XML 296 R22.htm IDEA: XBRL DOCUMENT v3.19.3.a.u2
Derivative Financial Instruments (All Registrants)
 12 Months Ended
Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments (All Registrants) Derivative Financial Instruments (All Registrants)
The Registrants use derivative instruments to manage commodity price risk, interest rate risk and foreign exchange risk related to ongoing business operations.
Authoritative guidance requires that derivative instruments be recognized as either assets or liabilities at fair value, with changes in fair value of the derivative recognized in earnings immediately. Other accounting treatments are
available through special election and designation, provided they meet specific, restrictive criteria both at the time of designation and on an ongoing basis. These alternative permissible accounting treatments include NPNS, cash flow hedges and fair value hedges. All derivative economic hedges related to commodities, referred to as economic hedges, are recorded at fair value through earnings at Generation and are offset by a corresponding regulatory asset or liability at ComEd. For all NPNS derivative instruments, accounts receivable or accounts payable are recorded when derivative settles and revenue or expense is recognized in earnings as the underlying physical commodity is sold or consumed.
Authoritative guidance about offsetting assets and liabilities requires the fair value of derivative instruments to be shown in the Combined Notes to Consolidated Financial Statements on a gross basis, even when the derivative instruments are subject to legally enforceable master netting agreements and qualify for net presentation in the Consolidated Balance Sheets. A master netting agreement is an agreement between two counterparties that may have derivative and non-derivative contracts with each other providing for the net settlement of all referencing contracts via one payment stream, which takes place as the contracts deliver, when collateral is requested or in the event of default. In the tables below that present fair value balances, Generation’s energy-related economic hedges and proprietary trading derivatives are shown gross. The impact of the netting of fair value balances with the same counterparty that are subject to legally enforceable master netting agreements, as well as netting of cash collateral, including margin on exchange positions, is aggregated in the collateral and netting columns.
Generation’s and ComEd’s use of cash collateral is generally unrestricted unless Generation or ComEd are downgraded below investment grade. Cash collateral held by PECO, BGE, Pepco, DPL and ACE must be deposited in an unaffiliated major U.S. commercial bank or foreign bank with a U.S. branch office that meet certain qualifications.
Commodity Price Risk (All Registrants)
Each of the Registrants employ established policies and procedures to manage their risks associated with market fluctuations in commodity prices by entering into physical and financial derivative contracts, including swaps, futures, forwards, options and short-term and long-term commitments to purchase and sell energy and commodity products. The Registrants believe these instruments, which are either determined to be non-derivative or classified as economic hedges, mitigate exposure to fluctuations in commodity prices.
Generation. To the extent the amount of energy Generation produces differs from the amount of energy it has contracted to sell, Exelon and Generation are exposed to market fluctuations in the prices of electricity, fossil fuels and other commodities. Within Exelon, Generation has the most exposure to commodity price risk. As such, Generation uses a variety of derivative and non-derivative instruments to manage the commodity price risk of its electric generation facilities, including power and gas sales, fuel and power purchases, natural gas transportation and pipeline capacity agreements and other energy-related products marketed and purchased. To manage these risks, Generation may enter into fixed-price derivative or non-derivative contracts to hedge the variability in future cash flows from expected sales of power and gas and purchases of power and fuel. The objectives for executing such hedges include fixing the price for a portion of anticipated future electricity sales at a level that provides an acceptable return. Generation is also exposed to differences between the locational settlement prices of certain economic hedges and the hedged generating units. This price difference is actively managed through other instruments which include derivative congestion products, whose changes in fair value are recognized in earnings each period, and auction revenue rights, which are accounted for on an accrual basis.
Additionally, Generation is exposed to certain market risks through its proprietary trading activities. The proprietary trading activities are a complement to Generation’s energy marketing portfolio but represent a small portion of Generation’s overall energy marketing activities and are subject to limits established by Exelon’s RMC.
Utility Registrants. The Utility Registrants procure electric and natural gas supply through a competitive procurement process approved by each of the respective state utility commissions. The Utility Registrants’ hedging programs are intended to reduce exposure to energy and natural gas price volatility and have no direct earnings impact as the costs are fully recovered from customers through regulatory-approved recovery mechanisms. The following table provides a summary of the Utility Registrants’ primary derivative hedging instruments, listed by commodity and accounting treatment.
Registrant
Commodity
Accounting Treatment
Hedging instrument
ComEd
Electricity
NPNS
Fixed price contracts based on all requirements in the IPA procurement plans.
Electricity
Changes in fair value of economic hedge recorded to an offsetting regulatory asset or liability(a)
20-year floating-to-fixed energy swap contracts beginning June 2012 based on the renewable energy resource procurement requirements in the Illinois Settlement Legislation of approximately 1.3 million MWhs per year.
PECO(b)
Gas
NPNS
Fixed price contracts to cover about 20% of planned natural gas purchases in support of projected firm sales.
BGE
Electricity
NPNS
Fixed price contracts for all SOS requirements through full requirements contracts.
Gas
NPNS
Fixed price contracts for between 10-20% of forecasted system supply requirements for flowing (i.e., non-storage) gas for the November through March period.
Pepco
Electricity
NPNS
Fixed price contracts for all SOS requirements through full requirements contracts.
DPL
Electricity
NPNS
Fixed price contracts for all SOS requirements through full requirements contracts.
Gas
NPNS
Fixed price contracts through full requirements contracts.
Changes in fair value of economic hedge recorded to an offsetting regulatory asset or liability(c)
Exchange traded future contracts for 50% of estimated monthly purchase requirements each month, including purchases for storage injections.
ACE
Electricity
NPNS
Fixed price contracts for all BGS requirements through full requirements contracts.
_________
(a)
See Note 3 - Regulatory Matters for additional information.
(b)
As part of its hedging program, PECO enters into electric supply procurement contracts that do not meet the definition of a derivative instrument.
(c)
The fair value of the DPL economic hedge is not material as of December 31, 2019 and 2018 and is not presented in the fair value tables below.
The following table provides a summary of the derivative fair value balances recorded by Exelon, Generation and ComEd as of December 31, 2019 and 2018:
 
