Exelon 2003 Annual Report Download - page 74

72 Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXELON CORPORATION AND SUBSIDIARY COMPANIES
The majority of our contracts are non-exchange-traded con-
tracts valued using prices provided by external sources, pri-
marily 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
we believe provide the most liquid market for the commod-
ity. The terms for which such price information is available
varies by commodity, region and product. The remainder of
the assets represents contracts for which external valuations
are not available, primarily option contracts. These contracts
are valued using the Black model, an industry standard op-
tion valuation model. The fair values in each category reflect
the level of forward prices and volatility factors as of De-
cember 31, 2003 and may change as a result of changes in
these factors. Management uses its best estimates to de-
termine the fair value of commodity and derivative contracts
it holds and sells. These estimates consider various factors
including closing exchange and over-the-counter price
quotations, time value, volatility factors and credit exposure.
It is possible, however, that future market prices could vary
from those used in recording assets and liabilities from en-
ergy marketing and trading activities and such variations
could be material.
The following table, which presents maturity and source
of fair value of mark-to-market energy contract net li-
abilities, provides two fundamental pieces of information.
First, the table provides the source of fair value used in de-
termining the carrying amount of Generation’s total mark-
to-market asset or liability. Second, this table provides the
maturity, by year, of Generation’s net assets/liabilities, giv-
ing an indication of when these mark-to-market amounts
will settle and either generate or require cash.
Maturities within
2004 2005 2006 2007 2008
2009
and
Beyond
Total Fair
Value
Normal operations, qualifying cash-flow hedge contracts(1):
Actively quoted prices $ 32 $ – $ – $ – $– $– $ 32
Prices provided by other external sources (219) (23) (8) – – – (250)
Total $(187) $(23) $(8) $ – $– $– $(218)
Normal operations, other derivative contracts(2):
Actively quoted prices $ 23 $ – $ – $ – $– $– $ 23
Prices provided by other external sources (26) 9 5 – – – (12)
Prices based on model or other valuation methods 7 (5) (9) (3) – – (10)
Total $ 4 $ 4 $(4) $(3) $– $– $ 1
Proprietary trading, other derivative contracts(3):
Actively quoted prices $ 1 $ – $ – $ – $– $– $ 1
Prices provided by other external sources (1) 1 – – – – –
Prices based on model or other valuation methods – – – – – – –
Total $ – $ 1 $ – $ – $– $– $ 1
Average tenor of proprietary trading portfolio(4) 1.0 years
(1) Mark-to-market gains and losses on contracts that qualify as cash-flow hedges are recorded in other comprehensive income.
(2) Mark-to-market gains and losses on other non-trading derivative contracts that do not qualify as cash-flow hedges are recorded in earnings.
(3) Mark-to-market gains and losses on trading contracts are recorded in earnings.
(4) Following the recommendations of the Committee of Chief Risk Officers, the average tenor of the proprietary trading portfolio measures the average time to collect value for
that portfolio. We measure the tenor by separating positive and negative mark-to-market values in our proprietary trading portfolio, estimating the mid-point in years for each
and then reporting the highest of the two mid-points calculated. In the event that this methodology resulted in significantly different absolute values of the positive and neg-
ative cash flow streams, we would use the mid-point of the portfolio with the largest cash flow stream as the tenor.