Investment in Constellation Energy Nuclear Group, LLC (Exelon and Generation)

As a result of the Constellation merger, Generation owns a 50.01% interest in CENG, a nuclear generation business. Generation has historically had various agreements with CENG to purchase power and to provide certain services. For further information regarding these agreements, see Note 25 — Related Party Transactions of the Exelon 2013 Form 10-K.

On April 1, 2014, Generation, CENG, and subsidiaries of CENG entered into a Nuclear Operating Services Agreement (NOSA) pursuant to which Generation will operate the CENG nuclear generation fleet owned by CENG subsidiaries and provide corporate and administrative services for the remaining life and decommissioning of the CENG nuclear plants as if they were a part of the Generation nuclear fleet, subject to EDF, Inc.'s (EDFI) rights as a member of CENG (the Integration Transaction). CENG will reimburse Generation for its direct and allocated costs for such services. As part of the arrangement, Nine Mile Point Nuclear Station, LLC, a subsidiary of CENG, also assigned to Generation its obligations as Operator of Nine Mile Point Unit 2 under an operating agreement with the co-owner. In addition, on April 1, 2014, the Power Services Agency Agreement (PSAA) was amended and extended until the permanent cessation of power generation by the CENG generation plants.

In addition, on April 1, 2014, Generation made a $400 million loan to CENG, bearing interest at 5.25% per annum and payable out of specified available cash flows of CENG and, in any event, payable upon the settlement of the Put Option Agreement discussed below (if the put option is exercised) or payable upon the maturity date of April 1, 2034, whichever occurs first. Immediately following receipt of the proceeds of such loan, CENG made a $400 million special distribution to EDFI.

Exelon, Generation, and subsidiaries of Generation, EDFI and its parent (E.D.F. International S.A.S.), and CENG also executed a Fourth Amended and Restated Operating Agreement for CENG (Operating Agreement) on April 1, 2014, pursuant to which, among other things, CENG committed to make preferred distributions to Generation (after repayment of the $400 million loan and associated interest) quarterly out of specified available cash flows until Generation has received aggregate distributions of $400 million plus a return of 8.5% per annum from April 1, 2014 (Preferred Distribution Rights).

Generation and EDFI also entered into a Put Option Agreement on April 1, 2014, pursuant to which EDFI has the option, exercisable beginning on January 1, 2016 and thereafter until June 30, 2022, to sell its 49.99% interest in CENG to Generation for a fair market value price determined by agreement of the parties, or absent agreement, a third-party arbitration process. The appraisers determining fair market value of EDF’s 49.99% interest in CENG under the Put Option Agreement are instructed to take into account all rights and obligations under the CENG Operating Agreement, including Generation’s rights with respect to any unpaid aggregate preferred distributions and the related return, and the value of Generation’s rights to other distributions. The beginning of the exercise period will be accelerated if Exelon’s affiliates cease to own a majority of CENG and exercise a related right to terminate the NOSA. In addition, under limited circumstances, the period for exercise of the put option may be extended for 18 months.

On April 1, 2014, Generation also executed an Indemnity Agreement pursuant to which Generation indemnified EDF and its affiliates against third-party claims that may arise from any future nuclear incident (as defined in the Price Anderson Act) in connection with the CENG nuclear plants or their operations. Exelon guarantees Generation’s obligations under this indemnity.

In addition, on April 1, 2014, Generation, EDFI, CENG and Nine Mile Point Nuclear Station, LLC entered into an Employee Matters Agreement (EMA) that provides for the transfer of CENG employees to Generation or one of its affiliates (the Generation Parties) and Exelon's assumption of sponsorship of the employee benefit plans (including certain incentive, health and welfare, and postemployment benefit plans, among others) and their related trust funds as of July 14, 2014. The EMA also generally requires CENG to fund obligations related to pre-transfer service of employees, including the underfunded balance of the pension and other postretirement welfare benefit plans measured as of July 14, 2014 by making periodic payments to Generation. These payments will be made on an agreed payment schedule or upon the occurrence of certain specified events, such as EDF’s disposition of a majority of its interest in CENG.

As a condition to obtaining regulatory approval for the NOSA and related transactions from the NRC, Exelon executed a support agreement pursuant to which Exelon may be required under specified circumstances to provide up to $245 million of financial support to the CENG plants (Exelon Support Agreement). The Exelon Support Agreement supersedes a previous support agreement under which Generation had agreed to provide up to $205 million of financial support for CENG. In addition, Exelon executed a guarantee pursuant to which Exelon may be required under specified circumstances to provide up to $165 million in additional financial support for CENG. A previous support agreement executed by an affiliate of EDF remains in effect under which the EDF affiliate may be required to provide up to approximately $145 million of financial support for CENG under specified circumstances. The agreements were executed as of April 1, 2014 when the NRC licenses were transferred to Generation. No liability has been recognized by Exelon for the Exelon Support Agreement or the guarantee.

Prior to April 1, 2014, Exelon and Generation accounted for their investment in CENG under the equity method of accounting. From January 1, 2014, through March 31, 2014, Generation recorded $19 million of equity in losses of unconsolidated affiliates related to its investment in CENG and recorded $17 million of revenues from CENG. For the three and nine months ended September 30, 2013, Generation recorded $37 million and $5 million, respectively, of equity in earnings of unconsolidated affiliates related to its investment in CENG and $12 million and $45 million, respectively, of revenues from CENG. The book value of Generation’s investment in CENG prior to the consolidation was $1.9 billion, and the book value of the AOCI related to CENG prior to consolidation was $116 million, net of taxes of $77 million.

