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EXELON CORP - Quarter Report: 2015 March (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2015

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission

File Number

  

Name of Registrant; State of Incorporation;

Address of Principal Executive Offices; and

Telephone Number

   IRS Employer
Identification
Number
 

1-16169

  

EXELON CORPORATION

     23-2990190   
  

(a Pennsylvania corporation)

10 South Dearborn Street

P.O. Box 805379

Chicago, Illinois 60680-5379

(800) 483-3220

  

333-85496

  

EXELON GENERATION COMPANY, LLC

     23-3064219   
  

(a Pennsylvania limited liability company)

300 Exelon Way

Kennett Square, Pennsylvania 19348-2473

(610) 765-5959

  

1-1839

  

COMMONWEALTH EDISON COMPANY

     36-0938600   
  

(an Illinois corporation)

440 South LaSalle Street

Chicago, Illinois 60605-1028

(312) 394-4321

  

000-16844

  

PECO ENERGY COMPANY

     23-0970240   
  

(a Pennsylvania corporation)

P.O. Box 8699

2301 Market Street

Philadelphia, Pennsylvania 19101-8699

(215) 841-4000

  

1-1910

  

BALTIMORE GAS AND ELECTRIC COMPANY

     52-0280210   
  

(a Maryland corporation)

2 Center Plaza

110 West Fayette Street

Baltimore, Maryland 21201-3708

(410) 234-5000

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

     Large Accelerated Filer    Accelerated Filer    Non-accelerated Filer    Smaller
Reporting
Company

Exelon Corporation

   x         

Exelon Generation Company, LLC

         x   

Commonwealth Edison Company

         x   

PECO Energy Company

         x   

Baltimore Gas and Electric Company

         x   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The number of shares outstanding of each registrant’s common stock as of March 31, 2015 was:

 

Exelon Corporation Common Stock, without par value

   861,243,550

Exelon Generation Company, LLC

   not applicable

Commonwealth Edison Company Common Stock, $12.50 par value

   127,016,962

PECO Energy Company Common Stock, without par value

   170,478,507

Baltimore Gas and Electric Company Common Stock, without par value

   1,000


Table of Contents

TABLE OF CONTENTS

 

    Page No.  
FILING FORMAT     7   
FORWARD-LOOKING STATEMENTS     7   
WHERE TO FIND MORE INFORMATION     7   
PART I.  

FINANCIAL INFORMATION

    8   
ITEM 1.  

FINANCIAL STATEMENTS

    8   
 

Exelon Corporation

 
 

Consolidated Statements of Operations and Comprehensive Income

    9   
 

Consolidated Statements of Cash Flows

    10   
 

Consolidated Balance Sheets

    11   
 

Consolidated Statement of Changes in Shareholders’ Equity

    13   
 

Exelon Generation Company, LLC

 
 

Consolidated Statements of Operations and Comprehensive Income

    14   
 

Consolidated Statements of Cash Flows

    15   
 

Consolidated Balance Sheets

    16   
 

Consolidated Statement of Changes in Equity

    18   
 

Commonwealth Edison Company

 
 

Consolidated Statements of Operations and Comprehensive Income

    19   
 

Consolidated Statements of Cash Flows

    20   
 

Consolidated Balance Sheets

    21   
 

Consolidated Statement of Changes in Shareholders’ Equity

    23   
 

PECO Energy Company

 
 

Consolidated Statements of Operations and Comprehensive Income

    24   
 

Consolidated Statements of Cash Flows

    25   
 

Consolidated Balance Sheets

    26   
 

Consolidated Statement of Changes in Shareholders’ Equity

    28   
 

Baltimore Gas and Electric Company

 
 

Consolidated Statements of Operations and Comprehensive Income

    29   
 

Consolidated Statements of Cash Flows

    30   
 

Consolidated Balance Sheets

    31   
 

Consolidated Statement of Changes in Shareholders’ Equity

    33   
 

Combined Notes to Consolidated Financial Statements

    34   
 

1. Basis of Presentation

    34   
 

2. New Accounting Pronouncements

    35   
 

3. Variable Interest Entities

    36   
 

4. Mergers, Acquisitions and Dispositions

    41   
 

5. Regulatory Matters

    44   
 

6. Investment in Constellation Energy Nuclear Group, LLC

    56   
 

7. Fair Value of Financial Assets and Liabilities

    58   

 

1


Table of Contents
    Page No.  
 

8. Derivative Financial Instruments

    73   
 

9. Debt and Credit Agreements

    88   
 

10. Income Taxes

    92   
 

11. Nuclear Decommissioning

    95   
 

12. Retirement Benefits

    98   
 

13. Severance

    100   
 

14. Changes in Accumulated Other Comprehensive Income

    101   
 

15. Common Stock

    104   
 

16. Earnings Per Share and Equity

    105   
 

17. Commitments and Contingencies

    105   
 

18. Supplemental Financial Information

    119   
 

19. Segment Information

    123   
ITEM 2.  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    128   
 

Exelon Corporation

    128   
 

General

    128   
 

Executive Overview

    129   
 

Critical Accounting Policies and Estimates

    149   
 

Results of Operations

    150   
 

Liquidity and Capital Resources

    172   
 

Contractual Obligations and Off-Balance Sheet Arrangements

    182   
ITEM 3.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    184   
ITEM 4.  

CONTROLS AND PROCEDURES

    193   
PART II.  

OTHER INFORMATION

    194   
ITEM 1.  

LEGAL PROCEEDINGS

    194   
ITEM 1A.  

RISK FACTORS

    194   
ITEM 4.  

MINE SAFETY DISCLOSURES

    194   
ITEM 6.  

EXHIBITS

    194   
SIGNATURES     196   
 

Exelon Corporation

    196   
 

Exelon Generation Company, LLC

    196   
 

Commonwealth Edison Company

    197   
 

PECO Energy Company

    197   
 

Baltimore Gas and Electric Company

    197   

 

2


Table of Contents

GLOSSARY OF TERMS AND ABBREVIATIONS

 

Exelon Corporation and Related Entities

Exelon

  

Exelon Corporation

Generation

  

Exelon Generation Company, LLC

ComEd

  

Commonwealth Edison Company

PECO

  

PECO Energy Company

BGE

  

Baltimore Gas and Electric Company

BSC

  

Exelon Business Services Company, LLC

Exelon Corporate

  

Exelon’s holding company

CENG

  

Constellation Energy Nuclear Group, LLC

Constellation

  

Constellation Energy Group, Inc.

Antelope Valley, AVSR

  

Antelope Valley Solar Ranch One

Exelon Transmission Company

  

Exelon Transmission Company, LLC

Exelon Wind

  

Exelon Wind, LLC and Exelon Generation Acquisition Company, LLC

Ventures

  

Exelon Ventures Company, LLC

AmerGen

  

AmerGen Energy Company, LLC

BondCo

  

RSB BondCo LLC

ComEd Financing III

  

ComEd Financing III

PEC L.P.

  

PECO Energy Capital, L.P.

PECO Trust III

  

PECO Energy Capital Trust III

PECO Trust IV

  

PECO Energy Capital Trust IV

BGE Trust II

  

BGE Capital Trust II

PETT

  

PECO Energy Transition Trust

Registrants

  

Exelon, Generation, ComEd, PECO and BGE, collectively

 

Other Terms and Abbreviations

Note “—” of the Exelon 2014
Form 10-K

   Reference to a specific Combined Note to Consolidated Financial Statements within Exelon’s 2014 Annual Report on Form 10-K

1998 restructuring settlement

   PECO’s 1998 settlement of its restructuring case mandated by the Competition Act

Act 11

   Pennsylvania Act 11 of 2012

Act 129

   Pennsylvania Act 129 of 2008

AEC

   Alternative Energy Credit that is issued for each megawatt hour of generation from a qualified alternative energy source

AEPS

   Pennsylvania Alternative Energy Portfolio Standards

AEPS Act

   Pennsylvania Alternative Energy Portfolio Standards Act of 2004, as amended

AESO

   Alberta Electric Systems Operator

AFUDC

   Allowance for Funds Used During Construction

ALJ

   Administrative Law Judge

AMI

   Advanced Metering Infrastructure

AMP

   Advanced Metering Program

ARC

   Asset Retirement Cost

ARO

   Asset Retirement Obligation

ARP

   Title IV Acid Rain Program

ARRA of 2009

   American Recovery and Reinvestment Act of 2009

Block contracts

   Forward Purchase Energy Block Contracts

CAIR

   Clean Air Interstate Rule

CAISO

   California ISO

CAMR

   Federal Clean Air Mercury Rule

 

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GLOSSARY OF TERMS AND ABBREVIATIONS

 

Other Terms and Abbreviations

CERCLA

   Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended

CFL

   Compact Fluorescent Light

Clean Air Act

   Clean Air Act of 1963, as amended

Clean Water Act

   Federal Water Pollution Control Amendments of 1972, as amended

Competition Act

   Pennsylvania Electricity Generation Customer Choice and Competition Act of 1996

CPI

   Consumer Price Index

CPUC

   California Public Utilities Commission

CSAPR

   Cross-State Air Pollution Rule

CTC

   Competitive Transition Charge

DC Circuit Court

   United States Court of Appeals for the District of Columbia Circuit

DOE

   United States Department of Energy

DOJ

   United States Department of Justice

DSP

   Default Service Provider

DSP Program

   Default Service Provider Program

EDF

   Electricite de France SA

EE&C

   Energy Efficiency and Conservation/Demand Response

EGR

   ExGen Renewables I, LLC

EGS

   Electric Generation Supplier

EGTP

   ExGen Texas Power, LLC

EIMA

   Illinois Energy Infrastructure Modernization Act

EPA

   United States Environmental Protection Agency

ERCOT

   Electric Reliability Council of Texas

ERISA

   Employee Retirement Income Security Act of 1974, as amended

EROA

   Expected Rate of Return on Assets

ESPP

   Employee Stock Purchase Plan

FASB

   Financial Accounting Standards Board

FERC

   Federal Energy Regulatory Commission

FRCC

   Florida Reliability Coordinating Council

FTC

   Federal Trade Commission

GAAP

   Generally Accepted Accounting Principles in the United States

GDP

   Gross Domestic Product

GHG

   Greenhouse Gas

GRT

   Gross Receipts Tax

GSA

   Generation Supply Adjustment

GWh

   Gigawatt hour

HAP

   Hazardous air pollutants

Health Care Reform Acts

   Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010

IBEW

   International Brotherhood of Electrical Workers

ICC

   Illinois Commerce Commission

ICE

   Intercontinental Exchange

Illinois Act

   Illinois Electric Service Customer Choice and Rate Relief Law of 1997

Illinois EPA

   Illinois Environmental Protection Agency

Illinois Settlement Legislation

   Legislation enacted in 2007 affecting electric utilities in Illinois

Integrys

   Integrys Energy Services, Inc.

IPA

   Illinois Power Agency

IRC

   Internal Revenue Code

 

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GLOSSARY OF TERMS AND ABBREVIATIONS

 

Other Terms and Abbreviations

IRS

   Internal Revenue Service

ISO

   Independent System Operator

ISO-NE

   ISO New England Inc.

ISO-NY

   New York Independent System Operator

kV

   Kilovolt

kW

   Kilowatt

kWh

   Kilowatt-hour

LIBOR

   London Interbank Offered Rate

LILO

   Lease-In, Lease-Out

LLRW

   Low-Level Radioactive Waste

LTIP

   Long-Term Incentive Plan

MATS

   U.S. EPA Mercury and Air Toxics Standard Rule

MBR

   Market Based Rates Incentive

MDE

   Maryland Department of the Environment

MDPSC

   Maryland Public Service Commission

MGP

   Manufactured Gas Plant

MISO

   Midcontinent Independent System Operator, Inc.

mmcf

   Million Cubic Feet

Moody’s

   Moody’s Investor Service

MOPR

   Minimum Offer Price Rule

MRV

   Market-Related Value

MW

   Megawatt

MWh

   Megawatt hour

NAAQS

   National Ambient Air Quality Standards

n.m.

   not meaningful

NAV

   Net Asset Value

NDT

   Nuclear Decommissioning Trust

NEIL

   Nuclear Electric Insurance Limited

NERC

   North American Electric Reliability Corporation

NGS

   Natural Gas Supplier

NJDEP

   New Jersey Department of Environmental Protection

Non-Regulatory Agreements Units

   Nuclear generating units or portions thereof whose decommissioning-related activities are not subject to contractual elimination under regulatory accounting including the CENG units (Calvert Cliffs, Nine Mile Point, and R.E. Ginna), Clinton, Oyster Creek, Three Mile Island, Zion (a former ComEd unit), and portions of Peach Bottom (a former PECO unit)

NOSA

   Nuclear Operating Services Agreement

NOV

   Notice of Violation

NPDES

   National Pollutant Discharge Elimination System

NRC

   Nuclear Regulatory Commission

NSPS

   New Source Performance Standards

NWPA

   Nuclear Waste Policy Act of 1982

NYMEX

   New York Mercantile Exchange

OCI

   Other Comprehensive Income

OIESO

   Ontario Independent Electricity System Operator

OPEB

   Other Postretirement Employee Benefits

PA DEP

   Pennsylvania Department of Environmental Protection

PAPUC

   Pennsylvania Public Utility Commission

PGC

   Purchased Gas Cost Clause

 

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GLOSSARY OF TERMS AND ABBREVIATIONS

 

Other Terms and Abbreviations

PHI

   Pepco Holdings, Inc.

PJM

   PJM Interconnection, LLC

POLR

   Provider of Last Resort

POR

   Purchase of Receivables

PPA

   Power Purchase Agreement

PPL

   PPL Holtwood, LLC

Price-Anderson Act

   Price-Anderson Nuclear Industries Indemnity Act of 1957

PRP

   Potentially Responsible Parties

PSEG

   Public Service Enterprise Group Incorporated

PURTA

   Pennsylvania Public Realty Tax Act

PV

   Photovoltaic

RCRA

   Resource Conservation and Recovery Act of 1976, as amended

REC

   Renewable Energy Credit which is issued for each megawatt hour of generation from a qualified renewable energy source

Regulatory Agreement Units

   Nuclear generating units whose decommissioning-related activities are subject to contractual elimination under regulatory accounting including the former ComEd units (Braidwood, Bryon, Dresden, LaSalle, Quad Cities) and the former PECO units (Limerick, Peach Bottom, Salem)

RES

   Retail Electric Suppliers

RFP

   Request for Proposal

Rider

   Reconcilable Surcharge Recovery Mechanism

RGGI

   Regional Greenhouse Gas Initiative

RMC

   Risk Management Committee

RPM

   PJM Reliability Pricing Model

RPS

   Renewable Energy Portfolio Standards

RTEP

   Regional Transmission Expansion Plan

RTO

   Regional Transmission Organization

S&P

   Standard & Poor’s Ratings Services

SEC

   United States Securities and Exchange Commission

Senate Bill 1

   Maryland Senate Bill 1

SERC

   SERC Reliability Corporation (formerly Southeast Electric Reliability Council)

SERP

   Supplemental Employee Retirement Plan

SGIG

   Smart Grid Investment Grant

SGIP

   Smart Grid Initiative Program

SILO

   Sale-In, Lease-Out

SMP

   Smart Meter Program

SMPIP

   Smart Meter Procurement and Installation Plan

SNF

   Spent Nuclear Fuel

SOA

   Society of Actuaries

SOS

   Standard Offer Service

SPP

   Southwest Power Pool

Tax Relief Act of 2010

   Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

Upstream

   Natural gas and oil exploration and production activities

VIE

   Variable Interest Entity

WECC

   Western Electric Coordinating Council

 

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Table of Contents

FILING FORMAT

This combined Form 10-Q is being filed separately by Exelon Corporation, Exelon Generation Company, LLC, Commonwealth Edison Company, PECO Energy Company and Baltimore Gas and Electric Company (Registrants). Information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf. No Registrant makes any representation as to information relating to any other Registrant.

FORWARD-LOOKING STATEMENTS

This Report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. The factors that could cause actual results to differ materially from the forward-looking statements made by the Registrants include those factors discussed herein, as well as the items discussed in (1) Exelon’s 2014 Annual Report on Form 10-K in (a) ITEM 1A. Risk Factors, (b) ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and (c) ITEM 8. Financial Statements and Supplementary Data: Note 22; (2) this Quarterly Report on Form 10-Q in (a) Part II, Other Information, ITEM 1A. Risk Factors, (b) Part 1, Financial Information, ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and (c) Part I, Financial Information, ITEM 1. Financial Statements: Note 17; and (3) other factors discussed in filings with the SEC by the Registrants. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Report. None of the Registrants undertakes any obligation to publicly release any revision to its forward-looking statements to reflect events or circumstances after the date of this Report.

WHERE TO FIND MORE INFORMATION

The public may read and copy any reports or other information that the Registrants file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents are also available to the public from commercial document retrieval services, the website maintained by the SEC at www.sec.gov and the Registrants’ websites at www.exeloncorp.com. Information contained on the Registrants’ websites shall not be deemed incorporated into, or to be a part of, this Report.

 

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

 

 

 

 

 

8


Table of Contents

EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
(In millions, except per share data)        2015             2014      

Operating revenues

   $ 8,830      $ 7,237   

Operating expenses

    

Purchased power and fuel

     4,470        4,006   

Purchased power and fuel from affiliates

            334   

Operating and maintenance

     2,081        1,858   

Depreciation and amortization

     610        564   

Taxes other than income

     304        293   
  

 

 

   

 

 

 

Total operating expenses

     7,465        7,055   
  

 

 

   

 

 

 

Equity in losses of unconsolidated affiliates

            (19

Gain on sales of assets

     1        5   
  

 

 

   

 

 

 

Operating income

     1,366        168   
  

 

 

   

 

 

 

Other income and (deductions)

    

Interest expense, net

     (335     (217

Interest expense to affiliates

     (10     (10

Other, net

     80        98   
  

 

 

   

 

 

 

Total other income and (deductions)

     (265     (129
  

 

 

   

 

 

 

Income before income taxes

     1,101        39   

Income taxes

     363        (54
  

 

 

   

 

 

 

Net income

     738        93   
  

 

 

   

 

 

 

Net income attributable to noncontrolling interest and preference stock dividends

     45        3   
  

 

 

   

 

 

 

Net income attributable to common shareholders

     693        90   
  

 

 

   

 

 

 

Comprehensive income, net of income taxes

    

Net income

     738        93   

Other comprehensive income (loss), net of income taxes

    

Pension and non-pension postretirement benefit plans:

    

Prior service (benefit) cost reclassified to periodic benefit cost

     (11     1   

Actuarial loss reclassified to periodic cost

     54        34   

Pension and non-pension postretirement benefit plans valuation adjustment

     (26     (13

Unrealized gain (loss) on cash flow hedges

     6        (25

Unrealized gain on equity investments

            12   

Unrealized loss on foreign currency translation

     (12     (5
  

 

 

   

 

 

 

Other comprehensive income

     11        4   
  

 

 

   

 

 

 

Comprehensive income

   $ 749      $ 97   
  

 

 

   

 

 

 

Average shares of common stock outstanding:

    

Basic

     862        858   

Diluted

     867        861   

Earnings per average common share:

    

Basic

   $ 0.80      $ 0.10   

Diluted

   $ 0.80      $ 0.10   
  

 

 

   

 

 

 

Dividends per common share

   $ 0.31      $ 0.31   
  

 

 

   

 

 

 

Combined Notes to Consolidated Financial Statements

 

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Table of Contents

EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

 

     Three Months Ended
March 31,
 
(In millions)        2015             2014      

Cash flows from operating activities

    

Net income

   $ 738      $ 93   

Adjustments to reconcile net income to net cash flows provided by operating activities:

    

Depreciation, amortization, depletion and accretion, including nuclear fuel and energy contract amortization

     948        908   

Impairment of long-lived assets

            1   

Gain on sales of assets

     (1     (5

Deferred income taxes and amortization of investment tax credits

     129        (48

Net fair value changes related to derivatives

     (91     730   

Net realized and unrealized gains on nuclear decommissioning trust fund investments

     (47     (26

Other non-cash operating activities

     344        276   

Changes in assets and liabilities:

    

Accounts receivable

     (270     (606

Inventories

     291        80   

Accounts payable, accrued expenses and other current liabilities

     (607     157   

Option premiums received, net

     5        15   

Counterparty collateral received (posted), net

     31        (677

Income taxes

     174        17   

Pension and non-pension postretirement benefit contributions

     (269     (472

Other assets and liabilities

     115        (278
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     1,490        165   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (1,784     (1,217

Proceeds from nuclear decommissioning trust fund sales

     1,681        1,825   

Investment in nuclear decommissioning trust funds

     (1,747     (1,878

Acquisition of businesses

     (15       

Proceeds from sale of long-lived assets

     142        18   

Proceeds from termination of direct financing lease investment

            335   

Change in restricted cash

     (26     (40

Other investing activities

     (2     (54
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (1,751     (1,011
  

 

 

   

 

 

 

Cash flows from financing activities

    

Changes in short-term borrowings

     (141     638   

Issuance of long-term debt

     1,206        950   

Retirement of long-term debt

     (580     (1,150

Dividends paid on common stock

     (269     (266

Proceeds from employee stock plans

     8        7   

Other financing activities

     (16     (28
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     208        151   
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (53     (695

Cash and cash equivalents at beginning of period

     1,878        1,609   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,825      $ 914   
  

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

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EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions)    March 31,
2015
     December 31,
2014
 
     (Unaudited)         
ASSETS      

Current assets

     

Cash and cash equivalents

   $ 1,825       $ 1,878   

Restricted cash and cash equivalents

     297         271   

Accounts receivable, net

     

Customer

     3,702         3,482   

Other

     1,077         1,227   

Mark-to-market derivative assets

     1,117         1,279   

Unamortized energy contract assets

     209         254   

Inventories, net

     

Fossil fuel and emission allowances

     266         579   

Materials and supplies

     1,035         1,024   

Deferred income taxes

     231         244   

Regulatory assets

     804         847   

Assets held for sale

     1         147   

Other

     793         865   
  

 

 

    

 

 

 

Total current assets

     11,357         12,097   
  

 

 

    

 

 

 

Property, plant and equipment, net

     53,001         52,087   

Deferred debits and other assets

     

Regulatory assets

     6,068         6,076   

Nuclear decommissioning trust funds

     10,712         10,537   

Investments

     568         544   

Goodwill

     2,672         2,672   

Mark-to-market derivative assets

     913         773   

Unamortized energy contracts assets

     558         549   

Pledged assets for Zion Station decommissioning

     308         319   

Other

     1,234         1,160   
  

 

 

    

 

 

 

Total deferred debits and other assets

     23,033         22,630   
  

 

 

    

 

 

 

Total assets(a)

   $ 87,391       $ 86,814   
  

 

 

    

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

11


Table of Contents

EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions)    March 31,
2015
    December 31,
2014
 
     (Unaudited)        
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities

    

Short-term borrowings

   $ 309      $ 460   

Long-term debt due within one year

     1,260        1,802   

Accounts payable

     2,839        3,048   

Accrued expenses

     1,230        1,539   

Payables to affiliates

     8        8   

Regulatory liabilities

     421        310   

Mark-to-market derivative liabilities

     117        234   

Unamortized energy contract liabilities

     172        238   

Other

     1,018        1,123   
  

 

 

   

 

 

 

Total current liabilities

     7,374        8,762   
  

 

 

   

 

 

 

Long-term debt

     20,519        19,362   

Long-term debt to financing trusts

     648        648   

Deferred credits and other liabilities

    

Deferred income taxes and unamortized investment tax credits

     13,218        13,019   

Asset retirement obligations

     7,446        7,295   

Pension obligations

     3,154        3,366   

Non-pension postretirement benefit obligations

     1,825        1,742   

Spent nuclear fuel obligation

     1,021        1,021   

Regulatory liabilities

     4,566        4,550   

Mark-to-market derivative liabilities

     491        403   

Unamortized energy contract liabilities

     189        211   

Payable for Zion Station decommissioning

     136        155   

Other

     2,166        2,147   
  

 

 

   

 

 

 

Total deferred credits and other liabilities

     34,212        33,909   
  

 

 

   

 

 

 

Total liabilities(a)

     62,753        62,681   
  

 

 

   

 

 

 

Commitments and contingencies

    

Shareholders’ equity

    

Common stock (No par value, 2,000 shares authorized, 861 shares and 860 shares outstanding at March 31, 2015 and December 31, 2014, respectively)

     16,731        16,709   

Treasury stock, at cost (35 shares at both March 31, 2015 and December 31, 2014)

     (2,327     (2,327

Retained earnings

     11,334        10,910   

Accumulated other comprehensive loss, net

     (2,673     (2,684
  

 

 

   

 

 

 

Total shareholders’ equity

     23,065        22,608   

BGE preference stock not subject to mandatory redemption

     193        193   

Noncontrolling interest

     1,380        1,332   
  

 

 

   

 

 

 

Total equity

     24,638        24,133   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 87,391      $ 86,814   
  

 

 

   

 

 

 

 

(a)

Exelon’s consolidated assets include $8,182 million and $8,160 million at March 31, 2015 and December 31, 2014, respectively, of certain VIEs that can only be used to settle the liabilities of the VIE. Exelon’s consolidated liabilities include $2,702 million and $2,723 million at March 31, 2015 and December 31, 2014, respectively, of certain VIEs for which the VIE creditors do not have recourse to Exelon. See Note 3 — Variable Interest Entities.

