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Investment in Constellation Energy Nuclear Group, LLC (Exelon and Generation)
 3 Months Ended
Mar. 31, 2014
Equity Method Investments and Joint Ventures [Line Items]  
Investment in Constellation Energy Nuclear Group, LLC (Exelon and Generation)

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

 

As a result of the Constellation merger, Generation owns a 50.01% interest in CENG, a nuclear generation business, which is accounted for as an equity method investment as of March 31, 2014. Generation's total equity in earnings (losses) on the investment in CENG is as follows:

  Three Months Three Months
  Ended March 31, Ended March 31,
 2014 2013
Equity investment income$(2) $15
Amortization of basis difference in CENG (17)  (27)
Total equity in earnings - CENG$(19) $(12)

As of March 12, 2012, Generation had an initial basis difference of approximately $204 million between the initial carrying value of its investment in CENG and its underlying equity in CENG.  This basis difference resulted from the requirement to record the investment in CENG at fair value under purchase accounting while the underlying assets and liabilities within CENG continue to be accounted for on a historical cost basis. Generation is amortizing this basis difference over the respective useful lives of the assets and liabilities of CENG or as those assets and liabilities affect the earnings of CENG.

 

Based on tax sharing provisions contained in the operating agreement for CENG, Generation may be eligible for distributions from its investment in CENG in excess of its 50.01% ownership interest. Through purchase accounting, Generation has recorded the fair value of expected future distributions. When these distributions are realized, Generation will record a reduction in its investment in CENG. Any distributions in excess of Generation's investment in CENG would be recorded in earnings. 

Generation has various agreements with CENG to purchase power and to provide certain services. For further information regarding these agreements see Note 25 – Related Party Transactions of the Exelon 2013 Form 10-K.

 

On July 29, 2013, Exelon, Generation and subsidiaries of Generation entered into a Master Agreement with EDF, EDF Inc. (EDFI) (a subsidiary of EDF) and CENG. The Master Agreement closed on April 1, 2014, and, as contemplated therein, the parties executed a series of additional agreements.

 

Under the Master Agreement, CENG made two pre-closing cash distributions to EDF and Generation. Generation received the distributions of $115 million and $13 million in December 2013 and March 2014, respectively, each of which was recorded as a reduction to the Investment in CENG on Exelon's and Generation's Consolidated Balance Sheets.

 

At the closing, Generation, CENG and subsidiaries of CENG executed a Nuclear Operating Services Agreement (NOSA) pursuant to which Generation will operate the CENG nuclear generation fleet owned by CENG subsidiaries and provide corporate and administrative services for the remaining life of the CENG nuclear plants as if they were a part of the Generation nuclear fleet, subject to EDFI's rights as a member of CENG. CENG will reimburse Generation for its direct and allocated costs for such services.

 

In addition, at closing, Generation made a $400 million loan to CENG, bearing interest at 5.25% per annum and payable out of specified available cash flows of CENG and, in any event, payable upon the settlement of the Put Option Agreement discussed below (if the put option is exercised) or payable upon the maturity date of April 1, 2034, whichever occurs first. Immediately following receipt of the proceeds of such loan, CENG made a $400 million special distribution to EDFI. The parties also executed a Fourth Amended and Restated Operating Agreement for CENG, pursuant to which, among other things, CENG committed to make preferred distributions to Generation (after repayment of the $400 million loan) quarterly out of specified available cash flows until Generation has received aggregate distributions of $400 million plus a return of 8.5% per annum from the date of the special distribution to EDFI.

 

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

 

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

 

In addition to the agreements contemplated in the Master Agreement, on April 1, 2014, Generation, EDFI, CENG and Nine Mile Point Nuclear Station, LLC entered into an Employee Matters Agreement (EMA) that provides for the transfer of CENG employees to the Generation Parties (Generation or one of its affiliates) and the assumption of the employee benefit plans and their related trusts by the Generation Parties as the plan sponsor as of August 1, 2014 or such other date as agreed to by Generation and EDFI (the Effective Date). The EMA also generally requires CENG to fund the underfunded balance of the pension and post-retirement welfare benefit plans as of the Effective Date on an agreed payment schedule (or upon the occurrence of certain specified events, such as EDF's disposition of a majority of its interest in CENG prior to completion of scheduled payments).

 

As a condition to obtaining regulatory approval for the transaction from the Nuclear Regulatory Commission, Exelon executed a Support Agreement pursuant to which Exelon may be required under specified circumstances to provide up to $245 million of financial support to the CENG plants. The Exelon Support Agreement was provided in substitution for a previous support agreement under which Generation had agreed to provide up to $205 million of financial support for CENG. In addition, Exelon executed a Guarantee pursuant to which Exelon may be required under specified circumstances to provide up to $165 million in additional financial support for the CENG plants. A previous Support Agreement executed by an affiliate of EDF remains in effect; under this Support Agreement the EDF affiliate may be required to provide up to approximately $145 million of financial support for the CENG plants under specified circumstances.

 

Due to changes in energy prices, discount rates and other factors, Exelon and Generation evaluated and determined that no impairment of the investment in CENG existed as of March 31, 2014. In addition, due to the transfer of the operating licenses and the execution of the NOSA on April 1, 2014, Exelon and Generation will derecognize their equity method investment in CENG and record all assets, liabilities and EDF's non-controlling interest in CENG at fair value on Exelon and Generation's balance sheets. Any difference between the carrying value of the investment in CENG and the newly recorded fair value will be recognized as a gain or loss upon consolidation in the second quarter of 2014, which could be material to Exelon's and Generation's results of operations. See Note 3 – Variable Interest Entities for further information regarding the consolidation of CENG beginning in the second quarter of 2014.

