Mergers, Acquisitions and Dispositions (Exelon, Generation and PHI)

Acquisition of FirstEnergy Solutions Load Business (Exelon and Generation)

On July 9, 2018, Generation entered into an Asset Purchase Agreement (the Purchase Agreement) with FirstEnergy Solutions Corporation (FirstEnergy). Pursuant to the Purchase Agreement, FirstEnergy agreed to assign all of its retail electricity and wholesale load serving contracts and certain other related commodity contracts to Generation for an all cash purchase price of $140 million. The closing of the transaction was subject to certain conditions including the approval of the Purchase Agreement by the United States Bankruptcy Court for the Northern District of Ohio (Bankruptcy Court). At FirstEnergy's request, Bankruptcy Court's review of the transaction was delayed on six occasions, and Generation disputed these delays with the Bankruptcy Court. On January 23, 2019 the Bankruptcy Court approved an order that stipulated FirstEnergy's termination of the Purchase Agreement, effective January 22, 2019. The termination order provided for Generation to receive a refund of its escrow deposit, payment of a termination fee and reimbursement of transaction expenses, all of which were immaterial.

Acquisition of James A. FitzPatrick Nuclear Generating Station (Exelon and Generation)

On March 31, 2017, Generation acquired the 842 MW single-unit James A. FitzPatrick (FitzPatrick) nuclear generating station located in Scriba, New York from Entergy Nuclear FitzPatrick LLC (Entergy) for a total purchase price of $289 million, which consisted of a cash purchase price of $110 million and a net cost reimbursement to and on behalf of Entergy of $179 million. As part of the acquisition agreements, Generation provided nuclear fuel and reimbursed Entergy for incremental costs to prepare for and conduct a plant refueling outage; and Generation reimbursed Entergy for incremental costs to operate and maintain the plant for the period after the refueling outage through the acquisition closing date. These reimbursements covered costs that Entergy otherwise would have avoided had it shutdown the plant as originally intended in January 2017. The amounts reimbursed by Generation were offset by FitzPatrick's electricity and capacity sales revenues for this same post-outage period. As part of the transaction, Generation received the FitzPatrick NDT fund assets and assumed the obligation to decommission FitzPatrick. The NRC license for FitzPatrick expires in 2034.

The fair values of FitzPatrick’s assets and liabilities were 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 power and fuel market prices.

An after-tax bargain purchase gain of $233 million was included within Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income which primarily reflects differences in strategies between Generation and Entergy for the intended use and ultimate decommissioning of the plant. See Note 15 — Asset Retirement Obligations and Note 16 — Retirement Benefits for additional information regarding the FitzPatrick decommissioning ARO and pension and OPEB updates.

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



Cash paid for purchase price	$	110
Cash paid for net cost reimbursement	125
Nuclear fuel transfer	54
Total consideration transferred	$	289

Identifiable assets acquired and liabilities assumed
Current assets	$	60
Property, plant and equipment	298
Nuclear decommissioning trust funds	807
Other assets^(a)	114
Total assets	$	1,279

Current liabilities	$	6
Nuclear decommissioning ARO	444
Pension and OPEB obligations	33
Deferred income taxes	149
Spent nuclear fuel obligation	110
Other liabilities	15
Total liabilities	$	757
Total net identifiable assets, at fair value	$	522

Bargain purchase gain (after-tax)	$	233

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(a)	Includes a $110 million asset associated with a contractual right to reimbursement from the New York Power Authority (NYPA), a prior owner of FitzPatrick, associated with the DOE one-time fee obligation. See Note 22-Commitments and Contingencies for additional information regarding SNF obligations to the DOE.

Exelon and Generation incurred $57 million of merger and integration related costs to FitzPatrick for the year ended December 31, 2017 which are included within Operating and maintenance expense in Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income. Exelon and Generation did not incur any merger and integration costs related to FitzPatrick for the year ended December 31, 2018.

