(1) ORGANIZATION

Pepco Holdings, Inc. (PHI or Pepco Holdings), a Delaware corporation incorporated in 2001, is a holding company that, through the following regulated public utility subsidiaries, is engaged primarily in the transmission, distribution and default supply of electricity and, to a lesser extent, the distribution and supply of natural gas (Power Delivery):

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Potomac Electric Power Company (Pepco), which was incorporated in Washington, D.C. in 1896 and became a domestic Virginia corporation in 1949,

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Delmarva Power & Light Company (DPL), which was incorporated in Delaware in 1909 and became a domestic Virginia corporation in 1979, and

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Atlantic City Electric Company (ACE), which was incorporated in New Jersey in 1924.

Each of PHI, Pepco, DPL and ACE is also a reporting company under the Securities Exchange Act of 1934, as amended. Together, Pepco, DPL and ACE constitute the Power Delivery segment for financial reporting purposes.

Through Pepco Energy Services, Inc. and its subsidiaries (collectively, Pepco Energy Services), PHI provides energy savings performance contracting services, underground transmission and distribution construction and maintenance services, and steam and chilled water under long-term contracts.

PHI Service Company, a wholly owned subsidiary service company of PHI, provides a variety of support services, including legal, accounting, treasury, tax, purchasing and information technology services to PHI and its operating subsidiaries. These services are provided pursuant to service agreements among PHI, PHI Service Company and the participating operating subsidiaries. The expenses of PHI Service Company are charged to PHI and the participating operating subsidiaries in accordance with cost allocation methodologies set forth in the service agreements.

Agreement and Plan of Merger with Exelon Corporation

PHI entered into an Agreement and Plan of Merger, dated April 29, 2014, as amended and restated on July 18, 2014 (the Merger Agreement), with Exelon Corporation, a Pennsylvania corporation (Exelon), and Purple Acquisition Corp., a Delaware corporation and an indirect, wholly owned subsidiary of Exelon (Merger Sub), providing for the merger of Merger Sub with and into PHI (the Merger), with PHI surviving the Merger as an indirect, wholly owned subsidiary of Exelon. Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock, par value $0.01 per share, of PHI (other than (i) shares owned by Exelon, Merger Sub or any other direct or indirect wholly owned subsidiary of Exelon and shares owned by PHI or any direct or indirect, wholly owned subsidiary of PHI, and in each case not held on behalf of third parties (but not including shares held by PHI in any rabbi trust or similar arrangement in respect of any compensation plan or arrangement) and (ii) shares that are owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law), will be canceled and converted into the right to receive $27.25 in cash, without interest.

In connection with entering into the Merger Agreement, as further described in Note (12), “Preferred Stock,” PHI entered into a Subscription Agreement with Exelon dated April 29, 2014 (the Subscription Agreement), pursuant to which PHI issued to Exelon 9,000 originally issued shares of non-voting, non-convertible and non-transferable Series A preferred stock, par value $0.01 per share (the Preferred Stock), for a purchase price of $90 million on April 30, 2014. Exelon also committed, pursuant to the Subscription Agreement, to purchase 1,800 originally issued shares of Preferred Stock for a purchase price of $18 million at the end of each 90-day period following the date of the Subscription Agreement until the Merger closes or is terminated, up to a maximum of 18,000 shares of Preferred Stock for a maximum aggregate consideration of $180 million. In accordance with the Subscription Agreement, on each of July 29, 2014, October 27, 2014, January 26, 2015, April 27, 2015 and July 24, 2015, an additional 1,800 shares of Preferred Stock were issued by PHI to Exelon for a purchase price of $18 million.