Exelon
 
Generation
 
ComEd
December 31, 2019
Total
Derivatives
 
Economic
Hedges
 
Proprietary
Trading
 
Collateral

(a)(b)
 
Netting(a)
 
Subtotal
 
Economic
Hedges
Mark-to-market derivative assets (current assets)
$
675

 
$
3,506

 
$
72

 
$
287

 
$
(3,190
)
 
$
675

 
$
—

Mark-to-market derivative assets (noncurrent assets)
508

 
1,238

 
25

 
122

 
(877
)
 
508

 
—

Total mark-to-market derivative assets
1,183

 
4,744


97


409

 
(4,067
)
 
1,183

 
—

Mark-to-market derivative liabilities (current liabilities)
(236
)
 
(3,713
)
 
(38
)
 
357

 
3,190

 
(204
)
 
(32
)
Mark-to-market derivative liabilities (noncurrent liabilities)
(380
)
 
(1,140
)
 
(11
)
 
163

 
877

 
(111
)
 
(269
)
Total mark-to-market derivative liabilities
(616
)
 
(4,853
)

(49
)

520

 
4,067

 
(315
)
 
(301
)
Total mark-to-market derivative net assets (liabilities)
$
567

 
$
(109
)

$
48


$
929

 
$
—

 
$
868

 
$
(301
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Mark-to-market derivative assets (current assets)
$
801

 
$
3,505

 
$
105

 
$
121

 
$
(2,930
)
 
$
801

 
$
—

Mark-to-market derivative assets (noncurrent assets)
445

 
1,266

 
41

 
51

 
(913
)
 
445

 
—

Total mark-to-market derivative assets
1,246

 
4,771

 
146

 
172

 
(3,843
)
 
1,246

 
—

Mark-to-market derivative liabilities (current liabilities)
(473
)
 
(3,429
)
 
(74
)
 
125

 
2,931

 
(447
)
 
(26
)
Mark-to-market derivative liabilities (noncurrent liabilities)
(474
)
 
(1,203
)
 
(20
)
 
60

 
912

 
(251
)
 
(223
)
Total mark-to-market derivative liabilities
(947
)
 
(4,632
)
 
(94
)
 
185

 
3,843

 
(698
)
 
(249
)
Total mark-to-market derivative net assets (liabilities)
$
299

 
$
139

 
$
52

 
$
357

 
$
—

 
$
548

 
$
(249
)
_________
(a)
Exelon and Generation net all available amounts allowed under the derivative authoritative guidance in the balance sheet. These amounts include unrealized derivative transactions with the same counterparty under legally enforceable master netting agreements and cash collateral. In some cases Exelon and Generation may have other offsetting exposures, subject to a master netting or similar agreement, such as trade receivables and payables, transactions that do not qualify as derivatives, letters of credit and other forms of non-cash collateral. These amounts are immaterial and not reflected in the table above.
(b)
Of the collateral posted/(received), $511 million and $(94) million represents variation margin on the exchanges at December 31, 2019 and 2018, respectively.
Economic Hedges (Commodity Price Risk)
Generation. For the years ended December 31, 2019, 2018 and 2017, Exelon and Generation recognized the following net pre-tax commodity mark-to-market gains (losses) which are also located in the Net fair value changes related to derivatives line in the Consolidated Statements of Cash Flows.