Acquisition of ConEdison Solutions (Exelon and Generation)

On September 1, 2016, Generation acquired the competitive retail electricity and natural gas business of Consolidated Edison Solutions, Inc. (ConEdison Solutions), a subsidiary of Consolidated Edison, Inc. for a purchase price of $257 million including net working capital of $204 million. The renewable energy, sustainable services and energy efficiency businesses of ConEdison Solutions are excluded from the transaction.

The purchase price of $257 million equaled the estimated fair value of the net assets acquired and the liabilities assumed and, therefore, no goodwill or bargain purchase was recorded as of the acquisition date.

Merger with Pepco Holdings, Inc. (Exelon)

Description of Transaction

On March 23, 2016, Exelon completed the merger contemplated by the Merger Agreement among Exelon, Purple Acquisition Corp., a wholly owned subsidiary of Exelon (Merger Sub) and Pepco Holdings, Inc. (PHI), for a total purchase price consideration of approximately $7.1 billion. As a result of the merger, Merger Sub was merged into PHI (the PHI Merger) with PHI surviving as a wholly owned subsidiary of Exelon and Exelon Energy Delivery Company, LLC (EEDC), a wholly owned subsidiary of Exelon which also owns Exelon's interests in ComEd, PECO and BGE (through a special purpose subsidiary in the case of BGE). Following the completion of the PHI Merger, Exelon and PHI completed a series of internal corporate organization restructuring transactions resulting in the transfer of PHI’s unregulated business interests to Exelon and Generation and the transfer of PHI, Pepco, DPL and ACE to a special purpose subsidiary of EEDC.

Regulatory Matters

Approval of the merger in Delaware, New Jersey, Maryland and the District of Columbia was conditioned upon Exelon and PHI agreeing to certain commitments including where applicable: customer rate credits, funding for energy efficiency and delivery system modernization programs, a green sustainability fund, workforce development initiatives, charitable contributions, renewable generation and other required commitments. In addition, the orders approving the merger in Delaware, New Jersey and Maryland include a “most favored nation” provision which, generally, requires allocation of merger benefits proportionally across all the jurisdictions.

Total nominal cost of commitments was $513 million excluding renewable generation commitments (approximately $444 million on a net present value basis amount, excluding renewable generation commitments and charitable contributions).

During the fourth quarter of 2018, Exelon finalized the application of $5 million funding for residential and non-residential customers in the DPL Maryland service territory. This resulted in an adjustment to merger commitment costs recorded at Exelon Corporate and DPL. Exelon Corporate recorded a decrease of $5 million and DPL recorded an increase of $5 million in Operating and maintenance expense.

The following amounts represent total commitment costs for Exelon, PHI, Pepco, DPL and ACE that have been recorded since the merger date:



	Expected Payment Period			Successor
Description	Expected Payment Period	Exelon		PHI		Pepco		DPL		ACE
Rate credits	2016 - 2021	$	259	$	264	$	91	$	72	$	101
Energy efficiency	2016 - 2021	117		—		—		—		—
Charitable contributions	2016 - 2026	50		50		28		12		10
Delivery system modernization	Q2 2017	22		—		—		—		—
Green sustainability fund	Q2 2017	14		—		—		—		—
Workforce development	2016 - 2020	17		—		—		—		—
Other		29		6		1		5		—
Total commitments		$	508	$	320	$	120	$	89	$	111
Remaining commitments as of December 31, 2018		$	128	$	92	$	73	$	12	$	7

Pursuant to the orders approving the merger, Exelon made $73 million, $46 million and $49 million of equity contributions to Pepco, DPL and ACE, respectively, in the second quarter of 2016 to fund the after-tax amounts of the customer bill credit and the customer base rate credit commitments.

