ComEd 2015 Annual Report Download - page 187

Table of Contents
Long-Term Leases (Exelon)
Exelon’s Consolidated Balance Sheet, as of December 31, 2015, included a $352 million net investment in coal-fired plants in Georgia
subject to long-term leases. This investment represents the estimated residual value of leased assets at the end of the respective lease terms of
$639 million, less unearned income of $287 million. As of December 31, 2014, Exelon’s Consolidated Balance Sheet included a $361 million net
investment in coal-fired plants in Georgia subject to long-term leases, which represented the estimated residual value of leased assets at the end
of the respective lease terms of $685 million, less unearned income of $324 million. The lease agreements provide the lessees with fixed purchase
options at the end of the lease terms. If the lessee does not exercise the fixed purchase options, Exelon has the ability to operate the stations and
keep or market the power itself or require the lessee to arrange for a third-party to bid on a service contract for a period following the lease term.
Exelon will be subject to residual value risk if the lessee does not exercise the fixed purchase options. This risk is partially mitigated by the fair
value of the scheduled payments under the service contract. However, such payments are not guaranteed. Further, the term of the service
contract is less than the expected remaining useful life of the plants and, therefore, Exelon’s exposure to residual value risk will not be mitigated
by payments under the service contract in this remaining period. Lessee performance under the lease agreements is supported by collateral and
credit enhancement measures. Management regularly evaluates the creditworthiness of Exelon’s counterparties to these long-term leases. Exelon
monitors the continuing credit quality of the credit enhancement party.
Pursuant to the applicable accounting guidance, Exelon is required to review the estimated residual values of its direct financing lease
investments at least annually and, if the review indicates a fair value below the carrying value and the decline is determined to be other than
temporary, must record an impairment charge in the period the estimate changed. Based on the annual review performed in the second quarters of
2015 and 2014, the estimated residual value of Exelon’s direct financing leases for the Georgia generating stations experienced other than
temporary declines given increases in estimated long-term operating and maintenance costs in the 2015 annual review and reduced long-term
energy and capacity price expectations in the 2014 annual review. As a result, Exelon recorded a $24 million pre-tax impairment charge in 2015
and 2014 for these stations. See Note 8—Impairment of Long-Lived Assets of the Combined Notes to Consolidated Financial Statements for
further information.
Interest Rate and Foreign Exchange Risk (Exelon, Generation, ComEd, PECO and BGE)
The Registrants use a combination of fixed-rate and variable-rate debt to manage interest rate exposure. The Registrants may also utilize
fixed-to-floating interest rate swaps, which are typically designated as fair value hedges, as a means to manage their interest rate exposure. In
addition, the Registrants may utilize interest rate derivatives to lock in rate levels in anticipation of future financings, which are typically designated
as cash flow hedges. These strategies are employed to manage interest rate risks. At December 31, 2015, Exelon had $800 million of notional
amounts of fixed-to-floating hedges outstanding and Exelon and Generation had $738 million of notional amounts of floating-to-fixed hedges
outstanding. Assuming the fair value and cash flow interest rate hedges are 100% effective, a hypothetical 50 bps increase in the interest rates
associated with unhedged variable-rate debt (excluding Commercial Paper) and fixed-to-floating swaps would result in approximately a $6 million
decrease in Exelon Consolidated pre-tax income for the year ended December 31, 2015. To manage foreign exchange rate exposure associated
with international energy purchases in currencies other than U.S. dollars, Generation utilizes foreign currency derivatives, which are typically
designated as economic hedges.
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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