Merger and Acquisitions (Exelon, Generation, ComEd, PECO and BGE)

3 Months Ended

Mar. 31, 2013

Acquisitions [Line Items]

Mergers and Acquisitions (Exelon, Generation, ComEd, PECO and BGE)

4.Merger and Acquisitions

Merger with Constellation (Exelon, Generation, ComEd, PECO and BGE)

Description of Transaction

On March 12, 2012, Exelon completed the merger contemplated by the Merger Agreement, among Exelon, Bolt Acquisition Corporation, a wholly owned subsidiary of Exelon (Merger Sub), and Constellation.As a result of that merger, Merger Sub was merged into Constellation (the Initial Merger) and Constellation became a whollyowned subsidiary of Exelon.Following the completion of the Initial Merger, Exelon and Constellation completed a series of internal corporate organizational restructuring transactions. Constellation merged with and into Exelon, with Exelon continuing as the surviving corporation (the Upstream Merger). Simultaneously with the Upstream Merger, Constellation's interest in RF HoldCo LLC, which holds Constellation's interest in BGE, was transferred to Exelon Energy Delivery Company, LLC, a wholly owned subsidiary of Exelon that also owns Exelon's interests in ComEd and PECO. Following the Upstream Merger and the transfer of RF HoldCo LLC, Exelon contributed to Generation certain subsidiaries, including those with generation and customer supply operations that were acquired from Constellation as a result of the Initial Merger and the Upstream Merger.

Regulatory Matters

In December 2011, Exelon and Constellation reached a settlement with the State of Maryland and the City of Baltimore and other interested parties in connection with the regulatory proceedings related to the merger that were pending before the MDPSC. As part of this settlement and the application for approval of the merger by MDPSC, Exelon agreed to provide a package of benefits to BGE customers, the City of Baltimore and the State of Maryland, resulting in an estimated direct investment in the State of Maryland of more than $1 billion.

The direct investment estimate includes $95 million to $120 million for the requirement to cause construction of a headquarters building in Baltimore for Generation's competitive energy businesses.On March 20, 2013, Generation signed a 20 year lease agreement that is contingent upon the developer obtaining financing for the construction of the building. Once the financing conditions are met, construction will commence and the building is expected to be ready for occupancy within 2 years.Thedirect investment estimate also includes $625 million for Exelon's and Generation's commitment to develop or assist in development of285 – 300 MWs of newgeneration in Maryland, expected to be completed over a period of 10 years. Such costs, which are expected to be primarily capital in nature, will be recognized as incurred. As of March 31, 2013, amounts reflected in the Exelon and Generation consolidated financial statements for these expenditure commitments were immaterial.

The settlement agreement contemplates various options for complying with the new generation development commitments, including building or acquiring generating assets, making subsidy or compliance payments, or in circumstances in which the generation build is delayed, making liquidated damages payments.  Exelon and Generation expect that the majority of these commitments will be satisfied by building or acquiring generating assets, and therefore will be primarily capital in nature and recognized as incurred.  If in the future Exelon determines that it is probable that it will make subsidy, compliance or liquidated damages payments related to the new generation development commitments, Exelon will record a liability at that time. As of March 31, 2013, it is reasonably possible that Exelon will be required to make subsidy or liquidated damages payments of approximately $40 million rather than build one of the generation projects contemplated by the commitments, given that the generation build is dependent upon the passage of legislation and other conditions that Exelon does not control. 

Associated with certain of the regulatory approvals required for the merger, on November 30, 2012, a subsidiary of Generation sold three Maryland generating stations and associated assets, Brandon Shores and H.A. Wagner in Anne Arundel County, Maryland, and C.P. Crane in Baltimore County, Maryland, to Raven Power Holdings LLC (Raven Power), a subsidiary of Riverstone Holdings LLC. In 2012, Exelon and Generation recorded a pre-tax loss of $272 million to reflect the difference between the sales price and the carrying value of the generating stations and associated assets. In the first quarter of 2013, Exelon and Generation recorded a pre-tax gain of $8 million to reflect the final settlement of the sales price with Raven Power.

