ComEd 2015 Annual Report Download - page 326

Table of Contents
Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
The Registrants’ deferred compensation plans allow
participants to defer certain cash compensation into a notional investment account. The Registrants include such plans in other current and
noncurrent liabilities in their Consolidated Balance Sheets. The value of the Registrants’ deferred compensation obligations is based on the market
value ofthe participants’ notional investment accounts. The underlying notional investments are comprised primarily of equities, mutual funds,
commingled funds, and fixed income securities which are based on directly and indirectly observable market prices. Since the deferred
compensation obligations themselves are not exchanged in an active market, they are categorized as Level 2 in the fair value hierarchy.
Additional Information Regarding Level 3 Fair Value Measurements (Exelon, Generation, ComEd)
 For valuations that include both observable and unobservable inputs, if the
unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in Level 3. This includes derivatives
valued using indicative price quotations whose contract tenure extends into unobservable periods. In instances where observable data is
unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes
assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 as the model inputs
generally are not observable. Exelon’s RMC approves risk management policies and objectives for risk assessment, control and valuation,
counterparty credit approval, and the monitoring and reporting of risk exposures. The RMC is chaired by the chief executive officer and includes
the chief risk officer, chief strategy officer, chief executive officer of Exelon Utilities, chief commercial officer, chief financial officer and chief
executive officer of Constellation. The RMC reports to the Finance and Risk Committee of the Exelon Board of Directors on the scope of the risk
management activities. Forward price curves for the power market utilized by the front office to manage the portfolio, are reviewed and verified by
the middle office, and used for financial reporting by the back office. The Registrants consider credit and nonperformance risk in the valuation of
derivative contracts categorized in Level 2 and 3, including both historical and current market data in its assessment of credit and nonperformance
risk by counterparty. Due to master netting agreements and collateral posting requirements, the impacts of credit and nonperformance risk were
not material to the financial statements.
Disclosed below is detail surrounding the Registrants’ significant Level 3 valuations. The calculated fair value includes marketability
discounts for margining provisions and other attributes. Generation’s Level 3 balance generally consists of forward sales and purchases of power
and natural gas, coal purchases and certain transmission congestion contracts. Generation utilizes various inputs and factors including market
data and assumptions that market participants would use in pricing assets or liabilities as well as assumptions about the risks inherent in the
inputs to the valuation technique. The inputs and factors include forward commodity prices, commodity price volatility, contractual volumes,
delivery location, interest rates, credit quality of counterparties and credit enhancements.
For commodity derivatives, the primary input to the valuation models is the forward commodity price curve for each instrument. Forward
commodity price curves are derived by risk management for liquid locations and by the traders and portfolio managers for illiquid locations. All
locations are reviewed and verified by risk management considering published exchange transaction prices, executed bilateral transactions, broker
quotes, and other observable or public data sources. The relevant forward commodity curve used to value each of the derivatives depends on a
number of factors, including commodity type, delivery location, and delivery period. Price volatility varies by
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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