See the Combined Notes to Consolidated Financial Statements

 

12


Table of Contents

EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(In millions, shares

in thousands)

  Issued
Shares
    Common
Stock
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss, net
    Noncontrolling
Interest
    Preference
Stock
    Total
Equity
 

Balance, December 31, 2014

    894,568      $ 16,709      $ (2,327   $ 10,910      $ (2,684   $ 1,332      $ 193      $ 24,133   

Net income

                         693               42        3        738   

Long-term incentive plan activity

    1,156        12                                           12   

Employee stock purchase plan issuances

    255        8                                           8   

Tax benefit on stock compensation

           2                                           2   

Changes in equity of noncontrolling interest

                                       6               6   

Common stock dividends

                         (269                          (269

Preference stock dividends

                                              (3     (3

Other comprehensive income, net of income taxes

                                11                      11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2015

    895,979      $ 16,731      $ (2,327   $ 11,334      $ (2,673   $ 1,380      $ 193      $ 24,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

13


Table of Contents

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
(In millions)        2015             2014      

Operating revenues

    

Operating revenues

   $ 5,629      $ 4,056   

Operating revenues from affiliates

     211        334   
  

 

 

   

 

 

 

Total operating revenues

     5,840        4,390   
  

 

 

   

 

 

 

Operating expenses

    

Purchased power and fuel

     3,426        3,008   

Purchased power and fuel from affiliates

     7        349   

Operating and maintenance

     1,162        938   

Operating and maintenance from affiliates

     149        149   

Depreciation and amortization

     254        211   

Taxes other than income

     122        105   
  

 

 

   

 

 

 

Total operating expenses

     5,120        4,760   
  

 

 

   

 

 

 

Equity in losses of unconsolidated affiliates

            (19

(Loss) gain on sales of assets

     (1     5   
  

 

 

   

 

 

 

Operating income (loss)

     719        (384
  

 

 

   

 

 

 

Other income and (deductions)

    

Interest expense

     (90     (73

Interest expense to affiliates, net

     (12     (12

Other, net

     94        85   
  

 

 

   

 

 

 

Total other income and (deductions)

     (8       
  

 

 

   

 

 

 

Income (loss) before income taxes

     711        (384

Income taxes

     226        (199
  

 

 

   

 

 

 

Net income (loss)

     485        (185

Net income attributable to noncontrolling interests

     42          
  

 

 

   

 

 

 

Net income (loss) attributable to membership interest

     443        (185
  

 

 

   

 

 

 

Comprehensive income (loss), net of income taxes

    

Net income (loss)

     485        (185

Other comprehensive income (loss), net of income taxes

    

Unrealized loss on cash flow hedges

     (5     (25

Unrealized gain on equity investments

            12   

Unrealized loss on foreign currency translation

     (12     (5

Unrealized loss on marketable securities

            (3
  

 

 

   

 

 

 

Other comprehensive loss

     (17     (21
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 468      $ (206
  

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

14


Table of Contents

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended
March 31,
 
(In millions)        2015             2014      

Cash flows from operating activities

    

Net income (loss)

   $ 485      $ (185

Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:

    

Depreciation, amortization, depletion and accretion, including nuclear fuel and energy contract amortization

     591        557   

Impairment of long-lived assets

            1   

Loss (gain) on sales of assets

     1        (5

Deferred income taxes and amortization of investment tax credits

     89        (161

Net fair value changes related to derivatives

     (165     737   

Net realized and unrealized gains on nuclear decommissioning trust fund investments

     (47     (26

Other non-cash operating activities

     45        89   

Changes in assets and liabilities:

    

Accounts receivable

     24        (295

Receivables from and payables to affiliates, net

     (10     3   

Inventories

     228        1   

Accounts payable, accrued expenses and other current liabilities

     (345     128   

Option premiums received, net

     5        15   

Counterparty collateral (posted) received, net

     62        (699

Income taxes

     (104     (35

Pension and non-pension postretirement benefit contributions

     (107     (191

Other assets and liabilities

     85        (103
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     837        (169
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (937     (535

Proceeds from nuclear decommissioning trust fund sales

     1,681        1,825   

Investment in nuclear decommissioning trust funds

     (1,747     (1,878

Acquisition of businesses

     (15       

Proceeds from sale of long-lived assets

     142        18   

Change in restricted cash

     (21     9   

Changes in Exelon intercompany money pool

            44   

Other investing activities

     (2     (77
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (899     (594
  

 

 

   

 

 

 

Cash flows from financing activities

    

Change in short-term borrowings

     (1     354   

Issuance of long-term debt

     806        300   

Retirement of long-term debt

     (18     (532

Retirement of long-term debt to affiliate

     (550       

Changes in Exelon intercompany money pool

     936          

Distribution to member

     (1,356     (30

Other financing activities

     (3     (21
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     (186     71   
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (248     (692

Cash and cash equivalents at beginning of period

     780        1,258   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 532      $ 566   
  

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

15


Table of Contents

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions)    March 31,
2015
     December 31,
2014
 
     (Unaudited)         
ASSETS      

Current assets

     

Cash and cash equivalents

   $ 532       $ 780   

Restricted cash and cash equivalents

     179         158   

Accounts receivable, net

     

Customer

     2,320         2,295   

Other

     378         318   

Mark-to-market derivative assets

     1,116         1,276   

Receivables from affiliates

     115         113   

Unamortized energy contract assets

     209         254   

Inventories, net

     

Fossil fuel and emission allowances

     232         465   

Materials and supplies

     841         847   

Deferred income taxes

     266         327   

Assets held for sale

     1         147   

Other

     530         658   
  

 

 

    

 

 

 

Total current assets

     6,719         7,638   
  

 

 

    

 

 

 

Property, plant and equipment, net

     23,414         22,945   

Deferred debits and other assets

     

Nuclear decommissioning trust funds

     10,712         10,537   

Investments

     122         104   

Goodwill

     47         47   

Mark-to-market derivative assets

     911         771   

Prepaid pension asset

     1,748         1,704   

Pledged assets for Zion Station decommissioning

     308         319   

Unamortized energy contract assets

     558         549   

Deferred income taxes

     3         3   

Other

     776         731   
  

 

 

    

 

 

 

Total deferred debits and other assets

     15,185         14,765   
  

 

 

    

 

 

 

Total assets(a)

   $ 45,318       $ 45,348   
  

 

 

    

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

16


Table of Contents

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions)    March 31,
2015
    December 31,
2014
 
     (Unaudited)        
LIABILITIES AND EQUITY     

Current liabilities

    

Short-term borrowings

   $ 25      $ 36   

Long-term debt due within one year

     75        58   

Long-term debt to affiliates due within one year

            556   

Accounts payable

     1,634        1,759   

Accrued expenses

     694        886   

Payables to affiliates

     110        107   

Borrowings from Exelon intercompany money pool

     936          

Mark-to-market derivative liabilities

     97        214   

Unamortized energy contract liabilities

     172        238   

Other

     532        605   
  

 

 

   

 

 

 

Total current liabilities

     4,275        4,459   
  

 

 

   

 

 

 

Long-term debt

     7,477        6,709   

Long-term debt to affiliate

     940        943   

Deferred credits and other liabilities

    

Deferred income taxes and unamortized investment tax credits

     6,091        6,034   

Asset retirement obligations

     7,296        7,146   

Non-pension postretirement benefit obligations

     919        915   

Spent nuclear fuel obligation

     1,021        1,021   

Payables to affiliates

     2,921        2,880   

Mark-to-market derivative liabilities

     121        105   

Unamortized energy contract liabilities

     189        211   

Payable for Zion Station decommissioning

     136        155   

Other

     764        719   
  

 

 

   

 

 

 

Total deferred credits and other liabilities

     19,458        19,186   
  

 

 

   

 

 

 

Total liabilities(a)

     32,150        31,297   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity

    

Member’s equity

    

Membership interest

     8,951        8,951   

Undistributed earnings

     2,890        3,803   

Accumulated other comprehensive income, net

     (53     (36
  

 

 

   

 

 

 

Total member’s equity

     11,788        12,718   

Noncontrolling interest

     1,380        1,333   
  

 

 

   

 

 

 

Total equity

     13,168        14,051   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 45,318      $ 45,348   
  

 

 

   

 

 

 

 

(a)

Generation’s consolidated assets include $8,118 million and $8,119 million at March 31, 2015 and December 31, 2014, respectively, of certain VIEs that can only be used to settle the liabilities of the VIE. Generation’s consolidated liabilities include $2,486 million and $2,507 million at March 31, 2015 and December 31, 2014, respectively, of certain VIEs for which the VIE creditors do not have recourse to Generation. See Note 3 — Variable Interest Entities.

See the Combined Notes to Consolidated Financial Statements

 

17


Table of Contents

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Unaudited)

 

     Member’s Equity               
(In millions)    Membership
Interest
     Undistributed
Earnings
    Accumulated
Other
Comprehensive
Income, net
    Noncontrolling
Interest
     Total Equity  

Balance, December 31, 2014

   $ 8,951       $ 3,803      $ (36   $ 1,333       $ 14,051   

Net income

             443               42         485   

Changes in equity of noncontrolling interest

                           5         5   

Distribution to member

             (1,356                    (1,356

Other comprehensive loss, net of income taxes

                    (17             (17
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, March 31, 2015

   $ 8,951       $ 2,890      $ (53   $ 1,380       $ 13,168   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

18


Table of Contents

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
(In millions)        2015             2014      

Operating revenues

    

Operating revenues

   $ 1,184      $ 1,133   

Operating revenues from affiliates

     1        1   
  

 

 

   

 

 

 

Total operating revenues

     1,185        1,134   
  

 

 

   

 

 

 

Operating expenses

    

Purchased power

     318        212   

Purchased power from affiliate

     9        108   

Operating and maintenance

     333        287   

Operating and maintenance from affiliate

     45        39   

Depreciation and amortization

     175        173   

Taxes other than income

     75        77   
  

 

 

   

 

 

 

Total operating expenses

     955        896   
  

 

 

   

 

 

 

Operating income

     230        238   
  

 

 

   

 

 

 

Other income and (deductions)

    

Interest expense, net

     (81     (77

Interest expense to affiliates

     (3     (3

Other, net

     3        5   
  

 

 

   

 

 

 

Total other income and (deductions)

     (81     (75
  

 

 

   

 

 

 

Income before income taxes

     149        163   

Income taxes

     59        65   
  

 

 

   

 

 

 

Net income

     90        98   
  

 

 

   

 

 

 

Comprehensive income

   $ 90      $ 98   
  

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

19


Table of Contents

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

       Three Months Ended  
March 31,
 
(In millions)        2015             2014      

Cash flows from operating activities

    

Net income

   $ 90      $ 98   

Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:

    

Depreciation, amortization and accretion

     175        173   

Deferred income taxes and amortization of investment tax credits

     35        35   

Other non-cash operating activities

     126        36   

Changes in assets and liabilities:

    

Accounts receivable

     (38     (64

Receivables from and payables to affiliates, net

     (2     (19

Inventories

     (10     2   

Accounts payable, accrued expenses and other current liabilities

     (126     (57

Income taxes

     131        44   

Pension and non-pension postretirement benefit contributions

     (121     (233

Other assets and liabilities

     (9     (24
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     251        (9
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (530     (341

Proceeds from sales of investments

            3   

Other investing activities

     7        8   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (523     (330
  

 

 

   

 

 

 

Cash flows from financing activities

    

Changes in short-term borrowings

     (21     350   

Issuance of long-term debt

     400        650   

Retirement of long-term debt

            (617

Contributions from parent

     14        38   

Dividends paid on common stock

     (75     (76

Other financing activities

     (4     (1
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     314        344   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     42        5   

Cash and cash equivalents at beginning of period

     66        36   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 108      $ 41   
  

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

20


Table of Contents

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions)    March 31,
2015
     December 31,
2014
 
     (Unaudited)         
ASSETS      

Current assets

     

Cash and cash equivalents

   $ 108       $ 66   

Restricted cash

     4         4   

Accounts receivable, net

     

Customer

     503         477   

Other

     512         648   

Receivables from affiliates

     17         14   

Inventories, net

     135         125   

Regulatory assets

     317         349   

Other

     41         40   
  

 

 

    

 

 

 

Total current assets

     1,637         1,723   
  

 

 

    

 

 

 

Property, plant and equipment, net

     16,099         15,793   

Deferred debits and other assets

     

Regulatory assets

     866         852   

Investments

     6         6   

Goodwill

     2,625         2,625   

Receivables from affiliates

     2,603         2,571   

Prepaid pension asset

     1,619         1,551   

Other

     276         271   
  

 

 

    

 

 

 

Total deferred debits and other assets

     7,995         7,876   
  

 

 

    

 

 

 

Total assets

   $ 25,731       $ 25,392   
  

 

 

    

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

21


Table of Contents

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions)    March 31,
2015
     December 31,
2014
 
     (Unaudited)         
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Current liabilities

     

Short-term borrowings

   $ 283       $ 304   

Long-term debt due within one year

     260         260   

Accounts payable

     534         598   

Accrued expenses

     223         331   

Payables to affiliates

     84         84   

Customer deposits

     128         128   

Regulatory liabilities

     131         125   

Deferred income taxes

     44         63   

Mark-to-market derivative liability

     20         20   

Other

     69         73   
  

 

 

    

 

 

 

Total current liabilities

     1,776         1,986   
  

 

 

    

 

 

 

Long-term debt

     6,099         5,698   

Long-term debt to financing trust

     206         206   

Deferred credits and other liabilities

     

Deferred income taxes and unamortized investment tax credits

     4,553         4,498   

Asset retirement obligations

     103         103   

Non-pension postretirement benefits obligations

     262         263   

Regulatory liabilities

     3,692         3,655   

Mark-to-market derivative liability

     221         187   

Other

     881         889   
  

 

 

    

 

 

 

Total deferred credits and other liabilities

     9,712         9,595   
  

 

 

    

 

 

 

Total liabilities

     17,793         17,485   
  

 

 

    

 

 

 

Commitments and contingencies

     

Shareholders’ equity

     

Common stock

     1,588         1,588   

Other paid-in capital

     5,484         5,468   

Retained earnings

     866         851   
  

 

 

    

 

 

 

Total shareholders’ equity

     7,938         7,907   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 25,731       $ 25,392   
  

 

 

    

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

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Table of Contents

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(In millions)    Common
Stock
     Other Paid-
In Capital
     Retained Deficit
Unappropriated
    Retained
Earnings
Appropriated
    Total
Shareholders’
Equity
 

Balance, December 31, 2014

   $ 1,588       $ 5,468       $ (1,639   $ 2,490      $ 7,907   

Net income

                     90               90   

Appropriation of retained earnings for future dividends

                     (90     90          

Common stock dividends

                            (75     (75

Contribution from parent

             14                       14   

Parent tax matter indemnification

             2                       2   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, March 31, 2015

   $ 1,588       $ 5,484       $ (1,639   $ 2,505      $ 7,938   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

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Table of Contents

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
(In millions)      2015         2014    

Operating revenues

    

Operating revenues

   $ 985      $ 992   

Operating revenues from affiliates

            1   
  

 

 

   

 

 

 

Total operating revenues

     985        993   
  

 

 

   

 

 

 

Operating expenses

    

Purchased power and fuel

     376        377   

Purchased power from affiliate

     62        87   

Operating and maintenance

     197        256   

Operating and maintenance from affiliates

     25        24   

Depreciation and amortization

     62        58   

Taxes other than income

     41        42   
  

 

 

   

 

 

 

Total operating expenses

     763        844   
  

 

 

   

 

 

 

Gain on sale of assets

     1          
  

 

 

   

 

 

 

Operating income

     223        149   
  

 

 

   

 

 

 

Other income and (deductions)

    

Interest expense, net

     (25     (25

Interest expense to affiliates

     (3     (3

Other, net

     2        2   
  

 

 

   

 

 

 

Total other income and (deductions)

     (26     (26
  

 

 

   

 

 

 

Income before income taxes

     197        123   

Income taxes

     58        34   
  

 

 

   

 

 

 

Net income attributable to common shareholder

   $ 139      $ 89   
  

 

 

   

 

 

 

Comprehensive income

   $ 139      $ 89   
  

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

24


Table of Contents

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended
March 31,
 
(In millions)      2015         2014    

Cash flows from operating activities

    

Net income

   $ 139      $ 89   

Adjustments to reconcile net income to net cash flows provided by operating activities:

    

Depreciation, amortization and accretion

     62        58   

Deferred income taxes and amortization of investment tax credits

     5        (2

Other non-cash operating activities

     44        49   

Changes in assets and liabilities:

    

Accounts receivable

     (115     (110

Receivables from and payables to affiliates, net

     5        2   

Inventories

     34        45   

Accounts payable, accrued expenses and other current liabilities

     1        117   

Income taxes

     67        33   

Pension and non-pension postretirement benefit contributions

     (12     (11

Other assets and liabilities

     (72     (127
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     158        143   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (148     (184

Other investing activities

     4        2   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (144     (182
  

 

 

   

 

 

 

Cash flows from financing activities

    

Change in Exelon intercompany money pool

     65          

Dividends paid on common stock

     (70     (80

Other financing activities

     (1       
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (6     (80
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     8        (119

Cash and cash equivalents at beginning of period

     30        217   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 38      $ 98   
  

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

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Table of Contents

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions)    March 31,
2015
     December 31,
2014
 
     (Unaudited)         
ASSETS      

Current assets

     

Cash and cash equivalents

   $ 38       $ 30   

Restricted cash and cash equivalents

     2         2   

Accounts receivable, net

     

Customer

     390         320   

Other

     123         141   

Receivables from affiliates

     3         3   

Inventories, net

     

Fossil fuel

     19         57   

Materials and supplies

     26         22   

Deferred income taxes

     70         69   

Prepaid utility taxes

     107         10   

Regulatory assets

     41         29   

Other

     30         31   
  

 

 

    

 

 

 

Total current assets

     849         714   
  

 

 

    

 

 

 

Property, plant and equipment, net

     6,867         6,801   

Deferred debits and other assets

     

Regulatory assets

     1,543         1,529   

Investments

     31         31   

Receivable from affiliates

     500         490   

Prepaid pension asset

     347         344   

Other

     32         34   
  

 

 

    

 

 

 

Total deferred debits and other assets

     2,453         2,428   
  

 

 

    

 

 

 

Total assets

   $ 10,169       $ 9,943   
  

 

 

    

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

26


Table of Contents

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions)    March 31,
2015
     December 31,
2014
 
     (Unaudited)         
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Current liabilities

     

Accounts payable

   $ 334       $ 337   

Accrued expenses

     109         91   

Payables to affiliates

     57         52   

Borrowings from Exelon intercompany money pool

     65           

Customer deposits

     53         52   

Regulatory liabilities

     119         90   

Other

     31         31   
  

 

 

    

 

 

 

Total current liabilities

     768         653   
  

 

 

    

 

 

 

Long-term debt

     2,246         2,246   

Long-term debt to financing trusts

     184         184   

Deferred credits and other liabilities

     

Deferred income taxes and unamortized investment tax credits

     2,708         2,671   

Asset retirement obligations

     29         29   

Non-pension postretirement benefits obligations

     287         287   

Regulatory liabilities

     662         657   

Other

     95         95   
  

 

 

    

 

 

 

Total deferred credits and other liabilities

     3,781         3,739   
  

 

 

    

 

 

 

Total liabilities

     6,979         6,822   
  

 

 

    

 

 

 

Commitments and contingencies

     

Shareholder’s equity

     

Common stock

     2,439         2,439   

Retained earnings

     750         681   

Accumulated other comprehensive income, net

     1         1   
  

 

 

    

 

 

 

Total shareholder’s equity

     3,190         3,121   
  

 

 

    

 

 

 

Total liabilities and shareholder’s equity

   $ 10,169       $ 9,943   
  

 

 

    

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

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Table of Contents

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER’S EQUITY

(Unaudited)

 

(In millions)    Common
Stock
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income, net
     Total
Shareholder’s
Equity
 

Balance, December 31, 2014

   $ 2,439       $ 681      $ 1       $ 3,121   

Net income

             139                139   

Common stock dividends

             (70             (70
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance, March 31, 2015

   $ 2,439       $ 750      $ 1       $ 3,190   
  

 

 

    

 

 

   

 

 

    

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

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Table of Contents

BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
(In millions)        2015             2014      

Operating revenue

    

Operating revenue

   $ 1,029      $ 1,038   

Operating revenue from affiliates

     7        16   
  

 

 

   

 

 

 

Total operating revenues

     1,036        1,054   
  

 

 

   

 

 

 

Operating expenses

    

Purchased power and fuel

     350        409   

Purchased power from affiliate

     137        120   

Operating and maintenance

     156        163   

Operating and maintenance from affiliates

     26        25   

Depreciation and amortization

     106        108   

Taxes other than income

     57        60   
  

 

 

   

 

 

 

Total operating expenses

     832        885   
  

 

 

   

 

 

 

Operating income

     204        169   
  

 

 

   

 

 

 

Other income and (deductions)

    

Interest expense, net

     (21     (23

Interest expense to affiliates

     (4     (4

Other, net

     4        4   
  

 

 

   

 

 

 

Total other income and (deductions)

     (21     (23
  

 

 

   

 

 

 

Income before income taxes

     183        146   

Income taxes

     74        58   
  

 

 

   

 

 

 

Net income

     109        88   

Preference stock dividends

     3        3   
  

 

 

   

 

 

 

Net income attributable to common shareholder

   $ 106      $ 85   
  

 

 

   

 

 

 

Comprehensive income

   $ 109      $ 88   
  

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

29


Table of Contents

BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended
March 31,
 
(In millions)        2015             2014      

Cash flows from operating activities

    

Net income

   $ 109      $ 88   

Adjustments to reconcile net income to net cash flows provided by operating activities:

    

Depreciation, amortization and accretion

     106        108   

Deferred income taxes and amortization of investment tax credits

     33        27   

Other non-cash operating activities

     64        43   

Changes in assets and liabilities:

    

Accounts receivable

     (141     (132

Receivables from and payables to affiliates, net

     (8     (8

Inventories

     38        33   

Accounts payable, accrued expenses and other current liabilities

     (8     (16

Counterparty collateral (posted) received, net

     (27     22   

Income taxes

     26        31   

Pension and non-pension postretirement benefit contributions

     (4     (5

Other assets and liabilities

     93        44   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     281        235   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (136     (146

Change in restricted cash

     2        (47

Other investing activities

     2        6   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (132     (187
  

 

 

   

 

 

 

Cash flows from financing activities

    

Changes in short-term borrowings

     (120     (66

Dividends paid on preference stock

     (3     (3

Dividends paid on common stock

     (36       

Other financing activities

     (13     13   
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (172     (56
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (23     (8

Cash and cash equivalents at beginning of period

     64        31   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 41      $ 23   
  

 

 

   

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

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Table of Contents

BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions)    March 31,
2015
     December 31,
2014
 
     (Unaudited)         
ASSETS      

Current assets

     

Cash and cash equivalents

   $ 41       $ 64   

Restricted cash and cash equivalents

     48         50   

Accounts receivable, net

     

Customer

     489         390   

Other

     99         82   

Inventories, net

     

Gas held in storage

     16         57   

Materials and supplies

     33         30   

Deferred income taxes

     15         6   

Prepaid utility taxes

     30         59   

Regulatory assets

     187         214   

Other

     4         5   
  

 

 

    

 

 

 

Total current assets

     962         957   
  

 

 

    

 

 

 

Property, plant and equipment, net

     6,280         6,204   

Deferred debits and other assets

     

Regulatory assets

     491         510   

Investments

     12         12   

Prepaid pension asset

     357         370   

Other

     28         25   
  

 

 

    

 

 

 

Total deferred debits and other assets

     888         917   
  

 

 

    

 

 

 

Total assets(a)

   $ 8,130       $ 8,078   
  

 

 

    

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

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Table of Contents

BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions)    March 31,
2015
     December 31,
2014
 
     (Unaudited)         
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Current liabilities

     

Short-term borrowings

   $       $ 120   

Long-term debt due within one year

     75         75   

Accounts payable

     222         215   

Accrued expenses

     155         131   

Deferred income taxes

     36         52   

Payables to affiliates

     46         66   

Customer deposits

     95         92   

Regulatory liabilities

     124         44   

Other

     27         51   
  

 

 

    

 

 

 

Total current liabilities

     780         846   
  

 

 

    

 

 

 

Long-term debt

     1,867         1,867   

Long-term debt to financing trust

     258         258   

Deferred credits and other liabilities

     

Deferred income taxes and unamortized investment tax credits

     1,924         1,865   

Asset retirement obligations

     18         17   

Non-pension postretirement benefits obligations

     211         212   

Regulatory liabilities

     187         200   

Other

     62         60   
  

 

 

    

 

 

 

Total deferred credits and other liabilities

     2,402         2,354   
  

 

 

    

 

 

 

Total liabilities(a)

     5,307         5,325   
  

 

 

    

 

 

 

Commitments and contingencies

     

Shareholders’ equity

     

Common stock

     1,360         1,360   

Retained earnings

     1,273         1,203   
  

 

 

    

 

 

 

Total shareholder’s equity

     2,633         2,563   
  

 

 

    

 

 

 

Preference stock not subject to mandatory redemption

     190         190   
  

 

 

    

 

 

 

Total equity

     2,823         2,753   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 8,130       $ 8,078   
  

 

 

    

 

 

 

 

(a)

BGE’s consolidated assets include $49 million and $24 million at March 31, 2015 and December 31, 2014, respectively, of BGE’s consolidated VIE that can only be used to settle the liabilities of the VIE. BGE’s consolidated liabilities include $200 million and $197 million at March 31, 2015 and December 31, 2014, respectively, of BGE’s consolidated VIE for which the VIE creditors do not have recourse to BGE. See Note 3 — Variable Interest Entities.