Accounting for the Merger Transaction

The fair value of Constellation's non-regulated business assets acquired and liabilities assumed 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 financial statements of BGE do not include fair value adjustments for assets or liabilities subject to rate-setting provisions for BGE. BGE is subject to the rate-setting authority of FERC and the MDPSC and is accounted for pursuant to the accounting guidance for regulated operations. The rate-setting and cost recovery provisions currently in place for BGE provide revenue derived from costs including a return on investment of assets and liabilities included in rate base. Except for debt, fuel supply contracts and regulatory assets not earning a return, the fair values of BGE's tangible and intangible assets and liabilities subject to these rate-setting provisions are assumed to approximate their carrying values and, therefore, do not reflect any net adjustments related to these amounts. For BGE's debt, fuel supply contracts and regulatory assets not earning a return, the difference between fair value and book value of BGE's assets acquired and liabilities assumed is recorded as a regulatory asset and liability at Exelon Corporate as Exelon did not apply push-down accounting to BGE. See Note 1 – Basis of Presentation for additional information on BGE's push-down accounting treatment. Also see Note 5– Regulatory Mattersfor additional information on BGE's regulatory assets.

The preliminary valuations performed in the first quarter of 2012 were updated in the second, third and fourthquarters of 2012, withthe most significant adjustments to the preliminary valuation amounts having been made to the fair values assigned to the acquired power supply and fuel contracts, unregulated property, plant and equipment and investments in affiliates.There were no significant adjustments to the purchase price allocation in the first quarter of 2013 and the purchase price allocation is now final.

The purchase priceallocation of the Initial Merger of Exelon with Constellation and Exelon's contribution of certain subsidiaries of Constellation to Generationat March 31, 2013was as follows:

Purchase Price Allocation, excluding amortization	Exelon		Generation
Current assets	$	4,936	$	3,638
Property, plant and equipment		9,342		4,054
Unamortized energy contracts		3,218		3,218
Other intangibles, trade name and retail relationships		457		457
Investment in affiliates		1,942		1,942
Pension and OPEB regulatory asset		740		0
Other assets		2,265		1,266
Total assets		22,900		14,575
Current liabilities		3,408		2,804
Unamortized energy contracts		1,722		1,512
Long-term debt, including current maturities		5,632		2,972
Noncontrolling interest		90		90
Deferred credits and other liabilities and preferred securities		4,683		1,933
Total liabilities, preferred securities and noncontrolling interest		15,535		9,311
Total purchase price	$	7,365	$	5,264

Intangible Assets Recorded

For the power supply and fuel contracts acquired from Constellation, the difference between the contract price and the market price at the date of the merger was recognized as either an intangible asset or liability based on whether the contracts were in or out-of-the-money. The fair value amounts are amortized over the life of the contract in relation to the present value of the underlying cash flows as of the merger date. Amortization expense and income are recorded through purchased power and fuel expense or operating revenues. Exelon and Generation present separately in their Consolidated Balance Sheets the unamortized energy contract assets and liabilities for these contracts. Exelon's and Generation's amortization expense for the three months ended March 31, 2013 and the period March 12, 2012 to March 31, 2012 amounted to $170 million and $131 million, respectively. This amortization expense excludes the $19 million and $9 million in amortization of the regulatory asset for the three months ended March 31, 2013 and the period March 12, 2012 to March 31, 2012 and equally offsetting amortization of the fuel supply contract liability recorded at Exelon Corporate in the Consolidated Statement of Operations. The weighted-average amortization period is approximately 1.5 years.

Exelon's and Generation's straight line amortization expense for the fair value of the Constellation trade name intangible asset for the three months ended March 31, 2013 and the period March 12, 2012 to March 31, 2012 amounted to $6 million and $2 million, respectively. The amortization period is approximately 10 years.The trade name intangible asset is included in deferred debits and other assets within Exelon's and Generation's Consolidated Balance Sheets.

