal sales and are thus not required to be recorded at fair value, but rather on an accrual basis of
accounting. Determining whether a contract qualifies for the normal purchases and normal sales exception requires that management exercise
judgment on whether the contract will physically deliver and requires that management ensure compliance with all of the associated qualification
and documentation requirements. Revenues and expenses on contracts that qualify as normal purchases and normal sales are recognized when
the underlying physical transaction is completed. Contracts which qualify for the normal purchases and normal sales exception are those for which
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 is
not financially settled on a net basis. The contracts that ComEd has entered into with suppliers as part of ComEd’s energy procurement process,
PECO’s full requirement contracts and block contracts under the PAPUC-approved DSP program, most of PECO’s natural gas supply agreements
and all of BGE’s full requirement contracts and natural gas supply agreements that are derivatives qualify for the normal purchases and normal
sales exception.
Commodity Contracts. Identification of a commodity contract as an economic hedge requires Generation to determine that the contract is
in accordance with the RMP. Generation reassesses its economic hedges on a regular basis to determine if they continue to be within the
guidelines of the RMP.
As a part of accounting for derivatives, the Registrants make estimates and assumptions concerning future commodity prices, load
requirements, interest rates, the timing of future transactions and their probable cash flows, the fair value of contracts and the expected changes
in the fair value in deciding whether or not to enter into derivative transactions, and in determining the initial accounting treatment for derivative
transactions. In accordance with the authoritative guidance for fair value measurements, the Registrants categorize these derivatives under a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. 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 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 Registrant’s derivatives are traded
predominately at liquid trading points. The remaining derivative contracts are valued using models that take into account inputs such as contract
terms, including maturity, and market parameters, and assumptions of the future prices of energy, interest rates, volatility, credit worthiness and
credit spread. For derivatives that trade in liquid
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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