See the Combined Notes to Consolidated Financial Statements

 

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Table of Contents

BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(In millions)    Common
Stock
     Retained
Earnings
    Total
Shareholders’
Equity
    Preference Stock
Not Subject To
Mandatory
Redemption
     Total Equity  

Balance, December 31, 2014

   $ 1,360       $ 1,203      $ 2,563      $ 190       $ 2,753   

Net income

             109        109                109   

Preference stock dividends

             (3     (3             (3

Common stock dividends

   $       $ (36   $ (36   $       $ (36
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, March 31, 2015

   $ 1,360       $ 1,273      $ 2,633      $ 190       $ 2,823   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See the Combined Notes to Consolidated Financial Statements

 

33


Table of Contents

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share data, unless otherwise noted)

1.    Basis of Presentation (Exelon, Generation, ComEd, PECO and BGE)

Exelon is a utility services holding company engaged through its principal subsidiaries in the energy generation and energy distribution businesses.

The energy generation business includes:

 

   

Generation:    Physical delivery and marketing of owned and contracted electric generation capacity and provision of renewable and other energy-related products and services, and natural gas exploration and production activities. Generation has six reportable segments consisting of the Mid-Atlantic, Midwest, New England, New York, ERCOT and Other Power Regions.

The energy delivery businesses include:

 

   

ComEd:    Purchase and regulated retail sale of electricity and the provision of distribution and transmission services in northern Illinois, including the City of Chicago.

 

   

PECO:    Purchase and regulated retail sale of electricity and the provision of distribution and transmission services in southeastern Pennsylvania, including the City of Philadelphia, and the purchase and regulated retail sale of natural gas and the provision of distribution services in the Pennsylvania counties surrounding the City of Philadelphia.

 

   

BGE:    Purchase and regulated retail sale of electricity and the provision of distribution and transmission services in central Maryland, including the City of Baltimore, and the purchase and regulated retail sale of natural gas and the provision of distribution services in central Maryland, including the City of Baltimore.

Each of the Registrant’s consolidated financial statements includes the accounts of its subsidiaries. All intercompany transactions have been eliminated. As a result of the Registrants’ 2014 divestiture of certain unconsolidated affiliates considered integral to their operations and the consolidation of CENG during 2014, all Equity in earnings (losses) from unconsolidated affiliates will be presented below Income taxes in the Registrants’ Statement of Operations and Comprehensive Income starting in the first quarter of 2015. For the three months ended March 31, 2015, Equity in earnings (losses) of unconsolidated affiliates was less than $1 million.

The accompanying consolidated financial statements as of March 31, 2015 and 2014 and for the three months then ended are unaudited but, in the opinion of the management of each Registrant include all adjustments that are considered necessary for a fair statement of the Registrants’ respective financial statements in accordance with GAAP. All adjustments are of a normal, recurring nature, except as otherwise disclosed. The December 31, 2014 Consolidated Balance Sheets were obtained from audited financial statements. Financial results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year ending December 31, 2015. These Combined Notes to Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These notes should be read in conjunction with the Combined Notes to Consolidated Financial Statements of all Registrants included in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of their respective 2014 Form 10-K Reports.

 

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Table of Contents

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

2.    New Accounting Pronouncements (Exelon, Generation, ComEd, PECO and BGE)

The following recently issued accounting standards are not yet required to be reflected in the combined financial statements of the Registrants.

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

In April 2015, the FASB issued authoritative guidance that clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software. A cloud computing arrangement would include a software license if (1) the customer has a contractual right to take possession of the software at any time during the hosting period without significant penalty and (2) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. If the arrangement does not contain a software license, it would be accounted for as a service contract. The guidance is effective for the Registrants for fiscal years beginning after December 15, 2015. Early adoption is permitted. The guidance can be applied retrospectively to each prior reporting period presented or prospectively to arrangements entered into, or materially modified, after the effective date. The Registrants are currently assessing the impact this guidance may have on their financial positions, results of operations, cash flows and disclosures as well as the transition method that they will use to adopt the guidance.

Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued authoritative guidance that changes the presentation of debt issuance costs in financial statements. The new guidance requires entity’s to present such costs in the balance sheet as a direct reduction to the related debt liability rather than as a deferred cost (i.e., an asset) as required by current guidance. The new standard does not change the recognition or measurement of debt issuance costs. The guidance is effective for the Registrants for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The guidance is required to be applied retrospectively to all prior periods presented. The Registrants are currently assessing the impact this guidance may have on their financial positions and disclosures, as well as whether to early adopt. The standard will not impact the results of operations and cash flows of the Registrants.

Amendments to the Consolidation Analysis

In February 2015, the FASB issued authoritative guidance that amends the consolidation analysis for variable interest entities (VIEs) as well as voting interest entities. The new guidance primarily (1) changes the assessment of limited partnerships as VIEs, (2) amends the effect that fees paid to a decision maker or service provider have on the VIE analysis, (3) amends how variable interests held by a reporting entity’s related parties and de facto agents impact its consolidation conclusion, (4) clarifies how to determine whether equity holders (as a group) have power over an entity and (5) provides a scope exception for registered and similar unregistered money market funds. The guidance is effective for the Registrants for the first interim period within annual reporting periods beginning on or after December 15, 2015. Early adoption is permitted. The guidance can be applied retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance at the date of adoption (modified retrospective method). The Registrants are currently assessing the impact this guidance may have on their financial positions, results of operations, cash flows and disclosures as well as the transition method that they will use to adopt the guidance. The Registrants do not plan to early adopt the standard.

Revenue from Contracts with Customers

In May 2014, the FASB issued authoritative guidance that changes the criteria for recognizing revenue from a contract with a customer. The new guidance replaces existing guidance on revenue recognition, including most

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

industry specific guidance, with a five step model for recognizing and measuring revenue from contracts with customers. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries and across capital markets. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance also requires a number of disclosures regarding the nature, amount, timing and uncertainty of revenue and the related cash flows. The guidance can be applied retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance at the date of initial adoption (modified retrospective method). The Registrants are currently assessing the impacts this guidance may have on their financial positions, results of operations, cash flows and disclosures as well as the transition method that they will use to adopt the guidance. The guidance is effective for the Registrants for the first interim period within annual reporting periods beginning on or after December 15, 2016; and early adoption would not be permitted. However, in April 2015, FASB proposed a one year deferral of the effective date to annual reporting periods beginning on or after December 15, 2017. In addition, the FASB proposal would include an option to early adopt the guidance for annual periods beginning on or after December 15, 2016.

3.    Variable Interest Entities (Exelon, Generation, ComEd, PECO and BGE)

Under the applicable authoritative guidance, a VIE is a legal entity that possesses any of the following characteristics: an insufficient amount of equity at risk to finance its activities, equity owners who do not have the power to direct the significant activities of the entity (or have voting rights that are disproportionate to their ownership interest), or equity owners who do not have the obligation to absorb expected losses or the right to receive the expected residual returns of the entity. Companies are required to consolidate a VIE if they are its primary beneficiary, which is the enterprise that has the power to direct the activities that most significantly affect the entity’s economic performance.

At March 31, 2015 and December 31, 2014, Exelon, Generation, and BGE collectively consolidated six VIEs or VIE groups for which the applicable Registrant was the primary beneficiary (see Consolidated Variable Interest Entities below). As of March 31, 2015 and December 31, 2014, the Registrants had significant interests in seven and six other VIEs, respectively, for which the Registrants do not have the power to direct the entities’ activities and, accordingly, were not the primary beneficiary.

Consolidated Variable Interest Entities

Exelon, Generation and BGE’s consolidated VIEs consist of:

 

   

BondCo, a special purpose bankruptcy remote limited liability company formed by BGE to acquire, hold, issue and service bonds secured by rate stabilization property,

 

   

a retail gas group formed by Generation to enter into a collateralized gas supply agreement with a third-party gas supplier

 

   

a group of solar project limited liability companies formed by Generation to build, own and operate solar power facilities,

 

   

several wind project companies designed by Generation to develop, construct and operate wind generation facilities,

 

   

certain retail power companies for which Generation is the sole supplier of energy, and

 

   

CENG.

As of March 31, 2015 and December 31, 2014, ComEd and PECO do not have any material consolidated VIEs.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

As of March 31, 2015 and December 31, 2014, Exelon, Generation, and BGE provided the following support to their respective consolidated VIEs:

 

   

In the case of BondCo, BGE is required to remit all payments it receives from all residential customers through non-bypassable, rate stabilization charges to BondCo. During the three months ended March 31, 2015 and March 31, 2014, BGE remitted $21 million and $21 million to BondCo, respectively.

 

   

Generation provides operating and capital funding to the solar entities for ongoing construction, operations and maintenance of the solar power facilities and provides limited recourse related to the Antelope Valley project.

 

   

Generation and Exelon, where indicated, provide the following support to CENG (see Note 6 — Investment in Constellation Energy Nuclear Group, LLC, and Note 25 — Related Party Transactions, of the Exelon 2014 Form 10-K for additional information regarding Generation’s and Exelon’s transactions with CENG):

 

   

under the NOSA, Generation conducts all activities related to the operation of the CENG nuclear generation fleet owned by CENG subsidiaries (the CENG fleet) and provides corporate and administrative services for the remaining life and decommissioning of the CENG nuclear plants as if they were a part of the Generation nuclear fleet, subject to the CENG member rights of EDF Inc. (EDFI) (a subsidiary of EDF),

 

   

under the Power Services Agency Agreement (PSAA), Generation provides scheduling, asset management, and billing services to the CENG fleet for the remaining operating life of the CENG nuclear plants,

 

   

under power purchase agreements with CENG, Generation will purchase 50.01% of the available output generated by the CENG nuclear plants from January 2015 through the end of the operating life of each respective plant. However, pursuant to amendments dated March 31, 2015, the energy obligations under the Ginna Nuclear Power Plant (Ginna) PPAs have been suspended during the term of the Reliability Support Services Agreement (RSSA) which Ginna entered into with Rochester Gas and Electric Corporation (RG&E) on February 13, 2015. The obligations under the RSSA commenced on April 1, 2015 and are effective through September 30, 2018, (see Note 5 — Regulatory Matters for additional details),

 

   

Generation provided a $400 million loan to CENG. As of March 31, 2015, the remaining obligation is $288 million, which reflects the principal payment made in January 2015 (see Note 5 — Investment in Constellation Energy Nuclear Group, LLC of the Exelon 2014 Form 10-K for additional details),

 

   

Generation executed an Indemnity Agreement pursuant to which Generation agreed to indemnify EDF and its affiliates against third-party claims that may arise from any future nuclear incident (as defined in the Price-Anderson Act) in connection with the CENG nuclear plants or their operations. Exelon guarantees Generation’s obligations under this Indemnity Agreement. (See Note 17 — Commitments and Contingencies for more details),

 

   

in connection with CENG’s severance obligations, Generation has agreed to reimburse CENG for a total of approximately $6 million of the severance benefits paid or to be paid in 2014 through 2016. As of March 31, 2015, the remaining obligation is approximately $2 million,

 

   

Generation and EDFI share in the $637 million of contingent payment obligations for the payment of contingent retrospective premium adjustments for the nuclear liability insurance (see Note 17 — Commitments and Contingencies for more details),

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

   

Generation provides a guarantee of approximately $7 million associated with hazardous waste management facilities and underground storage tanks. In addition, EDFI executed a reimbursement agreement that provides reimbursement to Exelon for 49.99% of any amounts paid by Generation under this guarantee,

 

   

Generation and EDFI are the members-insured with Nuclear Electric Insurance Limited (NEIL) and have assigned the loss benefits under the insurance and the NEIL premium costs to CENG and guarantee the obligations of CENG under these insurance programs in proportion to their respective member interests (see Note 17 — Commitments and Contingencies for more details), and

 

   

Exelon has executed an agreement to provide up to $245 million to support the operations of CENG as well as a $165 million guarantee of CENG’s cash pooling agreement with its subsidiaries.

 

   

Generation provides approximately $7 million in credit support for the retail power companies for which Generation is the sole supplier of energy, and

 

   

Generation provides a $75 million parental guarantee to the third-party gas supplier in support of its retail gas group.

For each of the consolidated VIEs, except as otherwise noted:

 

   

the assets of the VIEs are restricted and can only be used to settle obligations of the respective VIE;

 

   

Exelon, Generation and BGE did not provide any additional material financial support to the VIEs;

 

   

Exelon, Generation and BGE did not have any material contractual commitments or obligations to provide financial support to the VIEs; and

 

   

the creditors of the VIEs did not have recourse to Exelon’s, Generation’s or BGE’s general credit.

The carrying amounts and classification of the consolidated VIEs’ assets and liabilities included in Exelon’s, Generation’s, and BGE’s consolidated financial statements at March 31, 2015 and December 31, 2014 are as follows:

 

     March 31, 2015      December 31, 2014  
     Exelon(a)      Generation      BGE      Exelon(a)      Generation      BGE  

Current assets

   $ 1,185       $ 1,134       $ 46       $ 1,271       $ 1,242       $ 21   

Noncurrent assets

     7,676         7,664         3         7,580         7,566         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 8,861       $ 8,798       $ 49       $ 8,851       $ 8,808       $ 24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

   $ 520       $ 434       $ 80       $ 611       $ 526       $ 77   

Noncurrent liabilities

     2,812         2,682         120         2,730         2,600         120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 3,332       $ 3,116       $ 200       $ 3,341       $ 3,126       $ 197   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Includes certain purchase accounting adjustments not pushed down to the BGE standalone entity.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Assets and Liabilities of Consolidated VIEs

Included within the balances above are assets and liabilities of certain consolidated VIEs for which the assets can only be used to settle obligations of those VIEs, and liabilities that creditors, or beneficiaries, do not have recourse to the general credit of the Registrants. As of March 31, 2015 and December 31, 2014, these assets and liabilities primarily consisted of the following:

 

     March 31, 2015      December 31, 2014  
     Exelon      Generation      BGE      Exelon      Generation      BGE  

Cash and cash equivalents

   $ 334       $ 334       $       $ 392       $ 392       $   

Restricted cash

     159         113         46         117         96         21   

Accounts receivable, net

                 

Customer

     296         296                 297         297           

Other

     33         33                 57         57           

Mark-to-market derivatives assets

     130         130                 171         171           

Inventory

                 

Materials and supplies

     168         168                 172         172           

Other current assets

     40         34                 33         26           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     1,160         1,108         46         1,239         1,211         21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Property, plant and equipment, net

     4,720         4,720                 4,638         4,638           

Nuclear decommissioning trust funds

     2,114         2,114                 2,097         2,097           

Goodwill

     47         47                 47         47           

Mark-to-market derivatives assets

     51         51                 44         44           

Other noncurrent assets

     90         78         3         95         82         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total noncurrent assets

     7,022         7,010         3         6,921         6,908         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 8,182       $ 8,118       $ 49       $ 8,160       $ 8,119       $ 24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt due within one year

   $ 85       $ 5       $ 75       $ 87       $ 5       $ 75   

Accounts payable

     268         268                 292         292           

Accrued expenses

     77         71         5         111         108         2   

Mark-to-market derivative liabilities

     10         10                 24         24           

Unamortized energy contract liabilities

     9         9                 22         22           

Other current liabilities

     18         18                 25         25           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     467         381         80         561         476         77   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt

     211         81         120         212         81         120   

Asset retirement obligations

     1,843         1,843                 1,763         1,763           

Pension obligation(a)

     9         9                 9         9           

Unamortized energy contract liabilities

     48         48                 51         51           

Other noncurrent liabilities

     124         124                 127         127           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Noncurrent liabilities

     2,235         2,105         120         2,162         2,031         120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 2,702       $ 2,486       $ 200       $ 2,723       $ 2,507       $ 197   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Includes CNEG retail gas pension obligation, which is presented as a net asset balance within the Prepaid Pension asset line item on Generation’s balance sheet. See Note 12 — Retirement Benefits for additional details.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Unconsolidated Variable Interest Entities

Exelon’s and Generation’s variable interests in unconsolidated VIEs generally include equity investments and energy purchase and sale contracts. For the equity investments, the carrying amount of the investments is reflected on Exelon’s and Generation’s Consolidated Balance Sheets in Investments. For the energy purchase and sale contracts and the fuel purchase commitments (commercial agreements), the carrying amount of assets and liabilities in Exelon’s and Generation’s Consolidated Balance Sheets that relate to their involvement with the VIEs are predominately related to working capital accounts and generally represent the amounts owed by, or owed to, Exelon and Generation for the deliveries associated with the current billing cycles under the commercial agreements. Further, Exelon and Generation have not provided material debt or equity support, liquidity arrangements or performance guarantees associated with these commercial agreements.

The Registrants’ unconsolidated VIEs consist of:

 

   

Energy purchase and sale agreements with VIEs for which Generation has concluded that consolidation is not required.

 

   

Asset sale agreement with ZionSolutions, LLC and EnergySolutions, Inc. in which Generation has a variable interest but has concluded that consolidation is not required.

 

   

Equity investments in energy development projects and energy generating facilities for which Generation has concluded that consolidation is not required.

As of March 31, 2015 and December 31, 2014, Exelon and Generation had significant unconsolidated variable interests in seven and six VIEs, respectively, for which Exelon or Generation, as applicable, was not the primary beneficiary; including certain equity method investments and certain commercial agreements. The increase in the number of unconsolidated VIEs is due to the execution of an energy purchase and sale agreement with a new unconsolidated VIE. The following tables present summary information about Exelon and Generation’s significant unconsolidated VIE entities:

 

March 31, 2015

   Commercial
Agreement
VIEs
     Equity
Investment
VIEs
     Total  

Total assets(a)

   $ 259       $ 85       $ 344   

Total liabilities(a)

     32         47         79   

Exelon’s ownership interest in VIE(a)

             9         9   

Other ownership interests in VIE(a)

     227         29         256   

Registrants’ maximum exposure to loss:

        

Carrying amount of equity method investments

             13         13   

Contract intangible asset

     9                 9   

Debt and payment guarantees

             3         3   

Net assets pledged for Zion Station decommissioning(b)

     27                 27   

 

December 31, 2014

   Commercial
Agreement
VIEs
     Equity
Investment
VIEs
     Total  

Total assets(a)

   $ 506       $ 91       $ 597   

Total liabilities(a)

     237         49         286   

Exelon’s ownership interest in VIE(a)

             9         9   

Other ownership interests in VIE(a)

     269         33         302   

Registrants’ maximum exposure to loss:

        

Carrying amount of equity method investments

             13         13   

Contract intangible asset

     9                 9   

Debt and payment guarantees

             3         3   

Net assets pledged for Zion Station decommissioning(b)

     27                 27   

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

 

(a)

These items represent amounts on the unconsolidated VIE balance sheets, not on Exelon’s or Generation’s Consolidated Balance Sheets. These items are included to provide information regarding the relative size of the unconsolidated VIEs.

(b)

These items represent amounts on Exelon’s and Generation’s Consolidated Balance Sheets related to the asset sale agreement with ZionSolutions, LLC. The net assets pledged for Zion Station decommissioning include, gross pledged assets of $308 million and $319 million as of March 31, 2015 and December 31, 2014, respectively; offset by payables to ZionSolutions, LLC of $281 million and $292 million as of March 31, 2015 and December 31, 2014, respectively. These items are included to provide information regarding the relative size of the ZionSolutions, LLC unconsolidated VIE.

For each of the unconsolidated VIEs, Exelon and Generation has assessed the risk of a loss equal to their maximum exposure to be remote and, accordingly, Exelon and Generation have not recognized a liability associated with any portion of the maximum exposure to loss. In addition, there are no material agreements with, or commitments by, third parties that would affect the fair value or risk of their variable interests in these VIEs.

4.    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 $144 million of a new class of nonvoting, nonconvertible and nontransferable preferred securities of PHI as of March 31, 2015, 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, under pending or final settlements reached to date, as well as other filings, Exelon and PHI have proposed a package to the PHI utilities’ respective customers, providing for direct investment in excess of approximately $300 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.

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 have cooperated with the DOJ regarding the proposed 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.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

On February 13, 2015, Exelon and PHI announced that they had reached a settlement agreement in the proceeding before the Delaware Public Service Commission (DPSC) to review the proposed merger. The settlement, which was amended on April 7, 2015 and is subject to the approval of the DPSC, was signed and filed by Exelon, PHI, Delmarva Power & Light Company (DPL), the DPSC Staff, the Delaware Public Advocate, the Delaware Department of Natural Resources and Environment Control, the Delaware Sustainable Energy Utility, the Mid-Atlantic Renewable Energy Coalition and the Clean Air Council. As part of this settlement, Exelon and PHI have proposed a package of benefits to DPL customers and the state of Delaware including the establishment of customer rate credits of $40 million for DPL customers in Delaware, $2 million of funding for energy efficiency programs for DPL low income customers, and $2 million of funding for workforce development.

On March 17, 2015, Exelon and PHI announced that they had reached a settlement agreement with Montgomery and Prince George’s Counties in the proceeding before the MDPSC to review the proposed merger. The settlement, which is subject to the approval of the MDPSC, was signed and filed by Exelon, PHI, Montgomery County, Prince George’s County, the National Consumer Law Center, National Housing Trust, Maryland Affordable Housing Coalition, the Housing Association of Nonprofit Developers and a consortium of recreational trail advocacy organizations led by the Mid-Atlantic Off-Road Enthusiasts. As part of this settlement, Exelon and PHI have proposed a package of benefits to Potomac Electric Power Company (Pepco) and DPL customers and the state of Maryland including the establishment of a customer investment fund of $94.4 million for utility customers in Maryland. A portion of the customer investment fund, representing approximately $36.8 million, will provide bill credits to Pepco and DPL customers in Maryland, with the remaining $57.6 million funding energy-efficiency programs, including programs targeted to help low income customers lower their energy bills. Exelon also agreed to establish a Green Sustainability Fund (GSF) of $50 million to be allocated across the service territories of Pepco, DPL and ACE, with $19.8 million allocated to Maryland. The GSF will be allocated within each state to state and local “green banks” and similar sponsoring organizations to make loans to finance public and private investment in renewable energy, microgrids, and other developing energy technologies. Loans made by sponsoring organizations from the GSF must mature within 20 years following the merger closing. At the end of that 20 year period, principal payments received by the sponsoring organizations must be returned to Exelon, but Exelon’s recovery of the entire GSF is not assured. In the settlement, Exelon also agreed to provide $4 million in funding for workforce development in Maryland and made various other commitments, including a commitment to develop 15 MW of commercial solar projects in Maryland. In a related agreement with Prince George’s County, Exelon agreed to develop an additional 5 MW of solar generation in Maryland, the output of which will be delivered to Prince George’s County under a 30-year PPA at no cost to the county for the first 15 years and at market pricing for the second 15 years. This agreement also requires Prince George’s County to purchase substantially all of its requirements for electricity and natural gas from an Exelon affiliate for a period of 15 years, unless the Exelon affiliate is not the lowest bidder.

On March 10, 2015, Exelon and PHI announced that they had reached a settlement agreement with the Alliance for Solar Choice, a group of solar developers, in the proceeding before the MDPSC. The settlement, which is subject to the approval of the MDPSC, provides for enhancements to the interconnection process for behind-the-meter distributed generation and storage projects.

Exelon and PHI continue to expect the merger to be completed late 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. Exelon was also named in a federal court suit making similar claims. In September 2014, the parties reached a proposed settlement that would resolve all claims, which is subject to court approval. Final court approval of the proposed

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

settlement is not anticipated until approximately 90 days after merger close. 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.

Including 2014 and through March 31, 2015, Exelon has incurred approximately $289 million of expense associated with the proposed merger, primarily $69 million related to acquisition and integration costs and $220 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 Merger Agreement is terminated 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, plus certain expenses.

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 equity issuance and the net after-tax cash proceeds from generating asset divestitures during the second half of 2014. See Note 9 — Debt and Credit Agreements and Note 15 — Common Stock for more information.

Acquisitions (Exelon and Generation)

Acquisition of Integrys Energy Group, 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. As of March 31, 2015, Generation had remitted $319 million to Integrys Energy Group, Inc. and the remaining balance of $13 million is included in Other current liabilities on Exelon’s and Generation’s Consolidated Balance Sheets. The remaining balance was paid on April 17, 2015.

Asset Divestitures (Exelon and Generation)

On January 21, 2015, Generation closed on the sale of the Quail Run generating facility. Including the sale of the Quail Run generating facility, Generation has sold generating assets for total pre-tax proceeds of $1.8 billion (after-tax proceeds of $1.4 billion) which are expected to be used primarily to finance a portion of the acquisition of PHI.

At March 31, 2015, assets of $1 million related to property, plant and equipment are recorded as Assets held for sale on Exelon’s and Generation’s Consolidated Balance Sheet.

 

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5.    Regulatory Matters (Exelon, Generation, ComEd, PECO and BGE)

Regulatory and Legislative Proceedings (Exelon, Generation, ComEd, PECO and BGE)

Except for the matters noted below, the disclosures set forth in Note 3—Regulatory Matters of the Exelon 2014 Form 10-K appropriately represent, in all material respects, the current status of regulatory and legislative proceedings of the Registrants. The following is an update to that discussion.

Illinois Regulatory Matters

Energy Infrastructure Modernization Act (Exelon and ComEd).    Since 2011, ComEd’s distribution rates are established through a performance-based rate formula, pursuant to EIMA. EIMA also provides a structure for substantial capital investment by utilities to modernize Illinois’ electric utility infrastructure. EIMA was scheduled to sunset, ending ComEd’s performance based rate formula and investment commitment, at December 31, 2017, unless approved to continue through 2022 by the Illinois General Assembly. On April 3, 2015, the Governor signed legislation extending the EIMA sunset from 2017 to 2019.