The intangible assets for the fair value of the retail relationships are amortized as amortization expense on a straight line basis over the useful life of the underlying assets averaging approximately 12.4 years. Exelon's and Generation's straight line amortization expense for the three months ended March 31, 2013 and the period March 12, 2012 to March 31, 2012 amounted to $5 million and $1 million, respectively. The retail relationships intangible assets are included in deferred debits and other assets within Exelon's and Generation's Consolidated Balance Sheets.

Exelon's intangible assets and liabilities acquired through the merger with Constellation included in its Consolidated Balance Sheets, along with the future estimated amortization, were as follows as of March 31, 2013:

								Estimated amortization expense
Description	Weighted Average Amortization	Gross		Accumulated Amortization		Net		Remainder of 2013		2014		2015		2016		2017		2018 and Beyond
Unamortized energy contracts, net (a)	1.5	$	1,496	$	(1,133)	$	363	$	243	$	73	$	19	$	(31)	$	(22)	$	81
Trade name	10.0		243		(26)		217		18		24		24		24		24		103
Retail relationships	12.4		214		(20)		194		15		19		19		19		19		103
Total, net		$	1,953	$	(1,179)	$	774	$	276	$	116	$	62	$	12	$	21	$	287

(a) Includes the fair value of BGE's power and gas supply contracts of $70 million for which an offsetting regulatory asset was also recorded.

Impact of Merger

It is impracticable to determine the overall financial statementimpact for the Constellation subsidiaries contributed down to Generation following the Upstream Merger for the three months ended March 31, 2013 and 2012.  Upon closing of the merger, the operations of these Constellation subsidiaries were integrated into Generation's operations and are therefore notfully distinguishable after the merger. 

The impact of BGE on Exelon's Consolidated Statement of Operations and Comprehensive Income includes operating revenues of $880 million and net income of $80 million during the three months ended March 31, 2013, and operating revenues of $52 million and net loss of $65 million during the three months ended March 31, 2012.

During the threemonths ended March 31, 2013, Exelon, Generation, ComEd, PECO and BGE incurredmerger and integration-related costs of $33 million, $23 million,$4 million, $3 million and $2 million, respectively. Of these amounts, Exelon, ComEd and BGE deferred $6 million, $4 million and $2 million as a regulatory asset as of March 31, 2013. Additionally, Exelon and BGE established a regulatory asset of $6 millionas of March 31, 2013 for previously incurred 2012 merger and integration-related costs.

During the three months ended March 31, 2012, Exelon, Generation, ComEd, PECO and BGE incurred merger and integration-related costs of $516 million, $110 million, $18 million, $7 million and $169 million, respectively. Of these amounts, Exelon, ComEd and BGE deferred $32 million,$16 million and $16 million as a regulatory asset as of March 31, 2012. The costs incurred are classified primarily within Operating and Maintenance Expense in the Registrants' respective Consolidated Statements of Operations and Comprehensive Income, with the exception of the BGE customer rate credit and the credit facility fees, which are included as a reduction to operating revenues and other, net, respectively, for the three months ended March 31, 2012.

Severance Costs

The Registrants have an ongoing severance plan under which, in general, the longer an employee worked prior to termination the greater the amount of severance benefits. The Registrants record a liability and expense or regulatory asset for severance once terminations are probable of occurrence and the related severance benefits can be reasonably estimated. For severance benefits that are incremental to its ongoing severance plan (“one-time termination benefits”), the Registrants measure the obligation and record the expense at fair value at the communication date if there are no future service requirements, or, if future service is required to receive the termination benefit, ratably over the required service period.

Upon closing the merger with Constellation, Exelon recorded a severance accrual for the anticipated employee position reductions as a result of the post-merger integration. The majority of these positions are corporate and Generation support positions. Since then, Exelon has identified specific employees to be severed pursuant to the merger-related staffing and selection process; as well as employees that were previously identified for severance but have since accepted another position within Exelon and are no longer receiving a severance benefit. Exelon adjusts its accrual each quarter to reflect its best estimate of remaining severance costs. The amount of severance expense associated with the post-merger integration recognized for the three months ended March 31, 2013 and March 31, 2012, for Exelon is$3 million and $83 million, which includes$3 million and $45 million for Generation, $0million and $11 million for ComEd, $0 million and $5 million for PECO and $0 million and $16 millionfor BGE, respectively. Estimated costs to be incurred after March 31, 2013 are not material.In addition, certain employees identified during the staffing and selection process also receive pension and other postretirement benefits that are deemed contractual termination benefits, which the Registrants recorded during the second quarter of 2012.

