Exelon 2002 Annual Report Download - page 76

During 2002, PECO entered into forward starting interest
rate swaps,with an aggregate notional amount of $200 million,
in anticipation of the issuance of debt at PECO. These interest
rate swaps were designated as cash flow hedges. In connection
with bond issuances in 2002, PECO settled these forward
starting interestrate swaps resulting in a $5 million pre-tax loss
recorded in OCI, which is being amortized over the life of the
related debt.
PECO also had entered into interest rate swaps to manage
interestrate exposure associated with the floating rate series of
transition bonds issued to securitize PECO’s stranded cost
recovery.At December 31,2002, these interest rate swaps had an
aggregate fair market value exposure of $22 million.
PECO also has interest rate swaps in place to satisfy counter-
party credit requirements in regards to the floating rate series
of transition bonds which are mirror swaps of each other.These
swaps are not designated as cash flow hedges, therefore, they
are required to be marked-to-market if there is a difference in
their values.Since these swaps are offsetting each other,a mark-
to-market adjustment is not expected to occur.
Under the terms of the Sithe Boston Generation, LLC (SBG)
project debt facility, SBG is required to effectively fix the inter-
est rate on 50% of borrowings under the facility through its
maturity in 2007.As of December 31,2002,we have entered into
interest rate swap agreements which have effectively fixed
the interest rate on $861 million of notional principal, or 83% of
borrowings outstanding at December 31, 2002. The fair market
value exposure of these swaps,designated as cash flow hedges,
is $92 million.
The aggregate fair value of our interest rate swaps desig-
nated as fair value hedges that would have resulted from a
hypothetical 50 basis point decrease in the spot yield at
December 31, 2002 is estimated to be $49 million. If the deriva-
tive instruments had been terminated at December 31, 2002,
this estimated fair value represents the amount the counter-
parties would pay us.
The aggregate fair value of our interest rate swaps desig-
nated as fair value hedges that would have resulted from a
hypothetical 50 basis point increase in the spot yield at
December 31, 2002 is estimated to be $33 million. If the deriva-
tive instruments had been terminated at December 31, 2002,
this estimated fair value represents the amount the counter-
parties would pay us.
The aggregate fair value exposure of our interest rate swaps
designated as cash flow hedges that would have resulted from
a hypothetical 50 basis point decrease in the spot yield at
December 31, 2002 is estimated to be $200 million. If the deriv-
ative instruments had been terminated at December 31, 2002,
this estimated fair value represents the amount we would pay
to the counterparties.
The aggregate fair value exposure of our interest rate swaps
designated as cash flow hedges that would have resulted from
a hypothetical 50 basis point increase in the spot yield at
December 31, 2002 is estimated to be $132 million. If the deriva-
tive instruments had been terminated at December 31, 2002,
this estimated fair value represents the amount we would pay
to the counterparties.
Equity Price Risk
We maintain trust funds, as required by the NRC, to fund
certain costs of decommissioning our nuclear plants. As of
December 31, 2002, our decommissioning trust funds are
reflected at fair value on our Consolidated Balance Sheets. The
mix of securities in the trust funds is designed to provide
returns to be used to fund decommissioning and to compen-
sate us for inflationary increases in decommissioning costs.
However, the equity securities in the trust funds are exposed to
price fluctuations in equity markets,and the value of fixed rate,
fixed income securities are exposed to changes in interestrates.
We actively monitor the investment performance of the trust
funds and periodically review asset allocation in accordance
with our nuclear decommissioning trust fund investment pol-
icy.A hypothetical 10% increase in interest rates and decrease in
equity prices would result in a $172 million reduction in the fair
value of the trust assets.See Defined Benefit Pension and Other
Postretirement Welfare Benefits in the Critical Accounting
Estimates section for information regarding the pension and
other postretirement benefit trust assets.
new accounting pronouncements
In 2001, the FASB issued SFAS No. 143. SFAS No. 143 provides
accounting requirements for retirement obligations associated
with tangible long-lived assets. We will adopt SFAS No. 143 on
January 1, 2003. Retirement obligations associated with long-
lived assets included within the scope of SFAS No. 143 are those
for which there is a legal obligation to settle under existing or
enacted law, statute, written or oral contract or by legal con-
struction under the doctrine of promissory estoppel. Adoption
of SFAS No. 143 will change the accounting for the decommis-
sioning of our nuclear generating plants as well as certain other
long-lived assets.We are in the process of evaluating the impact
of adopting SFAS No. 143 on our financial condition.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
exelon corporation and subsidiary companies
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