Exelon 2014 Annual Report Download - page 68

Furthermore, Exelon, ComEd, PECO and BGE make other judgments related to the financial statement impact of their regulatory
environments, such as the types of adjustments to rate base that will be acceptable to regulatory bodies, if any, to which costs will be
recoverable through rates. Refer to the revenue recognition discussion below for additional information on the annual revenue
reconciliations associated with ComEd’s distribution formula rate tariff, pursuant to EIMA, and FERC-approved transmission formula
rate tariffs for ComEd and BGE. Additionally, estimates are made in accordance with the authoritative guidance for contingencies as
to the amount of revenues billed under certain regulatory orders that may ultimately be refunded to customers upon finalization of
applicable regulatory or judicial processes. These assessments are based, to the extent possible, on past relevant experience with
regulatory bodies in ComEd’s, PECO’s and BGE’s jurisdictions, known circumstances specific to a particular matter and hearings
held with the applicable regulatory body. If the assessments and estimates made by Exelon, ComEd, PECO and BGE are ultimately
different than actual regulatory outcomes, the impact on their results of operations, financial position, and cash flows could be
material.
The Registrants treat the impacts of a final rate order received after the balance sheet date but prior to the issuance of the financial
statements as a non-recognized subsequent event, as the receipt of a final rate order is a separate and distinct event that has future
impacts on the parties affected by the order.
Accounting for Derivative Instruments
The Registrants utilize derivative instruments to manage their exposure to fluctuations in interest rates, changes in interest rates
related to planned future debt issuances and changes in the fair value of outstanding debt. Generation uses a variety of derivative
and non-derivative instruments to manage the commodity price risk of its electric generation facilities, including power sales, fuel and
energy purchases and other energy-related products marketed and purchased. Additionally, Generation enters into energy-related
derivatives for proprietary trading purposes. ComEd has entered into contracts to procure energy, capacity and ancillary services. In
addition, ComEd had a financial swap contract with Generation that expired May 31, 2013 and currently holds floating-to-fixed
energy swaps with several unaffiliated suppliers that extend into 2032. PECO and BGE have entered into derivative natural gas
contracts to hedge their long-term price risk in the natural gas market. PECO has also entered into derivative contracts to procure
electric supply through a competitive RFP process as outlined in its PAPUC-approved DSP Program. BGE has also entered into
derivative contracts to procure electric supply through a competitive auction process as outlined in its MDPSC-approved SOS
Program. ComEd, PECO and BGE do not enter into derivatives for proprietary trading purposes. The Registrants’ derivative
activities are in accordance with Exelon’s Risk Management Policy (RMP). See Note 12—Derivative Financial Instruments of the
Combined Notes to Consolidated Financial Statements for additional information regarding the Registrants’ derivative instruments.
The Registrants account for derivative financial instruments under the applicable authoritative guidance. Determining whether or not
a contract qualifies as a derivative under this guidance requires that management exercise significant judgment, including assessing
the market liquidity as well as determining whether a contract has one or more underlyings and one or more notional amounts.
Further, interpretive guidance related to the authoritative literature continues to evolve, including how it applies to energy and
energy-related products. Changes in management’s assessment of contracts and the liquidity of their markets, and changes in
authoritative guidance related to derivatives, could result in previously excluded contracts being subject to the provisions of the
authoritative derivative guidance. Generation has determined that contracts to purchase uranium, contracts to purchase and sell
capacity in certain ISO’s, certain emission products and RECs do not meet the definition of a derivative under the current
authoritative guidance since they do not provide for net settlement and neither the uranium, certain capacity, emission nor the REC
markets are sufficiently liquid to conclude that physical forward contracts are readily convertible to cash. If these markets do become
sufficiently liquid in the future and Generation would be required to account for these contracts as derivative instruments, the fair
value of these contracts would be accounted for consistent with Generation’s other derivative instruments. In this case, if market
prices differ from the underlying prices of the contracts, Generation would be required to record mark-to-market gains or losses,
which may have a significant impact to Exelon’s and Generation’s financial positions and results of operations.
Under current authoritative guidance, all derivatives are recognized on the balance sheet at their fair value, except for certain
derivatives that qualify for, and are elected under, the normal purchases and normal sales exception. Further, derivatives that qualify
and are designated for hedge accounting are classified as fair value or cash flow hedges. For fair value hedges, changes in fair
values for both the derivative and the underlying hedged exposure are recognized in earnings each period. For cash flow hedges,
the portion of the derivative gain or loss that is effective in offsetting the change in the hedged cash flows of the underlying exposure
is deferred in accumulated OCI and later reclassified into earnings when the underlying transaction occurs. Gains and losses from
the ineffective portion of any hedge are recognized in earnings immediately. For commodity transactions, effective with the date of
the Constellation merger, Generation no longer utilizes the election provided for by the cash flow hedge designation and de-
designated all of its existing cash flow hedges prior to the Constellation merger. Because the underlying forecasted transactions
remain probable, the fair value of the effective portion of these cash flow hedges was frozen in accumulated OCI and will be
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