Exelon 2002 Annual Report Download - page 111

although the issuances had been delayed, we continued to
account for these interest rate swap transactions as hedges.
In connection with ComEd’s January 22, 2003 issuance of $700
million in First Mortgage Bonds, ComEd settled swaps, in the
aggregate notional amount of $550 million, for a payment of
$43 million, which will be recorded as a regulatory asset and
amortized over the life of the debt issuance.
The notional amount of derivatives does not represent
amounts that are exchanged by the parties and, thus, is not
a measure of Exelon’s exposure. The amounts exchanged are
calculated on the basis of the notional or contract amounts, as
well as on the other terms of the derivatives, which relate to
interest rates and the volatility of these rates.
Exelon utilizes derivatives to manage the utilization of its
available generating capacity and provision of wholesale
energy to its affiliates. Exelon also utilizes energy option con-
tracts and energy financial swap arrangements to limit the
market price risk associated with forward energy commodity
contracts. Additionally, Exelon enters into certain energy-
related derivatives for trading or speculative purposes.
During 2002 and 2001, Generation recognized net losses
of $6 million ($4 million, net of income taxes) and gains of $16
million ($10 million, net of income taxes), respectively, relating
to mark-to-market adjustments of certain non-trading power
purchase and sale contracts pursuant to SFAS No. 133. Mark-to-
market adjustments on non-trading power purchase and sale
contracts are reported in fuel and purchased power and mark-
to-market adjustments on trading activities are reported as
Operating Revenues in the Consolidated Statements of Income.
During 2002 and 2001, Generation recognized net losses aggre-
gating $9 million ($6 million,net of income taxes) and net gains
aggregating $14 million ($10 million, net of income taxes),
respectively, relating to mark-to-market adjustments on deriva-
tive instruments entered into for trading purposes. Exelon
Generation commenced financial trading in the second quarter
of 2001. Gains and losses associated with financial trading are
reported as Operating Revenue in the Consolidated Statements
of Income.During 2002 and 2001,no amounts were reclassified
from accumulated other comprehensive income into earnings
as a result of forecasted energy commodity transactions no
longer being probable. For 2002, no amounts were reclassified
from accumulated other comprehensive income into earnings
as a result of forecasted financing transactions no longer being
probable. For 2001, a $6 million gain ($4 million, net of income
taxes) was reclassified from accumulated other comprehensive
income into earnings as a result of forecasted financing trans-
actions no longer being probable.
Enterprises has entered into a limited number of energy
commodity derivative contracts in connection with its service of
gas customers.While the majority of these contracts qualify as
normal purchases and sales or as cash flow hedges under SFAS
No.133, $16 million was recorded as a reduction to fuel expense
as a result of contracts being marked to market in 2002. Of this
$16 million, $3 million was recorded upon contract settlement
and $13 million was recorded as a change in fair value prior to
contract settlement. The offset to this $13 million was recorded
as an asset on the balance sheet and it is expected that $11 mil-
lion and $2 million will reverse as fuel expense in 2003 and
2004, respectively. At December 31, 2002, there was a net asset
of $20 million on the balance sheet related to Enterprises’mark-
to-market contracts. The remaining $7 million of the offset to
this asset was recorded in other comprehensive income and is
expected to be reclassified to earnings within the next twelve
months. Enterprises’ counterparties in these contracts are all
investment grade, with the exception of Dynegy Inc. (Dynegy),
to whom Enterprises has $2 million of exposure.
On January 1, 2001,Exelon recognized a non-cash gain of $12
million,net of income taxes,in earnings and deferred a non-cash
gain of $44 million, net of income taxes, in accumulated other
comprehensive income, a component of shareholders’equity,
to reflect the initial adoption of SFAS No. 133, as amended. SFAS
No.133 must be applied to all derivative instruments and requires
that such instruments be recorded in the balance sheet either as
an asset or a liability measured at their fair value through earnings,
with special accounting permitted for certain qualifying hedges.
As of December 31, 2002, $102 million of deferred net losses
on derivative instruments in accumulated other comprehen-
sive income are expected to be reclassified to earnings during
the next twelve months. Amounts in accumulated other
comprehensive income related to interest rate cash flows are
reclassified into earnings when the forecasted interest payment
occurs. Amounts in accumulated other comprehensive income
related to energy commodity cash flows are reclassified into
earnings when the forecasted purchase or sale of the energy
commodity occurs. The majority of Exelon’s cash flow hedges
are expected to settle within the next 4 years.
Notes To Consolidated Financial Statements
exelon corporation and subsidiary companies
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