Exelon 2015 Annual Report Download - page 325

Table of Contents
Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
 Generation evaluated its NDT portfolios for the existence of significant concentrations of credit risk as of
December 31, 2015. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type
of industry, foreign country, and individual fund. As of December 31, 2015, there were no significant concentrations (generally defined as greater
than 10 percent) of risk in Generation’s NDT assets.
See Note 16—Asset Retirement Obligations for further discussion on the NDT fund investments.
 The Rabbi trusts were established to hold assets related to deferred
compensation plans existing for certain active and retired members of Exelon’s executive management and directors. The Rabbi trusts assets are
included in investments in the Registrants’ Consolidated Balance Sheets and consist primarily of mutual funds and life insurance policies. The
mutual funds are maintained by investment companies and hold certain investments in accordance with a stated set of fund objectives, which are
consistent with Exelon’s overall investment strategy. Mutual funds are publicly quoted and have been categorized as Level 1 given the clear
observability of the prices. The life insurance policies are valued using the cash surrender value of the policies, which is provided by a third party.
The cash surrender value inputs are not observable.
. Derivative contracts are traded in both exchange-based and non-exchange-
based markets. Exchange-based derivatives that are valued using unadjusted quoted prices in active markets are categorized in Level 1 in the fair
value hierarchy. Certain derivatives’ pricing is verified using indicative price quotations available through brokers or over-the-counter, on-line
exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask, mid-point prices and are obtained from
sources that the Registrants believe provide the most liquid market for the commodity. The price quotations are reviewed and corroborated to
ensure the prices are observable and representative of an orderly transaction between market participants. This includes consideration of actual
transaction volumes, market delivery points, bid-ask spreads and contract duration. The remainder of derivative contracts are valued using the
Black model, an industry standard option valuation model. The Black model takes into account inputs such as contract terms, including maturity,
and market parameters, including assumptions of the future prices of energy, interest rates, volatility, credit worthiness and credit spread. For
derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs are generally observable.Such instruments are
categorized in Level 2. The Registrants’ derivatives are predominately at liquid trading points. For derivatives that trade in less liquid markets with
limited pricing information model inputs generally would include both observable and unobservable inputs. These valuations may include an
estimated basis adjustment from an illiquid trading point to a liquid trading point for which active price quotations are available. Such instruments
are categorized in Level 3.
Exelon may utilize fixed-to-floating interest rate swaps, which are typically designated as fair value hedges, as a means to achieve its
targeted level of variable-rate debt as a percent of total debt. In addition, the Registrants may utilize interest rate derivatives to lock in interest rate
levels in anticipation of future financings. These interest rate derivatives are typically designated as cash flow hedges. Exelon determines the
current fair value by calculating the net present value of expected payments and receipts under the swap agreement, based on and discounted by
the market’s expectation of future interest rates. Additional inputs to the net present value calculation may include the contract terms, counterparty
credit risk and other market parameters. As these inputs are based on observable data and valuations of similar instruments, the interest rate
swaps are categorized in Level 2 in the fair value hierarchy. See Note 13—Derivative Financial Instruments for further discussion on mark-to-
market derivatives.
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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