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Acquisitions (Exelon and Generation)

6 Months Ended

Jun. 30, 2011

4. Merger and Acquisitions (Exelon and Generation)

Proposed Merger with Constellation Energy Group, Inc. (Exelon)

On April 28, 2011, Exelon and Constellation Energy Group, Inc. (Constellation) announced that they signed an agreement and plan of merger to combine the two companies in a stock-for-stock transaction. Under the merger agreement, Constellation's shareholders will receive 0.930 shares of Exelon common stock in exchange for each share of Constellation common stock. Based on Exelon's closing share price on April 27, 2011, Constellation shareholders would receive $7.9 billion in total equity value. The resulting company will retain the Exelon name and be headquartered in Chicago.

The transaction must be approved by the shareholders of both Exelon and Constellation. Completion of the transaction is also conditioned upon approval by the FERC, NRC, Maryland Public Service Commission (MDPSC), the New York Public Service Commission, the Public Utility Commission of Texas, and other state and federal regulatory bodies. The companies are committed to mitigating any competitive issues, and have proposed to divest three Constellation generating stations located in PJM, which is the only market where there is a material overlap of generation owned by both companies. These stations, Brandon Shores and H.A. Wagner in Anne Arundel County, Md., and C.P. Crane in Baltimore County, Md., include base-load coal-fired generation units plus associated gas/oil units located at the same sites, and total 2,648 MW of generation capacity. In addition, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), the transaction cannot be completed until Exelon has made required notifications and given certain information and materials to the Federal Trade Commission (FTC) and/or the Antitrust Division of the United States Department of Justice (DOJ) and until specified waiting period requirements have expired. During the second quarter, Exelon and Constellation filed applications with FERC, the MDPSC, the New York State Public Service Commission and the Public Utility Commission of Texas seeking approval of the transaction. Exelon and Constellation also filed an application with the NRC for indirect transfer of Constellation licenses and filed notifications with the FTC and DOJ in compliance with the requirements of the HSR Act.

Exelon has been named in suits filed in the Circuit Court of Baltimore City, Maryland alleging that individual directors of Constellation breached their fiduciary duties by entering into the proposed merger transaction and Exelon aided and abetted the individual directors' breaches. The suits seek to enjoin a Constellation shareholder vote on the proposed merger until all material information is disclosed and seek rescission of the proposed merger. In addition, they also seek compensatory damages, rescission damages, attorneys' fees and costs. Exelon intends to vigorously defend these suits. Exelon does not believe these suits will impact the completion of the transaction and are not expected to have a material impact on Exelon's results of operations.

Through June 30, 2011, Exelon has incurred approximately $24 million of expense associated with the transaction, primarily related to fees incurred as part of the acquisition. Exelon currently estimates the total costs directly related to closing the transaction will be $144 million, which include financial advisor, consultant, legal and SEC registration fees. In addition, Exelon estimates approximately $500 million of additional integration costs, primarily in 2012 and 2013. Such costs are expected to be partially offset by projected merger-related synergies in 2012 and fully offset in 2013 and beyond. As part of the application for approval of the merger by MDPSC, Exelon and Constellation have proposed a package of benefits to Baltimore Gas and Electric Company customers, the City of Baltimore and the state of Maryland, which results in a direct investment in the state of Maryland of more than $250 million. Under the merger agreement, in the event Exelon or Constellation terminates the merger agreement to accept a superior proposal, or under certain other circumstances, Exelon or Constellation, as applicable, would be required to pay a termination fee of $800 million in the case of a termination fee payable by Exelon to Constellation and a termination fee of $200 million in the case of a termination fee payable by Constellation to Exelon. The companies anticipate closing the transaction in early 2012.

Proposed Acquisition of Wolf Hollow (Exelon and Generation)

On May 12, 2011, Generation entered into an agreement to acquire Wolf Hollow, a combined-cycle natural gas-fired power plant in north Texas, for approximately $305 million. Under the terms of the agreement, Generation will acquire 720 MWs of energy within the ERCOT power market. The agreement is contingent upon antitrust clearance and Texas regulatory approval. The approval process is expected to be completed and the transaction is expected to close during the third quarter of 2011. In connection with the proposed acquisition, Generation's existing long-term PPA with Wolf Hollow will be terminated upon completion of the transaction. As of June 30, 2011, Generation's energy purchase commitments related to the Wolf Hollow PPA were approximately $340 million. Wolf Hollow will not be a “significant subsidiary,” as defined by SEC financial statement reporting requirements, for Exelon or Generation.