 
2019
 
2018
 
2017
Income Statement Location
 
Gain (Loss)
Operating revenues
 
$
—

 
$
(270
)
 
$
(126
)
Purchased power and fuel
 
(204
)
 
(47
)
 
(43
)
Total Exelon and Generation
 
$
(204
)
 
$
(317
)
 
$
(169
)

In general, increases and decreases in forward market prices have a positive and negative impact, respectively, on Generation’s owned and contracted generation positions that have not been hedged. Generation hedges commodity price risk on a ratable basis over three-year periods. As of December 31, 2019, the percentage of expected generation hedged for the Mid-Atlantic, Midwest, New York and ERCOT reportable segments is 91%-94% and 61%-64% for 2020 and 2021, respectively.
Proprietary Trading (Commodity Price Risk)
Generation also executes commodity derivatives for proprietary trading purposes. Proprietary trading includes all contracts executed with the intent of benefiting from shifts or changes in market prices as opposed to those executed with the intent of hedging or managing risk. Gains and losses associated with proprietary trading are reported as Operating revenues in Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income and are included in the Net fair value changes related to derivatives line in the Consolidated Statements of Cash Flows. For the years ended December 31, 2019, 2018 and 2017, net pre-tax commodity mark-to-market gains (losses) for Exelon and Generation were not material. The Utility Registrants do not execute derivatives for proprietary trading purposes.
Interest Rate and Foreign Exchange Risk (Exelon and Generation)
Exelon and Generation utilize interest rate swaps, which are treated as economic hedges, to manage their interest rate exposure. On July 1, 2018, Exelon de-designated its fair value hedges related to interest rate risk and Generation de-designated its cash flow hedges related to interest rate risk. The notional amounts were $1,269 million and $1,420 million at December 31, 2019 and 2018, respectively, for Exelon and $569 million and $620 million at December 31, 2019 and 2018, respectively, for Generation.
Generation utilizes foreign currency derivatives to manage foreign exchange rate exposure associated with international commodity purchases in currencies other than U.S. dollars, which are treated as economic hedges. The notional amounts were $231 million and $268 million at December 31, 2019 and 2018, respectively.
The mark-to-market derivative assets and liabilities as of December 31, 2019 and 2018 and the mark-to-market gains (losses) for the years ended December 31, 2019, 2018 and 2017 were not material for Exelon and Generation.
Credit Risk (All Registrants)
The Registrants would be exposed to credit-related losses in the event of non-performance by counterparties on executed derivative instruments. The credit exposure of derivative contracts, before collateral, is represented by the fair value of contracts at the reporting date.
Generation. For commodity derivatives, Generation enters into enabling agreements that allow for payment netting with its counterparties, which reduces Generation’s exposure to counterparty risk by providing for the offset of amounts payable to the counterparty against amounts receivable from the counterparty. Typically, each enabling agreement is for a specific commodity and so, with respect to each individual counterparty, netting is limited to transactions involving that specific commodity product, except where master netting agreements exist with a counterparty that allow for cross product netting. In addition to payment netting language in the enabling agreement, Generation’s credit department establishes credit limits, margining thresholds and collateral requirements for each counterparty, which are defined in the derivative contracts. Counterparty credit limits are based on an internal credit
review process that considers a variety of factors, including the results of a scoring model, leverage, liquidity, profitability, credit ratings by credit rating agencies, and risk management capabilities. To the extent that a counterparty’s margining thresholds are exceeded, the counterparty is required to post collateral with Generation as specified in each enabling agreement. Generation’s credit department monitors current and forward credit exposure to counterparties and their affiliates, both on an individual and an aggregate basis.
The following tables provide information on Generation’s credit exposure for all derivative instruments, NPNS and payables and receivables, net of collateral and instruments that are subject to master netting agreements, as of December 31, 2019. The tables further delineate that exposure by credit rating of the counterparties and provide guidance on the concentration of credit risk to individual counterparties. The figures in the tables below exclude credit risk exposure from individual retail counterparties, nuclear fuel procurement contracts and exposure through RTOs, ISOs, NYMEX, ICE, NASDAQ, NGX and Nodal commodity exchanges.
Rating as of December 31, 2019
Total
Exposure
Before Credit
Collateral
 
Credit
Collateral(a)
 
Net
Exposure
 
Number of
Counterparties
Greater than 10%
of Net Exposure
 
Net Exposure of
Counterparties
Greater than 10%
of Net Exposure
Investment grade
$
877


$
20

 
$
857

 
—

 
$
—

Non-investment grade
79


63

 
16

 
 
 
 
No external ratings



 

 
 
 
 
Internally rated — investment grade
218


—

 
218

 
 
 
 
Internally rated — non-investment grade
139


23

 
116

 
 
 
 
Total
$
1,313


$
106

 
$
1,207

 
—

 
$
—

Net Credit Exposure by Type of Counterparty
As of
December 31, 2019
Financial institutions
$
9

