Exelon 2003 Annual Report Download - page 116

114 Notes to Consolidated Financial Statements
EXELON CORPORATION AND SUBSIDIARY COMPANIES
Derivative Instruments
The fair values of Exelon’s interest-rate swaps and power
purchase and sale contracts are determined using quoted
exchange prices, external dealer prices or internal valuation
models which utilize assumptions of future energy prices
and available market pricing curves.
At December 31, 2003 and 2002, Exelon had $1.3 billion
and $2.3 billion, respectively, of notional amounts of interest-
rate swaps outstanding with net deferred losses of $44 mil-
lion and $125 million, respectively, as follows:
Notional
Amount Exelon Pays Counterparty Pays
Fair
Value
2003
Fair
Value
2002
Fair-Value Hedges
ComEd
$485
3 Month Libor
plus 1.68%–2.50% 6.40%–8.25% $33 $41
Cash-Flow Hedges
ComEd $630(a) 4.32% – 5.60% 3 Month Libor –(52)
Generation 861 5.71% – 5.74% 3 Month Libor (77) (92)
PETT
274(b) 6.58% – 6.94%
6 Month Libor
plus 0.02%–0.13% –(22)
Net deferred losses $(44) $(125)
(a) ComEd settled all of its cash flow swaps during 2003.
(b) PECO deconsolidated its financing trusts at December 31, 2003 in conjunction with the adoption of FIN No. 46-R. See Note 1—Accounting Policies and Note 11—Long-Term Debt
for further discussion of the adoption of FIN No. 46-R.
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.
During 2003 and 2002, Exelon settled interest-rate swaps
in an aggregate notional amounts of $860 million and $200
million, respectively, and recorded pre-tax gains of $1 million
and pre-tax losses of $5 million, respectively, which were re-
corded in other comprehensive income. Additionally, during
2003 and 2002, Exelon settled interest-rate swaps in ag-
gregate notional amounts of $1,070 million and $450 million,
respectively, and recorded net pre-tax losses of $45 million
and $10 million, respectively, which were recorded as regu-
latory assets. The pre-tax losses on settlements of interest-
rate swaps are being amortized over the life of the related
debt to interest expense.
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
contracts and energy financial swap arrangements to limit
the market price risk associated with forward energy com-
modity contracts. Additionally, Exelon enters into certain
energy-related derivatives for trading purposes. At De-
cember 31, 2003 and 2002, Exelon had $213 million and $143
million, respectively, of energy derivatives recorded as net
liabilities at fair value on the Consolidated Balance Sheets,
which includes the energy derivatives at Generation and
Enterprises discussed below.
For the years ended December 31, 2003, 2002, and 2001
Generation recognized net unrealized losses of $16 million,
net unrealized gains of $6 million, and net unrealized gains
of $16 million, respectively, relating to mark-to-market activ-
ity of certain non-trading power purchase and sale contracts
pursuant to SFAS No. 133. Mark-to-market activity on non-
trading power purchase and sale contracts are reported in
fuel and purchased power. For the years ended December 31,
2003, 2002 and 2001, Generation recognized net unrealized
losses of $3 million, net unrealized losses of $9 million and
net unrealized gains of $14 million, respectively, relating to
mark-to-market activity on derivative instruments entered
into for trading purposes. Gains and losses associated with
financial trading are reported as revenue in the Consolidated
Statements of Income. During 2001, a $6 million gain ($4 mil-
lion, net of income taxes) was reclassified from accumulated
other comprehensive income into earnings as a result of
forecasted financing transactions no longer being probable.
Enterprises has entered into a limited number of energy
commodity derivative contracts in connection with its serv-
ice of gas customers. While the majority of these contracts
qualify as normal purchases and sales or as cash-flow
hedges under SFAS No. 133, $15 million was recorded as an
increase to fuel expense in 2003 and $16 million was re-
corded as a reduction to fuel expense in 2002 as a result of
contracts being marked to market. The $15 million increase in
2003 was primarily related to the reversal of the 2002 mark-
to-market adjustments. It is expected that the remaining $1
million will reverse as fuel expense in 2004. At December 31,
2003 and 2002, Exelon had net assets of $3 million and $20
million, respectively, on the Consolidated Balance Sheets