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Merger and Acquisitions (Exelon, Generation, ComEd, PECO and BGE)
 6 Months Ended
Jun. 30, 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 wholly owned 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 relating to the 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. The direct investment estimate also includes $625 million for Exelon's and Generation's commitment to develop or assist in development of 285 – 300 MWs of new generation 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 June 30, 2013, amounts reflected in the Exelon and Generation consolidated financial statements for these expenditure commitments were immaterial. On July 26, 2013, Generation executed an engineering procurement and construction contract to expand its Perryman, Maryland site with 120MW of new natural gas-fired generation to satisfy certain of these commitments, the total commitment under the contract is $89 million and achievement of commercial operation is expected in 2015.

 

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 June 30, 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 Matters for additional information on BGE's regulatory assets.

 

The preliminary valuations performed in the first quarter of 2012 were updated in the second, third and fourth quarters of 2012, with the 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 was final as of March 31, 2013.

 

The final purchase price allocation of the Merger of Exelon with Constellation and Exelon's contribution of certain subsidiaries of Constellation to Generation was as follows:

 

Purchase Price Allocation, excluding amortizationExelonGeneration
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 and six months ended June 30, 2013 amounted to $162 million and $332 million, respectively. Exelon's and Generation's amortization expense for the three months ended June 30, 2012 and for the period March 12, 2012 to June 30, 2012 amounted to $370 million and $501 million, respectively. In addition, Exelon Corporate has established a regulatory asset and an unamortized energy contract liability related to BGE's power supply and fuel contracts. The power supply and fuel contracts regulatory asset amortization was $19 million and $38 million for the three and six months ended June 30, 2013, respectively, and $9 million and $12 million for the three months ended June 30, 2012 and for the period March 12, 2012 to June 30, 2012, respectively. An equally offsetting amortization of the unamortized energy contract liability has been 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 amortization expense for the fair value of the Constellation trade name intangible asset for the three and six months ended June 30, 2013 amounted to $6 million and $12 million, respectively. 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 June 30, 2012 and the period March 12, 2012 to June 30, 2012 amounted to $6 million and $8 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 and six months ended June 30, 2013 amounted to $4 million and $9 million, respectively. Exelon's and Generation's straight line amortization expense for the three months ended June 30, 2012 and the period March 12, 2012 to June 30, 2012 amounted to $6 million and $7 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 June 30, 2013:

 

 

 

            Estimated amortization expense
DescriptionWeighted Average Amortization (Years) Gross Accumulated Amortization  Net  Remainder of 2013 2014 2015 2016 2017 2018 and Beyond
Unamortized energy contracts, net (a) 1.5 $1,499 $(1,279) $220 $99 $75 $18 $(30) $(21) $79
Trade name 10.0  243  (32)  211  12  24  24  24  24  103
Retail relationships 12.4  214  (23)  191  10  19  19  19  19  105
                             
Total, net  $1,956 $(1,334) $622 $121 $118 $61 $13 $22 $287

       

(a) Includes the fair value of BGE's power and gas supply contracts of $52 million for which an offsetting regulatory asset was also recorded.

 

Impact of Merger

 

It is impracticable to determine the overall financial statement impact for the Constellation subsidiaries contributed down to Generation following the Upstream Merger for the three and six months ended June 30, 2013 and 2012.  Upon closing of the merger, the operations of these Constellation subsidiaries were integrated into Generation's operations and are therefore not fully distinguishable after the merger. 

 

The impact of BGE on Exelon's Consolidated Statement of Operations and Comprehensive Income included operating revenues of $653 million and net income of $25 million during the three months ended June 30, 2013, and operating revenues of $1,533 million and net income of $106 million during the six months ended June 30, 2013.

 

The impact of BGE on Exelon's Consolidated Statement of Operations and Comprehensive Income included operating revenues of $616 million and net income of $16 million during the three months ended June 30, 2012, and operating revenues of $668 million and net loss of $49 million during the six months ended June 30, 2012.

