filings.toolsItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Registrants are exposed to market risks associated with adverse changes in commodity prices, counterparty credit, interest rates, and equity prices. Exelon’s RMC approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval, and the monitoring and reporting of risk exposures. The RMC is chaired by the chief executive officer and includes the chief risk officer, chief strategy officer, chief executive officer of Exelon Utilities, chief commercial officer, chief financial officer, and chief executive officer of Constellation. The RMC reports to the Finance and Risk Committee of the Exelon Board of Directors on the scope of the risk management activities. The following discussion serves as an update to ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK of Exelon’s 2020 Annual Report on Form 10-K incorporated herein by reference.
Commodity Price Risk (All Registrants)
Commodity price risk is associated with price movements resulting from changes in supply and demand, fuel costs, market liquidity, weather conditions, governmental regulatory and environmental policies, and other factors. To the extent the total amount of energy Exelon generates and purchases differs from the amount of energy it has contracted to sell, Exelon is exposed to market fluctuations in commodity prices. Exelon seeks to mitigate its commodity price risk through the sale and purchase of electricity, fossil fuel, and other commodities.
Generation
Electricity available from Generation’s owned or contracted generation supply in excess of Generation’s obligations to customers, including portions of the Utility Registrants' retail load, is sold into the wholesale markets. To reduce commodity price risk caused by market fluctuations, Generation enters into non-derivative contracts as well as derivative contracts, including swaps, futures, forwards, and options, with approved counterparties to hedge anticipated exposures. Generation uses derivative instruments as economic hedges to mitigate exposure to fluctuations in commodity prices. Generation expects the settlement of the majority of its economic hedges will occur during 2021 through 2023.
As of September 30, 2021, the percentage of expected generation hedged for the Mid-Atlantic, Midwest, New York, and ERCOT reportable segments is 96%-99% for the remainder of 2021. Market price risk exposure is the risk of a change in the value of unhedged positions. The forecasted market price risk exposure for Generation’s entire economic hedge portfolio associated with a $5 reduction in the annual average around-the-clock energy price based on September 30, 2021 market conditions and hedged position would be immaterial for 2021. See Note 12 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information.
Fuel Procurement
Approximately 60% of Generation’s uranium concentrate requirements from 2021 through 2025 are supplied by three suppliers. In the event of non-performance by these or other suppliers, Generation believes that replacement uranium concentrates can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements. Non-performance by these counterparties could have a material adverse impact in Exelon’s and Generation’s financial statements.
Utility Registrants
There have been no significant changes or additions to the Utility Registrants exposures to commodity price risk that were described in ITEM 1A. RISK FACTORS of Exelon’s 2020 Annual Report on Form 10-K. See Note 12 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information regarding commodity price risk exposure.
Trading and Non-Trading Marketing Activities
The following table detailing Exelon’s, Generation’s, and ComEd’s trading and non-trading marketing activities is included to address the recommended disclosures by the energy industry’s Committee of Chief Risk Officers (CCRO).
The following table provides detail on changes in Exelon’s, Generation’s, and ComEd’s commodity mark-to-market net asset or liability balance sheet position from December 31, 2020 to September 30, 2021. It indicates the drivers behind changes in the balance sheet amounts. This table incorporates the mark-to-market activities that are immediately recorded in earnings. This table excludes all NPNS contracts and does not segregate proprietary trading activity. See Note 12 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information on the balance sheet classification of the mark-to-market energy contract net assets (liabilities) recorded as of September 30, 2021 and December 31, 2020.
| Exelon | Generation | ComEd | |||||||||||||||||||||||||||
| Total mark-to-market energy contract net assets (liabilities) at December 31, 2020(a) | $ | 428 | $ | 729 | $ | (301) | |||||||||||||||||||||||
| Total change in fair value during 2021 of contracts recorded in results of operations | 1,434 | 1,434 | — | ||||||||||||||||||||||||||
| Reclassification to realized at settlement of contracts recorded in results of operations | (186) | (186) | — | ||||||||||||||||||||||||||
| Changes in fair value — recorded through regulatory assets(b) | 87 | — | 87 | ||||||||||||||||||||||||||
| Changes in allocated collateral | (2,061) | (2,061) | — | ||||||||||||||||||||||||||
| Net option premium paid | 186 | 186 | — | ||||||||||||||||||||||||||
| Option premium amortization | (45) | (45) | — | ||||||||||||||||||||||||||
| Upfront payments and amortizations(c) | (107) | (107) | — | ||||||||||||||||||||||||||
| Total mark-to-market energy contract net liabilities at September 30, 2021(a) | $ | (264) | $ | (50) | $ | (214) |
(a)Amounts are shown net of collateral paid to and received from counterparties.
