| Derivative Financial Instruments (All Registrants) |
Derivative Financial Instruments (All Registrants) The Registrants use derivative instruments to manage commodity price risk and interest rate risk related to ongoing business operations. The Registrants do not execute derivatives for speculative or proprietary trading purposes. 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. At ComEd, derivative economic hedges related to commodities are recorded at fair value and offset by a corresponding regulatory asset or liability. At Exelon, derivative economic hedges related to interest rates are recorded at fair value and offsets are recorded to Electric operating revenues or Interest expense based on the activity the transaction is economically hedging. For all NPNS derivative instruments, accounts receivable or accounts payable are recorded when derivatives settle and revenue or expense is recognized in earnings as the underlying physical commodity is sold or consumed. At Exelon, derivative hedges that qualify and are designated as cash flow hedges are recorded at fair value and offsets are recorded to AOCI. ComEd’s use of cash collateral is generally unrestricted unless ComEd is 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 meets certain qualifications. Commodity Price Risk 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, which are either determined to be non-derivative or classified as economic hedges. 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 | Electricity | NPNS | Fixed price contracts for default supply requirements through full requirements contracts. | | Gas | NPNS | Fixed price contracts to cover about 10% 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 and index priced contracts through full requirements contracts. | | Gas | Changes in fair value of economic hedge recorded to an offsetting regulatory asset or liability(b) | Exchange traded future contracts for up to 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 of the 2022 Form 10-K for additional information. The fair value of derivative economic hedges is presented in Other current assets and current and noncurrent Mark-to-market derivative liabilities in Exelon's and ComEd's Consolidated Balance Sheets. Interest Rate and Other Risk (Exelon) Exelon Corporate uses a combination of fixed-rate and variable-rate debt to manage interest rate exposure. Exelon Corporate may utilize interest rate derivatives to lock in rate levels in anticipation of future financings, which are typically designated as cash flow hedges. In addition, Exelon Corporate may also utilize interest rate swaps to manage interest rate exposure and manage potential fluctuations in Electric operating revenues at the corporate level in consolidation, which are directly correlated to yields on U.S. Treasury bonds under ComEd's distribution formula rate. These interest rate swaps are accounted for as economic hedges. A hypothetical 50 basis point change in the interest rates associated with Exelon's interest rate swaps as of March 31, 2023 would result in an immaterial impact to Exelon's Consolidated Net Income. | | | | | | | | | | | | | | | | | | | March 31, 2023 | | Derivatives Designated
as Hedging Instruments | | Economic Hedges | | Total | | | | | | | | Other deferred debits (noncurrent assets) | $ | — | | | $ | 3 | | | $ | 3 | | | Total derivative assets | — | | | 3 | | | 3 | | | Mark-to-market derivative liabilities (current liabilities) | — | | | (1) | | | (1) | | | Mark-to-market derivative liabilities (noncurrent liabilities) | (1) | | | — | | | (1) | | | Total mark-to-market derivative liabilities | (1) | | | (1) | | | (2) | | | Total mark-to-market derivative net assets | $ | (1) | | | $ | 2 | | | $ | 1 | |
| | | | | | | | | | | | | | | | | | | December 31, 2022 | | Derivatives Designated
as Hedging Instruments | | Economic Hedges | | Total | | | | | | | | Other deferred debits (noncurrent assets) | $ | 6 | | | $ | 5 | | | $ | 11 | | | Total derivative assets | 6 | | | 5 | | | 11 | | | Mark-to-market derivative liabilities (current liabilities) | — | | | (3) | | | (3) | | | Mark-to-market derivative liabilities (noncurrent liabilities) | (4) | | | — | | | (4) | | | Total mark-to-market derivative liabilities | (4) | | | (3) | | | (7) | | | Total mark-to-market derivative net assets | $ | 2 | | | $ | 2 | | | $ | 4 | |