 

 

During the three months ended June 30, 2013, Exelon, Generation, ComEd, PECO and BGE incurred merger and integration-related costs of $30 million, $20 million, $5 million, $2 million and $1 million, respectively. During the six months ended June 30, 2013, Exelon, Generation, ComEd, PECO and BGE incurred merger and integration-related costs of $63 million, $43 million, $9 million, $5 million and $3 million, respectively. Of these amounts, Exelon, ComEd and BGE deferred $10 million, $8 million and $2 million as a regulatory asset as of June 30, 2013. Additionally, Exelon and BGE established a regulatory asset of $6 million as of June 30, 2013 for previously incurred 2012 merger and integration-related costs.

 

During the three months ended June 30, 2012, Exelon, Generation, ComEd, PECO and BGE incurred merger and integration-related costs of $119 million, $94 million, $8 million, $4 million and $2 million, respectively. During the six months ended June 30, 2012, Exelon, Generation, ComEd, PECO and BGE incurred merger and integration-related costs of $635 million, $204 million, $26 million, $11 million and $171 million, respectively. Of these amounts, Exelon, ComEd and BGE deferred $41 million, $23 million and $18 million as a regulatory asset as of June 30, 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 and six months ended June 30, 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. 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.

 

There was no severance expense associated with the post-merger integration recognized for the three months ended June 30, 2013 for Exelon, Generation, ComEd, PECO and BGE. The amount of severance expense associated with the post-merger integration recognized for the six months ended June 30, 2013 for Exelon, Generation, ComEd, PECO and BGE were $3 million, $3 million, $0 million, $0 million and $0 million, respectively. For Generation, the $3 million represents amounts billed by BSC through intercompany allocations. Estimated costs to be incurred after June 30, 2013 are not material.

 

For the three and six months ended June 30, 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 June 30, 2012               
Severance Benefits (a)  Exelon  Generation  ComEd (b)  PECO  BGE (c)
Severance charges $42 $29 $6 $4 $3
Stock compensation  (5)  (3)  (1)  (1)  (1)
Other charges (d)  (1)  (1)  0  (1)  0
Total severance benefits $36 $25 $5 $2 $2
                
Six Months Ended June 30, 2012               
Severance Benefits (a)  Exelon  Generation  ComEd (b)  PECO  BGE (c)
Severance charges $109 $64 $15 $7 $17
Stock compensation  3  2  0  0  0
Other charges (d)  7  4  1  0  1
Total severance benefits $119 $70 $16 $7 $18

_________________

  • The amounts above include $10 million and $40 million at Generation, $3 million and $14 million at ComEd, $2 million and $7 million at PECO, and $1 million and $6 million at BGE, for amounts billed by BSC through intercompany allocations for the three and six months ended June 30, 2012, respectively.
  • ComEd established regulatory assets of $5 million and $16 million for severance benefits costs for the three and six months ended June 30, 2012, respectively. The majority of these costs are expected to be recovered over a five-year period.
  • BGE established regulatory assets of $2 million and $18 million for severance benefits costs for the three and six months ended June 30, 2012, respectively. The majority of these costs are being recovered over a five-year period beginning in March 2013.

(d) Primarily includes life insurance, employer payroll taxes, educational assistance and outplacement services.

 

 

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:

 

Six Months Ended June 30, 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  (37)  (13)  0  0  (3)
Balance at June 30, 2013 $77 $20 $1 $0 $8

       

  • 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 for Exelon as of June 30, 2013.

 

 

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 June 30, 2012
  Generation  Exelon
Total Revenues$4,051 $6,256
Net income attributable to Exelon 397  528
      
Basic Earnings Per Share n.a. $0.62
Diluted Earnings Per Share n.a.  0.62
      
  Six Months Ended June 30, 2012
  Generation  Exelon
Total Revenues$8,523 $13,284
Net income attributable to Exelon 567  979
      
Basic Earnings Per Share n.a. $1.26
Diluted Earnings Per Share n.a.  1.25