(b)For ComEd, the changes in fair value are recorded as a change in regulatory assets. As of September 30, 2021, ComEd recorded a regulatory asset of $214 million related to its mark-to-market derivative liabilities with unaffiliated suppliers. For the nine months ended September 30, 2021, ComEd recorded $72 million of increases in fair value and an increase for realized losses due to settlements of $15 million recorded in purchased power expense associated with floating-to-fixed energy swap contracts with unaffiliated suppliers.
(c)Includes derivative contracts acquired or sold by Generation through upfront payments or receipts of cash, excluding option premiums, and the associated amortizations.
Fair Values
The following tables present maturity and source of fair value for Exelon, Generation, and ComEd mark-to-market commodity contract net assets (liabilities). The tables provide two fundamental pieces of information. First, the tables provide the source of fair value used in determining the carrying amount of the Registrants’ total mark-to-market net assets (liabilities), net of allocated collateral. Second, the tables show the maturity, by year, of the Registrants’ commodity contract net assets (liabilities), net of allocated collateral, giving an indication of when these mark-to-market amounts will settle and either generate or require cash. See Note 14 — Fair Value of Financial Assets and Liabilities of the Combined Notes to Consolidated Financial Statements for additional information regarding fair value measurements and the fair value hierarchy.
Exelon
| Maturities Within | Total Fair Value | ||||||||||||||||||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 and Beyond | ||||||||||||||||||||||||||||||||||||
| Normal Operations, Commodity derivative contracts(a)(b): | |||||||||||||||||||||||||||||||||||||||||
| Actively quoted prices (Level 1) | $ | 302 | $ | 578 | $ | 63 | $ | 53 | $ | 38 | $ | 23 | $ | 1,057 | |||||||||||||||||||||||||||
| Prices provided by external sources (Level 2) | 17 | 737 | 40 | (40) | — | — | 754 | ||||||||||||||||||||||||||||||||||
| Prices based on model or other valuation methods (Level 3)(c) | (566) | (1,304) | 17 | (15) | (18) | (189) | (2,075) | ||||||||||||||||||||||||||||||||||
| Total | $ | (247) | $ | 11 | $ | 120 | $ | (2) | $ | 20 | $ | (166) | $ | (264) |
(a)Mark-to-market gains and losses on other economic hedge and trading derivative contracts that are recorded in results of operations.
(b)Amounts are shown net of collateral paid/(received) from counterparties (and offset against mark-to-market assets and liabilities) of $(1,645) million at September 30, 2021.
(c)Includes ComEd’s net assets (liabilities) associated with the floating-to-fixed energy swap contracts with unaffiliated suppliers.
Generation
| Maturities Within | Total Fair Value | ||||||||||||||||||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 and Beyond | ||||||||||||||||||||||||||||||||||||
| Normal Operations, Commodity derivative contracts(a)(b): | |||||||||||||||||||||||||||||||||||||||||
| Actively quoted prices (Level 1) | $ | 302 | $ | 578 | $ | 63 | $ | 53 | $ | 38 | $ | 23 | $ | 1,057 | |||||||||||||||||||||||||||
| Prices provided by external sources (Level 2) | 17 | 737 | 40 | (40) | — | — | 754 | ||||||||||||||||||||||||||||||||||
| Prices based on model or other valuation methods (Level 3) | (565) | (1,293) | 39 | 8 | 5 | (55) | (1,861) | ||||||||||||||||||||||||||||||||||
| Total | $ | (246) | $ | 22 | $ | 142 | $ | 21 | $ | 43 | $ | (32) | $ | (50) |
(a)Mark-to-market gains and losses on other economic hedge and trading derivative contracts that are recorded in the results of operations.
(b)Amounts are shown net of collateral paid/(received) from counterparties (and offset against mark-to-market assets and liabilities) of $(1,645) million at September 30, 2021.
ComEd
| Maturities Within | Total Fair Value | ||||||||||||||||||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 and Beyond | ||||||||||||||||||||||||||||||||||||
| Commodity derivative contracts(a): | |||||||||||||||||||||||||||||||||||||||||
| Prices based on model or other valuation methods (Level 3)(a) | $ | (1) | $ | (11) | $ | (22) | $ | (23) | $ | (23) | $ | (134) | $ | (214) |
(a)Represents ComEd’s net liabilities associated with the floating-to-fixed energy swap contracts with unaffiliated suppliers.
Credit Risk (All Registrants)
The Registrants would be exposed to credit-related losses in the event of non-performance by counterparties that execute derivative instruments. The credit exposure of derivative contracts, before collateral, is represented by the fair value of contracts at the reporting date. See Note 12 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for detailed discussion of credit risk.