              

  • The valuation techniques, unobservable inputs and ranges are the same for the asset and liability positions.
  •  
Exelon Generation Co L L C [Member]
  
Equity Method Investments and Joint Ventures [Line Items]  
Investment in Constellation Energy Nuclear Group, LLC (Exelon and Generation)

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

 

As a result of the Constellation merger, Generation owns a 50.01% interest in CENG, a nuclear generation business, which is accounted for as an equity method investment as of March 31, 2014. Generation's total equity in earnings (losses) on the investment in CENG is as follows:

  Three Months Three Months
  Ended March 31, Ended March 31,
 2014 2013
Equity investment income$(2) $15
Amortization of basis difference in CENG (17)  (27)
Total equity in earnings - CENG$(19) $(12)

As of March 12, 2012, Generation had an initial basis difference of approximately $204 million between the initial carrying value of its investment in CENG and its underlying equity in CENG.  This basis difference resulted from the requirement to record the investment in CENG at fair value under purchase accounting while the underlying assets and liabilities within CENG continue to be accounted for on a historical cost basis. Generation is amortizing this basis difference over the respective useful lives of the assets and liabilities of CENG or as those assets and liabilities affect the earnings of CENG.

 

Based on tax sharing provisions contained in the operating agreement for CENG, Generation may be eligible for distributions from its investment in CENG in excess of its 50.01% ownership interest. Through purchase accounting, Generation has recorded the fair value of expected future distributions. When these distributions are realized, Generation will record a reduction in its investment in CENG. Any distributions in excess of Generation's investment in CENG would be recorded in earnings. 

Generation has various agreements with CENG to purchase power and to provide certain services. For further information regarding these agreements see Note 25 – Related Party Transactions of the Exelon 2013 Form 10-K.

 

On July 29, 2013, Exelon, Generation and subsidiaries of Generation entered into a Master Agreement with EDF, EDF Inc. (EDFI) (a subsidiary of EDF) and CENG. The Master Agreement closed on April 1, 2014, and, as contemplated therein, the parties executed a series of additional agreements.

 

Under the Master Agreement, CENG made two pre-closing cash distributions to EDF and Generation. Generation received the distributions of $115 million and $13 million in December 2013 and March 2014, respectively, each of which was recorded as a reduction to the Investment in CENG on Exelon's and Generation's Consolidated Balance Sheets.

 

At the closing, Generation, CENG and subsidiaries of CENG executed a Nuclear Operating Services Agreement (NOSA) pursuant to which Generation will operate the CENG nuclear generation fleet owned by CENG subsidiaries and provide corporate and administrative services for the remaining life of the CENG nuclear plants as if they were a part of the Generation nuclear fleet, subject to EDFI's rights as a member of CENG. CENG will reimburse Generation for its direct and allocated costs for such services.

 

In addition, at closing, Generation made a $400 million loan to CENG, bearing interest at 5.25% per annum and payable out of specified available cash flows of CENG and, in any event, payable upon the settlement of the Put Option Agreement discussed below (if the put option is exercised) or payable upon the maturity date of April 1, 2034, whichever occurs first. Immediately following receipt of the proceeds of such loan, CENG made a $400 million special distribution to EDFI. The parties also executed a Fourth Amended and Restated Operating Agreement for CENG, pursuant to which, among other things, CENG committed to make preferred distributions to Generation (after repayment of the $400 million loan) quarterly out of specified available cash flows until Generation has received aggregate distributions of $400 million plus a return of 8.5% per annum from the date of the special distribution to EDFI.

 

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

 

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

 

In addition to the agreements contemplated in the Master Agreement, on April 1, 2014, Generation, EDFI, CENG and Nine Mile Point Nuclear Station, LLC entered into an Employee Matters Agreement (EMA) that provides for the transfer of CENG employees to the Generation Parties (Generation or one of its affiliates) and the assumption of the employee benefit plans and their related trusts by the Generation Parties as the plan sponsor as of August 1, 2014 or such other date as agreed to by Generation and EDFI (the Effective Date). The EMA also generally requires CENG to fund the underfunded balance of the pension and post-retirement welfare benefit plans as of the Effective Date on an agreed payment schedule (or upon the occurrence of certain specified events, such as EDF's disposition of a majority of its interest in CENG prior to completion of scheduled payments).

 

As a condition to obtaining regulatory approval for the transaction from the Nuclear Regulatory Commission, Exelon executed a Support Agreement pursuant to which Exelon may be required under specified circumstances to provide up to $245 million of financial support to the CENG plants. The Exelon Support Agreement was provided in substitution for a previous support agreement under which Generation had agreed to provide up to $205 million of financial support for CENG. In addition, Exelon executed a Guarantee pursuant to which Exelon may be required under specified circumstances to provide up to $165 million in additional financial support for the CENG plants. A previous Support Agreement executed by an affiliate of EDF remains in effect; under this Support Agreement the EDF affiliate may be required to provide up to approximately $145 million of financial support for the CENG plants under specified circumstances.

 

Due to changes in energy prices, discount rates and other factors, Exelon and Generation evaluated and determined that no impairment of the investment in CENG existed as of March 31, 2014. In addition, due to the transfer of the operating licenses and the execution of the NOSA on April 1, 2014, Exelon and Generation will derecognize their equity method investment in CENG and record all assets, liabilities and EDF's non-controlling interest in CENG at fair value on Exelon and Generation's balance sheets. Any difference between the carrying value of the investment in CENG and the newly recorded fair value will be recognized as a gain or loss upon consolidation in the second quarter of 2014, which could be material to Exelon's and Generation's results of operations. See Note 3 – Variable Interest Entities for further information regarding the consolidation of CENG beginning in the second quarter of 2014.