Exelon 2014 Annual Report Download - page 215

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
exceeds the initial market price, the supplier is required to post collateral to the extent the credit exposure is greater than the
supplier’s unsecured credit limit. The unsecured credit used by the suppliers represents PECO’s net credit exposure. As of
December 31, 2014, PECO had no net credit exposure with suppliers.
PECO is permitted to recover its costs of procuring electric supply through its PAPUC-approved DSP Program. PECO’s counterparty
credit risk is mitigated by its ability to recover realized energy costs through customer rates. See Note 3—Regulatory Matters for
additional information.
PECO’s natural gas procurement plan is reviewed and approved annually on a prospective basis by the PAPUC. PECO’s
counterparty credit risk under its natural gas supply and asset management agreements is mitigated by its ability to recover its
natural gas costs through the PGC, which allows PECO to adjust rates quarterly to reflect realized natural gas prices. PECO does
not obtain collateral from suppliers under its natural gas supply and asset management agreements. As of December 31, 2014,
PECO had credit exposure of $8 million under its natural gas supply and asset management agreements with investment grade
suppliers.
BGE is permitted to recover its costs of procuring energy through the MDPSC-approved procurement tariffs. BGE’s counterparty
credit risk is mitigated by its ability to recover realized energy costs through customer rates. See Note 3—Regulatory Matters for
additional information.
BGE’s full requirement wholesale electric power agreements that govern the terms of its electric supply procurement contracts,
which define a supplier’s performance assurance requirements, allow a supplier, or its guarantor, to meet its credit requirements with
a certain amount of unsecured credit. The amount of unsecured credit is determined based on the supplier’s lowest credit rating from
the major credit rating agencies and the supplier’s tangible net worth, subject to an unsecured credit cap. The credit position is
based on the initial market price, which is the forward price of energy on the day a transaction is executed, compared to the current
forward price curve for energy. To the extent that the forward price curve for energy exceeds the initial market price, the supplier is
required to post collateral to the extent the credit exposure is greater than the supplier’s unsecured credit limit. The unsecured credit
used by the suppliers represents BGE’s net credit exposure. The seller’s credit exposure is calculated each business day. As of
December 31, 2014, BGE had no net credit exposure to suppliers.
BGE’s regulated gas business is exposed to market-price risk. This market-price risk is mitigated by BGE’s recovery of its costs to
procure natural gas through a gas cost adjustment clause approved by the MDPSC. BGE does make off-system sales after BGE has
satisfied its customers’ demands, which are not covered by the gas cost adjustment clause. At December 31, 2014, BGE had credit
exposure of $8 million related to off-system sales which is mitigated by parental guarantees, letters of credit, or right to offset clauses
within other contracts with those third-party suppliers.
Collateral and Contingent-Related Features
As part of the normal course of business, Generation routinely enters into physical or financially settled contracts for the purchase
and sale of electric capacity, energy, fuels, emissions allowances and other energy-related products. Certain of Generation’s
derivative instruments contain provisions that require Generation to post collateral. Generation also enters into commodity
transactions on exchanges (i.e. NYMEX, ICE). The exchanges act as the counterparty to each trade. Transactions on the exchanges
must adhere to comprehensive collateral and margining requirements. This collateral may be posted in the form of cash or credit
support with thresholds contingent upon Generation’s credit rating from each of the major credit rating agencies. The collateral and
credit support requirements vary by contract and by counterparty. These credit-risk-related contingent features stipulate that if
Generation were to be downgraded or lose its investment grade credit rating (based on its senior unsecured debt rating), it would be
required to provide additional collateral. This incremental collateral requirement allows for the offsetting of derivative instruments that
are assets with the same counterparty, where the contractual right of offset exists under applicable master netting agreements. In
the absence of expressly agreed-to provisions that specify the collateral that must be provided, collateral requested will be a function
of the facts and circumstances of the situation at the time of the demand. In this case, Generation believes an amount of several
months of future payments (i.e. capacity payments) rather than a calculation of fair value is the best estimate for the contingent
collateral obligation, which has been factored into the disclosure below.
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