ComEd 2015 Annual Report Download - page 177

Table of Contents
Generation
Normal Operations and Hedging Activities. Electricity available from Generation’s owned or contracted generation supply in excess of
Generation’s obligations to customers, including portions of ComEd’s, PECO’s and BGE’s retail load, is sold into the wholesale markets. To
reduce price risk caused by market fluctuations, Generation enters into non-derivative contracts as well as derivative contracts, including forwards,
futures, swaps, and options, with approved counterparties to hedge anticipated exposures. Generation believes these instruments represent
economic hedges that mitigate exposure to fluctuations in commodity prices. Generation expects the settlement of the majority of its economic
hedges will occur during 2016 through 2018.
In general, increases and decreases in forward market prices have a positive and negative impact, respectively, on Generation’s owned and
contracted generation positions which have not been hedged. Exelon’s hedging program involves the hedging of commodity risk for Exelon’s
expected generation, typically on a ratable basis over a three year period. As of December 31, 2015, the proportion of expected generation hedged
is 90%-93%, 60%-63% and 28%-31% for 2016, 2017 and 2018, respectively. The percentage of expected generation hedged is the amount of
equivalent sales divided by the expected generation. 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 Generation’s sales to ComEd, PECO and BGE to serve
their retail load.
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-proprietary trading portfolio associated with a $5 reduction in the annual average around-the-
clock energy price based on December 31, 2015, market conditions and hedged position would be a decrease in pre-tax net income of
approximately $50 million, $400 million and $725 million, respectively, for 2016, 2017 and 2018. 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 7,310 GWh, 10,571 GWh, and 8,762 GWh
for the years ended December 31, 2015, 2014 and 2013 respectively, are a complement to Generation’s energy marketing portfolio, but represent a
small portion of Generation’s overall revenue from energy marketing activities. Proprietary trading portfolio activity for the year ended
December 31, 2015, resulted in pre-tax gains of $1 million due to net mark-to-market losses of $8 million and realized gains of $9 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 $0.2 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
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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