ComEd 2015 Annual Report Download - page 119

Table of Contents
Accounting for Derivative Instruments (Exelon, Generation, ComEd, PECO and BGE)
The Registrants utilize derivative instruments to manage their exposure to fluctuations in interest rates, changes in interest rates related to
planned future debt issuances and changes in the fair value of outstanding debt. Generation uses a variety of derivative and non-derivative
instruments to manage the commodity price risk of its electric generation facilities, including power sales, fuel and energy purchases and other
energy-related products marketed and purchased. Additionally, Generation enters into energy-related derivatives for proprietary trading purposes.
ComEd has entered into contracts to procure energy, capacity and ancillary services. In addition, ComEd had a financial swap contract with
Generation that expired May 31, 2013 and currently holds floating-to-fixed energy swaps with several unaffiliated suppliers that extend into 2032.
PECO and BGE have entered into derivative natural gas contracts to hedge their long-term price risk in the natural gas market. PECO has also
entered into derivative contracts to procure electric supply through a competitive RFP process as outlined in its PAPUC-approved DSP Program.
BGE has also entered into derivative contracts to procure electric supply through a competitive auction process as outlined in its MDPSC-
approved SOS Program. ComEd, PECO and BGE do not enter into derivatives for proprietary trading purposes. The Registrants’ derivative
activities are in accordance with Exelon’s Risk Management Policy (RMP). See Note 13—Derivative Financial Instruments of the Combined Notes
to Consolidated Financial Statements for additional information regarding the Registrants’ derivative instruments.
The Registrants account for derivative financial instruments under the applicable authoritative guidance. Determining whether or not a
contract qualifies as a derivative under this guidance requires that management exercise significant judgment, including assessing the market
liquidity as well as determining whether a contract has one or more underlyings and one or more notional amounts. Further, interpretive guidance
related to the authoritative literature continues to evolve, including how it applies to energy and energy-related products. Changes in management’s
assessment of contracts and the liquidity of their markets, and changes in authoritative guidance related to derivatives, could result in previously
excluded contracts being subject to the provisions of the authoritative derivative guidance. Generation has determined that contracts to purchase
uranium, contracts to purchase and sell capacity in certain ISO’s, certain emission products and RECs do not meet the definition of a derivative
under the current authoritative guidance since they do not provide for net settlement and neither the uranium, certain capacity, emission nor the
REC markets are sufficiently liquid to conclude that physical forward contracts are readily convertible to cash. If these markets do become
sufficiently liquid in the future and Generation would be required to account for these contracts as derivative instruments, the fair value of these
contracts would be accounted for consistent with Generation’s other derivative instruments. In this case, if market prices differ from the underlying
prices of the contracts, Generation would be required to record mark-to-market gains or losses, which may have a significant impact to Exelon’s
and Generation’s financial positions and results of operations.
Under current authoritative guidance, all derivatives are recognized on the balance sheet at their fair value, except for certain derivatives that
qualify for, and are elected under, the normal purchases and normal sales exception. Further, derivatives that qualify and are designated for hedge
accounting are classified as fair value or cash flow hedges. For fair value hedges, changes in fair values for both the derivative and the underlying
hedged exposure are recognized in earnings each period. For cash flow hedges, the portion of the derivative gain or loss that is effective in
offsetting the change in the hedged cash flows of the underlying exposure is deferred in accumulated OCI and later reclassified into earnings when
the underlying transaction occurs. Gains and losses from the ineffective portion of any hedge are recognized in earnings immediately. For
commodity transactions, effective with the date of the Constellation merger, Generation no longer utilizes the election provided for by the cash flow
hedge designation and de-designated all of its existing cash flow hedges prior to the Constellation merger. Because the underlying forecasted
transactions remained probable, the fair value of the effective portion of these cash flow hedges was frozen in accumulated OCI and was
reclassified to results of operations when the forecasted purchase or sale of the energy commodity occurred. None of
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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