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 has purchased $126 million of a new class of nonvoting, nonconvertible and nontransferable preferred securities of PHI as of December 31, 2014, with additional investments of $18 million to be made quarterly up to a maximum aggregate investment of $180 million. The preferred securities are included in Other non-current assets on Exelon’s Consolidated Balance Sheet. PHI has the right to redeem the preferred securities at its option for the purchase price paid plus accrued dividends, if any. 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. As part of the applications for approval of the merger, Exelon and PHI proposed a package of benefits to the PHI utilities’ respective customers, providing for direct investment of more than $100 million with the actual amount and timing of any related payments dependent upon settlement discussions in merger regulatory approval proceedings and the terms of regulatory orders approving the merger.

To date, the PHI stockholders, the Virginia State Corporation Commission, the New Jersey Board of Public Utilities (NJBPU) and the FERC have approved the merger of PHI and Exelon. The Federal Communications Commission has also approved the transfer of certain PHI communications licenses. On February 11, 2015, the NJBPU approved the proposed merger and the previously filed settlement signed and filed by Exelon, PHI, Atlantic City Electric (ACE), NJBPU staff, and the Independent Energy Coalition. The settlement provides a package of benefits to ACE customers and the state of New Jersey. This package of benefits includes the establishment of customer rate credit programs, with an aggregate value of $62 million for ACE customers and energy efficiency programs that will provide savings for ACE customers of $15 million.

Completion of the transaction also remains conditioned upon approval by the Public Services Commissions of the District of Columbia, Delaware and Maryland. Procedural schedules have been set in these 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 had the effect of extending the DOJ review period until 30 days after PHI and Exelon each has certified that it had substantially complied with the request. On November 21, 2014, Exelon and PHI each certified that it had substantially complied with the request. Accordingly, the HSR Act waiting period expired on December 22, 2014, and the HSR Act no longer precludes completion of the merger. Although the DOJ allowed the waiting period under the HSR Act to expire without taking any action with respect to the merger, the DOJ has not advised Exelon or PHI that it has concluded its investigation. Exelon and PHI will continue to work cooperatively with the DOJ regarding 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 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 December 31, 2014, Exelon has incurred approximately $179 million of expense associated with the proposed merger, primarily $48 million related to acquisition and integration costs and $131 million of costs incurred to finance the transaction. 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, through the redemption by PHI of 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 $3.2 billion facility as a result of the execution of the debt and equity security issuances and the net after-tax cash proceeds from generating asset divestitures during the second half of 2014. See Note 13 — Debt and Credit Agreements and Note 19 — Common Stock for more information.

Acquisitions (Exelon and Generation)

Acquisition of Integrys Energy Services, Inc. (Exelon and Generation)

On November 1, 2014, Generation acquired the competitive retail electric and natural gas business activities of Integrys Energy Group, Inc. through the purchase of all of the stock of its wholly owned subsidiary, Integrys Energy Services, Inc. (Integrys) for a purchase price of $332 million, including net working capital. Generation has elected to account for the transaction as an asset acquisition for federal income tax purposes. As of December 31, 2014, Generation had remitted $319 million to Integrys Energy Group, Inc. and the remaining balance of $13 million, which is included in Other current liabilities on Exelon's and Generation's Consolidated Balance Sheets, will be paid during the first or second quarter of 2015. The generation and solar asset businesses of Integrys are excluded from the transaction. The Purchase Agreement also includes various representations, warranties, covenants, indemnification and other provisions customary for a transaction of this nature.

Consistent with the applicable accounting guidance, the fair value of the assets acquired and liabilities assumed was determined as of the acquisition date through 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 the amount and timing); discount rates reflecting the risk inherent in the future cash flows; and future power and fuel market prices.

The following table summarizes the acquisition-date fair value of the consideration transferred and the assets and liabilities assumed for the Integrys acquisition by Generation:




Total consideration transferred	$	332

Identifiable assets acquired and liabilities assumed
Working capital assets	$	389
Mark-to-market derivative assets	185
Unamortized energy contract assets	115
Customer relationships	48
Working capital liabilities	(195		)
Mark-to-market derivative liabilities	(57		)
Unamortized energy contract liabilities	(109		)
Deferred tax liability	(16		)
Total net identifiable assets, at fair value	$	360
Bargain purchase gain (after-tax)	$	28

The purchase accounting is preliminary, and although not expected, may be further adjusted from what is shown above.

The after-tax bargain purchase gain of $28 million is primarily the result of IES executing additional contract volumes between the date the acquisition agreement was signed and the closing of the transaction resulting in an increase in the fair value of the net assets acquired as of the acquisition date. The after-tax gain is included within Gain on consolidation and acquisition of businesses in Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income.

IES's operating revenue and net loss included in Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income for the period from November 1, 2014 to December 31, 2014 were approximately $386 million and $(42) million, respectively. The net loss includes pre-tax unrealized losses on derivative contracts of $108 million and the bargain purchase gain of $28 million. Exelon and Generation incurred approximately $7 million of merger and integration related costs which are included within Operating and maintenance expense in Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income.