The Merger Agreement provides for certain termination rights for each of PHI and Exelon, and further provides that, upon termination of the Merger Agreement under certain specified circumstances, PHI will be required to pay Exelon a termination fee of $259 million or reimburse Exelon for its expenses up to $40 million (which reimbursement of expenses shall reduce on a dollar for dollar basis any termination fee subsequently payable by PHI), provided, however, that if the Merger Agreement is terminated in connection with an acquisition proposal made under certain circumstances by a person who made an acquisition proposal between April 1, 2014 and the date of the Merger Agreement, the termination fee will be $293 million plus reimbursement of Exelon for its expenses up to $40 million (not subject to offset). In addition, if the Merger Agreement is terminated under certain circumstances due to the failure to obtain required regulatory approvals with respect to the Merger or the breach by Exelon of its obligations in respect of obtaining such regulatory approvals (a Regulatory Termination), PHI will be able to redeem any issued and outstanding Preferred Stock at par value, and in that case, Exelon will be required to pay all documented out-of-pocket expenses incurred by PHI in connection with the Merger Agreement or the transactions contemplated thereby, up to $40 million. If the Merger Agreement is terminated, other than for a Regulatory Termination, PHI will be required to redeem the Preferred Stock at the purchase price of $10,000 per share, plus any unpaid accrued and accumulated dividends thereupon.

Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the approval of the Merger by the holders of a majority of the outstanding shares of common stock of PHI; (ii) the receipt of regulatory approvals required to consummate the Merger, including approvals from the Federal Energy Regulatory Commission (FERC), the Federal Communications Commission (FCC), the Delaware Public Service Commission (DPSC), the District of Columbia Public Service Commission (DCPSC), the Maryland Public Service Commission (MPSC), the New Jersey Board of Public Utilities (NJBPU) and the Virginia State Corporation Commission (VSCC); (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act); and (iv) other customary closing conditions, including (a) the accuracy of each party’s representations and warranties (subject to customary materiality qualifiers) and (b) each party’s compliance with its obligations and covenants contained in the Merger Agreement (including covenants that may limit, restrict or prohibit PHI and its subsidiaries from taking specified actions during the period between the date of the Merger Agreement and the closing of the Merger or the termination of the Merger Agreement). In addition, the obligations of Exelon and Merger Sub to consummate the Merger are subject to the required regulatory approvals not imposing terms, conditions, obligations or commitments, individually or in the aggregate, that constitute a burdensome condition (as defined in the Merger Agreement). For additional discussion, see Note (7), “Regulatory Matters – Merger Approval Proceedings.”

On September 23, 2014, the stockholders of PHI approved the Merger, on October 7, 2014, the VSCC approved the Merger, and on November 20, 2014, FERC approved the Merger. In addition, the transfer of control of certain communications licenses held by certain of PHI’s subsidiaries has been approved by the FCC. The NJBPU approved the Merger on February 11, 2015, and on October 15, 2015, voted to extend the effectiveness of its approval until June 30, 2016. The DPSC approved the Merger on May 19, 2015.

On December 22, 2014, the waiting period under the HSR Act expired. Although the Department of Justice (DOJ) allowed the waiting period under the HSR Act to expire without taking any action with respect to the Merger, the DOJ has not advised PHI that it has concluded its investigation. The expiration of the HSR Act waiting period allows for the closing of the Merger at any time on or before December 21, 2015. If the Merger is not completed by that date the parties will be required to refile the required Notification and Report Forms with the DOJ and Federal Trade Commission (FTC), which will restart the 30-day waiting period required by the HSR Act, during which time the Merger may not be consummated, unless these agencies authorize the early termination of the waiting period. PHI and Exelon currently anticipate that they will refile with the DOJ and FTC in November 2015.

On May 15, 2015, the MPSC approved the Merger, with conditions, including conditions that modify and supplement those originally proposed. On May 18, 2015, PHI and Exelon announced that they had committed to fulfill the modified, more stringent conditions and package of customer benefits imposed by the MPSC. Multiple parties have filed petitions for judicial review of the MPSC order by the Circuit Court of Queen Anne’s County, Maryland, seeking to appeal the MPSC order. PHI is vigorously contesting these appeals. The MPSC order remains in effect during the appeals process. At this time, PHI is unable to predict the outcome of the proceeding.

On August 25, 2015, the DCPSC announced at a public meeting that it had denied the merger application, and on August 27, 2015, the DCPSC issued its written order related to the Merger. On September 28, 2015, Exelon, PHI and Pepco, and certain of their respective affiliates, filed an application for reconsideration with the DCPSC requesting reconsideration of the DCPSC order related to the Merger.

On October 6, 2015, Exelon, PHI and Pepco, and certain of their respective affiliates, entered into a Nonunanimous Full Settlement Agreement and Stipulation (the DC Settlement Agreement) with the District of Columbia Government, the Office of the People’s Counsel and other parties, which DC Settlement Agreement contains commitments from Exelon and PHI above those contained in their original merger application.