Participating utilities are required to file an annual update to the performance-based formula rate tariff on or before May 1, with resulting rates effective in January of the following year. This annual formula rate update is based on prior year actual costs and current year projected capital additions. The update also reconciles any differences between the revenue requirement(s) in effect for the prior year and actual costs incurred for that year. Throughout each year, ComEd records regulatory assets or regulatory liabilities and corresponding increases or decreases to operating revenues for any differences between the revenue requirement(s) in effect and ComEd’s best estimate of the revenue requirement expected to be approved by the ICC for that year’s reconciliation. As of March 31, 2015, and December 31, 2014, ComEd had recorded a net regulatory asset associated with the distribution formula rate of $316 million and $371 million, respectively. The regulatory asset associated with distribution true-up is amortized to Operating revenues as the associated amounts are recovered through rates.

On April 15, 2015, ComEd filed its annual distribution formula rate with the ICC. The filing establishes the revenue requirement used to set the rates that will take effect in January 2016 after the ICC’s review and approval, which is due by December 2015. The revenue requirement requested is based on 2014 actual costs plus projected 2015 capital additions as well as an annual reconciliation of the revenue requirement in effect in 2014 to the actual costs incurred that year. ComEd’s 2015 filing request includes a total decrease to the revenue requirement of $50 million, reflecting an increase of $92 million for the initial revenue requirement for 2016 and an decrease of $142 million related to the annual reconciliation for 2014. The revenue requirement for 2016 provides for a weighted average debt and equity return on distribution rate base of 7.05% inclusive of an allowed return on common equity of 9.14%, reflecting the average rate on 30-year treasury notes plus 580 basis points. The annual reconciliation for 2014 provided for a weighted average debt and equity return on distribution rate base of 7.02% inclusive of an allowed return on common equity of 9.09%, reflecting the average rate on 30-year treasury notes plus 580 basis points less a performance metrics penalty of 5 basis points.

Participating utilities are also required to file an annual update on their AMI implementation progress. On June 11, 2014, the ICC approved ComEd’s accelerated deployment plan which allows for the installation of more than four million smart meters throughout ComEd’s service territory by 2018, three years in advance of the originally scheduled 2021 completion date. On April 1, 2015, ComEd filed an annual progress report on its AMI Implementation Plan with the ICC. To date, over one million smart meters have been installed in the Chicago area.

Grand Prairie Gateway Transmission Line (Exelon and ComEd).    On December 2, 2013, ComEd filed a request to obtain the ICC’s approval to construct a 60-mile overhead 345kV transmission line that traverses Ogle, DeKalb, Kane and DuPage Counties in Northern Illinois. On May 28, 2014, in a separate proceeding, FERC

 

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issued an order granting ComEd’s request to include 100% of the capital costs recorded to construction work in progress during construction of the line in ComEd’s transmission rate base. If the project is cancelled or abandoned for reasons beyond ComEd’s control, FERC approved the ability for ComEd to recover 100% of its prudent costs incurred after May 21, 2014 and 50% of its costs incurred prior to May 21, 2014 in ComEd’s transmission rate base. The costs incurred for the project prior to May 21, 2014 were immaterial. On October 22, 2014, the ICC issued an order approving ComEd’s Grand Prairie Gateway Project over the objection of numerous landowners and the City of Elgin. On January 15, 2015, the City of Elgin and other parties filed a Notice of Appeal in the Illinois Appellate Court. On April 8, 2015, the ICC issued a rehearing order denying the appeals filed to consider an alternate route for the transmission line. The rehearing order affirmed the route approved within the ICC’s October 22, 2014 order. ComEd expects to begin construction of the line in the second quarter of 2015 with an in-service date expected in the second quarter of 2017.

Pennsylvania Regulatory Matters

2015 Pennsylvania Electric Distribution Rate Case (Exelon and PECO).    On March 27, 2015, PECO filed a petition with the PAPUC requesting an increase of $190 million to its annual service revenues for electric delivery, which would reflect a 4.4% increase on the basis of total Pennsylvania jurisdictional operating revenue. The requested rate of return on common equity is 10.95%. The new electric delivery rates would take effect no later than January 1, 2016. The results of the rate case are expected to be known in the fourth quarter of 2015. PECO cannot predict how much of the requested increase the PAPUC will ultimately approve.

Pennsylvania Procurement Proceedings (Exelon and PECO).    On October 12, 2012, the PAPUC issued its Opinion and Order approving PECO’s second DSP Program, which was filed with the PAPUC in January 2012. The program, which has a 24-month term from June 1, 2013 through May 31, 2015, complies with electric generation procurement guidelines set forth in Act 129. In the second DSP Program, PECO entered into contracts with PAPUC-approved bidders, including Generation, to procure electric supply for its default electric customers through five competitive procurements.

In addition, the second DSP Program includes a number of retail market enhancements recommended by the PAPUC in its previously issued Retail Markets Intermediate Work Plan Order. PECO was also directed to submit a plan to allow its low-income Customer Assistance Program (CAP) customers to purchase their generation supply from EGSs beginning in April 2014. In May 2013, PECO filed its CAP Shopping Plan with the PAPUC. By Order entered on January 24, 2014, the PAPUC approved PECO’s plan, with modifications, to make CAP shopping available beginning April 15, 2014. On March 20, 2014, the Office of Consumer Advocate (OCA) and low-income advocacy groups filed an appeal and emergency request for a stay with the Pennsylvania Commonwealth Court, claiming that the PAPUC-ordered CAP Shopping plan does not contain sufficient protections for low-income customers. On March 11, 2015, the appeal was argued before the Commonwealth Court (the Court). PECO cannot implement CAP Shopping until the Court reaches a decision, which is expected in 2015.

On December 4, 2014, the PAPUC approved PECO’s third DSP Program. The program has a 24-month term from June 1, 2015 through May 31, 2017, and complies with electric generation procurement guidelines set forth in Act 129. Under the program, PECO is procuring electric supply through four competitive procurements for fixed price full requirements contracts of two years or less for the residential classes and small and medium commercial classes and spot market price full requirement contracts for the large commercial and industrial class load. In March 2015, PECO entered into contracts with PAPUC-approved bidders, including Generation, for its residential class and its small, medium, and large commercial classes commencing in June 2015. Charges incurred for electric supply procured through contracts with Generation are included in purchased power from affiliates on PECO’s Statement of Operations and Comprehensive Income.

On March 12, 2015, PECO settled the CAP Design with the Office of Consumer Advocates (OCA) and Low Income Advocates, and filed the proposed plan with the PAPUC on March 20, 2015. The program design

 

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changes the rate structure of PECO’s CAP to make the bills more affordable to customers enrolled in the assistance program. The CAP discounts continue to be recovered through PECO’s universal service fund cost. If the CAP Design proposed plan is approved by the PAPUC, PECO plans to implement the program changes in October 2016.

Smart Meter and Smart Grid Investments (Exelon and PECO).    In April 2010, pursuant to Act 129 and the follow-on Implementation Order of 2009, the PAPUC approved PECO’s Smart Meter Procurement and Installation Plan (SMPIP). PECO is currently in the second phase of the SMPIP, under which PECO will deploy substantially all remaining smart meters, for a total of 1.7 million smart meters, on an accelerated basis by the second quarter of 2015. In total, PECO currently expects to spend up to $591 million, excluding the cost of the original meters, on its smart meter infrastructure and approximately $155 million on smart grid investments through final deployment of which $200 million was funded by SGIG. As of March 31, 2015, PECO has spent $568 million and $155 million on smart meter and smart grid infrastructure, respectively, not including the DOE reimbursements received.

For further information on the SGIG and Smart Meter and Smart Grid program, see Note 3—Regulatory Matters of the Exelon 2014 Form 10-K.

Pennsylvania Act 11 of 2012 (Exelon and PECO).    In February 2012, Act 11 was signed into law, which seeks to clarify the PAPUC’s authority to approve alternative ratemaking mechanisms, allowing for the implementation of a distribution system improvement charge (DSIC) in rates designed to recover capital project costs incurred to repair, improve or replace utilities’ aging electric and natural gas distribution systems in Pennsylvania. Prior to recovering costs pursuant to a DSIC, the PAPUC’s implementation order requires a utility to have a Long Term Infrastructure Improvement Plan (LTIIP) approved by the Commission, which outlines how the utility is planning to increase its investment for repairing, improving, or replacing aging infrastructure.

On February 5, 2015, PECO filed a petition to modify its natural gas LTIIP with the PAPUC, which was originally approved by the PAPUC in May 2013. If approved, the modification would allow PECO to further accelerate the replacement of existing gas mains and also included a plan for the relocation of meters from indoors to outside in accordance with recent PAPUC rulemaking. In addition, on March 20, 2015, PECO filed a petition with the PAPUC for approval of its gas DSIC mechanism for recovery of gas LTIIP expenditures.

On March 27, 2015, PECO filed a petition with the PAPUC for approval of its proposed electric DSIC and LTIIP. In accordance with the LTIIP (System 2020 plan), PECO plans to spend $275 million over the next five years to modernize and storm-harden its electric distribution system, making it more weather resistant and less vulnerable to damage. If approved, the DSIC will allow PECO the opportunity to recover the costs, subject to certain criteria, incurred to repair, improve or replace its electric distribution property between rate cases.

Maryland Regulatory Matters

2013 Maryland Electric and Gas Distribution Rate Case (Exelon and BGE).    On May 17, 2013, and as amended on August 23, 2013, BGE filed for electric and gas base increases with the MDPSC, ultimately requesting increases of $83 million and $24 million, respectively. In addition to these requested rate increases, BGE’s application included a request for recovery of incremental capital expenditures and operating costs associated with BGE’s proposed short-term reliability improvement plan (the ERI initiative) in response to a MDPSC order through a surcharge separate from base rates.

On December 13, 2013, the MDPSC issued an order in BGE’s 2013 electric and natural gas distribution rate case for increases in annual distribution service revenue of $34 million and $12 million, respectively, and an allowed return on equity of 9.75% and 9.60%, respectively. Rates became effective for services rendered on or

 

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after December 13, 2013. The MDPSC also authorized BGE to recover through a surcharge mechanism costs associated with five ERI initiative programs designed to accelerate electric reliability improvements premised upon the condition that the MDPSC approve specific projects in advance of cost recovery. On March 31, 2014, after reviewing comments filed by the parties and conducting a hearing on the matter, the MDPSC approved all but one project proposed for completion in 2014 as part of the ERI initiative. The ERI initiative surcharge became effective June 1, 2014. On November 3, 2014, BGE filed a surcharge update including a true-up of cost estimates included in the 2014 surcharge, along with its work plan and cost estimates for 2015, to be included in the 2015 surcharge. At its December 17, 2014 weekly Administrative Meeting, the MDPSC approved BGE’s 2014 annual report, 2015 work plan and the 2015 surcharge.

In January 2014, the residential consumer advocate in Maryland filed an appeal to the order issued by the MDPSC on December 13, 2013 in BGE’s 2013 electric and gas distribution rate cases. The residential consumer advocate filed its related legal memorandum on August 22, 2014, challenging the MDPSC’s approval of the ERI initiative surcharge. BGE submitted a response to the appeal on October 15, 2014, and a hearing was held on November 17, 2014. BGE cannot predict the outcome of this appeal. If the residential consumer advocate’s appeal is successful, BGE could recover ERI expenditures through other regulatory mechanisms.

Smart Meter and Smart Grid Investments (Exelon and BGE).    In August 2010, the MDPSC approved a comprehensive smart grid initiative for BGE that included the planned installation of 2 million residential and commercial electric and gas smart meters at an expected total cost of $480 million of which $200 million was recovered through a grant from the DOE. The MDPSC’s approval ordered BGE to defer the associated incremental costs, depreciation and amortization, and an appropriate return, in a regulatory asset until such time as a cost-effective advanced metering system is implemented. As of March 31, 2015 and December 31, 2014, BGE recorded a regulatory asset of $143 million and $128 million, respectively, representing incremental costs, depreciation and amortization, and a debt return on fixed assets related to its AMI program. As part of the settlement in BGE’s 2014 electric and gas distribution rate case, the cost of the retired non-AMI meters will be amortized over 10 years. 

The Maryland Strategic Infrastructure Development and Enhancement Program (Exelon and BGE).    In February 2013, the Maryland General Assembly passed legislation intended to accelerate gas infrastructure replacements in Maryland by establishing a mechanism for gas companies to recover promptly reasonable and prudent costs of eligible infrastructure replacement projects separate from base rate proceedings. On May 2, 2013, the Governor of Maryland signed the legislation into law; which took effect June 1, 2013. Under the new law, following a proceeding before the MDPSC and with the MDPSC’s approval of the eligible infrastructure replacement projects along with a corresponding surcharge, BGE could begin charging gas customers a monthly surcharge for infrastructure costs incurred after June 1, 2013. The legislation includes caps on the monthly surcharges to residential and non-residential customers, and would require an annual true-up of the surcharge revenues against actual expenditures. Investment levels in excess of the cap would be recoverable in a subsequent gas base rate proceeding at which time all costs for the infrastructure replacement projects would be rolled into gas distribution rates. Irrespective of the cap, BGE is required to file a gas rate case every five years under this legislation. On August 2, 2013, BGE filed its infrastructure replacement plan and associated surcharge. On January 29, 2014, the MDPSC issued a decision conditionally approving the first five years of BGE’s plan and surcharge. On March 26, 2014, the Maryland PSC approved as filed BGE’s proposed 2014 project list, tariff and associated surcharge amounts, with a surcharge that became effective April 1, 2014. On November 17, 2014, BGE filed a surcharge update including a true-up of cost estimates included in the 2014 surcharge, along with its 2015 project list and cost estimates to be included in the 2015 surcharge. The filing was approved with a revised surcharge effective January 1, 2015. At its December 17, 2014 weekly Administrative Meeting, the MDPSC approved BGE’s 2015 project list and the proposed surcharge for 2015. As of March 31, 2015, BGE recorded a regulatory liability of $1 million, representing the difference between the surcharge revenues and program costs.

 

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In February 2014, the residential consumer advocate in Maryland filed an appeal with the Baltimore City Circuit Court to the decision issued by the MDPSC on BGE’s infrastructure replacement plan. On September 5, 2014, the Baltimore City Circuit Court affirmed the MDPSC decision on BGE’s infrastructure replacement plan and associated surcharge. On October 10, 2014, the residential consumer advocate noticed its appeal to the Maryland Court of Special Appeals from the judgment entered by the Baltimore City Circuit Court. The Court of Special Appeals has issued a preliminary procedural schedule that sets oral argument in this matter for a date in the first two weeks of November 2015.

New York Regulatory Matters

Ginna Nuclear Power Plant Reliability Support Services Agreement (Exelon and Generation).    Ginna Nuclear Power Plant’s (Ginna) prior period fixed-price PPA contract with Rochester Gas & Electric Company (RG&E) expired in June 2014. In light of the expiration of the agreement, Ginna advised the New York Public Service Commission (NYPSC) and ISO-NY that in absence of a reliability need, Ginna management would make a recommendation, subject to approval by the CENG board, that Ginna be retired as soon as practicable. A formal study conducted by the ISO-NY and RG&E concluded that the Ginna nuclear plant needs to remain in operation to maintain the reliability of the transmission grid in the Rochester region through 2018 when planned transmission system upgrades are expected to be completed. In November 2014, in response to a petition filed by Ginna, the NYPSC directed Ginna and RG&E to negotiate a Reliability Support Services Agreement (RSSA). On February 13, 2015, regulatory filings, including RSSA terms negotiated between Ginna and RG&E, to support the continued operation of Ginna for reliability purposes were made with the NYPSC and with FERC for their approval. Although the RSSA contract is still subject to regulatory approvals, on April 1, 2015, Ginna began delivering power and capacity into ISO-NY consistent with the provisions of the proposed RSSA contract. RG&E may terminate the RSSA contract upon providing 12-months’ notice, which would require RG&E to make a specified termination payment to Ginna. The proposed RSSA contract extends through September 30, 2018. In the event that Ginna continues to operate beyond the RSSA term, Ginna would be required to make a specified refund payment to RG&E. The FERC issued an order on April 14, 2015, directing Ginna to make a compliance filing to ensure that the RSSA does not allow Ginna to receive revenues above its full cost-of-service and rejecting any extension of the RSSA beyond its initial term, rather requiring any extension be subject to the rules currently being developed by ISO-NY. The FERC order also set the RSSA for hearing and settlement procedures. Until final regulatory approvals are received, Generation will recognize revenue based on market prices for energy and capacity delivered by Ginna into ISO-NY. Upon receiving regulatory approvals, under the RSSA contract terms, Generation would record an adjustment to recognize revenue based on the final approved pricing contained in the contract as of the April 1, 2015 effective date. While the RSSA is expected to receive regulatory approvals and, therefore, permit Ginna to continue operating through the RSSA term, there is still a risk that, for economic reasons, including adjustments to the revenue Ginna would be entitled to under the RSSA, Ginna could be retired before the end of its operating license period. In absence of such an agreement and in the event the plant is retired before the current license term ends in 2029, Exelon’s and Generation’s results of operations could be adversely affected by increased depreciation rates, impairment charges, severance costs, and accelerated future decommissioning costs, among other items. However, it is not expected that such impacts would be material to Exelon’s or Generation’s results of operations.

Federal Regulatory Matters

Transmission Formula Rate (Exelon, ComEd and BGE).    ComEd’s and BGE’s transmission rates are each established based on a FERC-approved formula. ComEd and BGE are required to file an annual update to the FERC-approved formula on or before May 15, with the resulting rates effective on June 1 of the same year. The annual formula rate update is based on prior year actual costs and current year projected capital additions. The update also reconciles any differences between the revenue requirement in effect beginning June 1 of the

 

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prior year and actual costs incurred for that year. ComEd and BGE record regulatory assets or regulatory liabilities and corresponding increases or decreases to operating revenues for any differences between the revenue requirement in effect and ComEd’s and BGE’s best estimate of the revenue requirement expected to be approved by the FERC for that year’s reconciliation. As of March 31, 2015 and December 31, 2014, ComEd had recorded a net regulatory asset associated with the transmission formula rate of $25 million and $21 million, respectively, and BGE recorded a net regulatory asset associated with the transmission formula rate of $2 million and $1 million at March 31, 2015 and December 31, 2014, respectively. The regulatory asset associated with the transmission true-up is amortized to Operating revenues as the associated amounts are recovered through rates.

On April 15, 2015, ComEd filed its annual transmission formula rate update with the FERC. The filing establishes the revenue requirement used to set rates that will take effect in June 2015, subject to review by the FERC and other parties, which is due by October 2015. ComEd’s 2015 filing request includes a total increase to the revenue requirement of $91 million, reflecting an increase of $73 million for the initial revenue requirement and an increase of $18 million related to the annual reconciliation. The revenue requirement provides for a weighted average debt and equity return on transmission rate base of 8.61%, inclusive of an allowed return on common equity of 11.50%, a decrease from the 8.62% average debt and equity return previously authorized.

As part of the FERC-approved settlement of ComEd’s 2007 transmission rate case, the rate of return on common equity is 11.50% and the common equity component of the ratio used to calculate the weighted average debt and equity return for the transmission formula rate is currently capped at 55%.

In April 2015, BGE filed its annual transmission formula rate update with the FERC. The filing establishes the revenue requirement used to set rates that will take effect in June 2015, subject to review by the FERC and other parties, which is due by October 2015. BGE’s 2015 filing request includes a total increase to the revenue requirement of $10 million, reflecting an increase of $13 million for the initial revenue requirement and a decrease of $3 million related to the annual reconciliation. The revenue requirement provides for a weighted average debt and equity return on transmission rate base of 8.46%, inclusive of an allowed return on common equity of 11.30%, a decrease from the 8.53% average debt and equity return previously authorized.

As part of the FERC-approved settlement of BGE’s 2005 transmission rate case in 2006, the rate of return on common equity for BGE’s electric transmission business for new transmission projects placed in service on and after January 1, 2006 is 11.30%, which is inclusive of a 50 basis point incentive for participating in PJM.

FERC Transmission Complaint (Exelon and BGE).    On February 27, 2013, consumer advocates and regulators from the District of Columbia, New Jersey, Delaware and Maryland, and the Delaware Electric Municipal Cooperatives (the parties), filed a complaint at FERC against BGE and PHI companies relating to their respective transmission formula rates. BGE’s formula rate includes a 10.8% base rate of return on common equity (ROE) and a 50 basis point incentive for participating in PJM (the latter of which is conditioned upon crediting the first 50 basis points of any incentive ROE adders). The parties seek a reduction in the base return on equity to 8.7% and changes to the formula rate process. FERC docketed the matter and set April 3, 2013 as the deadline for interventions, protests and answers. Under FERC rules, the revenues subject to refund are limited to a fifteen month period and the earliest date from which the base ROE could be adjusted and refunds required is the date of the complaint. On March 19, 2013, BGE filed a motion to dismiss or sever the complaint.

On August 21, 2014, FERC issued an order in the BGE and PHI companies’ proceeding, which established hearing and settlement judge procedures for the complaint, and set a refund effective date of February 27, 2013. BGE, the PHI companies and the parties began settlement discussions under the guidance of a FERC administrative law judge on September 23, 2014. On November 24, 2014, the Settlement Judge informed FERC

 

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and the Chief Judge that the parties had reached an impasse and determined that a settlement was not possible. On November 26, 2014, the Chief Judge issued an order terminating the settlement proceeding, designating a presiding judge at the hearings and directing that an initial decision be issued by November 25, 2015.

On December 8, 2014, various state agencies in Delaware, Maryland, New Jersey, and D.C. filed a second complaint against BGE regarding the base ROE of the transmission business seeking a reduction from 10.8% to 8.8%. The filing of the second complaint creates a second refund window. By order issued on February 9, 2015, FERC established a hearing on the second complaint with the complainants’ requested refund effective date of December 8, 2014. On February 20, 2015, the Chief Judge issued an order consolidating the two complaint proceedings and established an Initial Decision issuance deadline of February 29, 2016. On March 2, 2015, the Presiding Administrative Law Judge issued an order establishing a procedural schedule for the consolidated proceedings that provides for the hearing to commence on October 20, 2015.

Based on the current status of the complaint filings, BGE believes it is probable that BGE’s base ROE rate will be adjusted, and that a refund to customers of transmission revenue for the two maximum fifteen month periods will be required. However, BGE is unable to estimate the most likely refund amount for either complaint at this time, and has therefore established a reserve, which is not material, representing the low end of a reasonably possible estimated range of loss. Additionally, management is unable to estimate the maximum exposure of a potential refund at this time, which may have a material impact on BGE’s results of operations and cash flows. The estimated annual ongoing reduction in revenues if FERC approved the ROEs requested by the parties in their filings is approximately $11 million. If FERC were to order a reduction of BGE’s base ROE to 8.7% as sought in the first complaint (while retaining the 50 basis points of any incentives that were credited to the base return on equity for certain new transmission investment), the result of the first fifteen month refund window would be a refund to customers of approximately $13 million. If FERC were to order a reduction in BGE’s base ROE to 8.8% as sought in the second complaint (while retaining 50 basis points of any incentives that were credited to the base return on equity for certain new transmission investment) and the refund period extended for a full fifteen months, the result would be a refund to customers of approximately $14 million.

PJM Transmission Rate Design and Operating Agreements (Exelon, ComEd, PECO and BGE).    PJM Transmission Rate Design specifies the rates for transmission service charged to customers within PJM. Currently, ComEd, PECO and BGE incur costs based on the existing rate design, which charges customers based on the cost of the existing transmission facilities within their load zone and the cost of new transmission facilities based on those who benefit from those facilities. In April 2007, FERC issued an order concluding that PJM’s current rate design for existing facilities is just and reasonable and should not be changed. In the same order, FERC held that the costs of new facilities 500 kV and above should be socialized across the entire PJM footprint and that the costs of new facilities less than 500 kV should be allocated to the customers of the new facilities who caused the need for those facilities. A number of parties appealed to the U.S. Court of Appeals for the Seventh Circuit.

In August 2009, the court issued its decision affirming the FERC’s order with regard to the existing facilities, but remanded to FERC the issue of the cost allocation associated with the new facilities 500 kV and above (Cost Allocation Issue) for further consideration by the FERC. On remand, FERC reaffirmed its earlier decision to socialize the costs of new facilities 500 kV and above. A number of parties filed appeals of these orders. In June 2014, the court again remanded the Cost Allocation Issue to FERC. On December 18, 2014, FERC issued an order setting an evidentiary hearing and settlement proceeding regarding the Cost Allocation Issue. The hearing only concerns new facilities approved by the PJM Board prior to February 1, 2013. As of March 31, 2015, settlement discussions are continuing.

Because a new cost allocation had been adopted for projects approved by the PJM Board on or after February 1, 2013, this latest remand only involves the cost allocation for facilities 500 kV and above approved prior

 

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to that date. ComEd anticipates that all impacts of any rate design changes effective after December 31, 2006, should be recoverable through retail rates and, thus, the rate design changes are not expected to have a material impact on ComEd’s results of operations, cash flows or financial position. PECO anticipates that all impacts of any rate design changes should be recoverable through the transmission service charge rider approved in PECO’s 2010 electric distribution rate case settlement and, thus, the rate design changes are not expected to have a material impact on PECO’s results of operations, cash flows or financial position. To the extent any rate design changes are retroactive to periods prior to January 1, 2011, there may be an impact on PECO’s results of operations. BGE anticipates that all impacts of any rate design changes effective after the implementation of its standard offer service programs in Maryland should be recoverable through retail rates and, thus, the rate design changes are not expected to have a material impact on BGE’s results of operations, cash flows or financial position.

Demand Response Resource Order (Exelon, Generation, ComEd, PECO, BGE).    On May 23, 2014, the D.C. Circuit Court issued an opinion vacating the FERC Order No. 745 (D.C. Circuit Decision). Order No. 745 established uniform compensation levels for demand response resources that participate in the day ahead and real-time wholesale energy markets. Under Order No. 745, buyers in ISO and RTO markets were required to pay demand response resources the full Locational Marginal Price when the demand response replaced a generation resource and was cost-effective.

