Exelon 2015 Annual Report Download - page 24

Table of Contents
Natural gas is procured through long-term and short-term contracts, as well as spot-market purchases. Fuel oil inventories are managed so
that in the winter months sufficient volumes of fuel are available in the event of extreme weather conditions and during the remaining months to
take advantage of favorable market pricing.
Generation uses financial instruments to mitigate price risk associated with certain commodity price exposures. Generation also hedges
forward price risk, using both over-the-counter and exchange-traded instruments. See ITEM 1A. RISK FACTORS, ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Critical Accounting Policies and Estimates and
Note 13—Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information regarding
derivative financial instruments.
Power Marketing
Generation’s integrated business operations include the physical delivery and marketing of power obtained through its generation capacity
and through long-term, intermediate-term and short-term contracts. Generation maintains an effective supply strategy through ownership of
generation assets and power purchase and lease agreements. Generation has also contracted for access to additional generation through bilateral
long-term PPAs. PPAs, including tolling agreements, are commitments related to power generation of specific generation plants and/or are
dispatchable in nature similar to asset ownership depending on the type of underlying asset. Generation secures contracted generation as part of
its overall strategic plan, with objectives such as obtaining low-cost energy supply sources to meet its physical delivery obligations to both
wholesale and retail customers and assisting customers to meet renewable portfolio standards. Generation may also buy power in the market to
meet the energy demand of its customers. Generation sells electricity, natural gas, and related products and solutions to various customers,
including distribution utilities, municipalities, cooperatives, and commercial, industrial, governmental, and residential customers in competitive
markets. Generation’s customer facing operations combine a unified sales force with a customer-centric model that leverages technology to
broaden the range of products and solutions offered, which Generation believes promotes stronger customer relationships. This model focuses on
efficiency and cost reduction, which provides a platform that is scalable and able to capitalize on opportunities for future growth.
Generation may purchase more than the energy demanded by its customers. Generation then sells this open position, along with capacity
not used to meet customer demand, in the wholesale electricity markets. Where necessary, Generation also purchases transmission service to
ensure that it has reliable transmission capacity to physically move its power supplies to meet customer delivery needs in markets without an
organized RTO. Generation also incorporates contingencies into its planning for extreme weather conditions, including potentially reserving
capacity to meet summer loads at levels representative of warmer-than-normal weather conditions. Additionally, Generation is involved in the
development, exploration, and harvesting of oil, natural gas and natural gas liquids properties (Upstream).
Price Supply Risk Management
Generation also manages the price and supply risks for energy and fuel associated with generation assets and the risks of power marketing
activities. Generation implements a three-year ratable sales plan to align its hedging strategy with its financial objectives. Generation also enters
into transactions that are outside of this ratable sales plan. Generation is exposed to commodity price risk in 2016 and beyond for portions of its
electricity portfolio that are unhedged. Generation has been and will continue to be proactive in using hedging strategies to mitigate this risk in
subsequent years. As of December 31, 2015, the percentage of expected generation hedged for the major reportable segments was 90%-93%,
60%-63% and 28%-31% for 2016, 2017, and 2018, respectively. The percentage of expected generation hedged is the amount of equivalent sales
divided by the expected generation.
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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