Exelon 2015 Annual Report Download - page 329

Table of Contents
Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
financial results, as well as other factors that may impact value. Significant judgment is required in the application of discounts or premiums
applied to the prices of comparable companies for factors such as size, marketability, credit risk and relative performance.
Because Generation relies on third-party fund managers to develop the quantitative unobservable inputs without adjustment for the
valuations of its Level 3 investments, quantitative information about significant unobservable inputs used in valuing these investments is not
reasonably available to Generation. This includes information regarding the sensitivity of the fair values to changes in the unobservable inputs.
Generation gains an understanding of the fund managers’ inputs and assumptions used in preparing the valuations. Generation performed
procedures to assess the reasonableness of the valuations. For a sample of its Level 3 investments, Generation reviewed independent valuations
and reviewed the assumptions in the detailed pricing models used by the fund managers.
13. Derivative Financial Instruments (Exelon, Generation, ComEd, PECO and BGE)
The Registrants use derivative instruments to manage commodity price risk, foreign currency exchange rate risk, and interest rate risk
related to ongoing business operations.
Commodity Price Risk (Exelon, Generation, ComEd, PECO and BGE)
To the extent the amount of energy Generation produces differs from the amount of energy it has contracted to sell, Exelon and Generation
are exposed to market fluctuations in the prices of electricity, fossil fuels and other commodities. Each of the Registrants employ established
policies and procedures to manage their risks associated with market fluctuations in commodity prices by entering into physical and financial
derivative contracts, including swaps, futures, forwards, options and short-term and long-term commitments to purchase and sell energy and
energy-related products. The Registrants believe these instruments, which are classified as either economic hedges or non-derivatives, mitigate
exposure to fluctuations in commodity prices.
Derivative accounting guidance requires that derivative instruments be recognized as either assets or liabilities at fair value, with changes in
fair value of the derivative recognized in earnings each period. Other accounting treatments are available through special election and designation,
provided they meet specific, restrictive criteria both at the time of designation and on an ongoing basis. These alternative permissible accounting
treatments include normal purchase normal sale (NPNS), cash flow hedge, and fair value hedge. For commodity transactions, Generation no
longer utilizes the special election provided for by the cash flow hedge designation and de-designated all of its existing cash flow hedges prior to
the Constellation merger. Because the underlying forecasted transactions remained probable, the fair value of the effective portion of these cash
flow hedges was frozen in Accumulated OCI and was reclassified to results of operations when the forecasted purchase or sale of the energy
commodity occurred. The effect of this decision is that all derivative economic hedges related to commodities are recorded at fair value through
earnings for the combined company, referred to as economic hedges in the following tables. The Registrants have applied the NPNS scope
exception to certain derivative contracts for the forward sale of generation, power procurement agreements, and natural gas supply agreements.
Non-derivative contracts for access to additional generation and certain sales to load-serving entities are accounted for primarily under the accrual
method of accounting, which is further discussed in Note 23—Commitments and Contingencies. Additionally, Generation is exposed to certain
market risks through its proprietary trading activities. The proprietary trading activities are a complement to Generation’s energy marketing
portfolio, but represent a small portion of Generation’s overall energy marketing activities.
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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