In addition to invalidating the compensation structure established by Order No. 745, the D.C. Circuit Court, in broad language, explained that demand response is part of the retail market and FERC is restricted from regulating retail markets. The full implication of the D.C. Circuit Decision for both energy and capacity markets regulated by FERC is not yet known and will depend on how FERC and the RTOs and ISOs implement the decision. FERC and several other parties sought rehearing of the D.C. Circuit Decision, which was denied in September 2014. In addition, on September 22, 2014, FERC and another party sought to stay the issuance of the D.C. Circuit Court’s mandate so that FERC may appeal the decision to the U.S. Supreme Court. The stay was granted with respect to the FERC’s request only. In January 2015, the FERC sought to appeal the decision to the U.S. Supreme Court. Thus, the stay will be extended at least until the U.S. Supreme Court determines whether to allow the appeal. In addition, contemporaneously with the D.C. Circuit Court’s decision on May 23, 2014, First Energy filed a complaint at FERC asking FERC to direct PJM to remove all PJM Tariff provisions that allow or require PJM to compensate demand response providers as a form of supply in the PJM capacity market effective May 23, 2014. FirstEnergy also asked FERC to declare the results of PJM’s May 2014 Base Residual Auction for the 2017/2018 Delivery Year, void and illegal to the extent that demand response resources cleared that auction. On November 14, 2014, the New England Power Generators Association, Inc. (NEPGA) filed a similar complaint at FERC asking FERC to disqualify demand response from the upcoming capacity auction in New England and to revise the New England tariff to remove demand response from participation in the capacity market. FERC’s response to the FirstEnergy complaint and the NEPGA complaint and its response to address the D.C. Circuit Court’s decision in all markets could preclude demand response resources from receiving any future capacity market revenues and also subject such resources to refund obligations. In addition, there is uncertainty as to how FERC might treat already settled capacity market auctions as well as future auctions, both for demand response resources and generation resources. FERC could grant all or a portion of the relief requested by FirstEnergy and may grant relief retroactively or only prospectively. FERC could also pursue alternative means for allowing demand response to effectively participate in capacity markets it regulates. Due to these uncertainties, the Registrants are unable to predict the outcome of these proceedings, and the final outcome is not expected for several months. Nonetheless, the final decision and its implementation by FERC and the RTOs and ISOs, could be material to Exelon, Generation, ComEd, PECO and BGE’s results of operations and cash flows.

New England Capacity Market Results (Exelon and Generation).    Each year, ISO New England, Inc. (ISO-NE) files the results of its annual capacity auction at the FERC which is required to include documentation

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

regarding the competitiveness of the auction. Consistent with this requirement, on February 27, 2015, ISO-NE filed the results of its ninth capacity auction (covering the June 1, 2018 through May 30, 2019 delivery period).

On February 28, 2014, ISO-NE filed the results of its eighth capacity auction (covering the June 1, 2017 through May 30, 2018 delivery period). On June 27, 2014, the FERC issued a letter to ISO-NE noting that ISO-NE’s February 28, 2014 filing was deficient and that ISO-NE must file additional information before the FERC can process the filing. ISO-NE filed the information on July 17, 2014, and the ISO-NE’s filings became effective by operation of law pursuant to a notice issued by the secretary of FERC on September 16, 2014. Several parties sought rehearing of the secretary’s notice which was effectively denied in October 2014 and have since appealed the matter to the D.C. Circuit Court. On April 7, 2015 the D.C. Circuit Court issued an order referring the matter to a merits panel where issues raised by parties challenging the FERC decision will be heard as well as FERC’s Motion to Dismiss the challenges. It is not clear whether the court will decide ultimately on the merits of the case or whether it will dismiss the case as FERC urges based on the fact that there is no action by the FERC to be considered. Nonetheless, while any change in the auction results is thought to be unlikely, Exelon and Generation cannot predict with certainty what further action the court may take concerning the results of that auction, but any court action could be material to Exelon’s and Generation’s expected revenues from the capacity auction.

License Renewals (Exelon and Generation).    On August 29, 2012 and August 30, 2012, Generation submitted hydroelectric license applications to FERC for 46-year licenses for the Conowingo Hydroelectric Project (Conowingo) and the Muddy Run Pumped Storage Project (Muddy Run), respectively.

Generation is working with stakeholders to resolve water quality licensing issues with the MDE for Conowingo, including: (1) water quality, (2) fish passage and habitat, and (3) sediment. On January 30, 2014, Generation filed a water quality certification application pursuant to Section 401 of the CWA with MDE for Conowingo, addressing these and other issues, although Generation cannot currently predict the conditions that ultimately may be imposed. MDE indicated that it believed it did not have sufficient information to process Generation’s application. As a result, on December 5, 2014, Generation withdrew its pending application for a water quality certification. FERC policy requires that an applicant resubmit its request for a water quality certification within 90 days of the date of withdrawal. Accordingly, on March 3, 2015, Generation refiled its application for a water quality certification. In addition, Generation has entered into an agreement with MDE to work with state agencies in Maryland, the U.S. Army Corps of Engineers, the U.S. Geological Survey, the University of Maryland Center for Environmental Science and the U.S. Environmental Protection Agency Chesapeake Bay Program to design, conduct and fund an additional multi-year sediment study. Generation has agreed to contribute up to $3.5 million to fund the additional study. Resolution of these issues relating to Conowingo may have a material effect on Exelon’s and Generation’s results of operations and financial position through an increase in capital expenditures and operating costs.

On June 3, 2014, and subsequently modified December 9, 2014, the PA DEP issued its water quality certificate for Muddy Run, which is a necessary step in the FERC licensing process and included certain commitments made by Generation. On March 2, 2015, Generation and US Fish and Wildlife Services (USFWS) submitted to FERC an executed settlement agreement resolving all outstanding issues related to Muddy Run. The financial impact associated with these commitments is estimated to be in the range of $25 million to $35 million, and will include both capital expenditures and operating expenses, primarily relating to fish passage and habitat improvement projects.

The FERC licenses for Muddy Run and Conowingo expired on August 31, 2014 and September 1, 2014 respectively. Under the Federal Power Act, FERC is required to issue annual licenses for the facilities until the new licenses are issued. On September 10, 2014, FERC issued annual licenses for Conowingo and Muddy Run, effective as of the expiration of the previous licenses. If FERC does not issue new licenses prior to the expiration of annual licenses, the annual licenses will renew automatically. On March 11, 2015, FERC issued the final Environmental Impact Statement for Muddy Run and Conowingo.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

The stations are currently being depreciated over their estimated useful lives, which includes the license renewal period. As of March 31, 2015, $40 million of direct costs associated with licensing efforts have been capitalized

Regulatory Assets and Liabilities (Exelon, ComEd, PECO and BGE)

Exelon, ComEd, PECO and BGE each prepare their consolidated financial statements in accordance with the authoritative guidance for accounting for certain types of regulation. Under this guidance, regulatory assets represent incurred costs that have been deferred because of their probable future recovery from customers through regulated rates. Regulatory liabilities represent the excess recovery of costs or accrued credits that have been deferred because it is probable such amounts will be returned to customers through future regulated rates or represent billings in advance of expenditures for approved regulatory programs.

The following tables provide information about the regulatory assets and liabilities of Exelon, ComEd, PECO and BGE as of March 31, 2015 and December 31, 2014. For additional information on the specific regulatory assets and liabilities, refer to Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K.

 

March 31, 2015

   Exelon      ComEd      PECO      BGE  

Regulatory assets

           

Pension and other postretirement benefits

   $ 3,248       $       $       $   

Deferred income taxes

     1,561         65         1,419         77   

AMI programs

     325         106         76         143   

Under-recovered distribution service costs(a)

     316         316                   

Debt costs

     54         51         3         8   

Fair value of BGE long-term debt

     184                           

Severance

     11                         11   

Asset retirement obligations

     119         75         26         18   

MGP remediation costs

     250         213         36         1   

Under-recovered uncollectible accounts

     62         62                   

Renewable energy

     241         241                   

Energy and transmission programs(b) (c)

     41         37                 4   

Deferred storm costs

     3                         3   

Electric generation-related regulatory asset

     28                         28   

Rate stabilization deferral

     136                         136   

Energy efficiency and demand response programs

     230                         230   

Merger integration costs

     8                         8   

Conservation voltage reduction

     2                         2   

Other

     53         17         24         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regulatory assets

     6,872         1,183         1,584         678   
  

 

 

    

 

 

    

 

 

    

 

 

 

Less: current portion

     804         317         41         187   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noncurrent regulatory assets

   $ 6,068       $ 866       $ 1,543       $ 491   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

March 31, 2015

   Exelon      ComEd      PECO      BGE  

Regulatory liabilities

           

Other postretirement benefits

   $ 72       $       $       $   

Nuclear decommissioning

     2,920         2,420         500           

Removal costs

     1,567         1,351                 216   

Energy efficiency and demand response programs

     27         25         2           

DLC Program Costs

     10                 10           

Energy efficiency Phase 2

     38                 38           

Electric distribution tax repairs

     106                 106           

Gas distribution tax repairs

     34                 34           

Energy and transmission programs(b)(c)(d)

     142         23         84         35   

Over-recovered electric universal service fund costs

     3                 3           

Revenue subject to refund

     3         3                   

Over-recovered revenue decoupling(e)

     56                         56   

Other

     9         1         4         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regulatory liabilities

     4,987         3,823         781         311   
  

 

 

    

 

 

    

 

 

    

 

 

 

Less: current portion

     421         131         119         124   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noncurrent regulatory liabilities

   $ 4,566       $ 3,692       $ 662       $ 187   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014

   Exelon      ComEd      PECO      BGE  

Regulatory assets

           

Pension and other postretirement benefits

   $ 3,256       $       $       $   

Deferred income taxes

     1,542         64         1,400         78   

AMI programs

     296         91         77         128   

Under-recovered distribution service costs(a)

     371         371                   

Debt costs

     57         53         4         9   

Fair value of BGE long-term debt

     190                           

Severance

     12                         12   

Asset retirement obligations

     116         74         26         16   

MGP remediation costs

     257         219         37         1   

Under-recovered uncollectible accounts

     67         67                   

Renewable energy

     207         207                   

Energy and transmission programs(b)(c)

     48         33                 15   

Deferred storm costs

     3                         3   

Electric generation-related regulatory asset

     30                         30   

Rate stabilization deferral

     160                         160   

Energy efficiency and demand response programs

     248                         248   

Merger integration costs

     8                         8   

Conservation voltage reduction

     2                         2   

Under recovered electric revenue decoupling

     7                         7   

Other

     46         22         14         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regulatory assets

     6,923         1,201         1,558         724   
  

 

 

    

 

 

    

 

 

    

 

 

 

Less: current portion

     847         349         29         214   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noncurrent regulatory assets

   $ 6,076       $ 852       $ 1,529       $ 510   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

December 31, 2014

   Exelon      ComEd      PECO      BGE  

Regulatory liabilities

           

Other postretirement benefits

   $ 88       $       $       $   

Nuclear decommissioning

     2,879         2,389         490           

Removal costs

     1,566         1,343                 223   

Energy efficiency and demand response programs

     27         25         2           

DLC Program Costs

     10                 10           

Energy efficiency phase II

     32                 32           

Electric distribution tax repairs

     102                 102           

Gas distribution tax repairs

     49                 49           

Energy and transmission programs(b)(c)(d)

     84         19         58         7   

Over-recovered electric universal service fund costs

     2                 2           

Revenue subject to refund

     3         3                   

Over-recovered revenue decoupling(e)

     12                         12   

Other

     6         1         2         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regulatory liabilities

     4,860         3,780         747         244   
  

 

 

    

 

 

    

 

 

    

 

 

 

Less: current portion

     310         125         90         44   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noncurrent regulatory liabilities

   $ 4,550       $ 3,655       $ 657       $ 200   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

As of March 31, 2015, ComEd’s regulatory asset of $316 million was comprised of $240 million for the applicable annual reconciliations and $76 million related to significant one-time events including $59 million of deferred storm costs and $17 million of Constellation merger and integration related costs. As of December 31, 2014, ComEd’s regulatory asset of $371 million was comprised of $286 million for the applicable annual reconciliations and $85 million related to significant one-time events, including $66 million of deferred storm costs and $19 million of Constellation merger and integration related costs. See Note 4 — Mergers, Acquisitions, and Dispositions of the Exelon 2014 Form 10-K for further information.

(b)

As of March 31, 2015, ComEd’s regulatory asset of $37 million included $5 million related to under-recovered energy costs for non-hourly customers, $25 million associated with transmission costs recoverable through its FERC approved formulate rate, and $7 million of Constellation merger and integration costs to be recovered upon FERC approval. As of March 31, 2015, ComEd’s regulatory liability of $23 million included $5 million related to over-recovered energy costs for hourly customers and $18 million associated with revenues received for renewable energy requirements. As of December 31, 2014, ComEd’s regulatory asset of $33 million included $4 million related to under-recovered energy costs for non-hourly customers, $22 million associated with transmission costs recoverable through its FERC approved formulate rate, and $7 million of Constellation merger and integration costs to be recovered upon FERC approval. As of December 31, 2014, ComEd’s regulatory liability of $19 million included $3 million related to over-recovered energy costs for hourly customers and $16 million associated with revenues received for renewable energy requirements.

(c)

As of March 31, 2015, BGE’s regulatory asset of $4 million included $4 million of Constellation merger and integration costs and $1 million of abandonment costs to be recovered upon FERC approval, partially offset by $1 million related to over-recovered electric energy costs. As of March 31, 2015, BGE’s regulatory liability of $35 million related to $31 million of over-recovered natural gas supply costs and $4 million of over-recovered electric energy costs. As of December 31, 2014, BGE’s regulatory asset of $15 million included $10 million related to under-recovered electric energy costs, $4 million of Constellation merger and integration costs and $1 million of abandonment costs to be recovered upon FERC approval. As of December 31, 2014, BGE’s regulatory liability of $7 million related to over-recovered natural gas supply costs.

(d)

At PECO, includes $42 million related to the DSP program, $34 million related to the over-recovered natural gas costs under the PGC and $8 million related to over-recovered electric transmission costs as of March 31, 2015. As of December 31, 2014, includes $39 million related to the DSP program, $16 million related to the over-recovered electric transmission costs and $3 million related to the over-recovered natural gas costs under the PGC.

(e)

Represents the electric and gas distribution costs recoverable from customers under BGE’s decoupling mechanism. As of March 31, 2015, BGE had a regulatory liability of $19 million related to over-recovered electric revenue decoupling and a regulatory liability of $37 million related to over-recovered natural gas revenue decoupling. As of December 31, 2014, BGE had a regulatory asset of $7 million related to under-recovered electric revenue decoupling and a regulatory liability of $12 million related to over-recovered natural gas revenue decoupling.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Purchase of Receivables Programs (Exelon, ComEd, PECO, and BGE)

ComEd, PECO and BGE are required, under separate legislation and regulations in Illinois, Pennsylvania and Maryland, respectively, to purchase certain receivables from retail electric and natural gas suppliers that participate in the utilities’ consolidated billing. ComEd and BGE purchase receivables at a discount to recover primarily uncollectible accounts expense from the suppliers. PECO is required to purchase receivables at face value and permitted to recover uncollectible accounts expense from customers through its distribution rates. Exelon, ComEd, PECO and BGE do not record unbilled commodity receivables under the POR programs. Purchased billed receivables are classified in Other accounts receivable, net on Exelon’s, ComEd’s, PECO’s and BGE’s Consolidated Balance Sheets. The following tables provide information about the purchased receivables of the Registrants as of March 31, 2015 and December 31, 2014.

 

As of March 31, 2015

   Exelon     ComEd     PECO     BGE  

Purchased receivables(a)

   $ 336      $ 150      $ 91      $ 95   

Allowance for uncollectible accounts(b)

     (51     (25     (10     (16
  

 

 

   

 

 

   

 

 

   

 

 

 

Purchased receivables, net

   $ 285      $ 125      $ 81      $ 79   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

As of December 31, 2014

   Exelon     ComEd     PECO     BGE  

Purchased receivables(a)

   $ 290      $ 139      $ 76      $ 75   

Allowance for uncollectible accounts(b)

     (42     (21     (8     (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Purchased receivables, net

   $ 248      $ 118      $ 68      $ 62   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

PECO’s gas POR program became effective on January 1, 2012 and includes a 1% discount on purchased receivables in order to recover the implementation costs of the program. If the costs are not fully recovered when PECO files its next gas distribution rate case, PECO will propose a mechanism to recover the remaining implementation costs as a distribution charge to low volume transportation customers or apply future discounts on purchased receivables from natural gas suppliers serving those customers.

(b)

For ComEd and BGE, reflects the incremental allowance for uncollectible accounts recorded, which is in addition to the purchase discount. For ComEd, the incremental uncollectible accounts expense is recovered through its Purchase of Receivables with Consolidated Billing (PORCB) tariff.

6.    Investment in Constellation Energy Nuclear Group, LLC (Exelon and Generation)

As a result of the Constellation merger, Generation owns a 50.01% interest in CENG, a nuclear generation business. Generation has historically had various agreements with CENG to purchase power and to provide certain services. For further information regarding these agreements, see Note 25 — Related Party Transactions of the Exelon 2014 Form 10-K.

As a result of the consolidation of CENG on April 1, 2014, there are several additional transactions included in Exelon’s and Generation’s Consolidated Financial Statements between CENG and Exelon’s affiliates that are considered related party transactions to Generation. As further described in Note 25 — Related Party Transactions of the Exelon 2014 Form 10-K, EDF and Generation had a PPA with CENG under which they purchased 15% and 85% (through December 31, 2014), respectively, of the nuclear output owned by CENG that was not sold to third parties under pre-existing PPAs. Beginning January 1, 2015 and continuing through the life of the respective plants, EDF and Generation will purchase 49.99% and 50.01%, respectively, of the nuclear output owned by CENG not subject to other contractual agreements. Beginning April 1, 2014, sales to Generation are eliminated in consolidation. For the three months ended March 31, 2015, Generation had sales to EDF of $182 million. See discussion above and Note 3 — Variable Interest Entities for additional information regarding other transactions between CENG and EDF included within Exelon and Generation’s financial statements and for additional information about the Registrants VIEs.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Accounting for the Consolidation of CENG

For the three months ended March 31, 2014, Generation recorded $19 million of equity in earnings of unconsolidated affiliates related to its investment in CENG and $17 million of revenues from CENG. The book value of Generation’s investment in CENG prior to the consolidation was $1.9 billion, and the book value of the AOCI related to CENG prior to consolidation was $116 million, net of taxes of $77 million.

The transfer of the nuclear operating licenses and the execution of the NOSA on April 1, 2014, resulted in the derecognition of the equity method investment in CENG and the recording of all assets, liabilities and EDF’s noncontrolling interest in CENG at fair value on Exelon’s and Generation’s Consolidated Balance Sheets.

Generation and EDFI also entered into a Put Option Agreement on April 1, 2014, pursuant to which EDFI has the option, exercisable beginning on January 1, 2016 and thereafter until June 30, 2022, to sell its 49.99% interest in CENG to Generation for a fair market value price determined by agreement of the parties, or absent agreement, a third-party arbitration process. The appraisers determining fair market value of EDF’s 49.99% interest in CENG under the Put Option Agreement are instructed to take into account all rights and obligations under the CENG Operating Agreement, including Generation’s rights with respect to any unpaid aggregate preferred distributions and the related return, and the value of Generation’s rights to other distributions. The beginning of the exercise period will be accelerated if Exelon’s affiliates cease to own a majority of CENG and exercise a related right to terminate the NOSA. In addition, under limited circumstances, the period for exercise of the put option may be extended for 18 months.

Due to the Preferred Distribution Rights that Generation has on CENG’s available cash, the earnings attributable to the noncontrolling interest on the Statements of Operations and Comprehensive Income as well as the corresponding adjustment to Noncontrolling interest on the Consolidated Balance Sheets will not be in proportion to Generation’s and EDF’s equity ownership interests. Rather, the attribution will consider Generation’s Preferred Distribution Rights and allocate net income based on each owner’s rights to CENG’s net assets. For the three months ended March 31, 2015, Generation reduced by $4 million the amount of Net income attributable to noncontrolling interests on Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income. As a result of the consolidation, Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income includes CENG’s incremental operating revenues of $197 million and CENG’s net income, prior to any intercompany eliminations and any adjustments for noncontrolling interest, of $98 million during the three months ended March 31, 2015.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

7.    Fair Value of Financial Assets and Liabilities (Exelon, Generation, ComEd, PECO and BGE)

Fair Value of Financial Liabilities Recorded at the Carrying Amount

The following tables present the carrying amounts and fair values of the Registrants’ short-term liabilities, long-term debt, SNF obligation, and trust preferred securities (long-term debt to financing trusts or junior subordinated debentures) as of March 31, 2015 and December 31, 2014:

Exelon

 

     March 31, 2015  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

Short-term liabilities

   $ 312       $ 3       $ 309       $       $ 312   

Long-term debt (including amounts due within one year)

     21,779         1,119         21,486         1,380         23,985   

Long-term debt to financing trusts

     648                         672         672   

SNF obligation

     1,021                 843                 843   

 

     December 31, 2014  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

Short-term liabilities

   $ 463       $ 3       $ 448       $ 12       $ 463   

Long-term debt (including amounts due within one year)

     21,164         1,208         20,417         1,311         22,936   

Long-term debt to financing trusts

     648                         648         648   

SNF obligation

     1,021                 833                 833   

Generation

 

     March 31, 2015  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

Short-term liabilities

   $ 25       $       $ 25       $       $ 25   

Long-term debt (including amounts due within one year)

     8,492                 7,885         1,380         9,265   

SNF obligation

     1,021                 843                 843   

 

     December 31, 2014  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

Short-term liabilities

   $ 36       $       $ 24       $ 12       $ 36   

Long-term debt (including amounts due within one year)

     8,266                 7,511         1,311         8,822   

SNF obligation

     1,021                 833                 833   

ComEd

 

     March 31, 2015  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

Short-term liabilities

   $ 283       $       $ 283       $       $ 283   

Long-term debt (including amounts due within one year)

     6,359                 7,347                 7,347   

Long-term debt to financing trust

     206                         206         206   

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

     December 31, 2014  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

Short-term liabilities

   $ 304       $       $ 304       $       $ 304   

Long-term debt (including amounts due within one year)

     5,958                 6,788                 6,788   

Long-term debt to financing trust

     206                         213         213   

PECO

 

     March 31, 2015  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

Long-term debt (including amounts due within one year)

   $ 2,246       $       $ 2,602       $       $ 2,602   

Long-term debt to financing trusts

     184                         201         201   

 

     December 31, 2014  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

Long-term debt (including amounts due within one year)

   $ 2,246       $       $ 2,537       $       $ 2,537   

Long-term debt to financing trusts

     184                         199         199   

BGE

 

     March 31, 2015  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

Short-term liabilities

   $ 3       $ 3       $       $       $ 3   

Long-term debt (including amounts due within one year)

     1,942                 2,234                 2,234   

Long-term debt to financing trusts

     258                         265         265   

 

     December 31, 2014  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

Short-term liabilities

   $ 123       $ 3       $ 120       $       $ 123   

Long-term debt (including amounts due within one year)

     1,942                 2,178                 2,178   

Long-term debt to financing trusts

     258                         236         236   

Short-Term Liabilities.    The short-term liabilities included in the tables above are comprised of dividends payable (included in other current liabilities) (Level 1), short-term borrowings (Level 2) and third party financing (Level 3). The Registrants’ carrying amounts of the short-term liabilities are representative of fair value because of the short-term nature of these instruments.

Long-Term Debt.    The fair value amounts of Exelon’s taxable debt securities (Level 2) are determined by a valuation model that is based on a conventional discounted cash flow methodology and utilizes assumptions of current market pricing curves. In order to incorporate the credit risk of the Registrants into the discount rates, Exelon obtains pricing (i.e., U.S. Treasury rate plus credit spread) based on trades of existing Exelon debt securities as well as debt securities of other issuers in the electric utility sector with similar credit ratings in both the primary and secondary market, across the Registrants’ debt maturity spectrum. The credit spreads of various

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

tenors obtained from this information are added to the appropriate benchmark U.S. Treasury rates in order to determine the current market yields for the various tenors. The yields are then converted into discount rates of various tenors that are used for discounting the respective cash flows of the same tenor for each bond or note. The fair value of Exelon’s equity units (Level 1) are valued based on publicly traded securities issued by Exelon.

The fair value of Generation’s non-government-backed fixed rate project financing debt, including nuclear fuel procurement contracts, (Level 3) is based on market and quoted prices for its own and other project financing debt with similar risk profiles. Given the low trading volume in the project financing debt market, the price quotes used to determine fair value will reflect certain qualitative factors, such as market conditions, investor demand, new developments that might significantly impact the project cash flows or off-taker credit, and other circumstances related to the project (e.g., political and regulatory environment). The fair value of Generation’s government-backed fixed rate project financing debt (Level 3) is largely based on a discounted cash flow methodology that is similar to the taxable debt securities methodology described above. Due to the lack of market trading data on similar debt, the discount rates are derived based on the original loan interest rate spread to the applicable Treasury rate as well as a current market curve derived from government-backed securities. Variable rate project financing debt resets on a quarterly basis and the carrying value approximates fair value (Level 2).

SNF Obligation.    The carrying amount of Generation’s SNF obligation (Level 2) is derived from a contract with the DOE to provide for disposal of SNF from Generation’s nuclear generating stations. When determining the fair value of the obligation, the future carrying amount of the SNF obligation estimated to be settled in 2025 is calculated by compounding the current book value of the SNF obligation at the 13-week Treasury rate. The compounded obligation amount is discounted back to present value using Generation’s discount rate, which is calculated using the same methodology as described above for the taxable debt securities, and an estimated maturity date of 2025.