For the three months ended March 31, 2013 and March 31, 2012, the Registrants recorded the following severance benefits costs associated with the identified job reductions within operating and maintenance expense in their Consolidated Statements of Operations, except for ComEd and BGE:

Three Months Ended March 31, 2013
Severance Benefits (a)		Exelon		Generation		ComEd (b)		PECO		BGE (c)
Severance charges	$	2	$	2	$	0	$	0	$	0
Stock compensation		1		1		0		0		0
Total severance benefits	$	3	$	3	$	0	$	0	$	0
Three Months Ended March 31, 2012
Severance Benefits (a)		Exelon		Generation		ComEd (b)		PECO		BGE (c)
Severance charges	$	67	$	35	$	9	$	3	$	14
Stock compensation		8		5		1		1		1
Other charges		8		5		1		1		1
Total severance benefits	$	83	$	45	$	11	$	5	$	16

_________________

• The amounts above include $3 million and $29 million at Generation, $0 million and $11 million at ComEd, $0 million and $5 million at PECO, and $0 million and $5 million at BGE, for amounts billed byBSC through intercompany allocations for the three months ended March 31, 2013 and 2012, respectively.
• ComEd established regulatory assetsof $0 million and$11 million for severance benefits costs for the three months ended March 31, 2013 and 2012, respectively. The majority of these costs are expected to be recovered over a five-year period.
• BGE established regulatory assets of $0 million and$16 millionfor severance benefits costs for the three months endedMarch 31, 2013 and 2012, respectively. The majority of these costs are being recovered over a five-year period beginning in March 2013.

Amounts included in the table below represent the severance liability recorded by Exelon, Generation, ComEd, PECO and BGE for employees of those Registrants and exclude amounts billed through intercompany allocations:

Three Months Ended March 31, 2013
Severance liability		Exelon		Generation		ComEd		PECO		BGE
Balance at December 31, 2012	$	111	$	33	$	1	$	0	$	11
Severance charges (a)		2		0		0		0		0
Stock compensation		1		0		0		0		0
Payments		(22)		(8)		0		0		(2)
Balance at March 31, 2013	$	92	$	25	$	1	$	0	$	9
Three Months Ended March 31, 2012
Severance liability		Exelon		Generation		ComEd		PECO		BGE
Balance at December 31, 2011	$	0	$	0	$	0	$	0	$	0
Severance charges (a)		67		13		0		0		11
Stock compensation		8		2		0		0		0
Other charges (b)		8		1		0		0		0
Balance at March 31, 2012	$	83	$	16	$	0	$	0	$	11

• Includes salary continuance and health and welfare severance benefits. Amounts represent ongoing severance plan benefits. Amounts also include one-time termination benefits of $1 million and $0 million for Exelon and Generation, respectively, as of March 31, 2013, which they began to recognize in the second quarter of 2012.
• Primarily includes life insurance, employer payroll taxes, educational assistance, and outplacement services.

Cash payments under the plan began in the second quarter of 2012. Substantially all cash payments under the plan are expected to be made by the end of 2016.

Pro-forma Impact of the Merger

The following unaudited pro forma financial information reflects the consolidated results of operations of Exelon and Generation as if the merger with Constellation had taken place on January 1, 2011. The unaudited pro forma information was calculated after applying Exelon's and Generation's accounting policies and adjusting Constellation's results to reflect purchase accounting adjustments.

The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the merger events taken place on the dates indicated, or the future consolidated results of operations of the combined company.

		Three Months Ended March 31, 2012
		Generation		Exelon
Total Revenues	$	3,997	$	6,977
Net income attributable to Exelon		129		409
Basic Earnings Per Share		n.a.	$	0.48
Diluted Earnings Per Share		n.a.		0.48