ComEd 2015 Annual Report Download - page 327

Table of Contents
Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
commodity and location. When appropriate, Generation discounts future cash flows using risk free interest rates with adjustments to reflect the
credit quality of each counterparty for assets and Generation’s own credit quality for liabilities. The level of observability of a forward commodity
price varies generally due to the delivery location and delivery period. Certain delivery locations including PJM West Hub (for power) and Henry
Hub (for natural gas) are more liquid and prices are observable for up to three years in the future. The observability period of volatility is generally
shorter than the underlying power curve used in option valuations. The forward curve for a less liquid location is estimated by using the forward
curve from the liquid location and applying a spread to represent the cost to transport the commodity to the delivery location. This spread does not
typically represent a majority of the instrument’s market price. As a result, the change in fair value is closely tied to liquid market movements and
not a change in the applied spread. The change in fair value associated with a change in the spread is generally immaterial. An average spread
calculated across all Level 3 power and gas delivery locations is approximately $2.91 and $0.27 for power and natural gas, respectively. Many of
the commodity derivatives are short term in nature and thus a majority of the fair value may be based on observable inputs even though the
contract as a whole must be classified as Level 3. See ITEM 7A.—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
for information regarding the maturity by year of the Registrant’s mark-to-market derivative assets and liabilities.
On December 17, 2010, ComEd entered into several 20-year floating to fixed energy swap contracts with unaffiliated suppliers for the
procurement of long-term renewable energy and associated RECs. See Note 13—Derivative Financial Instruments for more information. The fair
value of these swaps has been designated as a Level 3 valuation due to the long tenure of the positions and internal modeling assumptions. The
modeling assumptions include using natural gas heat rates to project long term forward power curves adjusted by a renewable factor that
incorporates time of day and seasonality factors to reflect accurate renewable energy pricing. In addition, marketability reserves are applied to the
positions based on the tenor and supplier risk.
The table below discloses the significant inputs to the forward curve used to value these positions.
Type of trade
Fair Value at
December 31, 2015
Valuation
Technique
Unobservable
Input Range
Mark-to-market derivatives—Economic hedges (Generation)
$ 857
Discounted
Cash Flow
Forward power
price $11 - $88
Forward gas
price $1.18 - $8.95
Option Model
Volatility
percentage 5% - 152%
Mark-to-market derivatives—Proprietary trading
(Generation)
$ (7) Discounted
Cash Flow
Forward power
price $13 - $78
Mark-to-market derivatives (ComEd) $ (247) Discounted
Cash Flow
Forward heat
rate 9x - 10x
Marketability
reserve 3.5% - 7%
Renewable
factor 87% - 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.
320
(a)(c) (d)
(d)
(a)(c) (d)
(b)
Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,
except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.