Long-Term Debt to Financing Trusts.    Exelon’s long-term debt to financing trusts is valued based on publicly traded securities issued by the financing trusts. Due to low trading volume of these securities, qualitative factors, such as market conditions, investor demand, and circumstances related to each issue, this debt is classified as Level 3.

Recurring Fair Value Measurements

Exelon records the fair value of assets and liabilities in accordance with the hierarchy established by the authoritative guidance for fair value measurements. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

 

   

Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities that the Registrants have the ability to access as of the reporting date.

 

   

Level 2 — inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

 

   

Level 3 — unobservable inputs, such as internally developed pricing models or third-party valuations for the asset or liability due to little or no market activity for the asset or liability.

Transfers in and out of levels are recognized as of the end of the reporting period when the transfer occurred. Given derivatives categorized within Level 1 are valued using exchange-based quoted prices within observable periods, transfers between Level 2 and Level 1 were not material. Transfers into Level 2 from Level 3 generally occur when the contract tenure becomes more observable. Transfers into Level 3 from Level 2 generally occur due to changes in market liquidity or assumptions for certain commodity contracts. There were

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

no transfers between Level 1 and Level 2 during the three months ended March 31, 2015 for cash equivalents, nuclear decommissioning trust fund investments, pledged assets for Zion Station decommissioning, Rabbi trust investments, and deferred compensation obligations.

Exelon and Generation

The following tables present assets and liabilities measured and recorded at fair value on Exelon’s and Generation’s Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy as of March 31, 2015 and December 31, 2014:

 

    Generation     Exelon  

As of March 31, 2015

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Assets

             

Cash equivalents(a)

  $ 220      $      $      $ 220      $ 1,107      $      $      $ 1,107   

Nuclear decommissioning trust fund investments

             

Cash equivalents

    224        40               264        224        40               264   

Equity

             

Domestic

    2,459        2,227               4,686        2,459        2,227               4,686   

Foreign

    639                      639        639                      639   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity funds subtotal

    3,098        2,227               5,325        3,098        2,227               5,325   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed income

             

Corporate debt

           1,911        248        2,159               1,911        248        2,159   

U.S. Treasury and agencies

    1,201                      1,201        1,201                      1,201   

Foreign governments

           89               89               89               89   

State and municipal debt

           423               423               423               423   

Other

           488               488               488               488   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed income subtotal

    1,201        2,911        248        4,360        1,201        2,911        248        4,360   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Middle market lending

                  363        363                      363        363   

Private Equity

                  95        95                      95        95   

Real Estate

                  9        9                      9        9   

Other

           323               323               323               323   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nuclear decommissioning trust fund investments subtotal(b)

    4,523        5,501        715        10,739        4,523        5,501        715        10,739   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pledged assets for Zion Station decommissioning

               

Cash equivalents

           19               19               19               19   

Equities

    6        1               7        6        1               7   

Fixed income

               

U.S. Treasury and agencies

    2        3               5        2        3               5   

Corporate debt

           84               84               84               84   

State and municipal debt

           10               10               10               10   

Other

           4               4               4               4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed income subtotal

    2        101               103        2        101               103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Middle market lending

                  178        178                      178        178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pledged assets for Zion Station decommissioning subtotal(c)

    8        121        178        307        8        121        178        307   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Rabbi trust investments in mutual funds(d)(e)

    16                      16        48                      48   

Commodity derivative assets

               

Economic hedges

    1,510        3,554        1,917        6,981        1,510        3,554        1,917        6,981   

Proprietary trading

    176        286        39        501        176        286        39        501   

Effect of netting and allocation of collateral(f)

    (1,899     (2,849     (740     (5,488     (1,899     (2,849     (740     (5,488
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commodity derivative assets subtotal

    (213     991        1,216        1,994        (213     991        1,216        1,994   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate and foreign currency derivative assets

               

Derivatives designated as hedging instruments

                                       32               32   

Economic hedges

           27               27               29               29   

Proprietary trading

    18        1               19        18        1               19   

Effect of netting and allocation of collateral

    (8     (5            (13     (8     (36            (44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate and foreign currency derivative assets subtotal

    10        23               33        10        26               36   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other investments

                  3        3        2               3        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    4,564        6,636        2,112        13,312        5,485        6,639        2,112        14,236   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

    Generation     Exelon  

As of March 31, 2015

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Liabilities

               

Commodity derivative liabilities

               

Economic hedges

    (2,126     (3,370     (1,025     (6,521     (2,126     (3,370     (1,266     (6,762

Proprietary trading

    (169     (295     (50     (514     (169     (295     (50     (514

Effect of netting and allocation of collateral(f)

    2,324        3,585        925        6,834        2,324        3,585        925        6,834   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commodity derivative liabilities subtotal

    29        (80     (150     (201     29        (80     (391     (442
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate and foreign currency derivative liabilities

               

Derivatives designated as hedging instruments

           (17            (17            (17            (17

Economic hedges

           (6            (6            (186            (186

Proprietary trading

    (1     (14            (15     (1     (14            (15

Effect of netting and allocation of collateral

    15        6               21        15        37               52   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate and foreign currency derivative liabilities subtotal

    14        (31            (17     14        (180            (166
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred compensation obligation

           (30            (30            (103            (103
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    43        (141     (150     (248     43        (363     (391     (711
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net assets

  $ 4,607      $ 6,495      $ 1,962      $ 13,064      $ 5,528      $ 6,276      $ 1,721      $ 13,525   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Generation     Exelon  

As of December 31, 2014

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Assets

               

Cash equivalents(a)

  $ 405      $      $      $ 405      $ 1,119      $      $      $ 1,119   

Nuclear decommissioning trust fund investments
Cash equivalents

    208        37               245        208        37               245   

Equity

               

Domestic

    2,423        2,207               4,630        2,423        2,207               4,630   

Foreign

    612                      612        612                      612   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity funds subtotal

    3,035        2,207               5,242        3,035        2,207               5,242   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed income

               

Corporate debt

           2,023        239        2,262               2,023        239        2,262   

U.S. Treasury and agencies

    996                      996        996                      996   

Foreign governments

           95               95               95               95   

State and municipal debt

           438               438               438               438   

Other

           511               511               511               511   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed income subtotal

    996        3,067        239        4,302        996        3,067        239        4,302   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Middle market lending

                  366        366                      366        366   

Private Equity

                  83        83                      83        83   

Real Estate

                  3        3                      3        3   

Other

           301               301               301               301   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nuclear decommissioning trust fund investments subtotal(b)

    4,239        5,612        691        10,542        4,239        5,612        691        10,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pledged assets for Zion Station decommissioning

               

Cash equivalents

           15               15               15               15   

Equities

    6        1               7        6        1               7   

Fixed income

               

U.S. Treasury and agencies

    5        3               8        5        3               8   

Corporate debt

           89               89               89               89   

State and municipal debt

           10               10               10               10   

Other

           3               3               3               3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed income subtotal

    5        105               110        5        105               110   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Middle market lending

                  184        184                      184        184   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pledged assets for Zion Station decommissioning subtotal(c)

    11        121        184        316        11        121        184        316   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Rabbi trust investments(d)

               

Cash equivalents

                                1                      1   

Mutual funds(e)

    16                      16        46                      46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Rabbi trust investments subtotal

    16                      16        47                      47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commodity derivative assets

               

Economic hedges

    1,667        3,465        1,681        6,813        1,667        3,465        1,681        6,813   

Proprietary trading

    201        284        27        512        201        284        27        512   

Effect of netting and allocation of collateral(f)

    (1,982     (2,757     (557     (5,296     (1,982     (2,757     (557     (5,296
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commodity derivative assets subtotal

    (114     992        1,151        2,029        (114     992        1,151        2,029   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

    Generation     Exelon  

As of December 31, 2014

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Interest rate and foreign currency derivative assets

               

Derivatives designated as hedging instruments

           8               8               31               31   

Economic hedges

           12               12               13               13   

Proprietary trading

    18        9               27        18        9               27   

Effect of netting and allocation of collateral

    (17     (12            (29     (17     (31            (48
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate and foreign currency derivative assets subtotal

    1        17               18        1        22               23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other investments

                  3        3        2               3        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    4,558        6,742        2,029        13,329        5,305        6,747        2,029        14,081   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

               

Commodity derivative liabilities

               

Economic hedges

    (2,241     (3,458     (788     (6,487     (2,241     (3,458     (995     (6,694

Proprietary trading

    (195     (295     (42     (532     (195     (295     (42     (532

Effect of netting and allocation of collateral(f)

    2,416        3,557        729        6,702        2,416        3,557        729        6,702   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commodity derivative liabilities subtotal

    (20     (196     (101     (317     (20     (196     (308     (524
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate and foreign currency derivative liabilities

               

Derivatives designated as hedging instruments

           (12            (12            (41            (41

Economic hedges

           (2            (2            (103            (103

Proprietary trading

    (14     (9            (23     (14     (9            (23

Effect of netting and allocation of collateral

    25        10               35        25        29               54   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate and foreign currency derivative liabilities subtotal

    11        (13            (2     11        (124            (113

Deferred compensation obligation

           (31            (31            (107            (107
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    (9     (240     (101     (350     (9     (427     (308     (744
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net assets

  $ 4,549      $ 6,502      $ 1,928      $ 12,979      $ 5,296      $ 6,320      $ 1,721      $ 13,337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Excludes certain cash equivalents considered to be held-to-maturity and not reported at fair value.

(b)

Excludes net (liabilities) of $(27) million and $(5) million at March 31, 2015 and December 31, 2014, respectively. These items consist of receivables related to pending securities sales, interest and dividend receivables, and payables related to pending securities purchases.

(c)

Excludes net assets of $1 million and $3 million at March 31, 2015 and December 31, 2014, respectively. These items consist of receivables related to pending securities sales, interest and dividend receivables, and payables related to pending securities purchases.

(d)

Excludes $36 million and $35 million of cash surrender value of life insurance investment at March 31, 2015 and December 31, 2014, respectively, at Exelon Consolidated. Excludes $12 million and $11 million and of cash surrender value of life insurance investment at March 31, 2015 and December 31, 2014, respectively, at Generation.

(e)

The mutual funds held by the Rabbi trusts at Exelon include $47 million related to deferred compensation and $1 million related to Supplemental Executive Retirement Plan at March 31, 2015, and $45 million related to deferred compensation and $1 million related to Supplemental Executive Retirement Plan at December 31, 2014.

(f)

Includes collateral postings (received) to/from counterparties. Collateral posted (received) to/from counterparties, net of collateral paid to counterparties, totaled $425 million, $736 million and $185 million allocated to Level 1, Level 2 and Level 3 mark-to-market derivatives, respectively, as of March 31, 2015. Collateral posted (received) from counterparties, net of collateral paid to counterparties, totaled $434 million, $800 million and $172 million allocated to Level 1, Level 2 and Level 3 mark-to-market derivatives, respectively, as of December 31, 2014.

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

ComEd, PECO and BGE

The following tables present assets and liabilities measured and recorded at fair value on the utility Registrants’ Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy as of March 31, 2015 and December 31, 2014:

 

    ComEd     PECO     BGE  

As of March 31, 2015

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Assets

                       

Cash equivalents

  $ 67      $      $      $ 67      $ 5      $      $      $ 5      $ 75      $      $      $ 75   

Rabbi trust investments in mutual funds(a)

                                9                      9        5                      5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    67                      67        14                      14        80                      80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

                       

Deferred compensation obligation

           (8            (8            (14            (14            (4            (4

Mark-to-market derivative liabilities(b)

                  (241     (241                                                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

           (8     (241     (249            (14            (14            (4            (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net assets (liabilities)

  $ 67      $ (8   $ (241   $ (182   $ 14      $ (14   $      $      $ 80      $ (4   $      $ 76   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    ComEd     PECO     BGE  

As of December 31, 2014

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Assets

                       

Cash equivalents

  $ 25      $      $      $ 25      $ 12      $      $      $ 12      $ 103      $      $      $ 103   

Rabbi trust investments in mutual funds(a)

                                9                      9        5                    $ 5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    25                      25        21                      21        108                      108   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

                       

Deferred compensation obligation

           (8            (8            (15            (15            (5            (5

Mark-to-market derivative liabilities(b)

                  (207     (207                                                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

           (8     (207     (215            (15            (15            (5            (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net assets (liabilities)

  $ 25      $ (8   $ (207   $ (190   $ 21      $ (15   $      $ 6      $ 108      $ (5   $      $ 103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

At PECO, excludes $14 million of the cash surrender value of life insurance investments at both March 31, 2015 and December 31, 2014.

(b)

The Level 3 balance includes the current and noncurrent liability of $20 million and $221 million at March 31, 2015, respectively, and $20 million and $187 million at December 31, 2014, respectively, related to floating-to-fixed energy swap contracts with unaffiliated suppliers.

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

The following table presents the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis during the three months ended March 31, 2015 and 2014:

 

    Generation     ComEd           Exelon  

Three Months Ended

March 31, 2015

  Nuclear
Decommissioning
Trust Fund
Investments
    Pledged Assets
for Zion Station
Decommissioning
    Mark-to-
Market
Derivatives
    Other
Investments
    Total
Generation
    Mark-to-
Market
Derivatives(b)
    Eliminated in
Consolidation
    Total  

Balance as of December 31, 2014

  $ 691      $ 184      $ 1,050      $ 3      $ 1,928      $ (207   $      $ 1,721   

Total realized / unrealized gains (losses)

               

Included in net income

    2               (32 )(a)             (30                   (30

Included in noncurrent payables to affiliates

    8                             8               (8       

Included in payable for Zion Station decommissioning

           3                      3                      3   

Included in regulatory assets

                                       (34     8        (26

Change in collateral

                  12               12                      12   

Purchases, sales, issuances and settlements

                    

Purchases

    47        5        41               93                      93   

Sales

    (8     (14                   (22                   (22

Settlements

    (29                          (29                   (29

Transfers into Level 3

    4                             4                      4   

Transfers out of Level 3

                  (5            (5                   (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2015

  $ 715      $ 178      $ 1,066      $ 3      $ 1,962      $ (241   $      $ 1,721   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amount of total gains included in income attributed to the change in unrealized gains related to assets and liabilities held for the three months ended March 31, 2015

  $ 1      $      $ 180      $      $ 181      $      $      $ 181   

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

    Generation     ComEd           Exelon  

Three Months Ended

March 31, 2014

  Nuclear
Decommissioning
Trust Fund
Investments
    Pledged Assets
for Zion Station
Decommissioning
    Mark-to-
Market
Derivatives
    Other
Investments
    Total
Generation
    Mark-to-
Market
Derivatives(b)
    Eliminated in
Consolidation
    Total  

Balance as of December 31, 2013

  $ 350      $ 112      $ 465      $ 15      $ 942      $ (193   $      $ 749   

Total realized / unrealized gains (losses)

               

Included in net income

    1               (312 )(a)             (311                   (311

Included in noncurrent payables to affiliates

    3                             3               (3       

Included in payable for Zion Station decommissioning

           (1                   (1                   (1

Included in regulatory assets

                                  25        3        28   

Change in collateral

                  144               144                      144   

Purchases, sales, issuances and settlements

               

Purchases

    139        30        10        2        181                      181   

Sales

    (1     (4     (2            (7                   (7

Settlements

    (6                          (6                   (6

Transfers into Level 3

                  (26            (26                   (26

Transfers out of Level 3

                  8        (7     1                      1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2014

  $ 486      $ 137      $ 287      $ 10      $ 920      $ (168   $      $ 752   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amount of total gains (losses) included in income attributed to the change in unrealized gains (losses) related to assets and liabilities held for the nine months ended March 31, 2014

  $      $      $ (446   $      $ (446   $      $      $ (446

 

(a)

Includes the reclassification of $212 million and $(134) million of realized gains (losses) due to the settlement of derivative contracts for the three months ended March 31, 2015 and 2014, respectively.

(b)

Includes $36 million of decreases in fair value and realized losses due to settlements of $2 million recorded in purchased power expense associated with floating-to-fixed energy swap contracts with unaffiliated suppliers for the three months ended March 31, 2015. Includes $30 million of increases in fair value and realized gains due to settlements of $5 million for the three months ended March 31, 2014.

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

The following tables present the income statement classification of the total realized and unrealized gains (losses) included in income for Level 3 assets and liabilities measured at fair value on a recurring basis during the three months ended March 31, 2015 and 2014:

 

    Generation     Exelon  
    Operating
Revenues
    Purchased
Power and
Fuel
    Other,  net(a)     Operating
Revenues
    Purchased
Power and
Fuel
    Other,  net(a)  

Total gains (losses) included in net income for the three months ended March 31, 2015

    (10     (22     2        (10     (22     2   

Change in the unrealized gains (losses) relating to assets and liabilities held for the three months ended March 31, 2015

    169        11        1        169        11        1   

Total gains (losses) included in net income for the three months ended March 31, 2014

  $ (268   $ (44   $ 1      $ (268   $ (44   $ 1   

Change in the unrealized gains (losses) relating to assets and liabilities held for the three months ended March 31, 2014

    (425     (21            (425     (21       

 

(a)

Other, net activity consists of realized and unrealized gains (losses) included in income for the NDT funds held by Generation.

Valuation Techniques Used to Determine Fair Value

The following describes the valuation techniques used to measure the fair value of the assets and liabilities shown in the tables above.

Cash Equivalents (Exelon, Generation, ComEd, PECO and BGE).    The Registrants’ cash equivalents include investments with maturities of three months or less when purchased. The cash equivalents shown in the fair value tables are comprised of investments in mutual and money market funds. The fair values of the shares of these funds are based on observable market prices and, therefore, have been categorized in Level 1 in the fair value hierarchy.

Nuclear Decommissioning Trust Fund Investments and Pledged Assets for Zion Station Decommissioning (Exelon and Generation).    The trust fund investments have been established to satisfy Generation’s and CENG’s nuclear decommissioning obligations as required by the NRC. The NDT funds hold debt and equity securities directly and indirectly through commingled funds and mutual funds, which are included in Equities, Fixed Income and Other. Generation’s and CENG’s investment policies place limitations on the types and investment grade ratings of the securities that may be held by the trusts. These policies limit the trust funds’ exposures to investments in highly illiquid markets and other alternative investments. Investments with maturities of three months or less when purchased, including certain short-term fixed income securities are considered cash equivalents and included in the recurring fair value measurements hierarchy as Level 1 or Level 2.

With respect to individually held equity securities, which are included in Domestic or Foreign equities, the trustees obtain prices from pricing services, whose prices are obtained from direct feeds from market exchanges, which Generation is able to independently corroborate. The fair values of equity securities held directly by the trust funds are based on quoted prices in active markets and are categorized in Level 1. Equity securities held individually are primarily traded on the New York Stock Exchange and NASDAQ-Global Select Market, which contain only actively traded securities due to the volume trading requirements imposed by these exchanges.

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

For fixed income securities, multiple prices from pricing services are obtained whenever possible, which enables cross-provider validations in addition to checks for unusual daily movements. A primary price source is identified based on asset type, class or issue for each security. The trustees monitor prices supplied by pricing services and may use a supplemental price source or change the primary price source of a given security if the portfolio managers challenge an assigned price and the trustees determine that another price source is considered to be preferable. Generation has obtained an understanding of how these prices are derived, including the nature and observability of the inputs used in deriving such prices. Additionally, Generation selectively corroborates the fair values of securities by comparison to other market-based price sources. U.S. Treasury securities are categorized as Level 1 because they trade in a highly liquid and transparent market. The fair values of fixed income securities, excluding U.S. Treasury securities, are based on evaluated prices that reflect observable market information, such as actual trade information or similar securities, adjusted for observable differences and are categorized in Level 2. The fair values of private placement fixed income securities, which are included in Corporate debt, are determined using a third party valuation that contains significant unobservable inputs and are categorized in Level 3.

Equity, balanced and fixed income commingled funds and fixed income mutual funds are maintained by investment companies and hold certain investments in accordance with a stated set of fund objectives. The fair values of fixed income commingled and mutual funds held within the trust funds, which generally hold short-term fixed income securities and are not subject to restrictions regarding the purchase or sale of shares, are derived from observable prices. The objectives of the remaining equity commingled funds in which Exelon, Generation, and CENG invest primarily seek to track the performance of certain equity indices by purchasing equity securities to replicate the capitalization and characteristics of the indices. Commingled and mutual funds are categorized in Level 2 because the fair value of the funds are based on NAVs per fund share (the unit of account), primarily derived from the quoted prices in active markets on the underlying equity securities.

Middle market lending are investments in loans or managed funds which invest in private companies. Generation elected the fair value option for its investments in certain limited partnerships that invest in middle market lending managed funds. The fair value of these loans is determined using a combination of valuation models including cost models, market models, and income models. Investments in middle market lending are categorized as Level 3 because the fair value of these securities is based largely on inputs that are unobservable and utilize complex valuation models. Investments in middle market lending typically cannot be redeemed until maturity of the term loan.

Private equity investments include investments in operating companies that are not publicly traded on a stock exchange. Private equity valuations are reported by the fund manager and are based on the valuation of the underlying investments, which include inputs such as cost, operating results, discounted future cash flows and market based comparable data. Since these valuation inputs are not highly observable, private equity investments have been categorized as Level 3.

As of March 31, 2015, Generation has outstanding commitments to invest in middle market lending, corporate debt securities, private equity investments, and real estate investments of approximately $265 million. These commitments will be funded by Generation’s existing nuclear decommissioning trust funds.

See Note 12—Nuclear Decommissioning for further discussion on the NDT fund investments.

Rabbi Trust Investments (Exelon, Generation, ComEd, PECO and BGE).    The Rabbi trusts were established to hold assets related to deferred compensation plans existing for certain active and retired members of Exelon’s executive management and directors. The Rabbi trusts assets are included in investments in the Registrants’ Consolidated Balance Sheets and consist primarily of mutual funds and life insurance policies. The

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

mutual funds are maintained by investment companies and hold certain investments in accordance with a stated set of fund objectives, which are consistent with Exelon’s overall investment strategy. Mutual funds are publicly quoted and have been categorized as Level 1 given the clear observability of the prices. The life insurance policies are valued using the cash surrender value of the policies, which is provided by a third party. The cash surrender value inputs are not observable.

Mark-to-Market Derivatives (Exelon, Generation, and ComEd).    Derivative contracts are traded in both exchange-based and non-exchange-based markets. Exchange-based derivatives that are valued using unadjusted quoted prices in active markets are categorized in Level 1 in the fair value hierarchy. Certain derivatives’ pricing is verified using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask, mid-point prices and are obtained from sources that the Registrants believe provide the most liquid market for the commodity. The price quotations are reviewed and corroborated to ensure the prices are observable and representative of an orderly transaction between market participants. This includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration. The remainder of derivative contracts are valued using the Black model, an industry standard option valuation model. The Black model takes into account inputs such as contract terms, including maturity, and market parameters, including assumptions of the future prices of energy, interest rates, volatility, credit worthiness and credit spread. For derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs are generally observable. Such instruments are categorized in Level 2. The Registrants’ derivatives are predominately at liquid trading points. For derivatives that trade in less liquid markets with limited pricing information model inputs generally would include both observable and unobservable inputs. These valuations may include an estimated basis adjustment from an illiquid trading point to a liquid trading point for which active price quotations are available. Such instruments are categorized in Level 3.

Exelon may utilize fixed-to-floating interest rate swaps, which are typically designated as fair value hedges, as a means to achieve its targeted level of variable-rate debt as a percent of total debt. In addition, the Registrants may utilize interest rate derivatives to lock in interest rate levels in anticipation of future financings. These interest rate derivatives are typically designated as cash flow hedges. Exelon determines the current fair value by calculating the net present value of expected payments and receipts under the swap agreement, based on and discounted by the market’s expectation of future interest rates. Additional inputs to the net present value calculation may include the contract terms, counterparty credit risk and other market parameters. As these inputs are based on observable data and valuations of similar instruments, the interest rate swaps are categorized in Level 2 in the fair value hierarchy. See Note 8—Derivative Financial Instruments for further discussion on mark-to-market derivatives.

Deferred Compensation Obligations (Exelon, Generation, ComEd, PECO and BGE).    The Registrants’ deferred compensation plans allow participants to defer certain cash compensation into a notional investment account. The Registrants include such plans in other current and noncurrent liabilities in their Consolidated Balance Sheets. The value of the Registrants’ deferred compensation obligations is based on the market value of the participants’ notional investment accounts. The underlying notional investments are comprised primarily of equities, mutual funds, commingled funds, and fixed income securities which are based on directly and indirectly observable market prices. Since the deferred compensation obligations themselves are not exchanged in an active market, they are categorized as Level 2 in the fair value hierarchy.

Additional Information Regarding Level 3 Fair Value Measurements (Exelon, Generation, ComEd)

Mark-to-Market Derivatives (Exelon, Generation, ComEd).    For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire

 

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valuation is categorized in Level 3. This includes derivatives valued using indicative price quotations whose contract tenure extends into unobservable periods. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 as the model inputs generally are not observable. Exelon’s RMC approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval, and the monitoring and reporting of risk exposures. The RMC is chaired by the chief risk officer and includes the chief financial officer, corporate controller, general counsel, treasurer, vice president of strategy, vice president of audit services and officers representing Exelon’s business units. The RMC reports to the Exelon Board of Directors on the scope of the risk management activities and is responsible for approving all valuation procedures at Exelon. Forward price curves for the power market utilized by the front office to manage the portfolio, are reviewed and verified by the middle office, and used for financial reporting by the back office. The Registrants consider credit and nonperformance risk in the valuation of derivative contracts categorized in Level 2 and 3, including both historical and current market data in its assessment of credit and nonperformance risk by counterparty. Due to master netting agreements and collateral posting requirements, the impacts of credit and nonperformance risk were not material to the financial statements.

