Exelon 2014 Annual Report Download - page 115

reportable segments was 93%-96%, 61%-64% and 31%-34% for 2015, 2016 and 2017, respectively. The percentage of expected
generation hedged is the amount of equivalent sales divided by the expected generation (which reflects the divestiture impact of
Quail Run). Expected generation is the volume of energy that best represents our commodity position in energy markets from owned
or contracted for capacity based upon a simulated dispatch model that makes assumptions regarding future market conditions,
which are calibrated to market quotes for power, fuel, load following products, and options. Equivalent sales represent all hedging
products, which include economic hedges and certain non-derivative contracts including sales to ComEd, PECO and BGE to serve
their retail load. See Note 4—Mergers, Acquisitions, and Dispositions of the Combined Notes to Consolidated Financial Statements
for more detail regarding divestitures.
A portion of Generation’s hedging strategy may be accomplished with fuel products based on assumed correlations between power
and fuel prices, which routinely change in the market. Market price risk exposure is the risk of a change in the value of unhedged
positions. The forecasted market price risk exposure for Generation’s entire non-trading portfolio associated with a $5 reduction in
the annual average around-the-clock energy price based on December 31, 2014, market conditions and hedged position would be a
decrease in pre-tax net income of approximately $10 million, $350 million and $670 million, respectively, for 2015, 2016 and 2017.
Power price sensitivities are derived by adjusting power price assumptions while keeping all other price inputs constant. Generation
expects to actively manage its portfolio to mitigate market price risk exposure for its unhedged position. Actual results could differ
depending on the specific timing of, and markets affected by, price changes, as well as future changes in Generation’s portfolio.
Proprietary Trading Activities. Generation also enters into certain energy-related derivatives for proprietary trading purposes.
Proprietary trading includes all contracts entered into with the intent of benefiting from shifts or changes in market prices as opposed
to those entered into with the intent of hedging or managing risk. Proprietary trading activities are subject to limits established by
Exelon’s RMC. The proprietary trading portfolio is subject to a risk management policy that includes stringent risk management
limits, including volume, stop loss and Value-at-Risk (VaR) limits to manage exposure to market risk. Additionally, the Exelon risk
management group and Exelon’s RMC monitor the financial risks of the proprietary trading activities. The proprietary trading
activities, which included physical volumes of 10,571 GWh, 8,762 GWh, and 12,958 GWh for the years ended December 31, 2014,
2013 and 2012 respectively, are a complement to Generation’s energy marketing portfolio, but represent a small portion of
Generation’s overall revenue from energy marketing activities. Trading portfolio activity for the year ended December 31, 2014,
resulted in pre-tax gains of $42 million due to net mark-to-market losses of $26 million and realized gains of $68 million. Generation
uses a 95% confidence interval, assuming standard normal distribution, one day holding period, one-tailed statistical measure in
calculating its VaR. The daily VaR on proprietary trading activity averaged $0.4 million of exposure during the year. Generation has
not segregated proprietary trading activity within the following discussion because of the relative size of the proprietary trading
portfolio in comparison to Generation’s total gross margin from continuing operations for the year ended December 31, 2014 of
$7,468 million.
Fuel Procurement. Generation procures coal and natural gas through long-term and short-term contracts, and spot-market
purchases. Nuclear fuel assemblies are obtained primarily through long-term contracts for uranium concentrates, and long-term
contracts for conversion services, enrichment services and fuel fabrication services. The supply markets for coal, natural gas,
uranium concentrates and certain nuclear fuel services are subject to price fluctuations and availability restrictions. Supply market
conditions may make Generation’s procurement contracts subject to credit risk related to the potential non-performance of
counterparties to deliver the contracted commodity or service at the contracted prices. Approximately 50% of Generation’s uranium
concentrate requirements from 2015 through 2019 are supplied by three producers. In the event of non-performance by these or
other suppliers, Generation believes that replacement uranium concentrates can be obtained, although at prices that may be
unfavorable when compared to the prices under the current supply agreements. Non-performance by these counterparties could
have a material impact on Exelon’s and Generation’s results of operations, cash flows and financial positions. See Note 22—
Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information regarding
uranium and coal supply agreement matters.
ComEd
The financial swap contract between Generation and ComEd was deemed prudent by the Illinois Settlement Legislation, thereby
ensuring that ComEd would be entitled to receive full cost recovery in rates. The change in fair value each period was recorded by
ComEd with an offset to a regulatory asset or liability. This financial swap contract between Generation and ComEd expired on
May 31, 2013. All realized impacts have been included in Generation’s and ComEd’s results of operations.
ComEd entered into 20-year contracts for renewable energy and RECs beginning in June 2012. ComEd is permitted to recover its
renewable energy and REC costs from retail customers with no mark-up. The annual commitments represent the maximum
settlements with suppliers for renewable energy and RECs under the existing contract terms. Pursuant to the ICC’s Order on
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