Mergers, Acquisitions and Dispositions

Proposed Merger with Pepco Holdings, Inc. (Exelon)

Description of Transaction

On April 29, 2014, Exelon and Pepco Holdings, Inc. (PHI) signed an agreement and plan of merger (as subsequently amended and restated as of July 18, 2014, the Merger Agreement) to combine the two companies in an all cash transaction. The resulting company will retain the Exelon name and be headquartered in Chicago. Under the Merger Agreement, PHI’s shareholders will receive $27.25 of cash in exchange for each share of PHI common stock. In connection with the Merger Agreement, Exelon entered into a subscription agreement under which it purchased $90 million of a new class of nonvoting, nonconvertible and nontransferable preferred securities of PHI, in the second quarter of 2014, with additional investments of $18 million to be made quarterly up to a maximum aggregate investment of $180 million. PHI has the right to redeem the preferred securities at its option for the purchase price paid plus accrued dividends, if any. The $108 million of PHI preferred securities are included in Other non-current assets on Exelon's Consolidated Balance Sheet as of September 30, 2014. Exelon expects total cash required to fund the acquisition of common stock and preferred securities plus other related acquisition costs to total approximately $7.2 billion.

On September 23, 2014, PHI stockholders overwhelmingly approved the merger of PHI and Exelon. Completion of the transaction is also conditioned upon approval by the FERC and the public service commissions of the District of Columbia, Delaware, New Jersey and Virginia. 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 Antitrust Division of the DOJ and until specified waiting period requirements have expired. In addition, the transfer of certain PHI communications licenses requires approval by the Federal Communication Commission.

During the second quarter of 2014, Exelon and PHI (“Joint Applicants”) filed approval applications with the FERC and the public service commissions of the District of Columbia, Delaware, New Jersey and Virginia. On August 19, 2014, the Joint Applicants filed their approval application in Maryland. The Joint Applicants also filed notifications with the DOJ in compliance with the requirements of the HSR Act. Exelon’s notification was voluntarily withdrawn and refiled in the third quarter.

On October 7, 2014, the Virginia State Corporation Commission issued its Order, granting approval to transfer control of Delmarva Power & Light Company and Potomac Electric Power Company to Exelon. FERC approval is expected in the fourth quarter of 2014, while procedural schedules have been set in the remaining state commission proceedings and final approval decisions are expected in the first half of 2015.

On October 9, 2014, PHI and Exelon each received a request for additional information from the DOJ. The request has the effect of extending the DOJ review period until 30 days after PHI and Exelon each has certified that it has substantially complied with the request. Exelon and PHI will continue to work cooperatively with the DOJ as it conducts its review of the proposed merger.

Exelon and PHI continue to expect to complete the merger in the second or third quarter of 2015.

Exelon has been named in suits filed in the Delaware Chancery Court alleging that individual directors of PHI 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 PHI from completing the merger or seek rescission of the merger if completed. In addition, they also seek unspecified damages and costs. In September 2014, the parties reached a proposed settlement which is subject to court approval. Final court approval of the proposed settlement is not expected to occur until the second quarter of 2015, at the earliest. Exelon has also been named in a federal court case with similar claims and is in the process of negotiating a settlement. Exelon intends to vigorously defend these suits. Exelon does not believe these suits will impact the completion of the transaction, and they are not expected to have a material impact on Exelon’s results of operations.

Through September 30, 2014, Exelon has incurred approximately $57 million of expense associated with the transaction, primarily related to acquisition and integration costs. As part of the applications for approval of the merger, Exelon and PHI have proposed a package of benefits to the PHI utilities’ respective customers, which would result in a direct investment of more than $100 million. The Merger Agreement also provides for termination rights on behalf of both parties. Under certain circumstances, if the Merger Agreement is terminated, PHI may be required to pay Exelon a termination fee ranging from $259 million to $293 million plus certain expenses. If the Merger Agreement does not close due to a regulatory failure, Exelon may be required to pay PHI a termination fee equal to the amount of purchased nonvoting preferred securities of PHI described above, as a result of PHI redeeming the outstanding nonvoting preferred securities for no consideration other than the nominal par value of the stock.