Disclosed below is detail surrounding the Registrants’ significant Level 3 valuations. The calculated fair value includes marketability discounts for margining provisions and other attributes. Generation’s Level 3 balance generally consists of forward sales and purchases of power and natural gas, coal purchases, certain transmission congestion contracts, and project financing debt. Generation utilizes various inputs and factors including market data and assumptions that market participants would use in pricing assets or liabilities as well as assumptions about the risks inherent in the inputs to the valuation technique. The inputs and factors include forward commodity prices, commodity price volatility, contractual volumes, delivery location, interest rates, credit quality of counterparties and credit enhancements.

For commodity derivatives, the primary input to the valuation models is the forward commodity price curve for each instrument. Forward commodity price curves are derived by risk management for liquid locations and by the traders and portfolio managers for illiquid locations. All locations are reviewed and verified by risk management considering published exchange transaction prices, executed bilateral transactions, broker quotes, and other observable or public data sources. The relevant forward commodity curve used to value each of the derivatives depends on a number of factors, including commodity type, delivery location, and delivery period. Price volatility varies by commodity and location. When appropriate, Generation discounts future cash flows using risk free interest rates with adjustments to reflect the credit quality of each counterparty for assets and Generation’s own credit quality for liabilities. The level of observability of a forward commodity price varies generally due to the delivery location and delivery period. Certain delivery locations including PJM West Hub (for power) and Henry Hub (for natural gas) are more liquid and prices are observable for up to three years in the future. The observability period of volatility is generally shorter than the underlying power curve used in option valuations. The forward curve for a less liquid location is estimated by using the forward curve from the liquid location and applying a spread to represent the cost to transport the commodity to the delivery location. This spread does not typically represent a majority of the instrument’s market price. As a result, the change in fair value is closely tied to liquid market movements and not a change in the applied spread. The change in fair value associated with a change in the spread is generally immaterial. An average spread calculated across all Level 3 power and gas delivery locations is approximately $3.15 and $0.31 for power and natural gas, respectively. Many of the commodity derivatives are short term in nature and thus a majority of the fair value may be based on observable inputs even though the contract as a whole must be classified as Level 3. See ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK for information regarding the maturity by year of the Registrant’s mark-to-market derivative assets and liabilities.

 

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On December 17, 2010, ComEd entered into several 20-year floating to fixed energy swap contracts with unaffiliated suppliers for the procurement of long-term renewable energy and associated RECs. See Note 8 —Derivative Financial Instruments for more information. The fair value of these swaps has been designated as a Level 3 valuation due to the long tenure of the positions and internal modeling assumptions. The modeling assumptions include using natural gas heat rates to project long term forward power curves adjusted by a renewable factor that incorporates time of day and seasonality factors to reflect accurate renewable energy pricing. In addition, marketability reserves are applied to the positions based on the tenor and supplier risk. The table below discloses the significant inputs to the forward curve used to value these positions.

 

Type of trade

   Fair Value at
March 31,
2015
    Valuation
Technique
   Unobservable
Input
  Range

Mark-to-market derivatives — Economic Hedges (Generation)(a)(c)

   $ 892      Discounted

Cash Flow

   Forward power
price
  $17 - $121(d)
        Forward gas
price
  $1.68 - $13.69(d)
     Option Model    Volatility
percentage
  8% - 172%

Mark-to-market derivatives — Proprietary trading (Generation)(a)(c)

   $ (11   Discounted

Cash Flow

   Forward power
price
  $17 -  $95(d)

Mark-to-market derivatives (ComEd)

   $ (241   Discounted

Cash Flow

   Forward heat
rate
(b)
  8x - 9x
        Marketability
reserve
  3.5% - 8%
        Renewable
factor
  86% - 126%

 

(a)

The valuation techniques, unobservable inputs and ranges are the same for the asset and liability positions.

(b)

Quoted forward natural gas rates are utilized to project the forward power curve for the delivery of energy at specified future dates. The natural gas curve is extrapolated beyond its observable period to the end of the contract’s delivery.

(c)

The fair values do not include cash collateral held on level three positions of $185 million as of March 31, 2015.

(d)

The upper ends of the ranges are driven by the winter power and gas prices in the New England region. Without the New England region, the upper ends of the ranges for power and gas economic hedges would be approximately $107 and $8.19, respectively, and would be approximately $55 for power proprietary trading.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Type of trade

   Fair Value at
December 31,
2014
    Valuation
Technique
   Unobservable
Input
  Range

Mark-to-market derivatives — Economic Hedges (Generation)(a)(c)

   $ 893      Discounted

Cash Flow

   Forward power
price
  $15 -  $120(d)
        Forward gas
price
  $1.52 - $14.02(d)
     Option
Model
   Volatility
percentage
  8% — 257%

Mark-to-market derivatives — Proprietary trading (Generation)(a)(c)

   $ (15   Discounted

Cash Flow

   Forward power
price
  $15 -  $117(d)

Mark-to-market derivatives (ComEd)

   $ (207   Discounted

Cash Flow

   Forward heat
rate
(b)
  8x - 9x
        Marketability
reserve
  3.5% - 8%
        Renewable
factor
  86% - 126%

 

(a)

The valuation techniques, unobservable inputs and ranges are the same for the asset and liability positions.

(b)

Quoted forward natural gas rates are utilized to project the forward power curve for the delivery of energy at specified future dates. The natural gas curve is extrapolated beyond its observable period to the end of the contract’s delivery.

(c)

The fair values do not include cash collateral held on level three positions of $172 million as of December 31, 2014.

(d)

The upper ends of the ranges are driven by the winter power and gas prices in the New England region. Without the New England region, the upper ends of the ranges for power and gas would be approximately $97 and $8.14, respectively, and would be approximately $76 for power proprietary trading.

The inputs listed above would have a direct impact on the fair values of the above instruments if they were adjusted. The significant unobservable inputs used in the fair value measurement of Generation’s commodity derivatives are forward commodity prices and for options is price volatility. Increases (decreases) in the forward commodity price in isolation would result in significantly higher (lower) fair values for long positions (contracts that give Generation the obligation or option to purchase a commodity), with offsetting impacts to short positions (contracts that give Generation the obligation or right to sell a commodity). Increases (decreases) in volatility would increase (decrease) the value for the holder of the option (writer of the option). Generally, a change in the estimate of forward commodity prices is unrelated to a change in the estimate of volatility of prices. An increase to the reserves listed above would decrease the fair value of the positions. An increase to the heat rate or renewable factors would increase the fair value accordingly. Generally, interrelationships exist between market prices of natural gas and power. As such, an increase in natural gas pricing would potentially have a similar impact on forward power markets.

Nuclear Decommissioning Trust Fund Investments and Pledged Assets for Zion Station Decommissioning (Exelon and Generation).    For middle market lending, certain corporate debt securities, and private equity investments, the fair value is determined using a combination of valuation models including cost models, market models and income models. The valuation estimates are based on valuations of comparable companies, discounting the forecasted cash flows of the portfolio company, estimating the liquidation or collateral value of the portfolio company or its assets, considering offers from third parties to buy the portfolio company, its historical and projected financial results, as well as other factors that may impact value. Significant judgment is required in the application of discounts or premiums applied to the prices of comparable companies for factors such as size, marketability, credit risk and relative performance.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Because Generation relies on third-party fund managers to develop the quantitative unobservable inputs without adjustment for the valuations of its Level 3 investments, quantitative information about significant unobservable inputs used in valuing these investments is not reasonably available to Generation. This includes information regarding the sensitivity of the fair values to changes in the unobservable inputs. Generation gains an understanding of the fund managers’ inputs and assumptions used in preparing the valuations. Generation performed procedures to assess the reasonableness of the valuations. For a sample of its Level 3 investments, Generation reviewed independent valuations and reviewed the assumptions in the detailed pricing models used by the fund managers.

8.    Derivative Financial Instruments (Exelon, Generation, ComEd, PECO and BGE)

The Registrants use derivative instruments to manage commodity price risk and interest rate risk related to ongoing business operations.

Commodity Price Risk (Exelon, Generation, ComEd, PECO and BGE)

To the extent the amount of energy Generation produces differs from the amount of energy it has contracted to sell, Exelon and Generation are exposed to market fluctuations in the prices of electricity, fossil fuels and other commodities. Each of the Registrants employ established policies and procedures to manage their risks associated with market fluctuations in commodity prices by entering into physical and financial derivative contracts, including swaps, futures, forwards, options and short-term and long-term commitments to purchase and sell energy and energy-related products. The Registrants believe these instruments, which are classified as either economic hedges or non-derivatives, mitigate exposure to fluctuations in commodity prices.

Derivative accounting guidance requires that derivative instruments be recognized as either assets or liabilities at fair value, with changes in fair value of the derivative recognized in earnings each period. Other accounting treatments are available through special election and designation, provided they meet specific, restrictive criteria both at the time of designation and on an ongoing basis. These alternative permissible accounting treatments include normal purchase normal sale (NPNS), cash flow hedge, and fair value hedge. For commodity transactions, Generation no longer utilizes the special election provided for by the cash flow hedge designation and de-designated all of its existing cash flow hedges prior to the Constellation merger. Because the underlying forecasted transactions remained probable, the fair value of the effective portion of these cash flow hedges was frozen in Accumulated OCI and was reclassified to results of operations when the forecasted purchase or sale of the energy commodity occurred. The effect of this decision is that all derivative economic hedges related to commodities are recorded at fair value through earnings for the combined company, referred to as economic hedges in the following tables. The Registrants have applied the NPNS scope exception to certain derivative contracts for the forward sale of generation, power procurement agreements, and natural gas supply agreements. Non-derivative contracts for access to additional generation and certain sales to load-serving entities are accounted for primarily under the accrual method of accounting, which is further discussed in Note 22 — Commitments and Contingencies of the Exelon 2014 Form 10-K. Additionally, Generation is exposed to certain market risks through its proprietary trading activities. The proprietary trading activities are a complement to Generation’s energy marketing portfolio but represent a small portion of Generation’s overall energy marketing activities.

Economic Hedging.    The Registrants are exposed to commodity price risk primarily relating to changes in the market price of electricity, fossil fuels, and other commodities associated with price movements resulting from changes in supply and demand, fuel costs, market liquidity, weather conditions, governmental regulatory and environmental policies, and other factors. Within Exelon, Generation has the most exposure to commodity price risk. As such, Generation uses a variety of derivative and non-derivative instruments to manage the

 

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commodity price risk of its electric generation facilities, including power and gas sales, fuel and energy purchases, natural gas transportation and pipeline capacity agreements and other energy-related products marketed and purchased. In order to manage these risks, Generation may enter into fixed-price derivative or non-derivative contracts to hedge the variability in future cash flows from forecasted sales of energy and gas and purchases of fuel and energy. The objectives for entering into such hedges include fixing the price for a portion of anticipated future electricity sales at a level that provides an acceptable return on electric generation operations, fixing the price of a portion of anticipated fuel purchases for the operation of power plants, and fixing the price for a portion of anticipated energy purchases to supply load-serving customers. The portion of forecasted transactions hedged may vary based upon management’s policies and hedging objectives, the market, weather conditions, operational and other factors. Generation is also exposed to differences between the locational settlement prices of certain economic hedges and the hedged generating units. This price difference is actively managed through other instruments which include derivative congestion products, whose changes in fair value are recognized in earnings each period, and auction revenue rights, which are accounted for on an accrual basis.

In general, increases and decreases in forward market prices have a positive and negative impact, respectively, on Generation’s owned and contracted generation positions that have not been hedged. Generation hedges commodity price risk on a ratable basis over three-year periods. As of March 31, 2015, the proportion of expected generation hedged is for the major reportable segments was 94%-97%, 67%-70%, and 37%-40% for 2015, 2016, and 2017, respectively. The percentage of expected generation hedged is the amount of equivalent sales divided by the expected generation. Expected generation is the volume of energy that best represents our commodity position in energy markets from owned or contracted for capacity based upon a simulated dispatch model that makes assumptions regarding future market conditions, which are calibrated to market quotes for power, fuel, load following products, and options. Equivalent sales represent all hedging products, which include economic hedges and certain non-derivative contracts including Generation’s sales to ComEd, PECO and BGE to serve their retail load.

On December 17, 2010, ComEd entered into several 20-year floating-to-fixed energy swap contracts with unaffiliated suppliers for the procurement of long-term renewable energy and associated RECs. Delivery under the contracts began in June 2012. Pursuant to the ICC’s Order on December 19, 2012, ComEd’s commitments under the existing long-term contracts for energy and associated RECs were reduced for the June 2013 through May 2014 procurement period. In addition, the ICC’s December 18, 2013 Order approved the reduction of ComEd’s commitments under those contracts for the June 2014 through May 2015 procurement period, and the amount of the reductions was approved in March 2014. These contracts are designed to lock in a portion of the long-term commodity price risk resulting from the renewable energy resource procurement requirements in the Illinois Settlement Legislation. ComEd has not elected hedge accounting for these derivative financial instruments. ComEd records the fair value of the swap contracts on its balance sheet. Because ComEd receives full cost recovery for energy procurement and related costs from retail customers, the change in fair value each period is recorded by ComEd as a regulatory asset or liability. See Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for additional information.

PECO has contracts to procure electric supply that were executed through the competitive procurement process outlined in its PAPUC-approved DSP Programs, which are further discussed in Note 5 — Regulatory Matters. Based on Pennsylvania legislation and the DSP Programs permitting PECO to recover its electric supply procurement costs from retail customers with no mark-up, PECO’s price risk related to electric supply procurement is limited. PECO locked in fixed prices for a significant portion of its commodity price risk through full requirements contracts and block contracts. PECO has certain full requirements contracts and block contracts that are considered derivatives and qualify for the NPNS scope exception under current derivative authoritative guidance.

 

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PECO’s natural gas procurement policy is designed to achieve a reasonable balance of long-term and short-term gas purchases under different pricing approaches in order to achieve system supply reliability at the least cost. PECO’s reliability strategy is two-fold. First, PECO must assure that there is sufficient transportation capacity to satisfy delivery requirements. Second, PECO must ensure that a firm source of supply exists to utilize the capacity resources. All of PECO’s natural gas supply and asset management agreements that are derivatives either qualify for the NPNS scope exception and have been designated as such, or have no mark-to-market balances because the derivatives are index priced. Additionally, in accordance with the 2014 PAPUC PGC settlement and to reduce the exposure of PECO and its customers to natural gas price volatility, PECO has continued its program to purchase natural gas for both winter and summer supplies using a layered approach of locking-in prices ahead of each season with long-term gas purchase agreements (those with primary terms of at least twelve months). Under the terms of the 2014 PGC settlement, PECO is required to lock in (i.e., economically hedge) the price of a minimum volume of its long-term gas commodity purchases. PECO’s gas-hedging program is designed to cover about 30% of planned natural gas purchases in support of projected firm sales. The hedging program for natural gas procurement has no direct impact on PECO’s financial position or results of operations as natural gas costs are fully recovered from customers under the PGC.

BGE has contracts to procure SOS electric supply that are executed through a competitive procurement process approved by the MDPSC. The SOS rates charged recover BGE’s wholesale power supply costs and include an administrative fee. The administrative fee includes an incremental cost component and a shareholder return component for commercial and industrial rate classes. BGE’s price risk related to electric supply procurement is limited. BGE locks in fixed prices for all of its SOS requirements through full requirements contracts. Certain of BGE’s full requirements contracts, which are considered derivatives, qualify for the NPNS scope exception under current derivative authoritative guidance. Other BGE full requirements contracts are not derivatives.

BGE provides natural gas to its customers under a MBR mechanism approved by the MDPSC. Under this mechanism, BGE’s actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between BGE’s actual cost and the market index is shared equally between shareholders and customers. BGE must also secure fixed price contracts for at least 10%, but not more than 20%, of forecasted system supply requirements for flowing (i.e., non-storage) gas for the November through March period. These fixed-price contracts are not subject to sharing under the MBR mechanism. BGE also ensures it has sufficient pipeline transportation capacity to meet customer requirements. All of BGE’s natural gas supply and asset management agreements qualify for the NPNS scope exception and result in physical delivery.

Proprietary Trading.    Generation also enters into certain energy-related derivatives for proprietary trading purposes. Proprietary trading includes all contracts entered into with the intent of benefiting from shifts or changes in market prices as opposed to those entered into with the intent of hedging or managing risk. Proprietary trading activities are subject to limits established by Exelon’s RMC. The proprietary trading activities, which included settled physical sales volumes of 1,808 GWhs and 2,494 GWhs for the three months ended March 31, 2015 and 2014, respectively, are a complement to Generation’s energy marketing portfolio but represent a small portion of Generation’s revenue from energy marketing activities. ComEd, PECO and BGE do not enter into derivatives for proprietary trading purposes.

Interest Rate and Foreign Exchange Risk (Exelon, Generation, ComEd, PECO and BGE)

The Registrants use a combination of fixed-rate and variable-rate debt to manage interest rate exposure. The Registrants utilize fixed-to-floating interest rate swaps, which are typically designated as fair value hedges, as a means to manage their interest rate exposure. In addition, the Registrants may utilize interest rate derivatives to lock in rate levels in anticipation of future financings, which are typically designated as cash flow hedges. These

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

strategies are employed to manage interest rate risks. At March 31, 2015, Exelon had $900 million of notional amounts of fixed-to-floating hedges outstanding, and Exelon and Generation had $3,068 million and $768 million of notional amounts of floating-to-fixed hedges outstanding, respectively. Assuming the fair value and cash flow interest rate hedges are 100% effective, a hypothetical 50 bps increase in the interest rates associated with unhedged variable-rate debt (excluding Commercial Paper) and fixed-to-floating swaps would result in an approximately $1 million decrease in Exelon Consolidated pre-tax income for the three months ended March 31, 2015. To manage foreign exchange rate exposure associated with international energy purchases in currencies other than U.S. dollars, Generation utilizes foreign currency derivatives, which are typically designated as economic hedges. Below is a summary of the interest rate and foreign currency hedges as of March 31, 2015.

 

    Generation     Other     Exelon  

Description

  Derivatives
Designated
as Hedging
Instruments
    Economic
Hedges
    Proprietary
Trading(a)
    Collateral
and
Netting(b)
    Subtotal     Derivatives
Designated
as Hedging
Instruments
    Economic
Hedges
    Collateral
and
Netting(b)
    Subtotal     Total  

Mark-to-market derivative assets (current assets)

  $      $ 13      $ 11      $ (10   $ 14      $ 1      $      $      $ 1      $ 15   

Mark-to-market derivative assets (noncurrent assets)

           14        8        (3     19        31        2        (31     2        21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative assets

           27        19        (13     33        32        2        (31     3        36   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Mark-to-market derivative liabilities (current liabilities)

    (8     (6     (8     15        (7                                 (7

Mark-to-market derivative liabilities (noncurrent liabilities)

    (9            (7     6        (10            (180     31        (149     (159
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative liabilities

    (17     (6     (15     21        (17            (180     31        (149     (166
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative net assets (liabilities)

  $ (17   $ 21      $ 4      $ 8      $ 16      $ 32      $ (178   $      $ (146   $ (130
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Generation enters into interest rate derivative contracts to economically hedge risk associated with the interest rate component of commodity positions. The characterization of the interest rate derivative contracts within the proprietary trading activity in the above table is driven by the corresponding characterization of the underlying commodity position that gives rise to the interest rate exposure. Generation does not utilize proprietary trading interest rate derivatives with the objective of benefiting from shifts or changes in market interest rates.

(b)

Exelon and Generation net all available amounts allowed under the derivative accounting guidance on the balance sheet. These amounts include unrealized derivative transactions with the same counterparty under legally enforceable master netting agreements and cash collateral. In some cases Exelon and Generation may have other offsetting exposures, subject to a master netting or similar agreement, such as accrued interest, transactions that do not qualify as derivatives, letters of credit and other forms of non-cash collateral. These are not reflected in the table above.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

The following table provides a summary of the interest rate and foreign exchange hedge balances recorded by the Registrants as of December 31, 2014:

 

    Generation     Other     Exelon  

Description

  Derivatives
Designated
as Hedging
Instruments
    Economic
Hedges
    Proprietary
Trading(a)
    Collateral
and
Netting(b)
    Subtotal     Derivatives
Designated
as Hedging
Instruments
    Economic
Hedges
    Collateral
and
Netting(b)
    Subtotal     Total  

Mark-to-market derivative assets (current assets)

  $ 7      $ 7      $ 20      $ (22   $ 12      $ 3      $      $      $ 3      $ 15   

Mark-to-market derivative assets (noncurrent assets)

    1        5        7        (7     6        20        1        (19     2        8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative assets

    8        12        27        (29     18        23        1        (19     5        23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Mark-to-market derivative liabilities (current liabilities)

    (8     (2     (14     25        1                                    1   

Mark-to-market derivative liabilities (noncurrent liabilities)

    (4            (9     10        (3     (29     (101     19        (111     (114
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative liabilities

    (12     (2     (23     35        (2     (29     (101     19        (111     (113
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative net assets (liabilities)

  $ (4   $ 10      $ 4      $ 6      $ 16      $ (6   $ (100   $      $ (106   $ (90
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Generation enters into interest rate derivative contracts to economically hedge risk associated with the interest rate component of commodity positions. The characterization of the interest rate derivative contracts within the proprietary trading activity in the above table is driven by the corresponding characterization of the underlying commodity position that gives rise to the interest rate exposure. Generation does not utilize proprietary trading interest rate derivatives with the objective of benefiting from shifts or changes in market interest rates.

(b)

Exelon and Generation net all available amounts allowed under the derivative accounting guidance on the balance sheet. These amounts include unrealized derivative transactions with the same counterparty under legally enforceable master netting agreements and cash collateral. In some cases Exelon and Generation may have other offsetting exposures, subject to a master netting or similar agreement, such as accrued interest, transactions that do not qualify as derivatives, letters of credit and other forms of non-cash collateral. These are not reflected in the table above.

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

Fair Value Hedges.    For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. Exelon includes the gain or loss on the hedged items and the offsetting loss or gain on the related interest rate swaps in interest expense as follows:

 

    

Income Statement

Location

   Three Months Ended March 31,  
        2015     2014     2015      2014  
        Gain (Loss) on Swaps     Gain (Loss) on Borrowings  

Generation

   Interest expense(a)    $ (1   $ (5   $       $ (1

Exelon

   Interest expense      9        2        11         4   

 

(a)

For the three months ended March 31, 2015 and 2014, the loss on Generation swaps included $1 million and $4 million realized in earnings with an immaterial amount excluded from hedge effectiveness testing.

At March 31, 2015, Exelon had total outstanding fixed-to-floating fair value hedges related to interest rate swaps of $900 million, with a derivative asset of $32 million. At December 31, 2014, Exelon and Generation had outstanding fixed-to-floating fair value hedges related to interest rate swaps of $1,450 million and $550 million, with a derivative asset of $29 million and $7 million, respectively. During the three months ended March 31, 2015 and 2014, the impact on the results of operations as a result of the ineffectiveness from fair value hedges was a $4 million and a $5 million gain, respectively.

Cash Flow Hedges.    During 2014, Exelon entered into $400 million of floating-to-fixed forward starting interest rate swaps to manage a portion of the interest rate exposure associated with the anticipated refinancing of existing debt. The swaps are designated as cash flow hedges. In January 2015, in connection with Generation’s $750 million issuance of five-year Senior Unsecured Notes, Exelon terminated these swaps. As the original forecasted transactions were a series of future interest payments over a ten year period, a portion of the anticipated interest payments are probable not to occur. As a result, $26 million of anticipated payments were reclassified from Accumulated OCI to Other, net in Exelon’s Consolidated Statement of Operations and Comprehensive Income.

During the third quarter of 2014, ExGen Texas Power, LLC, a subsidiary of Generation, entered into a floating-to-fixed interest rate swap to manage a portion of its interest rate exposure in connection with a long-term borrowing. See Note 13 — Debt and Credit Agreements of the Exelon 2014 Form 10-K for additional information regarding the financing. The swaps have a notional amount of $504 million as of March 31, 2015 and expire in 2019. The swap was designated as a cash flow hedge in the fourth quarter of 2014. At March 31, 2015, the subsidiary had a $13 million derivative liability related to the swap.

During the first quarter of 2014, ExGen Renewables I, LLC, a subsidiary of Exelon Generation, entered into floating-to-fixed interest rate swaps to manage a portion its interest rate exposure in connection with long-term borrowings. See Note 13 — Debt and Credit Agreements of the Exelon 2014 Form 10-K for additional information regarding the financing. The swaps have a notional amount of $212 million as of March 31, 2015 and expire in 2020. The swaps are designated as cash flow hedges. At March 31, 2015, the subsidiary had a $3 million derivative liability related to the swaps.

During the three months ended March 31, 2015 and 2014, the impact on the results of operations as a result of ineffectiveness from cash flow hedges in continuing designated hedge relationships were immaterial.

Economic Hedges.    During the third quarter of 2011, Sacramento PV Energy, a subsidiary of Generation entered into floating-to-fixed interest rate swaps to manage a portion of its interest rate exposure in connection with the long-term borrowings. See Note 13 — Debt and Credit Agreements of the Exelon 2014 Form 10-K for additional information regarding the financing. The swaps have a total notional amount of $26 million as of

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

March 31, 2015 and expire in 2027. After the closing of the Constellation merger, the swaps were re-designated as cash flow hedges. During the first quarter of 2015, the swaps were de-designated as the forecasted transaction was no longer probable of occurring. The balance in Accumulated OCI was frozen as of the date of de-designation and will amortize into Interest expense over the remaining term of the forecasted transaction. All future changes in fair value are reflected in Interest expense. At March 31, 2015, the subsidiary had a $3 million derivative liability related to these swaps, which included an immaterial amount that was amortized to Interest expense after de-designation.

