Exelon 2014 Annual Report Download - page 123

Interest Rate and Foreign Exchange Risk
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,
2014, Exelon and Generation had $1,450 million and $550 million of notional amounts of fixed-to-floating hedges outstanding,
respectively, and $3,070 million and $770 million of notional amounts of floating-to-fixed hedges outstanding, respectively. 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 $8
million decrease in Exelon Consolidated pre-tax income for the year ended December 31, 2014. 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.
Equity Price Risk
Exelon and Generation maintain trust funds, as required by the NRC, to fund certain costs of decommissioning Generation’s nuclear
plants. As of December 31, 2014, Generation’s decommissioning trust funds are reflected at fair value on its Consolidated Balance
Sheets. The mix of securities in the trust funds is designed to provide returns to be used to fund decommissioning and to
compensate Generation 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
interest rates. Generation actively monitors the investment performance of the trust funds and periodically reviews asset allocation in
accordance with Generation’s NDT fund investment policy. A hypothetical 10% increase in interest rates and decrease in equity
prices would result in a $617 million reduction in the fair value of the trust assets. This calculation holds all other variables constant
and assumes only the discussed changes in interest rates and equity prices. See MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for further discussion of equity price risk as a result of the current
capital and credit market conditions.
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