Merger Financing

Exelon intends to fund the all-cash transaction using a combination of approximately $3.5 billion of debt, up to $1.0 billion in cash from asset sales primarily at Generation, and the remainder through issuance of equity (including mandatory convertible securities). On June 11, 2014, Exelon marketed an equity offering of 57.5 million shares of its common stock at a public offering price of $35 per share in connection with forward sales agreements and $1.2 billion of junior subordinated notes in the form of 23 million equity units. In addition, Exelon signed a 364-day $7.2 billion senior unsecured bridge credit facility to support the contemplated transaction and provide flexibility for timing of permanent financing, which has subsequently been reduced to a $3.9 billion facility as a result of the equity issuances and applicable asset divestitures. See Note 10 — Debt and Credit Agreements and Note 16 — Common Stock for more information.

Integrys Energy Group, Inc. (Exelon and Generation)

On July 29, 2014, Generation entered into a Stock Purchase Agreement (the Purchase Agreement) with Integrys Energy Group, Inc. (Integrys). Pursuant to the Purchase Agreement, Integrys agreed to sell its competitive retail electric and natural gas businesses through a sale of all of the stock of its wholly-owned subsidiary, Integrys Energy Services, Inc. (IES), to Generation for an all cash purchase price of $60 million plus adjusted net working capital at the time of the closing. IES’s adjusted net working capital balance was approximately $260 million as of September 30, 2014. Pursuant to the Purchase Agreement, Generation has agreed to use its commercially reasonable efforts to replace the guarantees and other credit support currently being provided by Integrys for IES in support of the ongoing competitive retail businesses and to reimburse Integrys for any payments arising pursuant to such arrangements continuing for any post-closing period. The generation and solar asset businesses of IES are excluded from the transaction.

The transaction is expected to close November 1, 2014. The closing of the transaction is subject to certain conditions, including, among others, approval by the FERC and expiration or termination of the applicable waiting period under the HSR Act. The FERC approved the sale of IES to Exelon on September 16, 2014; additionally, the DOJ granted early termination of the HSR Act waiting period effective October 10, 2014. Either party may terminate the Purchase Agreement if the transaction has not been consummated within 6 months after the date of the Purchase Agreement. The Purchase Agreement also includes various representations, warranties, covenants, indemnification and other provisions customary for a transaction of this nature. The total costs directly related to the closing of the transaction are not expected to have a material impact on the financial results of Exelon and Generation.

Asset Divestitures (Exelon and Generation)

As of September 30, 2014, Generation has entered into agreements with various counterparties to divest certain generating assets with total expected pre-tax proceeds of $1.3 billion (approximately $975 million after-tax) which are expected to be used primarily to finance a portion of the acquisition of PHI. The net book value of these assets was approximately $900 million.

On August 8, 2014 Generation closed on the sale of its 67% economic equity interest in the 417 MW Safe Harbor Water Power Corporation hydroelectric facility on the Susquehanna River in Pennsylvania for a purchase price of approximately $615 million. Generation recorded a pre-tax gain on the sale of approximately $329 million within Other, net on Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income.

During the third quarter of 2014, Generation also entered into purchase and sale agreements with separate counterparties to divest the following long-lived assets:



Station	Net Generation Capacity	Location	Operating Segment
Fore River	726 MW	North Weymouth, MA	New England
West Valley	185 MW	Salt Lake City, UT	Other
Quail Run	488 MW	Odessa, TX	ERCOT

The assets and liabilities of the three power plants are reported as Assets held for sale and within Other current liabilities on Exelon’s and Generation’s Consolidated Balance Sheets. The table below presents the major classes of assets and liabilities held for sale at September 30, 2014.



	September 30, 2014
Assets:
Property, plant and equipment, net ^(a)	$	617
Inventory	31
Current assets	1
Total assets held for sale	$	649
Liabilities:
Accounts payable	$	1
Accrued expenses	4
Other current liabilities	13
Total liabilities held for sale^(b)	$	18

(a) The total aggregate book value of property, plant and equipment is net of a $50 million pre-tax impairment loss recorded within Operating and maintenance expense on Exelon’s and Generation’s Statements of Operations and Comprehensive Income. See Note 7 - Impairment of Long-Lived Assets for further information.

(b) Included within Other current liabilities on Exelon's and Generation's Consolidated Balance Sheets.

The transactions, which are subject to customary closing conditions and regulatory approvals, are expected to be completed by the end of the first quarter of 2015.