In addition, Exelon is committed to develop or to assist in the commercial development of approximately 37 MWs of new solar generation in Maryland, District of Columbia and Delaware, at an estimated cost of approximately $127 million, which will generate future earnings at Exelon and Generation. Investment costs, which are expected to be primarily capital in nature, will be recognized as incurred and recorded on Exelon's and Generation's financial statements. As of December 31, 2018, 27 MWs were developed and Exelon and Generation have incurred costs of $83 million. Exelon has also committed to purchase 100 MWs of wind energy in PJM. DPL has committed to conducting three RFPs to procure up to a total of 120 MWs of wind RECs for the purpose of meeting Delaware's renewable portfolio standards. DPL has conducted two of the three wind REC RFPs. The first 40 MW wind REC tranche was conducted in 2017 and did not result in a purchase agreement. The second 40 MW wind REC tranche was conducted in 2018 and resulted in a proposed REC purchase agreement that is pending review and approval with the DPSC. The third and final 40 MW wind REC tranche will be conducted in 2022.

Pursuant to the various jurisdictions' merger approval conditions, over specified periods Pepco, DPL and ACE are not permitted to reduce employment levels due to involuntary attrition associated with the merger integration process and have made other commitments regarding hiring and relocation of positions.

In July 2015, the OPC, Public Citizen, Inc., the Sierra Club and the Chesapeake Climate Action Network (CCAN) filed motions to stay the MDPSC order approving the merger. The Circuit Court judge issued an order denying the motions for stay on August 12, 2015. On January 8, 2016, the Circuit Court judge affirmed the MDPSC’s order approving the merger and denied the petitions for judicial review filed by the OPC, the Sierra Club, CCAN and Public Citizen, Inc. On January 19, 2016, the OPC filed a notice of appeal to the Maryland Court of Special Appeals, and on January 21, the Sierra Club and CCAN filed notices of appeal. On January 27, 2017, the Maryland Court of Special Appeals affirmed the Circuit Court's judgment that the MDPSC did not err in approving the merger. The OPC and Sierra Club filed petitions seeking further review in the Maryland Court of Appeals, which is the highest court in Maryland. On August 29, 2018, the Maryland Court of Appeals affirmed the MDPSC's May 2015 Order approving the merger of Exelon and PHI.

Between March 25, 2016 and April 22, 2016, various parties filed motions with the DCPSC to reconsider its March 23, 2016 order approving the merger. On June 17, 2016, the DCPSC denied all motions. In August 2016, the District Legal Entity of Columbia Office of People’s Counsel, the District of Columbia Government, and Public Citizen jointly with DC Sun each filed petitions for judicial review of the DCPSC’s March 23, 2016 order with the District of Columbia Court of Appeals. On July 20, 2017, the Court issued an opinion rejecting all of appellants’ arguments and affirming the Commission’s decision approving the merger.

Accounting for the Merger Transaction

The total purchase price consideration for the PHI merger was approximately $7.1 billion. The excess of the purchase price over the estimated fair value of the assets acquired and the liabilities assumed totaled $4 billion, which was recognized as goodwill by PHI and Exelon at the merger date, reflecting the value associated with enhancing Exelon's regulated utility portfolio of businesses, including the ability to leverage experience and best practices across the utilities and the opportunities for synergies. None of this goodwill is expected to be tax deductible. For purposes of future required impairment assessments, the goodwill has been assigned to PHI's reportable units Pepco, DPL and ACE. See Note 10 - Intangible Assets for additional information.

Immediately following closing of the merger, $235 million of net assets associated with PHI's unregulated business interests were distributed by PHI to Exelon. Exelon contributed $163 million of such net assets to Generation.

Rates charged to customers are established by a regulator to provide for recovery of costs and a fair return on invested capital, or rate base, generally measured at historical cost. Historical cost information therefore is the most relevant presentation for the financial statements of PHI’s rate regulated utility subsidiary registrants, Pepco, DPL and ACE. As such, Exelon and PHI did not push-down the application of acquisition accounting to PHI's utility registrants, and therefore the financial statements of Pepco, DPL and ACE do not reflect the revaluation of any assets and liabilities.

