Exelon 2014 Annual Report Download - page 177

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
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
173