Exelon 2014 Annual Report Download - page 191

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
11. Fair Value of Financial Assets and Liabilities
Fair Value of Financial Liabilities Recorded at the Carrying Amount
The following tables present the carrying amounts and fair values of Exelon’s short-term liabilities, long-term debt, SNF obligation,
and trust preferred securities (long-term debt to financing trusts or junior subordinated debentures) as of December 31, 2014 and
2013:
December 31, 2014 December 31, 2013
Carrying
Amount
Fair Value Carrying
Amount
Fair
ValueLevel 1 Level 2 Level 3 Total
Short-term liabilities ................................. $ 463 $ 3 $ 448 $ 12 $ 463 $ 344 $ 344
Long-term debt (including amounts due within one year) . . . 21,164 1,208 20,417 1,311 22,936 19,132 19,751
Long-term debt to financing trusts ...................... 648 — — 648 648 648 631
SNF obligation ...................................... 1,021 — 833 — 833 1,021 790
Short-Term Liabilities. The short-term liabilities included in the tables above are comprised of dividends payable (included in other
current liabilities) (Level 1), short-term borrowings (Level 2) and third party financing (Level 3). The Registrants’ carrying amounts of
the short-term liabilities are representative of fair value because of the short-term nature of these instruments.
Long-Term Debt. The fair value amounts of Exelon’s taxable debt securities (Level 2) are determined by a valuation model that is
based on a conventional discounted cash flow methodology and utilizes assumptions of current market pricing curves. In order to
incorporate the credit risk of the Registrants into the discount rates, Exelon obtains pricing (i.e., U.S. Treasury rate plus credit
spread) based on trades of existing Exelon debt securities as well as debt securities of other issuers in the electric utility sector with
similar credit ratings in both the primary and secondary market, across the Registrants’ debt maturity spectrum. The credit spreads
of various tenors obtained from this information are added to the appropriate benchmark U.S. Treasury rates in order to determine
the current market yields for the various tenors. The yields are then converted into discount rates of various tenors that are used for
discounting the respective cash flows of the same tenor for each bond or note. The fair value of Exelon’s equity units (Level 1) are
valued based on publicly traded securities issued by Exelon.
The fair value of Generation’s non-government-backed fixed rate project financing debt, including nuclear fuel procurement
contracts, (Level 3) is based on market and quoted prices for its own and other project financing debt with similar risk profiles. Given
the low trading volume in the project financing debt market, the price quotes used to determine fair value will reflect certain
qualitative factors, such as market conditions, investor demand, new developments that might significantly impact the project cash
flows or off-taker credit, and other circumstances related to the project (e.g., political and regulatory environment). The fair value of
Generation’s government-backed fixed rate project financing debt (Level 3) is largely based on a discounted cash flow methodology
that is similar to the taxable debt securities methodology described above. Due to the lack of market trading data on similar debt, the
discount rates are derived based on the original loan interest rate spread to the applicable Treasury rate as well as a current market
curve derived from government-backed securities. Variable rate project financing debt resets on a quarterly basis and the carrying
value approximates fair value (Level 2).
SNF Obligation. The carrying amount of Generation’s SNF obligation (Level 2) is derived from a contract with the DOE to provide for
disposal of SNF from Generation’s nuclear generating stations. When determining the fair value of the obligation, the future carrying
amount of the SNF obligation estimated to be settled in 2025 is calculated by compounding the current book value of the SNF
obligation at the 13-week Treasury rate. The compounded obligation amount is discounted back to present value using Generation’s
discount rate, which is calculated using the same methodology as described above for the taxable debt securities, and an estimated
maturity date of 2025.
Long-Term Debt to Financing Trusts. Exelon’s long-term debt to financing trusts is valued based on publicly traded securities issued
by the financing trusts. Due to low trading volume of these securities, qualitative factors, such as market conditions, investor
demand, and circumstances related to each issue, this debt is classified as Level 3.
187