The current impact of PHI, including its unregulated businesses, in Exelon's Consolidated Statements of Operations and Comprehensive Income includes Operating revenues and Net Income (Loss) as follows:



	For the Years Ended December 31,
	2018	2017	2016
Operating Revenues	4,670	4,829	3,785
Net Income (Loss)	453	364	(66	)

For the periods ended December 31, 2018, 2017 and 2016, the Registrants have recognized costs to achieve the PHI merger as follows:



	For the Year Ended December 31,
Acquisition, Integration and Financing Costs^(a)	2018		2017			2016
Exelon	$	7	$	16		$	143
Generation	5		22			37
ComEd^(b)	—		1			(6		)
PECO	1		4			5
BGE^(b)	1		4			(1		)
Pepco^(b)	—		(6		)	28
DPL^(b)	—		(7		)	20
ACE^(b)	—		(6		)	19



	Successor							Predecessor
	For the Year Ended December 31,					March 24, 2016 to December 31, 2016		January 1, 2016 to March 23, 2016
Acquisition, Integration and Financing Costs^(a)	2018		2017			March 24, 2016 to December 31, 2016		January 1, 2016 to March 23, 2016
PHI^(b)	$	—	$	(18	)	$	69	$	29

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(a)	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 financing costs, which are included within Interest expense. Costs do not include merger commitments discussed above.

(b)

For the year ended December 31, 2017, includes deferrals of previously incurred integration costs as regulatory assets of $24 million, $8 million, $8 million, and $8 million at PHI, Pepco, DPL and ACE, respectively. For the year ended December 31, 2016, includes deferrals of previously incurred integration costs as regulatory assets of $8 million, $6 million, $11 million and $4 million at ComEd, BGE, Pepco and DPL, respectively. For the Successor period March 24, 2016 to December 31, 2016, includes deferrals of previously incurred integration costs as regulatory assets of $16 million at PHI. See Note 4 - Regulatory Matters for additional information.

Pro-forma Impact of the Merger

The following unaudited pro-forma financial information reflects the consolidated results of operations of Exelon as if the PHI merger had taken place on January 1, 2015. The unaudited pro forma information was calculated after applying Exelon’s accounting policies and adjusting PHI’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 future consolidated results of operations of the combined company.



	Year Ended December 31,
	2016^(a)		2015^(b)
Total operating revenues	$	32,342	$	33,823
Net income attributable to common shareholders	1,562		2,618

Basic earnings per share	$	1.69	$	2.85
Diluted earnings per share	1.69		2.84

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(a)	The amounts above exclude non-recurring costs directly related to the merger of $680 million and intercompany revenue of $171 million for the year ended December 31, 2016.


(b)	The amounts above exclude non-recurring costs directly related to the merger of $92 million and intercompany revenue of $559 million for the year ended December 31, 2015.

Disposition of Oyster Creek (Exelon and Generation)

On July 31, 2018, Generation entered into an agreement with Holtec International (Holtec) and its indirect wholly owned subsidiary, Oyster Creek Environmental Protection, LLC (OCEP), for the sale and decommissioning of the Oyster Creek Generating Station (Oyster Creek) located in Forked River, New Jersey. On September 17, 2018, Oyster Creek permanently ceased generation operations.

Under the terms of the transaction, Generation will transfer to OCEP substantially all the assets associated with Oyster Creek, including assets held in NDT funds, along with the assumption of liability for all responsibility for the site, including full decommissioning and ongoing management of spent fuel until the spent fuel is moved offsite. In addition to the assumption of liability for the full decommissioning and ongoing management of spent fuel, other consideration to be received in the transaction is contingent on several factors, including a requirement that Generation deliver a minimum NDT fund balance at closing, subject to adjustment for specific terms that include income taxes that would be imposed on any net unrealized built-in gains and certain decommissioning activities to be performed during the pre-close period after the unit shuts down in the fall of 2018 and prior to the anticipated close of the transaction. The terms of the transaction also include various forms of performance assurance for the obligations of OCEP to timely complete the required decommissioning, including a parental guaranty from Holtec for all performance and payment obligations of OCEP, and a requirement for Holtec to deliver a letter of credit to Generation upon the occurrence of specified events.

