ComEd 2013 Annual Report Download - page 110

administrators. Thecredit policiesoftheRTOs and ISOs may, under certaincircumstances, require that lossesarisingfromthe
default ofone member on spot market transactionsbesharedbytheremainingparticipants. Non-performance or non-payment by a
major counterpartycouldresult inamaterial adverseimpactontheRegistrants’ resultsofoperations, cash flows andfinancial
positions.
Exchange Traded Transactions
Generation entersinto commoditytransactionson NYMEX, ICE andtheNodal exchange.TheNYMEX, ICE andNodal exchange
clearinghousesactasthecounterpartyto each trade.Transactionson theNYMEX, ICE andNodal exchangemustadhere to
comprehensivecollateral andmarginingrequirements. Asaresult,transactionson NYMEX, ICE andNodal exchange are
significantlycollateralizedandhavelimitedcounterpartycreditrisk.
Long-Term Leases
Exelon’s consolidatedbalancesheet,asofDecember 31,2013,includeda$698 million net investment incoal-firedplantsin
GeorgiaandTexassubject to long-termleases. This investment representstheestimatedresidual value ofleasedassetsat theend
oftherespective lease terms of$1,465 million,less unearnedincomeof $767 million.The leaseagreementsprovidethelessees
with fixedpurchase optionsat theendofthe lease terms. If thelesseesdo not exercisethefixedpurchase options, Exelon hasthe
abilityto require thelesseesto return the leaseholdinterestsor to arrangefor a third-partyto bid on a servicecontractfor a period
followingthe lease term. If Exelon choosestheservicecontract option,the leaseholdinterestswill be returnedto Exelon at theend
ofthe termoftheservicecontract.Inanyevent,Exelon will besubjecttoresidual value risk if thelesseesdo not exercisethefixed
purchase options. This risk is partiallymitigatedbythefairvalue ofthescheduledpaymentsunder theservicecontract.However,
such paymentsare not guaranteed. Further,the termoftheservicecontractis less than theexpectedremaininguseful lifeofthe
plantsand, therefore,Exelon’s exposure to residual value risk will not bemitigatedbypaymentsunder theservicecontractinthis
remainingperiod. Lessee performanceunder the leaseagreementsissupportedbycollateral andcreditenhancement measures.
Management regularlyevaluatesthecreditworthiness ofExelon’s counterpartiesto these long-termleases. Exelon monitorsthe
continuingcreditqualityofthecreditenhancement party.
Pursuant to the applicable accountingguidance,Exelon is requiredto reviewtheestimatedresidual valuesofitsdirectfinancing
leaseinvestmentsat least annuallyand, if thereviewindicatesafairvalue belowthecarryingvalue andthedecline is determinedto
beother than temporary, mustrecordan impairment chargeinthe periodtheestimate changed. Basedon thereviewperformedin
thesecondquarter of2013,theestimatedresidual value ofone ofExelon’s directfinancingleasesexperiencedan other than
temporarydecline resultingina$14million pre-taximpairment chargeinthesecondquarter of2013.See Note 8oftheCombined
Notesto ConsolidatedFinancial Statementsfor further information.Through December 31,2013,no eventshaveoccurredthat
wouldrequire Exelon to reviewtheestimatedresidual valuesofitsdirectfinancingleaseinvestmentssubsequent to thereview
performedinthesecondquarter of2013.
Interest-Rate Risk
Exelon usesacombination of fixed-rate andvariable-rate debttomanageinterest rate exposure.TheRegistrantsmayalsoutilize
fixed-to-floatinginterest rate swaps, which are typicallydesignatedasfairvalue hedges, asameansto managetheirinterest rate
exposure.Inaddition,theRegistrantsmayutilizeinterest rate derivativesto lock in rate levelsin anticipation offuture financings,
which are typicallydesignatedascash flowhedges. Thesestrategiesare employedto manageinterest rate risks. At December 31,
2013,Exelon had$1,425million ofnotional amountsof fixed-to-floatinghedgesoutstandingand$190million ofnotional amountsof
floating-to-fixedhedgesoutstanding. Assumingthefairvalue andcash flowinterest rate hedgesare 100%effective,ahypothetical
50bpsincreaseintheinterest ratesassociatedwithunhedgedvariable-rate debt(excludingCommercial Paper)and fixed-to-floating
swapswouldresult in an approximate $5 million decreaseinExelon Consolidatedpre-taxincomefor theyear endedDecember 31,
2013.
Equity Price Risk
Exelon andGeneration maintain trustfunds, asrequiredbytheNRC, to fundcertaincostsofdecommissioningGeneration’s nuclear
plants. AsofDecember 31,2013,Generation’s decommissioningtrustfunds are reflectedat fairvalue on itsConsolidatedBalance
Sheets. Themix ofsecuritiesinthe trustfunds is designedto provide returnsto beusedto funddecommissioningandto
compensate Generation for inflationaryincreasesindecommissioningcosts; however,theequitysecuritiesinthe trustfunds are
exposedto pricefluctuationsinequitymarkets, andthevalue of fixed-rate, fixed-incomesecuritiesare exposedto changesin
interest rates. Generation activelymonitorstheinvestment performanceofthe trustfunds andperiodicallyreviews asset allocation in
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