Exelon 2014 Annual Report Download - page 50

nontransferable preferred securities in 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. 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 has 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.
Through December 31, 2014, Exelon has incurred approximately $179 million of expense associated with the proposed merger,
including $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 for 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 transaction 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.
Exelon has listed various potential risks relating to the pending merger with PHI including difficulties that may be encountered in
satisfying the conditions to completion of the merger and the potential for developments that might have an adverse effect on Exelon
and the ability to realize the expected benefits of the merger. Exelon is taking steps to manage these risks and expects that the
merger can be completed on a basis favorable to the company’s shareholders and customers. Accordingly, Exelon anticipates
closing the transaction in the second or third quarter of 2015. Refer to Note 4—Mergers, Acquisitions, and Dispositions of the
Combined Notes to Consolidated Financial Statements for additional information on the merger transaction.
Power Markets
Price of Fuels. The use of new technologies to recover natural gas from shale deposits is increasing natural gas supply and
reserves, which places downward pressure on natural gas prices and, therefore, on wholesale and retail power prices, which results
in a reduction in Exelon’s revenues. Forward natural gas prices have declined significantly over the last several years; in part
reflecting an increase in supply due to strong natural gas production (due to shale gas development).
Capacity Market Changes in PJM. In the wake of the January 2014 Polar Vortex that blanketed much of the Eastern and
Midwestern United States, it became clear that while a major outage event was narrowly avoided, resources in PJM were not
providing the level of reliability expected by customers. To address this disconnect, on December 12, 2014, PJM filed at FERC a
proposal to make significant changes to its current capacity market construct, the Reliability Pricing Model (RPM). PJM’s proposed
changes generally seek to improve resource performance and reliability largely by limiting the excuses for non-performance and by
increasing the penalties for performance failures. To cover capital and other costs and risks that suppliers would incur to meet these
higher reliability standards, suppliers would be allowed to include adders for such costs as well as risk premiums in their capacity
46