Generation
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 September 30, 2021. The tables further delineate that exposure by credit rating of the counterparties and provide guidance on the concentration of credit risk to individual counterparties and an indication of the duration of a company’s credit risk by credit rating of the counterparties. The amounts in the tables below exclude credit risk exposure from individual retail customers, uranium procurement contracts, and exposure through RTOs, ISOs, and commodity exchanges, which are discussed below.
| Rating as of September 30, 2021 | 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 | $ | 701 | $ | 254 | $ | 447 | — | $ | — | |||||||||||||||||||||||
| Non-investment grade | 23 | 2 | 21 | — | — | |||||||||||||||||||||||||||
| No external ratings | ||||||||||||||||||||||||||||||||
| Internally rated — investment grade | 110 | 1 | 109 | — | — | |||||||||||||||||||||||||||
| Internally rated — non-investment grade | 309 | 48 | 261 | — | — | |||||||||||||||||||||||||||
| Total | $ | 1,143 | $ | 305 | $ | 838 | — | $ | — |
(a)As of September 30, 2021, credit collateral held from counterparties where Generation had credit exposure included $188 million of cash and $117 million of letters of credit.
| Maturity of Credit Risk Exposure | ||||||||||||||||||||||||||
| Rating as of September 30, 2021 | Less than 2 Years | 2-5 Years | Exposure Greater than 5 Years | Total Exposure Before Credit Collateral | ||||||||||||||||||||||
| Investment grade | $ | 579 | $ | 69 | $ | 53 | $ | 701 | ||||||||||||||||||
| Non-investment grade | 23 | — | — | 23 | ||||||||||||||||||||||
| No external ratings | ||||||||||||||||||||||||||
| Internally rated — investment grade | 96 | 10 | 4 | 110 | ||||||||||||||||||||||
| Internally rated — non-investment grade | 251 | 49 | 9 | 309 | ||||||||||||||||||||||
| Total | $ | 949 | $ | 128 | $ | 66 | $ | 1,143 |
| Net Credit Exposure by Type of Counterparty | As of September 30, 2021 | |||||||
| Financial institutions | $ | 53 | ||||||
| Investor-owned utilities, marketers, power producers | 652 | |||||||
| Energy cooperatives and municipalities | 62 | |||||||
| Other | 71 | |||||||
| Total | $ | 838 |
The Utility Registrants
There have been no significant changes or additions to the Utility Registrants exposures to credit risk that are described in ITEM 1A. RISK FACTORS of Exelon’s 2020 Annual Report on Form 10-K. See Note 12 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information regarding credit exposure to suppliers.
Credit-Risk-Related Contingent Features (All Registrants)
Generation
As part of the normal course of business, Generation routinely enters into physical or financial contracts for the sale and purchase of electricity, natural gas, and other commodities. In accordance with the contracts and applicable law, if Generation is downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance. Depending on Generation’s net position with a counterparty, the demand could be for the posting of collateral. 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. See Note 12 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information regarding collateral requirements. See Note 15 — Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information regarding the letters of credit supporting the cash collateral.
Generation transacts output through bilateral contracts. The bilateral contracts are subject to credit risk, which relates to the ability of counterparties to meet their contractual payment obligations. Any failure to collect these payments from counterparties could have a material impact on Exelon’s and Generation’s financial statements. As market prices rise above or fall below contracted price levels, Generation is required to post collateral with purchasers; as market prices fall below contracted price levels, counterparties are required to post collateral with Generation. To post collateral, Generation depends on access to bank credit facilities, which serve as liquidity sources to fund collateral requirements. See Note 17 — Debt and Credit Agreements of Exelon’s 2020 Annual Report on Form 10-K for additional information.
Utility Registrants
As of September 30, 2021, the Utility Registrants were not required to post collateral under their energy and/or natural gas procurement contracts. See Note 12 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information.
Interest Rate and Foreign Exchange Risk (Exelon and Generation)
Exelon and Generation use a combination of fixed-rate and variable-rate debt to manage interest rate exposure. Exelon and Generation may also utilize interest rate swaps to manage their interest rate exposure. A hypothetical 50 basis point increase in the interest rates associated with unhedged variable-rate debt (excluding Commercial Paper) and fixed-to-floating swaps would result in approximately a $1 million decrease in Exelon pre-tax income for the nine months ended September 30, 2021. 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. See Note 12 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information.
Equity Price Risk (Exelon and Generation)
Exelon and Generation maintain trust funds, as required by the NRC, to fund certain costs of decommissioning its nuclear plants. As of September 30, 2021, Generation’s NDT funds are reflected at fair value in 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 25 basis points increase in interest rates and 10% decrease in equity prices would result in a $863 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.
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