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

Description of Constellation Merger 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 from the Constellation Merger

In February 2012, the MDPSC issued an order approving the Exelon and Constellation merger. As part of the MDPSC Order, 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 approximately $1 billion.

The following costs were recognized after the closing of the merger and are included in Exelon’s, Generation’s and BGE’s Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2012:



Description	Payment Period	BGE			Generation		Exelon			Statement of Operations Location
BGE rate credit of $100 per residential customer ^(a)	Q2 2012	$	113		$	—	$	113		Revenues
Customer investment fund to invest in energy efficiency and low-income energy assistance to BGE customers	2012 to 2014	—			—		114			O&M Expense
Contribution for renewable energy, energy efficiency or related projects in Baltimore	2012 to 2014	—			—		2			O&M Expense
Charitable contributions at $7 million per year for 10 years	2012 to 2021	28			35		70			O&M Expense
State funding for offshore wind development projects	Q2 2012	—			—		32			O&M Expense
Miscellaneous tax benefits	Q2 2012	(2		)	—		(2		)	Taxes Other Than Income
Total		$	139		$	35	$	329

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(a)	Exelon made a $66 million equity contribution to BGE in the second quarter of 2012 to fund the after-tax amount of the rate credit as directed in the MDPSC order approving the merger transaction.

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 was contingent upon the developer obtaining all required approvals, permits and financing for the construction of a building in Baltimore, Maryland. The operating lease became effective during the second quarter of 2014 when these outstanding contingencies were met by the developer. See Note 22 — Commitments and Contingencies for further information regarding Generation's total commitments under the lease agreement.

The direct investment estimate also includes $600 million to $650 million for Exelon’s and Generation’s commitment to develop or assist in development of 285—300MWs of new generation in Maryland, expected to be completed over a period of 10 years. The MDPSC order 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 or certain specified provisions are elected, 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. However, during the third quarter of 2014, the conditions associated with one of the generation development commitments changed such that Exelon and Generation now believe that the most likely outcome will involve making subsidy payments and/or liquidated damages payments rather than constructing the specified generating plant. As a result, Exelon and Generation recorded a pre-tax $44 million loss contingency related to this generation development commitment which is included in Operating and maintenance expense in Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income. While this $44 million loss contingency represents Generation's best estimate of the future obligation, it is reasonably possible that Exelon and Generation could ultimately be required to make cumulative subsidy payments of up to a maximum of approximately $105 million over a 20-year period dependent on actual generating output from a successfully constructed generating plant.

To date, Generation has placed into service 40MW and has commenced development of 150MW of new generation in Maryland towards the 300MW commitment. In July 2013, Generation executed an engineering procurement and construction contract to expand its Perryman, Maryland site with at least 120MW of natural gas-fired generation to satisfy one of the commitments to Maryland with achievement of commercial operation expected in 2015. In December 2013, Generation entered into contracts associated with the construction of the 40MW Fourmile Wind project, which was placed in service in December 2014. In December 2014, Generation entered into contracts associated with the construction of the 30MW Fair Wind project in western Maryland with achievement of commercial operations expected in 2015. The wind projects will satisfy a portion of the 125MW Tier I land-based renewables commitment. See Note 22 — Commitments and Contingencies for additional information. Exelon’s and Generation’s consolidated financial statements include $185 million and $24 million of capitalized expenditures within Property, plant and equipment, net as of December 31, 2014 and 2013, respectively, and $3 million and $6 million of development costs within Operating and maintenance expense for the periods ended December 31, 2014 and 2013, respectively, associated with the pursuit of these commitments for new generation in the State of Maryland.

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. The sale agreement included a base price with purchase price adjustments based on fuel inventory, working capital, capital expenditures, and timing of the closing, resulting in net proceeds from the sale of approximately $371 million. Decisions by certain market participants to remove themselves from the bidding process, combined with the deadlines and limitations on the pool of potential buyers imposed by the merger approval orders, resulted in realized sales proceeds below Generation’s estimated fair value of the Maryland generating stations. Consequently, Exelon and Generation recorded a pre-tax loss of $272 million in 2012 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.

In connection with the sale of the Maryland generating stations, Exelon agreed to indemnify Raven Power for certain costs associated with the treatment of hazardous substances at off-site disposal facilities and any claims arising as a result of, or in connection with, any toxic tort, natural resource damages, loss of life or injury to persons due to releases of, or exposure to hazardous substances in connection with Raven Power’s remediation of environmental contamination or Exelon’s non-compliance with environmental laws or permits prior to the closing date of the sale.

Pursuant to the MDPSC merger approval conditions, BGE was restricted from paying any dividend on its common shares through the end of 2014, was required to maintain specified minimum capital and O&M expenditure levels in 2012 and 2013, and was not permitted to reduce employment levels due to involuntary attrition associated with the merger integration process for two years following the closing of the merger. Additionally, BGE is subject to other merger approval conditions to enhance BGE’s ring-fencing measures established by order of the MDPSC.