Cash Flow Hedges (Interest Rate Risk) For derivative instruments that qualify and are designated as cash flow hedges, the changes in fair value each period are initially recorded in AOCI and reclassified into earnings when the underlying transaction affects earnings. The total notional of the swaps issued as of December 31, 2022 was $1.27 billion. In January 2023, Exelon Corporate entered into $115 million notional of 5-year maturity floating-to-fixed swaps and $115 million notional of 10-year maturity floating-to-fixed swaps, for a total of $230 million designated as cash flow hedges. In February 2023, Exelon terminated the previously issued floating-to-fixed swaps with a total notional of $1.5 billion upon issuance of $2.5 billion of debt. See Note 10 – Debt and Credit Agreements for additional information on the debt issuance. Prior to the termination, the AOCI derivative gain was $7 million (net of tax). The settlements resulted in a cash receipt of $10 million, which will be amortized into Interest expense in Exelon's Consolidated Statement of Operations and Comprehensive Income over the terms of the swaps. See Note 14 – Changes in Accumulated Other Comprehensive Income (Loss) for additional information. In March 2023, Exelon Corporate entered into $65 million notional of 5-year maturity floating-to-fixed swaps and $65 million 10-year maturity floating-to-fixed swaps, for a total of $130 million designated as cash flow hedges. The related AOCI derivative gain for the three months ended as of March 31, 2023 was immaterial. Economic Hedges (Interest Rate and Other Risk) Exelon Corporate executes derivative instruments to mitigate exposure to fluctuations in interest rates but for which the fair value or cash flow hedge elections were not made. For derivatives intended to serve as economic hedges, fair value is recorded on the balance sheet and changes in fair value each period are recognized in earnings or as a regulatory asset or liability, if regulatory requirements are met, each period. Exelon Corporate enters into floating-to-fixed interest rate cap swaps to manage a portion of interest rate exposure in connection with existing borrowings. In the fourth quarter of 2022, Exelon Corporate entered into $1 billion notional of 18-month maturity floating-to-fixed interest rate cap swaps and $850 million notional of 6-month maturity floating-to-fixed interest rate cap swaps, for a total of $1.85 billion notional of floating-to-fixed interest rate cap swaps as of December 31, 2022. The 6-month maturity floating-to-fixed interest rate cap swaps of $850 million notional matured in March 2023. The total remaining notional of the swaps was $1 billion as of March 31, 2023. Additionally, to manage potential fluctuations in Electric operating revenues related to ComEd's distribution formula rate, Exelon Corporate enters into 30-year constant maturity treasury interest rate (Corporate 30-year treasury) swaps. In the first quarter of 2023, Exelon Corporate entered into a total of $3.6 billion notional of calendar year 2023 Corporate 30-year treasury swaps. The total notional of the swaps issued was $4.1 billion and $500 million as of March 31, 2023 and December 31, 2022, respectively. For the three months ended March 31, 2023, Exelon Corporate recognized the following net pre-tax mark-to-market gains (losses) which are also recognized in Net fair value changes related to derivatives in Exelon's Consolidated Statements of Cash Flows. Exelon had no swaps for the three months ended March 31, 2022. | | | | | | | | | | | | | | | Gain (Loss) | | | | | | Income Statement Location | | 2023 | | | | | | Electric operating revenues | | $ | 1 | | | | | | | Interest expense | | (1) | | | | | | | Total | | $ | — | | | | | |
Credit Risk 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. 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. The amount of cash collateral received from external counterparties decreased as of March 31, 2023 due to decreasing energy prices. The amount of cash collateral for PECO was immaterial as of March 31, 2023 and December 31, 2022. The following table reflects the Registrants' cash collateral held with external counterparties, which is recorded in Other current liabilities on their respective Consolidated Balance Sheets, as of March 31, 2023 and December 31, 2022: 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's, and DPL’s credit rating. As of March 31, 2023, 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 March 31, 2023, they could have been required to post collateral to their counterparties of $39 million, $73 million, and $14 million, respectively.
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