ComEd 2006 Annual Report Download - page 145

grounds for doing so. In accordance with the contracts and applicable law, if Generation is downgraded
by a credit rating agency, especially if such downgrade is to a level below investment grade, it is
possible that a counterparty would attempt to rely on such a downgrade as a basis for making a
demand for adequate assurance of future performance. Depending on Generation’s net position with a
counterparty, the demand could be for the posting of collateral. In the absence of expressly agreed-to
provisions that specify the collateral that must be provided, the obligation to supply the collateral
requested will be a function of the facts and circumstances of the situation at the time of the demand. If
Generation can reasonably claim that it is willing and financially able to perform its obligations, it may
be possible to successfully argue that no collateral should be posted or that only an amount equal to
two or three months of future payments should be sufficient.
Generation sells output through bilateral contracts. Generation’s sales to counterparties other than
ComEd and PECO will increase due to the expiration of the PPA with ComEd at the end of 2006. The
bilateral contracts are subject to credit risk, which relates to the ability of counterparties to meet their
contractual payment obligations. Any failure to collect these payments from counterparties could have
a material impact on Exelon’s and Generation’s results of operations, cash flows and financial position.
As market prices rise above contracted price levels, Generation is required to post collateral with
purchasers; as market prices fall below contracted price levels, counterparties are required to post
collateral with Generation. Under the Illinois auction rules and the supplier forward contracts that
Generation entered into with ComEd and Ameren, beginning in 2007, collateral postings will be
one-sided from Generation only. That is, if market prices fall below ComEd’s or Ameren’s contracted
price levels, neither ComEd nor Ameren is required to post collateral; however, if market prices rise
above contracted price levels with ComEd or Ameren, Generation may be required to post collateral.
See Note 4 of the Combined Notes to the Consolidated Financial Statements for further information on
contracted clearing prices related to the ComEd and Ameren auctions.
As of December 31, 2006, Generation had $26 million of collateral deposit payments being held by
counterparties and Generation was holding $273 million of collateral deposits received from
counterparties.
RTOs and ISOs. Generation participates in the following established, real-time energy markets
that are administered by: PJM, ISO-NE, New York ISO, MISO, Southwest Power Pool, Inc. and the
Electric Reliability Council of Texas. In these areas, power is traded through bilateral agreements
between buyers and sellers and on the spot markets that are operated by the RTOs or ISOs, as
applicable. In areas where there is no spot market, electricity is purchased and sold solely through
bilateral agreements. For sales into the spot markets administered by an RTO or ISO, the RTO or ISO
maintains financial assurance policies that are established and enforced by those administrators. The
credit policies of the RTOs and ISOs may under certain circumstances require that losses arising from
the default of one member on spot market transactions be shared by the remaining participants.
Non-performance or non-payment by a major counterparty could result in a material adverse impact on
Generation’s financial condition, results of operations or net cash flows.
ComEd and PECO
Credit risk for ComEd and PECO is managed by credit and collection policies which are consistent
with state regulatory requirements. ComEd and PECO are each currently obligated to provide service
to all electric customers within their respective franchised territories. ComEd and PECO record a
provision for uncollectible accounts, based upon historical experience and third-party studies, to
provide for the potential loss from nonpayment by these customers. ComEd is currently unable to
predict the impact of the reverse-auction power prices, effective in January 2007, on its provision for
uncollectible accounts. ComEd will monitor nonpayment from customers and will make any necessary
adjustments to the provision for uncollectible accounts. PECO has experienced an increase in its
provision for uncollectible accounts in 2006 as compared to 2005 as a result of higher average
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