Investor-owned utilities, marketers, power producers
930

Energy cooperatives and municipalities
235

Other
33

Total
$
1,207

__________
(a)
As of December 31, 2019, credit collateral held from counterparties where Generation had credit exposure included $25 million of cash and $81 million of letters of credit. The credit collateral does not include non-liquid collateral.
Utility Registrants. The Utility Registrants have contracts to procure electric and natural gas supply that provide suppliers with a certain amount of unsecured credit. If the exposure on the supply contract exceeds the amount of unsecured credit, the suppliers may be required to post collateral. The net credit exposure is mitigated primarily by the ability to recover procurement costs through customer rates. As of December 31, 2019, the Utility Registrants’ counterparty credit risk with suppliers was immaterial.
Credit-Risk-Related Contingent Features (All Registrants)
Generation. As part of the normal course of business, Generation routinely enters into physically or financially settled contracts for the purchase and sale of electric capacity, electricity, fuels, emissions allowances and other energy-related products. Certain of Generation’s derivative instruments contain provisions that require Generation to post collateral. Generation also enters into commodity transactions on exchanges where the exchanges act as the counterparty to each trade. Transactions on the exchanges must adhere to comprehensive collateral and margining requirements. This collateral may be posted in the form of cash or credit support with thresholds contingent upon Generation’s credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. These credit-risk related contingent features stipulate that if Generation were to be downgraded or lose its investment grade credit rating (based on its senior unsecured debt rating), it would be required to provide additional collateral. This incremental collateral requirement allows for the offsetting of derivative instruments that are assets with the same counterparty, where the contractual right of offset exists under applicable master netting agreements. In the absence of expressly agreed-to provisions that specify
the collateral that must be provided, collateral requested will be a function of the facts and circumstances of the situation at the time of the demand. In this case, Generation believes an amount of several months of future payments (i.e., capacity payments) rather than a calculation of fair value is the best estimate for the contingent collateral obligation, which has been factored into the disclosure below.
The aggregate fair value of all derivative instruments with credit-risk related contingent features in a liability position that are not fully collateralized (excluding transactions on the exchanges that are fully collateralized) is detailed in the table below:
 
 
As of December 31,
Credit-Risk Related Contingent Features
 
2019
 
2018
Gross fair value of derivative contracts containing this feature(a)
 
$
(956
)
 
$
(1,723
)
Offsetting fair value of in-the-money contracts under master netting arrangements(b)
 
649

 
1,105

Net fair value of derivative contracts containing this feature(c)
 
$
(307
)
 
$
(618
)
__________
(a)
Amount represents the gross fair value of out-of-the-money derivative contracts containing credit-risk-related contingent features ignoring the effects of master netting agreements.
(b)
Amount represents the offsetting fair value of in-the-money derivative contracts under legally enforceable master netting agreements with the same counterparty, which reduces the amount of any liability for which a Registrant could potentially be required to post collateral.
(c)
Amount represents the net fair value of out-of-the-money derivative contracts containing credit-risk related contingent features after considering the mitigating effects of offsetting positions under master netting arrangements and reflects the actual net liability upon which any potential contingent collateral obligations would be based.
As of December 31, 2019 and 2018, Exelon and Generation posted or held the following amounts of cash collateral and letters of credit on derivative contracts with external counterparties, after giving consideration to offsetting derivative and non-derivative positions under master netting agreements.
 
 
As of December 31,
 
 
2019
 
2018
Cash collateral posted
 
$
982

 
$
418

Letters of credit posted
 
264

 
367

Cash collateral held
 
103

 
47

Letters of credit held
 
112

 
44

Additional collateral required in the event of a credit downgrade below investment grade
 
1,509

 
2,104


Generation entered into supply forward contracts with certain utilities, including PECO and BGE, with one-sided collateral postings only from Generation. If market prices fall below the benchmark price levels in these contracts, the utilities are not required to post collateral. However, when market prices rise above the benchmark price levels, counterparty suppliers, including Generation, are required to post collateral once certain unsecured credit limits are exceeded.
Utility Registrants
The Utility Registrants’ electric supply procurement contracts do not contain provisions that would require them to post collateral.
PECO’s, BGE’s, and DPL’s natural gas procurement contracts contain provisions that could require PECO, BGE, and DPL to post collateral in the form of cash or credit support, which vary by contract and counterparty, with thresholds contingent upon PECO’s, BGE, and DPL’s credit rating. As of December 31, 2019, PECO, BGE, and DPL were not required to post collateral for any of these agreements. If PECO, BGE or DPL lost their investment grade credit rating as of December 31, 2019, they could have been required to post incremental collateral to its counterparties of $44 million, $50 million, and $11 million, respectively.