Also on October 6, 2015, PHI, Exelon and Merger Sub entered into a Letter Agreement (the Letter Agreement), setting forth the terms and conditions under which the parties will file with the DCPSC (a) a Motion of Joint Applicants to Reopen the Record in Formal Case No. 1119 to Allow for Consideration of the DC Settlement Agreement (the Motion to Reopen), or (b) if the Motion to Reopen is not granted, a new merger application, requesting approval of the Merger on the terms and commitments agreed to in the DC Settlement Agreement. Pursuant to the Letter Agreement, PHI and Exelon each agrees, among other things, that neither party will exercise the termination rights each may have under the Merger Agreement on or after October 29, 2015, unless: (i) the DCPSC does not, within 45 days following the date on which the DC Settlement Agreement is filed with the DCPSC (the Settlement Filing Date), set a procedural schedule which allows for a final order for approval of the Merger within 150 days after the Settlement Filing Date, (ii) the DCPSC sets a schedule for action which does not allow for a final order for approval of the Merger within 150 days after the Settlement Filing Date, (iii) the DCPSC fails to issue a final order approving the Merger and the DC Settlement Agreement as filed without condition or modification within 150 days after the Settlement Filing Date, (iv) the DCPSC issues a final order denying approval of the Merger or the DC Settlement Agreement or adds conditions or makes modifications to the DC Settlement Agreement, (v) the DC Settlement Agreement is terminated for any reason, or (vi) on or after the date that is 151 days after the Settlement Filing Date a condition to closing of the Merger has not been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing). The Letter Agreement also provides that, subject to certain conditions, Exelon may, following receipt of all regulatory approvals consistent with the DC Settlement Agreement, delay closing of the Merger for up to 30 days to engage in capital markets transactions to raise additional funds required to consummate the Merger.

On October 6, 2015, following execution of the DC Settlement Agreement and the Letter Agreement, Exelon, PHI and Pepco, and certain of their respective affiliates, filed with the DCPSC the Motion to Reopen requesting consideration of the DC Settlement Agreement and approval of the Merger on such terms and conditions set forth in the DC Settlement Agreement, without condition or modification, and to stay further proceedings on the application for reconsideration filed by the parties on September 28, 2015 and suspend the time period for reconsideration pending the DCPSC’s consideration of the DC Settlement Agreement.

Power Delivery

Each of Pepco, DPL and ACE is a regulated public utility in the jurisdictions that comprise its service territory. Each utility owns and operates a network of wires, substations and other equipment that is classified as transmission facilities, distribution facilities or common facilities (which are used for both transmission and distribution). Transmission facilities are high-voltage systems that carry wholesale electricity into, or across, the utility’s service territory. Distribution facilities are low-voltage systems that carry electricity to end-use customers in the utility’s service territory.

Each utility is responsible for the distribution of electricity, and in the case of DPL, the distribution and supply of natural gas, in its service territory, for which it is paid tariff rates established by the applicable local public service commissions. Each utility also supplies electricity at regulated rates to retail customers in its service territory who do not elect to purchase electricity from a competitive energy supplier. The regulatory term for this supply service is Standard Offer Service (SOS) in Delaware, the District of Columbia and Maryland, and Basic Generation Service in New Jersey. These supply service obligations are referred to generally as Default Electricity Supply.

Pepco Energy Services

Pepco Energy Services is engaged in the following businesses:

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Energy savings performance contracting: designing, constructing and operating energy efficiency projects and distributed generation equipment, including combined heat and power plants, principally for federal, state and local government customers;

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Underground transmission and distribution: providing underground transmission and distribution construction and maintenance services for electric utilities in North America; and

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Thermal: providing steam and chilled water under long-term contracts through systems owned and operated by Pepco Energy Services, primarily to hotels and casinos in Atlantic City, New Jersey.

During 2012, Pepco Energy Services deactivated its Buzzard Point and Benning Road oil-fired generation facilities. Pepco Energy Services completed demolition of the Benning Road generation facility in July 2015 and recognized the scrap metal salvage value of the facility as a reduction in its demolition expenses over the life of the project.

