ComEd 2015 Annual Report Download - page 46

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the energy markets could lead to pressures for greater regulation of those markets or attempts to replace market structures with other
mechanisms for the sale of power, including the requirement of long-term contracts, which could have a material adverse effect on Exelon’s and
Generation’s results of operations or cash flows.
If any of the Registrants were to experience a downgrade in its credit ratings to below investment grade or otherwise fail to satisfy the
credit standards in its agreements with its trading counterparties, it would be required to provide significant amounts of collateral under
its agreements with counterparties and could experience higher borrowing costs. (Exelon, Generation, ComEd, PECO and BGE)
Generation’s business is subject to credit quality standards that could require market participants to post collateral for their obligations. If
Generation were to be downgraded or lose its investment grade credit rating (based on its senior unsecured debt rating) or otherwise fail to satisfy
the credit standards of trading counterparties, it would be required under its hedging arrangements to provide collateral in the form of letters of
credit or cash, which may have a material adverse effect upon its liquidity. The amount of collateral required to be provided by Generation at any
point in time is dependent on a variety of factors, including (1) the notional amount of the applicable hedge, (2) the nature of counterparty and
related agreements, and (3) changes in power or other commodity prices. In addition, if Generation were downgraded, it could experience higher
borrowing costs as a result of the downgrade. Generation could experience a downgrade in its ratings if any of the credit rating agencies concludes
that the level of business or financial risk and overall creditworthiness of the power generation industry in general, or Generation in particular, has
deteriorated. Changes in ratings methodologies by the credit rating agencies could also have a negative impact on the ratings of Generation.
Generation has project-specific financing arrangements and must meet the requirements of various agreements relating to those financings.
Failure to meet those arrangements could give rise to a project-specific financing default which, if not cured or waived, could result in the specific
project being required to repay the associated debt or other borrowings earlier than otherwise anticipated, and if such repayment were not made,
the lenders or security holders would generally have rights to foreclose against the project assets and related collateral.
ComEd’s, PECO’s and BGE’s operating agreements with PJM and PECO’s and BGE’s natural gas procurement contracts contain collateral
provisions that are affected by their credit rating and market prices. If certain wholesale market conditions were to exist and ComEd, PECO and
BGE were to lose their investment grade credit ratings (based on their senior unsecured debt ratings), they would be required to provide collateral
in the forms of letters of credit or cash, which could have a material adverse effect upon their liquidity. Collateral posting requirements will
generally increase as market prices rise and decrease as market prices fall. Collateral posting requirements for PECO and BGE, with respect to
their natural gas supply contracts, will generally increase as forward market prices fall and decrease as forward market prices rise. Given the
relationship to forward market prices, contract collateral requirements can be volatile. In addition, if ComEd, PECO and BGE were downgraded,
they could experience higher borrowing costs as a result of the downgrade.
ComEd, PECO or BGE could experience a downgrade in its ratings if any of the credit rating agencies conclude that the level of business or
financial risk and overall creditworthiness of the utility industry in general, or ComEd, PECO, or BGE in particular, has deteriorated. ComEd, PECO
or BGE could experience a downgrade if the current regulatory environments in Illinois, Pennsylvania or Maryland, respectively, become less
predictable by materially lowering returns for utilities in the applicable state or adopting other measures to limit electricity prices. Additionally, the
ratings for ComEd, PECO or BGE could be downgraded if their financial results are weakened from current levels due to weaker operating
performance or due to a failure to properly manage their capital structure. In addition, changes in ratings methodologies by the agencies could also
have a negative impact on the ratings of ComEd, PECO or BGE.
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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