ComEd 2013 Annual Report Download - page 62

Further,interpretiveguidance relatedto the authoritativeliterature continuesto evolve,includinghowit appliesto energy and
energy-relatedproducts. Changesinmanagement’s assessment ofcontractsandtheliquidityoftheirmarkets, andchangesin
authoritativeguidance relatedto derivatives, couldresult in previouslyexcludedcontractsbeingsubjecttothe provisionsofthe
authoritativederivativeguidance.Generation hasdeterminedthat contractsto purchase uranium, contractsto purchaseandsell
capacityincertainISO’s, certainemission productsandRECs do not meet thedefinition ofaderivativeunder thecurrent
authoritativeguidancesincetheydo not providefor net settlement andneither the uranium, certaincapacity, emission nor theREC
marketsare sufficientlyliquid to concludethat physical forwardcontractsare readilyconvertible to cash. If thesemarketsdobecome
sufficientlyliquid inthefuture andGeneration wouldberequiredto account for thesecontractsasderivativeinstruments, thefair
value ofthesecontractswouldbeaccountedfor consistent withGeneration’s other derivativeinstruments. Inthis case,ifmarket
prices differ fromtheunderlyingpricesofthecontracts, Generation wouldberequiredto recordmark-to-market gainsor losses,
which mayhaveasignificant impacttoExelon’s andGeneration’s financial positionsandresultsofoperations.
Under current authoritativeguidance,all derivativesare recognizedon thebalancesheet at theirfairvalue,except for certain
derivativesthat qualify for,andare electedunder,the normal purchasesandnormal salesexception.Further,derivativesthat qualify
andare designatedfor hedgeaccountingare classifiedasfairvalue or cash flowhedges. For fairvalue hedges, changesinfair
valuesfor boththederivativeandtheunderlyinghedgedexposure are recognizedin earnings each period. For cash flowhedges,
the portion ofthederivativegainorloss that is effectiveinoffsettingthechangeinthehedgedcash flows oftheunderlyingexposure
is deferredinaccumulated OCI andlater reclassifiedinto earnings when theunderlyingtransaction occurs. Gainsandlossesfrom
theineffective portion ofanyhedge are recognizedin earnings immediately. For commoditytransactions, effectivewiththedate of
merger withConstellation,Generation no longer utilizesthe election providedfor by thecash flowhedgedesignation and
de-designatedall ofitsexistingcash flowhedgesprior to themerger.Becausetheunderlyingforecastedtransactionsremain
probable,thefairvalue oftheeffective portion ofthesecash flowhedgeswasfrozen inaccumulated OCI andwill bereclassifiedto
resultsofoperationswhen theforecastedpurchaseorsale ofthe energy commodityoccurs, or becomesprobable ofnot occurring.
None ofConstellation’s designatedcash flowhedgesfor commoditytransactionsprior to themerger were re-designatedascash
flowhedges. Theeffectofthis decision is that all economic hedgesfor commoditiesare recordedat fairvalue through earnings for
thecombinedcompany. Inaddition,for energy-relatedderivativesenteredinto for proprietarytradingpurposes, changesinthefair
value ofthederivativesare recognizedin earnings each period. For economic hedgesthat are not designatedfor hedgeaccounting
for ComEd, PECO and BGE, changesinthefairvalue each periodare recordedasaregulatoryasset or liability.
Normal Purchases and Normal Sales Exception. Aspart ofGeneration’s energy marketingbusiness, Generation entersinto
contractsto buyandsell energy to meet therequirementsofitscustomers. Thesecontractsincludeshort-termandlong-term
commitmentsto purchaseandsell energy andenergy-relatedproductsinthe retailandwholesale marketswiththeintent andability
to deliver or takedelivery. While someofthesecontractsare consideredderivativefinancial instrumentsunder the authoritative
guidance,certainofthesequalifyingtransactionshavebeen designatedasnormal purchasesandnormal salesandare thusnot
requiredto berecordedat fairvalue,but rather on an accrual basis ofaccounting. Determiningwhether a contractqualifiesfor the
normal purchasesandnormal salesexception requiresthat management exercisejudgment on whether thecontractwill physically
deliver andrequiresthat management ensure compliancewithall oftheassociatedqualification anddocumentation requirements.
Revenuesandexpenseson contractsthat qualify asnormal purchasesandnormal salesare recognizedwhen theunderlying
physical transaction is completed. Contracts which qualify for the normal purchasesandnormal salesexception are thosefor which
physical deliveryisprobable,quantitiesare expectedto beusedor soldinthe normal courseofbusiness over a reasonable period
oftimeandisnot financiallysettledon a net basis. Thecontractsthat ComEd hasenteredinto withsuppliersaspart ofComEd’s
energy procurement process, PECO’s full requirement contractsandblock contractsunder thePAPUC-approved DSP program,
mostof PECO’s natural gassupplyagreementsandall of BGE’s full requirement contractsandnatural gassupplyagreementsthat
are derivativesqualify for the normal purchasesandnormal salesexception.
Commodity Contracts. Identification ofacommoditycontractasan economic hedgerequiresGeneration to determine that the
contractis inaccordancewiththeRMP. Generation reassessesitseconomic hedgeson a regular basis to determine if theycontinue
to bewithintheguidelinesoftheRMP.
Asa part ofaccountingfor derivatives, theRegistrantsmakeestimatesandassumptionsconcerningfuture commodityprices, load
requirements, interest rates, thetimingoffuture transactionsandtheir probable cash flows, thefairvalue ofcontractsandthe
expectedchangesinthefairvalue indecidingwhether or not to enter into derivative transactions, andindeterminingtheinitial
accountingtreatment for derivative transactions. Inaccordancewiththe authoritativeguidancefor fairvalue measurements, the
Registrantscategorizethesederivativesunder a fairvalue hierarchy that prioritizestheinputsto valuation techniquesusedto
measure fairvalue.Derivativecontractsare tradedinbothexchange-basedandnon-exchange-basedmarkets. Exchange-based
derivativesthat are valuedusingunadjustedquotedpricesinactivemarketsare categorizedinLevel 1 inthefairvalue hierarchy.
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