Exelon 2014 Annual Report Download - page 202

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
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 $2.75 and $0.34 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 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 12—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 31,2014
Valuation
Technique
Unobservable
Input Range
Mark-to-market derivatives—Economic hedges (Generation) (a)(c) . . . $ 893 Discounted
Cash Flow
Forward power
price
$ 15 - $120(d)
Forward gas
price
Volatility
$1.52 - $14.02(d)
Option Model percentage 8% - 257%
Mark-to-market derivatives—Proprietary trading (Generation) (a)(c) . . $ (15) Discounted
Cash Flow
Forward power
price
$ 15 - $117(d)
Mark-to-market derivatives (ComEd) .......................... $(207) Discounted
Cash Flow
Forward heat
rate (b)
8x - 9x
Marketability
reserve
3.5% - 8%
Renewable
factor
86% - 126%
(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.
(c) The fair values do not include cash collateral held on level three positions of $172 million as of December 31, 2014.
(d) The upper ends of the ranges are driven by the winter power and gas prices in the New England region. Without the New England region, the upper ends of the
ranges for power and gas would be approximately $97 and $8.14, respectively, and would be approximately $76 for power proprietary trading.
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