As a result of the consolidation of CENG, there are several transactions included in Exelon’s and Generation’s Consolidated Financial Statements between CENG and EDF that are considered related party transactions to Generation. As further described in Note 25 — Related Party Transactions of the Exelon 2013 Form 10-K, EDF and Generation have a PPA with CENG under which they purchase 15% and 85%, respectively, of the nuclear output owned by CENG that is not sold to third parties under pre-existing PPAs. Beginning January 1, 2015 and continuing through the life of the respective plants, EDF and Generation will purchase 49.99% and 50.01%, respectively, of the nuclear output owned by CENG. Beginning April 1, 2014, sales to Generation are eliminated in consolidation. For the three and nine months ended September 30, 2014, Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income include sales to EDF of $52 million and $90 million, respectively. See discussion above and Note 3 — Variable Interest Entities for additional information regarding other related party transactions, between CENG and EDF included within Exelon and Generation’s financial statements.

See Note 3 — Variable Interest Entities for additional information about the Registrants VIEs.

Accounting for the Consolidation of CENG

The transfer of the nuclear operating licenses and the execution of the NOSA on April 1, 2014, resulted in the derecognition of the equity method investment in CENG and the recording of all assets, liabilities and EDF’s noncontrolling interest in CENG at fair value on Exelon’s and Generation’s Consolidated Balance Sheets. As a result of the consolidation, Exelon and Generation recorded a net gain of $261 million within their respective Consolidated Statements of Operations and Comprehensive Income. This gain consists of approximately $136 million related to the step up to fair value basis of Generation's ownership interest in CENG, and approximately $132 million related to the settlement of pre-existing transactions between CENG and Generation. The net gain on the consolidation of CENG of $261 million is net of a $7 million payment to EDF.

The fair value of CENG’s assets and liabilities recorded in consolidation was determined based on significant estimates and assumptions that are judgmental in nature, including projected future cash flows (including timing); discount rates reflecting risk inherent in the future cash flows; and future market prices. There were also judgments made to determine the expected useful lives assigned to each class of assets acquired and duration of liabilities assumed.

The valuations necessary to assess the fair values of certain assets and liabilities are considered preliminary as a result of the short time period between the execution of the NOSA and the end of the second quarter of 2014. The estimates of the fair value of assets and liabilities may be modified up to one year from April 1, 2014, as more information is obtained about the fair value of assets and liabilities. The principal items that are expected to be revised include the asset retirement obligation liabilities and related asset retirement costs. These items are expected to be updated with inputs from a third party engineering firm with corresponding adjustments recorded by the end of 2014. See Note 12 — Nuclear Decommissioning for discussion of the impacts of adjustments recorded during the third quarter of 2014 related to updated estimates of the CENG asset retirement obligation liabilities. In the period of such revisions, these and any other material changes to the fair value assessments could result in adjustments to the amounts recorded upon consolidation, including the overall gain recorded by Generation. In addition, any asset or liability adjustments impacting depreciation and/or accretion expense recorded after the consolidation date would impact Generation’s post-consolidation results of operations.

Generation recorded the assets and liabilities of CENG at fair value as of April 1, 2014. The following assets and liabilities of CENG were recorded within Generation’s Consolidated Balance Sheets as of the date of integration:



Preliminary Fair Values	Exelon and Generation
Current assets	$	499
Nuclear decommissioning trust fund	1,955
Property, plant and equipment	2,941
Nuclear fuel	482
Other assets	10
Total assets	5,887

Current liabilities	237
Asset retirement obligation	1,684
Pension and other employee benefit obligations	281
Unamortized energy contract liabilities	171
Other liabilities	114
Total liabilities	2,487
Total net assets	$	3,400

Generation also recorded the fair value of the noncontrolling interest on its Consolidated Balance Sheets of approximately $1.5 billion, net of the fair value of $152 million for certain specified additional distribution rights under the Operating Agreement. In addition, the noncontrolling interest was further reduced by the $400 million special cash distribution to EDF.

Due to the Preferred Distribution Rights that Generation has on CENG’s available cash, the earnings attributable to the noncontrolling interest on the Statements of Operations and Comprehensive Income as well as the corresponding adjustment to Non-controlling interest on the Consolidated Balance Sheets will not be in proportion to Generation’s and EDF’s equity ownership interests. Rather, the attribution will consider Generation’s Preferred Distribution Rights and allocate net income based on each owner’s rights to CENG’s net assets. For the three and nine months ended September 30, 2014, Generation reduced by $4 million and $8 million, respectively, the amount of Net income attributable to noncontrolling interests on Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income. As a result of the consolidation, Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income includes CENG’s incremental operating revenues of $58 million and $155 million and CENG’s net income, prior to any intercompany eliminations and any adjustments for noncontrolling interest, of $171 million and $248 million during the three and nine months ended September 30, 2014, respectively.

Exelon and Generation both incurred integration-related costs of $4 million and $22 million during the three and nine months ended September 30, 2014. The costs incurred are classified primarily within Operating and Maintenance Expense in Exelon’s and Generation’s respective Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2014.

See Note 14 — Severance for integration-related severance costs related to CENG incurred by Exelon and Generation during the three and nine months ended September 30, 2014.