ComEd 2006 Annual Report Download - page 79

external prices are not available, Generation uses internal models to determine the fair value. These
internal models include assumptions of the future prices of energy based on the specific market in
which the energy is being purchased, using externally available forward market pricing curves for all
periods possible under the pricing model. Generation uses the Black model, a standard industry
valuation model, to determine the fair value of energy derivative contracts that are marked-to-market.
See ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk—Normal Operations
and Hedging Activities for further information regarding sensitivity analysis related to market price
exposure.
Interest-Rate Derivative Instruments. To determine the fair value of interest-rate swap
agreements, the Registrants use external dealer prices and/or internal valuation models that utilize
assumptions of available market pricing curves.
Accounting for Contingencies (Exelon, Generation, ComEd and PECO)
In the preparation of their financial statements, the Registrants make judgments regarding the
future outcome of contingent events and record loss contingency amounts that are probable and
reasonably estimated based upon available information. The amounts recorded may differ from the
actual income or expense that occurs when the uncertainty is resolved. The estimates that the
Registrants make in accounting for contingencies and the gains and losses that they record upon the
ultimate resolution of these uncertainties could have a significant effect on the liabilities and expenses
in their financial statements.
Taxation
The Registrants are required to make judgments regarding the potential tax effects of various
financial transactions and results of operations in order to estimate their obligations to taxing
authorities. These tax obligations include income, real estate, sales and use and employment-related
taxes and ongoing appeals related to these tax matters. These judgments include reserves for
potential adverse outcomes regarding tax positions that have been taken. The Registrants also
estimate their ability to utilize tax attributes, including those in the form of carryforwards for which the
benefits have already been reflected in the financial statements. The Registrants do not record
valuation allowances for deferred tax assets related to capital losses that the Registrants believe will
be realized in future periods. While the Registrants believe the resulting tax reserve balances as of
December 31, 2006 reflect the probable expected outcome of pending tax matters in accordance with
SFAS No. 5, “Accounting for Contingencies,” SFAS No. 109, “Accounting for Income Taxes,” and
Statement of Financial Accounting Concepts No. 6, “Elements of Financial Statements—a replacement
of FASB Concepts Statement No. 3 (incorporating an amendment of FASB Concepts Statement
No. 2)”, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to
their consolidated financial statements and such adjustments could be material.
Environmental Costs
Environmental investigation and remediation liabilities are based upon estimates with respect to the
number of sites for which the Registrants will be responsible, the scope and cost of work to be performed
at each site, the portion of costs that will be shared with other parties, the timing of the remediation work,
changes in technology, regulations and the requirements of local governmental authorities.
Other, Including Personal Injury Claims
The Registrants are self-insured for general liability, automotive liability, and personal injury claims
to the extent that losses are within policy deductibles or exceed the amount of insurance maintained.
74