Corporate and Other

Corporate and Other includes the remaining operations of the former Other Non-Regulated segment, certain parent company transactions (including interest expense on parent company debt and incremental external Merger-related costs) and inter-company eliminations.

Organization

(1) ORGANIZATION

Potomac Electric Power Company (Pepco) is engaged in the transmission and distribution of electricity in the District of Columbia and major portions of Prince George’s County and Montgomery County in suburban Maryland. Pepco also provides Default Electricity Supply, which is the supply of electricity at regulated rates to retail customers in its service territories who do not elect to purchase electricity from a competitive supplier. Default Electricity Supply is known as Standard Offer Service in both the District of Columbia and Maryland. Pepco is a wholly owned subsidiary of Pepco Holdings, Inc. (Pepco Holdings or PHI).

PHI entered into an Agreement and Plan of Merger, dated April 29, 2014, as amended and restated on July 18, 2014 (the Merger Agreement), with Exelon Corporation, a Pennsylvania corporation (Exelon), and Purple Acquisition Corp., a Delaware corporation and an indirect, wholly owned subsidiary of Exelon (Merger Sub), providing for the merger of Merger Sub with and into PHI (the Merger), with PHI surviving the Merger as an indirect, wholly owned subsidiary of Exelon. Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock, par value $0.01 per share, of PHI (other than (i) shares owned by Exelon, Merger Sub or any other direct or indirect wholly owned subsidiary of Exelon and shares owned by PHI or any direct or indirect wholly owned subsidiary of PHI, and in each case not held on behalf of third parties (but not including shares held by PHI in any rabbi trust or similar arrangement in respect of any compensation plan or arrangement) and (ii) shares that are owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law), will be canceled and converted into the right to receive $27.25 in cash, without interest.

In connection with entering into the Merger Agreement, PHI entered into a Subscription Agreement, dated April 29, 2014 (the Subscription Agreement), with Exelon, pursuant to which on April 30, 2014, PHI issued to Exelon 9,000 originally issued shares of non-voting, non-convertible and non-transferable Series A preferred stock, par value $0.01 per share (the Preferred Stock), for a purchase price of $90 million. Exelon also committed pursuant to the Subscription Agreement to purchase 1,800 originally issued shares of Preferred Stock for a purchase price of $18 million at the end of each 90-day period following the date of the Subscription Agreement until the Merger closes or is terminated, up to a maximum of 18,000 shares of Preferred Stock for a maximum aggregate consideration of $180 million. In accordance with the Subscription Agreement, on each of July 29, 2014, October 27, 2014, January 26, 2015, April 27, 2015 and July 24, 2015, an additional 1,800 shares of Preferred Stock were issued by PHI to Exelon for a purchase price of $18 million. The holders of the Preferred Stock will be entitled to receive a cumulative, non-participating cash dividend of 0.1% per annum, payable quarterly, when, as and if declared by PHI’s board of directors. The proceeds from the issuance of the Preferred Stock are not subject to restrictions and are intended to serve as a prepayment of any applicable reverse termination fee payable from Exelon to PHI. The Preferred Stock will be redeemable on the terms and in the circumstances set forth in the Merger Agreement and the Subscription Agreement.

The Merger Agreement provides for certain termination rights for each of PHI and Exelon, and further provides that, upon termination of the Merger Agreement under certain specified circumstances, PHI will be required to pay Exelon a termination fee of $259 million or reimburse Exelon for its expenses up to $40 million (which reimbursement of expenses shall reduce on a dollar for dollar basis any termination fee subsequently payable by PHI), provided, however, that if the Merger Agreement is terminated in connection with an acquisition proposal made under certain circumstances by a person who made an acquisition proposal between April 1, 2014 and the date of the Merger Agreement, the termination fee will be $293 million plus reimbursement of Exelon for its expenses up to $40 million (not subject to offset). In addition, if the Merger Agreement is terminated under certain circumstances due to the failure to obtain required regulatory approvals with respect to the Merger or the breach by Exelon of its obligations in respect of obtaining such regulatory approvals (a Regulatory Termination), PHI will be able to redeem any issued and outstanding Preferred Stock at par value, and in that case, Exelon will be required to pay all documented out-of-pocket expenses incurred by PHI in connection with the Merger Agreement or the transactions contemplated thereby, up to $40 million. If the Merger Agreement is terminated, other than for a Regulatory Termination, PHI will be required to redeem the Preferred Stock at the purchase price of $10,000 per share, plus any unpaid accrued and accumulated dividends thereupon.

Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the approval of the Merger by the holders of a majority of the outstanding shares of common stock of PHI; (ii) the receipt of regulatory approvals required to consummate the Merger, including approvals from the Federal Energy Regulatory Commission (FERC), the Federal Communications Commission (FCC), the Delaware Public Service Commission (DPSC), the District of Columbia Public Service Commission (DCPSC), the Maryland Public Service Commission (MPSC), the New Jersey Board of Public Utilities (NJBPU) and the Virginia State Corporation Commission (VSCC); (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act); and (iv) other customary closing conditions, including (a) the accuracy of each party’s representations and warranties (subject to customary materiality qualifiers) and (b) each party’s compliance with its obligations and covenants contained in the Merger Agreement (including covenants that may limit, restrict or prohibit PHI and its subsidiaries from taking specified actions during the period between the date of the Merger Agreement and the closing of the Merger or the termination of the Merger Agreement). In addition, the obligations of Exelon and Merger Sub to consummate the Merger are subject to the required regulatory approvals not imposing terms, conditions, obligations or commitments, individually or in the aggregate, that constitute a burdensome condition (as defined in the Merger Agreement). For additional discussion, see Note (6), “Regulatory Matters – Merger Approval Proceedings.”

On September 23, 2014, the stockholders of PHI approved the Merger, on October 7, 2014, the VSCC approved the Merger, and on November 20, 2014, FERC approved the Merger. In addition, the transfer of control of certain communications licenses held by certain of PHI’s subsidiaries has been approved by the FCC. The NJBPU approved the Merger on February 11, 2015, and on October 15, 2015, voted to extend the effectiveness of its approval until June 30, 2016. The DPSC approved the Merger on May 19, 2015.

On December 22, 2014, the waiting period under the HSR Act expired. Although the Department of Justice (DOJ) allowed the waiting period under the HSR Act to expire without taking any action with respect to the Merger, the DOJ has not advised PHI that it has concluded its investigation. The expiration of the HSR Act waiting period allows for the closing of the Merger at any time on or before December 21, 2015. If the Merger is not completed by that date the parties will be required to refile the required Notification and Report Forms with the DOJ and Federal Trade Commission (FTC), which will restart the 30-day waiting period required by the HSR Act, during which time the Merger may not be consummated, unless these agencies authorize the early termination of the waiting period. PHI and Exelon currently anticipate that they will refile with the DOJ and FTC in November 2015.

On May 15, 2015, the MPSC approved the Merger, with conditions, including conditions that modify and supplement those originally proposed. On May 18, 2015, PHI and Exelon announced that they had committed to fulfill the modified, more stringent conditions and package of customer benefits imposed by the MPSC. Multiple parties have filed petitions for judicial review of the MPSC order by the Circuit Court of Queen Anne’s County, Maryland, seeking to appeal the MPSC order. PHI is vigorously contesting these appeals. The MPSC order remains in effect during the appeals process. At this time, PHI is unable to predict the outcome of the proceeding.

On August 25, 2015, the DCPSC announced at a public meeting that it had denied the merger application, and on August 27, 2015, the DCPSC issued its written order related to the Merger. On September 28, 2015, Exelon, PHI and Pepco, and certain of their respective affiliates, filed an application for reconsideration with the DCPSC requesting reconsideration of the DCPSC order related to the Merger.

On October 6, 2015, Exelon, PHI and Pepco, and certain of their respective affiliates, entered into a Nonunanimous Full Settlement Agreement and Stipulation (the DC Settlement Agreement) with the District of Columbia Government, the Office of the People’s Counsel and other parties, which DC Settlement Agreement contains commitments from Exelon and PHI above those contained in their original merger application.

