ComEd 2006 Annual Report Download - page 45

purchase or sell power in the wholesale markets at less favorable prices and incur additional losses, to
the extent of amounts, if any, already paid to the counterparties. In the spot markets, Generation is
exposed to the risks of whatever default mechanisms exist in that market, some of which attempt to
spread the risk across all participants, which may or may not be an effective way of lessening the
severity of the risk and the amounts at stake. Generation is also a party to agreements with entities in
the energy sector that have experienced rating downgrades or other financial difficulties.
Generation’s credit risk profile is anticipated to change based on the creditworthiness of new and
existing counterparties, including ComEd and Ameren. Additionally, due to the possibility of rate freeze
legislation in Illinois affecting both ComEd and Ameren, Generation may be subject to the risk of
default and, in the event of a bankruptcy filing by ComEd or Ameren, a risk that the bankruptcy may
result in rejection of contracts for the purchase of electricity. A default by ComEd or Ameren on
contracts for purchase of electricity, or a rejection of those contracts in a bankruptcy proceeding, could
result in a disruption in the wholesale power markets. For additional information on the ComEd auction
and the various regulatory proceedings and possible legislative actions, see Note 4 of the Combined
Notes to Consolidated Financial Statements.
In addition, the retail businesses subject Generation to credit risk resulting from a different
customer base.
Risk of Credit Downgrades. Generation’s trading business is required to meet credit quality
standards. If Generation were to lose its investment grade credit rating or otherwise fail to satisfy the
credit standards of trading counterparties, it would be required under trading agreements to provide
collateral in the form of letters of credit or cash, which may have a material adverse effect upon its
liquidity. If Generation had lost its investment grade credit rating as of December 31, 2006, it would
have been required to provide approximately $880 million in collateral.
Immature Markets. Certain wholesale spot markets are new and evolving markets that vary from
region to region and are still developing practices and procedures. Problems in or the failure of any of
these markets, as was experienced in California in 2000, could adversely affect Generation’s business.
Hedging. Power Team buys and sells energy and other products in the wholesale markets and
enters into financial contracts to manage risk and hedge various positions in Generation’s power
generation portfolio. This activity may cause volatility in Generation’s future results of operations.
Weather.Generation’s operations are affected by weather, which affects demand for electricity as
well as operating conditions. Generation plans its business based upon normal weather assumptions.
To the extent that weather is warmer in the summer or colder in the winter than assumed, Generation
may require greater resources to meet its contractual requirements. Extreme weather conditions or
storms may affect the availability of generation capacity and transmission, limiting Generation’s ability
to source or send power to where it is sold. These conditions, which may not have been fully
anticipated, may have an adverse effect by causing Generation to seek additional capacity at a time
when wholesale markets are tight or to seek to sell excess capacity at a time when those markets are
weak.
Generation’s risk management policies cannot fully eliminate the risk associated with its
energy trading activities.
Power Team's power trading (including fuel procurement and power marketing) activities expose
Generation to risks of commodity price movements. Generation attempts to manage this exposure
through enforcement of established risk limits and risk management procedures. These risk limits and
risk management procedures may not work as planned and cannot eliminate all risks associated with
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