Subsequent to the merger, Generation discovered that, for the first two weeks following the merger, due to a software error, Generation inadvertently bid certain generating units into the PJM energy market at prices that slightly exceeded the cost-based caps to which it had agreed. This error was a violation of the commitments made in connection with merger approvals by DOJ, FERC and the MDPSC. Generation reported the error to the DOJ, FERC and the MDPSC and committed to remedy the impacts of its error. The MDPSC held a hearing to review the error, and accepted Generation’s proposed remediation. Subsequent close examination by Generation of its cost-based bids also revealed the need for some minor adjustments to the cost build up for certain of its PJM units. Generation has coordinated with PJM to determine the impact on Generation’s revenues and the market from this error and these adjustments, and Generation has worked with PJM to reverse the financial impacts. In November 2012, Generation reached a settlement with the DOJ regarding this matter. The final resolution did not have a material impact on Exelon’s or Generation’s results of operations, cash flows or financial position.

Exelon was 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. Similar suits were also filed in the United States District Court for the District of Maryland. The suits sought to enjoin a Constellation shareholder vote on the proposed merger until all material information was disclosed and sought rescission of the proposed merger. During the third quarter of 2011, the parties to the suits reached an agreement in principle to settle the suits through additional disclosures to Constellation shareholders. On June 26, 2012, the court approved the settlement and entered final judgment.

Accounting for the Constellation Merger

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 ratesetting 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 — Significant Accounting Policies for additional information on BGE’s push-down accounting treatment. Also see Note 3 — 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:



Preliminary 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		—
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

Impact of the Constellation 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 year ended December 31, 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 includes operating revenues of $3,165 million, $3,065 million and $2,091 million and net income (loss) $211 million, $210 million and $(31) million during the years ended December 31, 2014, 2013 and 2012, respectively.

During the year ended December 31, 2014, Exelon and Generation both incurred merger and integration-related costs of $22 million. Of these amounts, nothing was deferred as a regulatory asset as of December 31, 2014.

During the year ended December 31, 2013, Exelon, Generation, ComEd, PECO and BGE incurred merger and integration-related costs of $142 million, $106 million, $16 million, $9 million and $6 million, respectively. Of these amounts, Exelon, ComEd and BGE deferred $17 million, $11 million and $6 million, respectively, as a regulatory asset as of December 31, 2013. Additionally, Exelon and BGE established a regulatory asset of $6 million as of December 31, 2013 for previously incurred 2012 merger and integration-related costs.

During the year ended December 31, 2012, Exelon, Generation, ComEd, PECO and BGE incurred merger and integration-related costs of $804 million, $340 million, $41 million, $17 million and $182 million, respectively. Of these amounts, Exelon, ComEd and BGE deferred $58 million, $36 million and $22 million, respectively, as a regulatory asset as of December 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 years ended December 31, 2014, 2013, and 2012. See Note 22 — Commitments and Contingencies for additional information.

Pro-forma Impact of the Constellation 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.



	Exelon		Generation
	Year Ended December 31,		Year Ended December 31,
(unaudited)	2012	2011^(a)	2012	2011 ^(a)
Total revenues	26,700	30,712	17,013	19,494
Net income attributable to Exelon	2,092	974	1,205	324
Basic earnings per share	2.56	1.15	n.a.	n.a.
Diluted earnings per share	2.55	1.14	n.a.	n.a.

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(a) The amounts above include non-recurring costs directly related to the merger of $236 million for the year ended December 31, 2011.

(b) The amounts above include non-recurring costs directly related to the merger of $203 million for the year ended December 31, 2011.

Asset Divestitures (Exelon and Generation)

Including the Quail Run generating facility that was sold on January 21, 2015, Generation has sold certain generating assets with a total net book value of approximately $1.8 billion prior to consideration of asset impairments (See Note 8 — Impairment of Long-Lived Assets for further information), for total pre-tax proceeds of approximately $1.8 billion (after-tax proceeds of approximately $1.4 billion), which resulted in cumulative pre-tax gains on sale of approximately $412 million, which are included in Gain (loss) on sales of assets on Exelon's and Generation's Consolidated Statement of Operations and Comprehensive Income. The proceeds are expected to be used primarily to finance a portion of the acquisition of PHI.



Station	Net Generation Capacity	Location	Operating Segment	Percent Owned
Fore River	726	North Weymouth, MA	New England	100%
West Valley	185	Salt Lake City, UT	Other	100%
Keystone	714	Shelocta, PA	Mid-Atlantic	41.98%
Conemaugh	532	New Florence, PA	Mid-Atlantic	31.28%
Safe Harbor	278	Conestoga, PA	Mid-Atlantic	66.7%
Quail Run	488	Odessa, TX	ERCOT	100%

At December 31, 2014, the assets and liabilities of the Quail Run generating facility were 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 December 31, 2014.



	December 31, 2014
Assets:
Property, plant and equipment, net ^(a)	$	143
Inventory	4
Total assets held for sale	$	147
Liabilities:
Accrued expenses	$	1
Asset retirement obligations	4
Total liabilities held for sale^(b)	$	5

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(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 8 — Impairment of Long-Lived Assets for further information.

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