Also on October 6, 2015, PHI, Exelon and Merger Sub entered into a Letter Agreement (the Letter Agreement), setting forth the terms and conditions under which the parties will file with the DCPSC (a) a Motion of Joint Applicants to Reopen the Record in Formal Case No. 1119 to Allow for Consideration of the DC Settlement Agreement (the Motion to Reopen), or (b) if the Motion to Reopen is not granted, a new merger application, requesting approval of the Merger on the terms and commitments agreed to in the DC Settlement Agreement. Pursuant to the Letter Agreement, PHI and Exelon each agrees, among other things, that neither party will exercise the termination rights each may have under the Merger Agreement on or after October 29, 2015, unless: (i) the DCPSC does not, within 45 days following the date on which the DC Settlement Agreement is filed with the DCPSC (the Settlement Filing Date), set a procedural schedule which allows for a final order for approval of the Merger within 150 days after the Settlement Filing Date, (ii) the DCPSC sets a schedule for action which does not allow for a final order for approval of the Merger within 150 days after the Settlement Filing Date, (iii) the DCPSC fails to issue a final order approving the Merger and the DC Settlement Agreement as filed without condition or modification within 150 days after the Settlement Filing Date, (iv) the DCPSC issues a final order denying approval of the Merger or the DC Settlement Agreement or adds conditions or makes modifications to the DC Settlement Agreement, (v) the DC Settlement Agreement is terminated for any reason, or (vi) on or after the date that is 151 days after the Settlement Filing Date a condition to closing of the Merger has not been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing). The Letter Agreement also provides that, subject to certain conditions, Exelon may, following receipt of all regulatory approvals consistent with the DC Settlement Agreement, delay closing of the Merger for up to 30 days to engage in capital markets transactions to raise additional funds required to consummate the Merger.

On October 6, 2015, following execution of the DC Settlement Agreement and the Letter Agreement, Exelon, PHI and Pepco, and certain of their respective affiliates, filed with the DCPSC the Motion to Reopen requesting consideration of the DC Settlement Agreement and approval of the Merger on such terms and conditions set forth in the DC Settlement Agreement, without condition or modification, and to stay further proceedings on the application for reconsideration filed by the parties on September 28, 2015 and suspend the time period for reconsideration pending the DCPSC’s consideration of the DC Settlement Agreement.

Organization

(1) ORGANIZATION

Delmarva Power & Light Company (DPL) is engaged in the transmission and distribution of electricity in Delaware and portions of Maryland and provides natural gas distribution service in northern Delaware. Additionally, DPL provides Default Electricity Supply, which is the supply of electricity at regulated rates to retail customers in its service territories who do not elect to purchase electricity from a competitive supplier. Default Electricity Supply is known as Standard Offer Service in both Delaware and Maryland. DPL is a wholly owned subsidiary of Conectiv, LLC, which is wholly owned by Pepco Holdings, Inc. (Pepco Holdings or PHI).

PHI entered into an Agreement and Plan of Merger, dated April 29, 2014, as amended and restated on July 18, 2014 (the Merger Agreement), with Exelon Corporation, a Pennsylvania corporation (Exelon), and Purple Acquisition Corp., a Delaware corporation and an indirect, wholly owned subsidiary of Exelon (Merger Sub), providing for the merger of Merger Sub with and into PHI (the Merger), with PHI surviving the Merger as an indirect, wholly owned subsidiary of Exelon. Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock, par value $0.01 per share, of PHI (other than (i) shares owned by Exelon, Merger Sub or any other direct or indirect wholly owned subsidiary of Exelon and shares owned by PHI or any direct or indirect wholly owned subsidiary of PHI, and in each case not held on behalf of third parties (but not including shares held by PHI in any rabbi trust or similar arrangement in respect of any compensation plan or arrangement) and (ii) shares that are owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law), will be canceled and converted into the right to receive $27.25 in cash, without interest.

In connection with entering into the Merger Agreement, PHI entered into a Subscription Agreement, dated April 29, 2014 (the Subscription Agreement), with Exelon, pursuant to which on April 30, 2014, PHI issued to Exelon 9,000 originally issued shares of non-voting, non-convertible and non-transferable Series A preferred stock, par value $0.01 per share (the Preferred Stock), for a purchase price of $90 million. Exelon also committed pursuant to the Subscription Agreement to purchase 1,800 originally issued shares of Preferred Stock for a purchase price of $18 million at the end of each 90-day period following the date of the Subscription Agreement until the Merger closes or is terminated, up to a maximum of 18,000 shares of Preferred Stock for a maximum aggregate consideration of $180 million. In accordance with the Subscription Agreement, on each of July 29, 2014, October 27, 2014, January 26, 2015, April 27, 2015 and July 24, 2015, an additional 1,800 shares of Preferred Stock were issued by PHI to Exelon for a purchase price of $18 million. The holders of the Preferred Stock will be entitled to receive a cumulative, non-participating cash dividend of 0.1% per annum, payable quarterly, when, as and if declared by PHI’s board of directors. The proceeds from the issuance of the Preferred Stock are not subject to restrictions and are intended to serve as a prepayment of any applicable reverse termination fee payable from Exelon to PHI. The Preferred Stock will be redeemable on the terms and in the circumstances set forth in the Merger Agreement and the Subscription Agreement.