Acquisition of John Deere Renewables (Exelon and Generation)

On December 9, 2010, Generation completed the acquisition of all of the equity interests of John Deere Renewables, LLC (now known as Exelon Wind), a leading operator and developer of wind power. Under the terms of the agreement, Generation acquired 735 MWs of installed, operating wind capacity located in eight states. The acquisition builds on Exelon's commitment to renewable energy as part of Exelon 2020, a business and environmental strategy to eliminate the equivalent of Exelon's 2001 carbon footprint.

The fair value of assets acquired and liabilities assumed was determined based upon the use of significant estimates and assumptions that are judgmental in nature. Some of the more significant estimates and assumptions used include: projected future cash flows (including timing); discount rates reflecting the 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 the duration of the liabilities assumed. Generation did not record any goodwill related to the acquisition of Exelon Wind.

The following table summarizes the fair value of consideration transferred to acquire Exelon Wind and the value of identified assets and liabilities assumed as of the acquisition date:

Fair Value of Consideration Transferred

Cash (a)	$	893
Contingent consideration		32

Total fair value of consideration recorded	$	925


Recognized amounts of identifiable assets acquired and liabilities assumed

Property, plant and equipment	$	700
Intangible assets		224
Working capital		18
Asset retirement obligations		(13)
Noncontrolling interest		(3)
Other		(1)

Total net identifiable assets	$	925

_____________

(a) On September 30, 2010, Generation issued $900 million of senior notes, the proceeds of which were used to fund the acquisition.

The contingent consideration arrangement requires that Generation pay up to $40 million related to three individual projects with a capacity of 230 MWs, which are currently in advanced stages of development, upon meeting certain contractual commitments related to the commencement of construction of each project. The fair value of the contingent consideration arrangement of $32 million was determined based upon a weighted average probability of meeting certain contractual commitments related to the commencement of construction of each project, which is considered an unobservable (Level 3) input pursuant to applicable accounting guidance. As of June 30, 2011, the amount recognized for the contingent consideration arrangement, the range of outcomes, and the assumptions used to develop the estimate had not changed since December 31, 2010. Generation anticipates paying a portion of the contingent consideration within the next 12 months and, accordingly, $24 million of contingent consideration is included within other current liabilities within Exelon and Generation's Consolidated Balance Sheets. The remaining amount was recorded in other deferred credits and other liabilities within Exelon and Generation's Consolidated Balance Sheets.

The fair value of the assets acquired included customer receivables of $18 million. As of June 30, 2011, there are no outstanding customer receivables that were acquired in the Exelon Wind transaction.

The $3 million noncontrolling interest represents the noncontrolling members' proportionate share in the fair value of the assets acquired and liabilities assumed in the transaction.

The unaudited pro forma results for Exelon and Generation as if the Exelon Wind acquisition occurred on January 1, 2009 were not materially different from Exelon and Generation's financial results for the three and six months ended June 30, 2010.

Accounting guidance requires that the acquirer must recognize separately identifiable intangible assets in the application of purchase accounting. Most of the output of the acquired wind turbines has been sold under PPA contracts. The excess of the contract price of the PPAs over market prices was recognized as intangible assets. Generation determined that the estimated acquisition-date fair value of the intangible assets was approximately $224 million, which was recorded in other deferred debits and other assets within Exelon and Generation's Consolidated Balance Sheets. Included in this amount is $48 million related to the PPAs for the projects that are in the advanced stage of development. While Generation expects to perform under the PPAs once the construction of these projects is complete, there is a risk of impairment if the projects do not reach commercial operation. The valuation of the acquired intangible assets was estimated by applying the income approach, which is based upon discounted projected future cash flows associated with the PPA contracts. That measure is based upon certain unobservable inputs, which are considered Level 3 inputs, pursuant to applicable accounting guidance. Key assumptions include forecasted power prices and discount rate. The intangible assets are amortized on a straight-line basis over the period in which the associated contract revenues are recognized. Generation determined that the unit of production amortization method would best reflect when the intangible assets' economic benefits would be consumed; however, the straight-line method approximates the equivalent of the unit of production method on an annual basis. The amortization expense is reflected as a decrease in operating revenue within Exelon and Generation's Consolidated Statements of Operations and Comprehensive Income. Amortization expense related to Exelon and Generation's acquired intangible assets for the three and six months ended June 30, 2011 was $3 million and $6 million, respectively.

Exelon's and Generation's other acquired intangible assets, included in deferred debits and other assets in the Consolidated Balance Sheets, consisted of the following as of June 30, 2011:

								Estimated amortization expense
		Gross		Accumulated Amortization		Net		Second Half of 2011		2012		2013		2014		2015
Generation
	Exelon Wind acquisition	$	224	$	(7)	$	217	$	6	$	13	$	14	$	14	$	14

Total intangible assets		$	224	$	(7)	$	217	$	6	$	13	$	14	$	14	$	14

Exelon Generation Co L L C [Member]

Acquisitions [Line Items]

Acquisitions (Exelon and Generation)