As a result of the transaction, in 2018, Exelon and Generation reclassified certain Oyster Creek assets and liabilities in Exelon’s and Generation’s Consolidated Balance Sheets as held for sale at their respective fair values. At December 31, 2018 Generation has $897 million and $777 million of Assets held for sale and Liabilities held for sale, respectively, for Oyster Creek. Upon remeasurement of the Oyster Creek ARO in 2018, Exelon and Generation recognized an $84 million pre-tax charge to Operating and maintenance expense. See Note 15 -Asset Retirement Obligations for additional information.

Completion of the transaction contemplated by the sale agreement is subject to the satisfaction of several closing conditions, including approval of the license transfer from the NRC and other regulatory approvals, and the receipt of a private letter ruling from the IRS. Generation currently anticipates satisfaction of the closing conditions to occur in the second half of 2019.

Disposition of EGTP and Acquisition of Handley Generating Station (Exelon and Generation)

EGTP, a Delaware limited liability company, was formed in 2014 with the purpose of financing a portfolio of assets comprised of two combined-cycle gas turbines (CCGTs) and three peaking/simple cycle facilities consisting of approximately 3.4 GW of generation capacity in ERCOT North and Houston Zones. EGTP was an indirect wholly owned subsidiary of Exelon and Generation.

EGTP’s operating cash flows were negatively impacted by certain market conditions and the seasonality of its cash flows. On May 2, 2017, as a result of the negative impacts of certain market conditions and the seasonality of its cash flows, EGTP entered into a consent agreement with its lenders to permit EGTP to draw on its revolving credit facility and initiate an orderly sales process to sell the assets of its wholly owned subsidiaries. As a result, Exelon and Generation classified certain of EGTP assets and liabilities as held for sale at their respective fair values less costs to sell and recorded a $460 million pre-tax impairment loss. See Note 13 - Debt and Credit Agreements for details regarding the nonrecourse debt associated with EGTP and Note 7 - Impairment of Long-Lived Assets and Intangibles for additional information.

On November 7, 2017, EGTP and all of its wholly owned subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware, which resulted in Exelon and Generation deconsolidating EGTP's assets and liabilities from their consolidated financial statements in the fourth quarter of 2017 that resulted in a pre-tax gain upon deconsolidation of $213 million. Concurrently with the Chapter 11 filings, Generation entered into an asset purchase agreement to acquire one of EGTP's generating plants, the Handley Generating Station, subject to a potential adjustment for fuel oil and assumption of certain liabilities. In the Chapter 11 Filings, EGTP requested that the proposed acquisition of the Handley Generating Station be consummated through a court-approved and supervised sales process. The acquisition closed on April 4, 2018 for a purchase price of $62 million. The Chapter 11 bankruptcy proceedings were finalized on April 17, 2018, resulting in the ownership of EGTP assets (other than the Handley Generating Station) being transferred to EGTP's lenders.

Other Asset Dispositions (Exelon, Generation, DPL and Pepco)

In December 2017, Generation entered into an agreement to sell its interest in an electrical contracting business that primarily installs, maintains and repairs underground and high-voltage cable transmission and distribution systems. As a result, as of December 31, 2017, certain assets and liabilities were classified as held for sale and included in the Other current assets and Other current liabilities balances in Exelon's and Generation's Consolidated Balance Sheet. On February 28, 2018, Generation completed the sale of its interest for $87 million, resulting in a pre-tax gain which is included within Gain on sales of assets and businesses in Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income. In June 2018, additional proceeds were received, and a pre-tax gain was recorded within Gain on sales of assets and businesses in Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income.

During the fourth quarter of 2016, as part of its continual assessment of growth and development opportunities, Generation reevaluated and in certain instances terminated or renegotiated certain projects and contracts. As a result, a pre-tax loss of $69 million was recorded within Loss on sales of assets and businesses and pre-tax impairment charges of $23 million was recorded within Operating and maintenance expense in Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income.

On June 16, 2016, Generation initiated the sales process of its Upstream business by executing a forbearance agreement with the lenders of the nonrecourse debt. See Note 13 - Debt and Credit Agreements for additional information. In December 2016, Generation sold substantially all of the Upstream assets for $37 million which resulted in a pre-tax loss on sale of $10 million which is included in Gain (loss) on sales of assets and businesses in Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income.