The Merger Agreement provides for certain termination rights for each of PHI and Exelon, and further provides that, upon termination of the Merger Agreement under certain specified circumstances, PHI will be required to pay Exelon a termination fee of $259 million or reimburse Exelon for its expenses up to $40 million (which reimbursement of expenses shall reduce on a dollar for dollar basis any termination fee subsequently payable by PHI), provided, however, that if the Merger Agreement is terminated in connection with an acquisition proposal made under certain circumstances by a person who made an acquisition proposal between April 1, 2014 and the date of the Merger Agreement, the termination fee will be $293 million plus reimbursement of Exelon for its expenses up to $40 million (not subject to offset). In addition, if the Merger Agreement is terminated under certain circumstances due to the failure to obtain required regulatory approvals with respect to the Merger or the breach by Exelon of its obligations in respect of obtaining such regulatory approvals (a Regulatory Termination), PHI will be able to redeem any issued and outstanding Preferred Stock at par value, and in that case, Exelon will be required to pay all documented out-of-pocket expenses incurred by PHI in connection with the Merger Agreement or the transactions contemplated thereby, up to $40 million. If the Merger Agreement is terminated, other than for a Regulatory Termination, PHI will be required to redeem the Preferred Stock at the purchase price of $10,000 per share, plus any unpaid accrued and accumulated dividends thereupon.

Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the approval of the Merger by the holders of a majority of the outstanding shares of common stock of PHI; (ii) the receipt of regulatory approvals required to consummate the Merger, including approvals from the Federal Energy Regulatory Commission (FERC), the Federal Communications Commission (FCC), the Delaware Public Service Commission (DPSC), the District of Columbia Public Service Commission (DCPSC), the Maryland Public Service Commission (MPSC), the New Jersey Board of Public Utilities (NJBPU) and the Virginia State Corporation Commission (VSCC); (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act); and (iv) other customary closing conditions, including (a) the accuracy of each party’s representations and warranties (subject to customary materiality qualifiers) and (b) each party’s compliance with its obligations and covenants contained in the Merger Agreement (including covenants that may limit, restrict or prohibit PHI and its subsidiaries from taking specified actions during the period between the date of the Merger Agreement and the closing of the Merger or the termination of the Merger Agreement). In addition, the obligations of Exelon and Merger Sub to consummate the Merger are subject to the required regulatory approvals not imposing terms, conditions, obligations or commitments, individually or in the aggregate, that constitute a burdensome condition (as defined in the Merger Agreement). For additional discussion, see Note (7), “Regulatory Matters – Merger Approval Proceedings.”

On September 23, 2014, the stockholders of PHI approved the Merger, on October 7, 2014, the VSCC approved the Merger, and on November 20, 2014, FERC approved the Merger. In addition, the transfer of control of certain communications licenses held by certain of PHI’s subsidiaries has been approved by the FCC. The NJBPU approved the Merger on February 11, 2015, and on October 15, 2015, voted to extend the effectiveness of its approval until June 30, 2016. The DPSC approved the Merger on May 19, 2015.

On December 22, 2014, the waiting period under the HSR Act expired. Although the Department of Justice (DOJ) allowed the waiting period under the HSR Act to expire without taking any action with respect to the Merger, the DOJ has not advised PHI that it has concluded its investigation. The expiration of the HSR Act waiting period allows for the closing of the Merger at any time on or before December 21, 2015. If the Merger is not completed by that date the parties will be required to refile the required Notification and Report Forms with the DOJ and Federal Trade Commission (FTC), which will restart the 30-day waiting period required by the HSR Act, during which time the Merger may not be consummated, unless these agencies authorize the early termination of the waiting period. PHI and Exelon currently anticipate that they will refile with the DOJ and FTC in November 2015.

