Exelon 2001 Annual Report Download - page 42

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40
Exelon’s energy contracts are accounted for under SFAS No. 133. Most non-trading contracts qualify for a normal
purchases and normal sales exception. Those that do not are recorded as assets or liabilities on the balance sheet at fair
value. Changes in the fair value of qualifying hedge contracts are recorded in Other Comprehensive Income, and gains and
losses are recognized in earnings when the underlying transaction occurs. Changes in the fair value of derivative contracts
that do not meet hedge criteria under SFAS No. 133 and the ineffective portion of hedge contracts are recognized in earnings
on a current basis. Outlined below is a summary of the changes in fair value for those contracts included as assets and
liabilities in the Consolidated Balance Sheet for the year ended December 31, 2001:
(in millions) Non-trading Trading
Fair value of contracts outstanding as of January 1, 2001 (reflects the adoption of SFAS No. 133) $ (7) $ –
Change in fair value during 2001:
Contracts settled during year $ 87 7
Mark-to-market gain/(loss) (2) 7
Total change in fair value 85 14
Fair value of contracts outstanding at December 31, 2001 $ 78 $ 14
The total change in fair value during 2001 is reflected in the 2001 financial statements as follows:
Non-trading Trading
Mark-to-market gain/(loss) on non-qualifying hedge
contracts or hedge ineffectiveness reflected in earnings $ 16 $ 14
Mark-to-market gain/(loss) on hedge contracts reflected
in Other Comprehensive Income 69 –
Total change in fair value $85 $14
The majority of Exelon’s contracts are non-exchange traded contracts valued using prices provided by external sources,
which primarily represent price quotations available through brokers or over-the-counter, on-line exchanges. Prices reflect
the average of the bid-ask midpoint prices obtained from all sources that Exelon believes provide the most liquid market
for the commodity. The terms for which such price information is available varies by commodity, by region and by product.
The remainder of the assets represent contracts for which external valuations are not available, primarily option contracts.
These contracts are valued using the Black model, an industry standard option valuation model and other valuation
techniques. The fair values in each category reflect the level of forward prices and volatility factors as of December 31, 2001
and may change as a result of future changes in these factors. The maturities of the net energy trading and non-trading
assets and sources of fair value as of December 31, 2001 are as follows:
Maturities Within Total Fair
(in millions) 1 Year 2–3 Years 4–5 Years Value
Non-trading:
Actively quoted prices $ – $ – $ – $ –
Prices provided by other external sources 36 50 – 86
Prices based on model or other valuation methods (4) 2 (6) (8)
Total $ 32 $ 52 $ (6) $ 78
Trading:
Actively quoted prices $ – $ – $ – $ –
Prices provided by other external sources 10 4 – 14
Prices based on model or other valuation methods – – – –
Total $ 10 $ 4 $ – $ 14