On May 15, 2015, the MPSC approved the Merger, with conditions, including conditions that modify and supplement those originally proposed. On May 18, 2015, PHI and Exelon announced that they had committed to fulfill the modified, more stringent conditions and package of customer benefits imposed by the MPSC. Multiple parties have filed petitions for judicial review of the MPSC order by the Circuit Court of Queen Anne’s County, Maryland, seeking to appeal the MPSC order. PHI is vigorously contesting these appeals. The MPSC order remains in effect during the appeals process. At this time, PHI is unable to predict the outcome of the proceeding.

On August 25, 2015, the DCPSC announced at a public meeting that it had denied the merger application, and on August 27, 2015, the DCPSC issued its written order related to the Merger. On September 28, 2015, Exelon, PHI and Potomac Electric Power Company (Pepco), and certain of their respective affiliates, filed an application for reconsideration with the DCPSC requesting reconsideration of the DCPSC order related to the Merger.

On October 6, 2015, Exelon, PHI and Pepco, and certain of their respective affiliates, entered into a Nonunanimous Full Settlement Agreement and Stipulation (the DC Settlement Agreement) with the District of Columbia Government, the Office of the People’s Counsel and other parties, which DC Settlement Agreement contains commitments from Exelon and PHI above those contained in their original merger application.

Also on October 6, 2015, PHI, Exelon and Merger Sub entered into a Letter Agreement (the Letter Agreement), setting forth the terms and conditions under which the parties will file with the DCPSC (a) a Motion of Joint Applicants to Reopen the Record in Formal Case No. 1119 to Allow for Consideration of the DC Settlement Agreement (the Motion to Reopen), or (b) if the Motion to Reopen is not granted, a new merger application, requesting approval of the Merger on the terms and commitments agreed to in the DC Settlement Agreement. Pursuant to the Letter Agreement, PHI and Exelon each agrees, among other things, that neither party will exercise the termination rights each may have under the Merger Agreement on or after October 29, 2015, unless: (i) the DCPSC does not, within 45 days following the date on which the DC Settlement Agreement is filed with the DCPSC (the Settlement Filing Date), set a procedural schedule which allows for a final order for approval of the Merger within 150 days after the Settlement Filing Date, (ii) the DCPSC sets a schedule for action which does not allow for a final order for approval of the Merger within 150 days after the Settlement Filing Date, (iii) the DCPSC fails to issue a final order approving the Merger and the DC Settlement Agreement as filed without condition or modification within 150 days after the Settlement Filing Date, (iv) the DCPSC issues a final order denying approval of the Merger or the DC Settlement Agreement or adds conditions or makes modifications to the DC Settlement Agreement, (v) the DC Settlement Agreement is terminated for any reason, or (vi) on or after the date that is 151 days after the Settlement Filing Date a condition to closing of the Merger has not been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing). The Letter Agreement also provides that, subject to certain conditions, Exelon may, following receipt of all regulatory approvals consistent with the DC Settlement Agreement, delay closing of the Merger for up to 30 days to engage in capital markets transactions to raise additional funds required to consummate the Merger.

On October 6, 2015, following execution of the DC Settlement Agreement and the Letter Agreement, Exelon, PHI and Pepco, and certain of their respective affiliates, filed with the DCPSC the Motion to Reopen requesting consideration of the DC Settlement Agreement and approval of the Merger on such terms and conditions set forth in the DC Settlement Agreement, without condition or modification, and to stay further proceedings on the application for reconsideration filed by the parties on September 28, 2015 and suspend the time period for reconsideration pending the DCPSC’s consideration of the DC Settlement Agreement.

Organization

(1) ORGANIZATION

Atlantic City Electric Company (ACE) is engaged in the transmission and distribution of electricity in southern New Jersey. ACE also provides Default Electricity Supply, which is the supply of electricity at regulated rates to retail customers in its service territory who do not elect to purchase electricity from a competitive energy supplier. Default Electricity Supply is known as Basic Generation Service in New Jersey. ACE is a wholly owned subsidiary of Conectiv, LLC, which is wholly owned by Pepco Holdings, Inc. (Pepco Holdings or PHI).