During the third quarter of 2012, Constellation Solar Horizon, a subsidiary of Exelon Generation, entered into a floating-to-fixed interest rate swap to manage a portion of its interest rate exposure in connection with the long-term borrowings. See Note 13 — Debt and Credit Agreements of the Exelon 2014 Form 10-K for additional information regarding the financing. The swap has a notional amount of $26 million as of March 31, 2015 and expires in 2030. This swap was designated as a cash flow hedge. During the first quarter of 2015, the swaps were de-designated as the forecasted transaction was no longer probable of occurring. The balance in OCI was frozen as of the date of de-designation and will amortize into Interest expense over the remaining term of the forecasted transaction. All future changes in fair value are reflected in Interest expense. At March 31, 2015, the subsidiary had an immaterial derivative liability related to the swap.

Through March 31, 2015, Exelon entered into $2,300 million of floating-to-fixed forward starting interest rate swaps to manage interest rate risks associated with anticipated future debt issuance related to the proposed merger with PHI. At March 31, 2015, Exelon had a $178 million derivative liability related to the swaps.

At March 31, 2015, Generation had $271 million in notional amounts of interest rate derivative contracts to economically hedge risk associated with the interest rate component of commodity positions and $338 million in notional amounts of foreign currency exchange rate swaps that are marked-to-market to manage the exposure associated with international purchases of commodities in currencies other than U.S. dollars.

Fair Value Measurement and Accounting for the Offsetting of Amounts Related to Certain Contracts (Exelon, Generation, ComEd, PECO and BGE)

Fair value accounting guidance and disclosures about offsetting assets and liabilities requires the fair value of derivative instruments to be shown in the Notes to the Consolidated Financial Statements on a gross basis, even when the derivative instruments are subject to legally enforceable master netting agreements and qualify for net presentation in the Consolidated Balance Sheet. A master netting agreement is an agreement between two counterparties that may have derivative and non-derivative contracts with each other providing for the net settlement of all referencing contracts via one payment stream, which takes place as the contracts deliver, when collateral is requested or in the event of default. Generation’s use of cash collateral is generally unrestricted, unless Generation is downgraded below investment grade (i.e., to BB+ or Ba1). In the table below, Generation’s energy related economic hedges and proprietary trading derivatives are shown gross. The impact of the netting of fair value balances with the same counterparty that are subject to legally enforceable master netting agreements, as well as netting of cash collateral, including initial margin on exchange positions, is aggregated in the collateral and netting column. As of March 31, 2015 and December 31, 2014, $5 million and $8 million of cash collateral posted, respectively, was not offset against derivative positions because such collateral was not associated with any energy-related derivatives, were associated with accrual positions, or as of the balance sheet date there were no positions to offset. Excluded from the tables below are economic hedges that qualify for the NPNS scope exception and other non-derivative contracts that are accounted for under the accrual method of accounting.

ComEd’s use of cash collateral is generally unrestricted, unless ComEd is downgraded below investment grade (i.e., to BB+ or Ba1).

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

Cash collateral held by PECO and BGE must be deposited in a non-affiliate major U.S. commercial bank or foreign bank with a U.S. branch office that meet certain qualifications.

The following table provides a summary of the derivative fair value balances recorded by the Registrants as of March 31, 2015:

 

    Generation     ComEd     Exelon  

Derivatives

  Economic
Hedges
    Proprietary
Trading
    Collateral
and
Netting(a)
    Subtotal(b)     Economic
Hedges(c)
    Total
Derivatives
 

Mark-to-market derivative assets (current assets)

  $ 4,618      $ 431      $ (3,947   $ 1,102      $      $ 1,102   

Mark-to-market derivative assets (noncurrent assets)

    2,363        70        (1,541     892               892   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative assets

    6,981        501        (5,488     1,994               1,994   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Mark-to-market derivative liabilities (current liabilities)

    (4,505     (437     4,852        (90     (20     (110

Mark-to-market derivative liabilities (noncurrent liabilities)

    (2,016     (77     1,982        (111     (221     (332
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative liabilities

    (6,521     (514     6,834        (201     (241     (442
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative net assets (liabilities)

  $ 460      $ (13   $ 1,346      $ 1,793      $ (241   $ 1,552   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Exelon and Generation net all available amounts allowed under the derivative accounting guidance on the balance sheet. These amounts include unrealized derivative transactions with the same counterparty under legally enforceable master netting agreements and cash collateral. In some cases Exelon and Generation may have other offsetting exposures, subject to a master netting or similar agreement, such as trade receivables and payables, transactions that do not qualify as derivatives, letters of credit and other forms of non-cash collateral. These are not reflected in the table above.

(b)

Current and noncurrent assets are shown net of collateral of $387 million and $192 million, respectively, and current and noncurrent liabilities are shown net of collateral of $519 million and $248 million, respectively. The total cash collateral posted, net of cash collateral received and offset against mark-to-market assets and liabilities was $1,346 million at March 31, 2015.

(c)

Includes current and noncurrent liabilities relating to floating-to-fixed energy swap contracts with unaffiliated suppliers.

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

The following table provides a summary of the derivative fair value balances recorded by the Registrants as of December 31, 2014:

 

    Generation     ComEd     Exelon  

Description

  Economic
Hedges
    Proprietary
Trading
    Collateral
and
Netting(a)
    Subtotal(b)     Economic
Hedges(c)
    Total
Derivatives
 

Mark-to-market derivative assets (current assets)

  $ 4,992      $ 456      $ (4,184   $ 1,264      $      $ 1,264   

Mark-to-market derivative assets (noncurrent assets)

    1,821        56        (1,112     765               765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative assets

    6,813        512        (5,296     2,029               2,029   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Mark-to-market derivative liabilities (current liabilities)

    (4,947     (468     5,200        (215     (20     (235

Mark-to-market derivative liabilities (noncurrent liabilities)

    (1,540     (64     1,502        (102     (187     (289
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative liabilities

    (6,487     (532     6,702        (317     (207     (524
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mark-to-market derivative net assets (liabilities)

  $ 326      $ (20   $ 1,406      $ 1,712      $ (207   $ 1,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Exelon and Generation net all available amounts allowed under the derivative accounting guidance on the balance sheet. These amounts include unrealized derivative transactions with the same counterparty under legally enforceable master netting agreements and cash collateral. In some cases Exelon and Generation may have other offsetting exposures, subject to a master netting or similar agreement, such as trade receivables and payables, transactions that do not qualify as derivatives, and letters of credit. These are not reflected in the table above.

(b)

Current and noncurrent assets are shown net of collateral of $416 million and $171 million, respectively, and current and noncurrent liabilities are shown net of collateral of $599 million and $220 million, respectively. The total cash collateral posted, net of cash collateral received and offset against mark-to-market assets and liabilities was $1,406 million at December 31, 2014.

(c)

Includes current and noncurrent liabilities relating to floating-to-fixed energy swap contracts with unaffiliated suppliers.

Cash Flow Hedges (Exelon, Generation and ComEd).    As discussed previously, effective prior to the Constellation merger, Generation de-designated all of its cash flow hedges relating to commodity price risk. Because the underlying forecasted transactions remain at least reasonably probable, the fair value of the effective portion of these cash flow hedges was frozen in Accumulated OCI and is reclassified to results of operations when the forecasted purchase or sale of the energy commodity occurs, or becomes probable of not occurring. Generation began recording prospective changes in the fair value of these instruments through current earnings from the date of de-designation. As of March 31, 2015, no unrealized balance remains in accumulated OCI to be reclassified by Generation.

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

The tables below provide the activity of accumulated OCI related to cash flow hedges for the three months ended March 31, 2015 and 2014, containing information about the changes in the fair value of cash flow hedges and the reclassification from accumulated OCI into results of operations. The amounts reclassified from accumulated OCI, when combined with the impacts of the actual physical power sales, result in the ultimate recognition of net revenues at the contracted price.

 

     Income  Statement
Location
     Total Cash Flow Hedge OCI Activity,
                   Net of Income Tax                  
 
        Generation     Exelon  

Three Months Ended March 31, 2015

      Total Cash Flow
Hedges
    Total Cash Flow
Hedges
 

Accumulated OCI derivative gain at December 31, 2014

      $ (18   $ (28

Effective portion of changes in fair value

        (6     (11

Reclassifications from accumulated OCI to net income

     Other, net                16 (a) 

Reclassifications from accumulated OCI to net income

     Interest Expense         3        3   

Reclassifications from accumulated OCI to net income

     Operating Revenues         (2     (2
     

 

 

   

 

 

 

Accumulated OCI derivative gain at March 31, 2015

      $ (23   $ (22
     

 

 

   

 

 

 

 

(a)

Amount is net of related income tax expense of $10 million for the three months ended March 31, 2015.

 

     Income  Statement
Location
     Total Cash Flow Hedge OCI Activity,
                  Net of Income Tax                   
 
        Generation     Exelon  

Three Months Ended March 31, 2014

      Total Cash Flow
Hedges
    Total Cash Flow
Hedges
 

Accumulated OCI derivative gain at December 31, 2013

      $ 116      $ 120   

Effective portion of changes in fair value

        (4     (1

Reclassifications from accumulated OCI to net income

     Operating Revenues         (24 )(a)      (24 )(a) 
     

 

 

   

 

 

 

Accumulated OCI derivative gain at March 31, 2014

      $ 88      $ 95   
     

 

 

   

 

 

 

 

(a)

Amount is net of related income tax expense of $15 million for the three months ended March 31, 2014.

The effect of Exelon’s and Generation’s former energy-related cash flow hedge activity on pre-tax earnings based on the reclassification adjustment from accumulated OCI to earnings was a $2 million pre-tax gain for the three months ended March 31, 2015, and a $39 million pre-tax gain for the three months ended March 31, 2014. Neither Exelon nor Generation will incur changes in cash flow hedge ineffectiveness in future periods as all energy-related cash flow hedge positions were de-designated prior to the merger date.

Economic Hedges (Exelon and Generation).    These instruments represent hedges that economically mitigate exposure to fluctuations in commodity prices and include financial options, futures, swaps, physical forward sales and purchases, but for which the fair value or cash flow hedge elections were not made.

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

Additionally, Generation enters into interest rate derivative contracts and foreign exchange currency swaps (“treasury”) to manage the exposure related to the interest rate component of commodity positions and international purchases of commodities in currencies other than U.S. Dollars. Exelon entered into floating-to-fixed forward starting interest rate swaps to manage interest rate risks associated with anticipated future debt issuance related to the proposed PHI acquisition. For the three months ended March 31, 2015 and 2014, the following pre-tax mark-to-market gains (losses) of certain purchase and sale contracts were reported in operating revenues or purchased power and fuel expense, or interest expense at Exelon and Generation in the Consolidated Statements of Operations and Comprehensive Income and are included in “Net fair value changes related to derivatives” in Exelon’s and Generation’s Consolidated Statements of Cash Flows. In the tables below, “Change in fair value” represents the change in fair value of the derivative contracts held at the reporting date. The “Reclassification to realized at settlement” represents the recognized change in fair value that was reclassified to realized due to settlement of the derivative during the period.

 

     Generation     HoldCo     Exelon  

Three Months Ended March 31, 2015

   Operating
Revenues
    Purchased
Power
and Fuel
    Interest
Expense
     Total     Interest
Expense
    Total  

Change in fair value of commodity positions

   $ 164      $ (79   $       $ 85      $      $ 85   

Reclassification to realized at settlement of commodity positions

     (21     87                66               66   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net commodity mark-to-market gains (losses)

     143        8                151               151   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Change in fair value of treasury positions

     13                       13        (78     (65

Reclassification to realized at settlement of treasury positions

     (2                    (2            (2
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net treasury mark-to-market gains (losses)

     11                       11        (78     (67
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Net mark-to-market gains (losses)

   $ 154      $ 8      $       $ 162      $ (78   $ 84   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

     Generation     HoldCo      Exelon  

Three Months Ended March 31, 2014

   Operating
Revenues
    Purchased
Power
and Fuel
    Interest
Expense
    Total     Interest
Expense
     Total  

Change in fair value of commodity positions

   $ (852   $ 171      $      $ (681   $       $ (681

Reclassification to realized at settlement of commodity positions

     93        (141            (48             (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net commodity mark-to-market gains (losses)

     (759     30               (729             (729
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Change in fair value of treasury positions

     (1            (1     (2             (2

Reclassification to realized at settlement of treasury positions

                                           
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net treasury mark-to-market gains (losses)

     (1            (1     (2             (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Net mark-to-market gains (losses)

   $ (760   $ 30      $ (1   $ (731   $       $ (731
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Proprietary Trading Activities (Exelon and Generation).    For the three months ended March 31, 2015 and 2014, Exelon and Generation recognized the following net unrealized mark-to-market gains (losses), net realized mark-to-market gains (losses) and total net mark-to-market gains (losses) (before income taxes) relating to mark-to-market activity on commodity derivative instruments entered into for proprietary trading purposes and interest rate derivative contracts to hedge risk associated with the interest rate component of underlying commodity positions. Gains and losses associated with proprietary trading are reported as operating revenue in Exelon’s and

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

Generation’s Consolidated Statements of Operations and Comprehensive Income and are included in “Net fair value changes related to derivatives” in Exelon’s and Generation’s Consolidated Statements of Cash Flows. In the tables below, “Change in fair value” represents the change in fair value of the derivative contracts held at the reporting date. The “Reclassification to realized at settlement” represents the recognized change in fair value that was reclassified to realized due to settlement of the derivative during the period.

 

     Location on Income
Statement
     Three Months Ended
March 31,
 
        2015     2014  

Change in fair value of commodity positions

     Operating Revenues       $ 1      $ (3

Reclassification to realized at settlement of commodity positions

     Operating Revenues         2        1   
     

 

 

   

 

 

 

Net commodity mark-to-market gains (losses)

     Operating Revenues         3        (2
     

 

 

   

 

 

 

Change in fair value of treasury positions

     Operating Revenues         4          

Reclassification to realized at settlement of treasury positions

     Operating Revenues         (4       
     

 

 

   

 

 

 

Net treasury mark-to-market gains (losses)

     Operating Revenues                  
     

 

 

   

 

 

 

Total Net mark-to-market gains (losses)

     Operating Revenues       $ 3      $ (2
     

 

 

   

 

 

 

Credit Risk (Exelon, Generation, ComEd, PECO and BGE)

The Registrants would be exposed to credit-related losses in the event of non-performance by counterparties that enter into derivative instruments. The credit exposure of derivative contracts, before collateral, is represented by the fair value of contracts at the reporting date. For energy-related derivative instruments, Generation enters into enabling agreements that allow for payment netting with its counterparties, which reduces Generation’s exposure to counterparty risk by providing for the offset of amounts payable to the counterparty against amounts receivable from the counterparty. Typically, each enabling agreement is for a specific commodity and so, with respect to each individual counterparty, netting is limited to transactions involving that specific commodity product, except where master netting agreements exist with a counterparty that allow for cross product netting. In addition to payment netting language in the enabling agreement, Generation’s credit department establishes credit limits, margining thresholds and collateral requirements for each counterparty, which are defined in the derivative contracts. Counterparty credit limits are based on an internal credit review process that considers a variety of factors, including the results of a scoring model, leverage, liquidity, profitability, credit ratings by credit rating agencies, and risk management capabilities. To the extent that a counterparty’s margining thresholds are exceeded, the counterparty is required to post collateral with Generation as specified in each enabling agreement. Generation’s credit department monitors current and forward credit exposure to counterparties and their affiliates, both on an individual and an aggregate basis.

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

The following tables provide information on Generation’s credit exposure for all derivative instruments, NPNS, and applicable payables and receivables, net of collateral and instruments that are subject to master netting agreements, as of March 31, 2015. The tables further delineate that exposure by credit rating of the counterparties and provide guidance on the concentration of credit risk to individual counterparties. The figures in the table below exclude credit risk exposure from individual retail counterparties, Nuclear fuel procurement contracts, and exposure through RTOs, ISOs, NYMEX, ICE and Nodal commodity exchanges, further discussed in ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Additionally, the figures in the tables below exclude exposures with affiliates, including net receivables with ComEd, PECO and BGE of $52 million, $36 million and $26 million, as of March 31, 2015, respectively.

 

Rating as of March 31, 2015

  Total
Exposure
Before Credit
Collateral
    Credit
Collateral(a)
    Net
Exposure
    Number of
Counterparties
Greater than 10%
of Net Exposure
    Net Exposure of
Counterparties
Greater than 10%
of Net Exposure
 

Investment grade

  $ 1,570      $ 56      $ 1,514        1      $ 442   

Non-investment grade

    63        16        47                 

No external ratings

         

Internally rated — investment grade

    495               495                 

Internally rated — non-investment grade

    68        3        65                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,196      $ 75      $ 2,121        1      $ 442   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Net Credit Exposure by Type of Counterparty

   As of March 31, 2015  

Financial institutions

   $ 324   

Investor-owned utilities, marketers, power producers

     897   

Energy cooperatives and municipalities

     869   

Other

     31   
  

 

 

 

Total

   $ 2,121   
  

 

 

 

 

(a)

As of March 31, 2015, credit collateral held from counterparties where Generation had credit exposure included $62 million of cash and $14 million of letters of credit.

ComEd’s power procurement contracts provide suppliers with a certain amount of unsecured credit. The credit position is based on forward market prices compared to the benchmark prices. The benchmark prices are the forward prices of energy projected through the contract term and are set at the point of supplier bid submittals. If the forward market price of energy exceeds the benchmark price, the suppliers are required to post collateral for the secured credit portion after adjusting for any unpaid deliveries and unsecured credit allowed under the contract. The unsecured credit used by the suppliers represents ComEd’s net credit exposure. As of March 31, 2015, ComEd’s net credit exposure to suppliers was immaterial.

ComEd is permitted to recover its costs of procuring energy through the Illinois Settlement Legislation. ComEd’s counterparty credit risk is mitigated by its ability to recover realized energy costs through customer rates. See Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for additional information.

PECO’s supplier master agreements that govern the terms of its electric supply procurement contracts, which define a supplier’s performance assurance requirements, allow a supplier to meet its credit requirements with a certain amount of unsecured credit. The amount of unsecured credit is determined based on the supplier’s lowest credit rating from the major credit rating agencies and the supplier’s tangible net worth. The credit position is based on the initial market price, which is the forward price of energy on the day a transaction is

 

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executed, compared to the current forward price curve for energy. To the extent that the forward price curve for energy exceeds the initial market price, the supplier is required to post collateral to the extent the credit exposure is greater than the supplier’s unsecured credit limit. The unsecured credit used by the suppliers represents PECO’s net credit exposure. As of March 31, 2015, PECO is currently holding $2 million in collateral from suppliers.

PECO is permitted to recover its costs of procuring electric supply through its PAPUC-approved DSP Program. PECO’s counterparty credit risk is mitigated by its ability to recover realized energy costs through customer rates. See Note 5 — Regulatory Matters for additional information.

PECO’s natural gas procurement plan is reviewed and approved annually on a prospective basis by the PAPUC. PECO’s counterparty credit risk under its natural gas supply and asset management agreements is mitigated by its ability to recover its natural gas costs through the PGC, which allows PECO to adjust rates quarterly to reflect realized natural gas prices. PECO does not obtain collateral from suppliers under its natural gas supply and asset management agreements. As of March 31, 2015, PECO had no credit exposure under its natural gas supply and asset management agreements with investment grade suppliers.

BGE is permitted to recover its costs of procuring energy through the MDPSC-approved procurement tariffs. BGE’s counterparty credit risk is mitigated by its ability to recover realized energy costs through customer rates. See Note 5 — Regulatory Matters for additional information.

BGE’s full requirement wholesale electric power agreements that govern the terms of its electric supply procurement contracts, which define a supplier’s performance assurance requirements, allow a supplier, or its guarantor, to meet its credit requirements with a certain amount of unsecured credit. The amount of unsecured credit is determined based on the supplier’s lowest credit rating from the major credit rating agencies and the supplier’s tangible net worth, subject to an unsecured credit cap. The credit position is based on the initial market price, which is the forward price of energy on the day a transaction is executed, compared to the current forward price curve for energy. To the extent that the forward price curve for energy exceeds the initial market price, the supplier is required to post collateral to the extent the credit exposure is greater than the supplier’s unsecured credit limit. The unsecured credit used by the suppliers represents BGE’s net credit exposure. The seller’s credit exposure is calculated each business day. As of March 31, 2015, BGE had no net credit exposure to suppliers.

BGE’s regulated gas business is exposed to market-price risk. This market-price risk is mitigated by BGE’s recovery of its costs to procure natural gas through a gas cost adjustment clause approved by the MDPSC. BGE does make off-system sales after BGE has satisfied its customers’ demands, which are not covered by the gas cost adjustment clause. At March 31, 2015, BGE had credit exposure of $4 million related to off-system sales which is mitigated by parental guarantees, letters of credit, or right to offset clauses within other contracts with those third-party suppliers.

Collateral and Contingent-Related Features (Exelon, Generation, ComEd, PECO and BGE)

As part of the normal course of business, Generation routinely enters into physical or financially settled contracts for the purchase and sale of electric capacity, energy, fuels, emissions allowances and other energy-related products. Certain of Generation’s derivative instruments contain provisions that require Generation to post collateral. Generation also enters into commodity transactions on exchanges (i.e. NYMEX, ICE). The exchanges act as the counterparty to each trade. Transactions on the exchanges must adhere to comprehensive collateral and margining requirements. This collateral may be posted in the form of cash or credit support with thresholds contingent upon Generation’s credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. These credit-risk-related

 

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contingent features stipulate that if Generation were to be downgraded or lose its investment grade credit rating (based on its senior unsecured debt rating), it would be required to provide additional collateral. This incremental collateral requirement allows for the offsetting of derivative instruments that are assets with the same counterparty, where the contractual right of offset exists under applicable master netting agreements. In the absence of expressly agreed-to provisions that specify the collateral that must be provided, collateral requested will be a function of the facts and circumstances of the situation at the time of the demand. In this case, Generation believes an amount of several months of future payments (i.e., capacity payments) rather than a calculation of fair value is the best estimate for the contingent collateral obligation, which has been factored into the disclosure below.

The aggregate fair value of all derivative instruments with credit-risk-related contingent features in a liability position that are not fully collateralized (excluding transactions on the exchanges that are fully collateralized) is detailed in the table below:

 

Credit-Risk Related Contingent Feature

   March 31,
2015
    December 31,
2014
 

Gross Fair Value of Derivative Contracts Containing this Feature(a)

   $ (1,420   $ (1,433

Offsetting Fair Value of In-the-Money Contracts Under Master Netting Arrangements(b)

     1,138        1,140   
  

 

 

   

 

 

 

Net Fair Value of Derivative Contracts Containing This Feature(c)

   $ (282   $ (293
  

 

 

   

 

 

 

 

(a)

Amount represents the gross fair value of out-of-the-money derivative contracts containing credit-risk related contingent features ignoring the effects of master netting agreements.

(b)

Amount represents the offsetting fair value of in-the-money derivative contracts under legally enforceable master netting agreements with the same counterparty, which reduces the amount of any liability for which a Registrant could potentially be required to post collateral.

(c)

Amount represents the net fair value of out-of-the-money derivative contracts containing credit-risk related contingent features after considering the mitigating effects of offsetting positions under master netting arrangements and reflects the actual net liability upon which any potential contingent collateral obligations would be based.

Generation had cash collateral posted of $1,428 million and letters of credit posted of $626 million and cash collateral held of $69 million and letters of credit held of $22 million as of March 31, 2015 for counterparties with derivative positions. Generation had cash collateral posted of $1,497 million and letters of credit posted of $672 million and cash collateral held of $77 million and letters of credit held of $24 million at December 31, 2014 for counterparties with derivative positions. In the event of a credit downgrade below investment grade (i.e., to BB+ by S&P or Ba1 by Moody’s), Generation would have been required to post additional collateral of $2.3 billion and $2.4 billion as of March 31, 2015 and December 31, 2014, respectively. These amounts represent the potential additional collateral required after giving consideration to offsetting derivative and non-derivative positions under master netting agreements.

Generation’s and Exelon’s interest rate swaps contain provisions that, in the event of a merger, if Generation’s debt ratings were to materially weaken, it would be in violation of these provisions, resulting in the ability of the counterparty to terminate the agreement prior to maturity. Collateralization would not be required under any circumstance. Termination of the agreement could result in a settlement payment by Exelon or the counterparty on any interest rate swap in a net liability position. The settlement amount would be equal to the fair value of the swap on the termination date. As of March 31, 2015, Generation’s swaps were in an asset with a fair value of $16 million and Exelon’s swaps were in a liability position, with a fair value of $(130) million, respectively.

 

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See Note 24 — Segment Information of the Exelon 2014 Form 10-K for further information regarding the letters of credit supporting the cash collateral.

Generation entered into supply forward contracts with certain utilities, including PECO and BGE, with one-sided collateral postings only from Generation. If market prices fall below the benchmark price levels in these contracts, the utilities are not required to post collateral. However, when market prices rise above the benchmark price levels, counterparty suppliers, including Generation, are required to post collateral once certain unsecured credit limits are exceeded. Under the terms of ComEd’s standard block energy contracts, collateral postings are one-sided from suppliers, including Generation, should exposures between market prices and benchmark prices exceed established unsecured credit limits outlined in the contracts. As of March 31, 2015, ComEd held approximately $2 million collateral from suppliers in association with energy procurement contracts. Under the terms of ComEd’s annual renewable energy contracts, collateral postings are required to cover a fixed value for RECs only. In addition, under the terms of ComEd’s long-term renewable energy contracts, collateral postings are required from suppliers for both RECs and energy. The REC portion is a fixed value and the energy portion is one-sided from suppliers should the forward market prices exceed contract prices. As of March 31, 2015, ComEd held approximately $19 million in the form of cash and letters of credit as margin for both the annual and long-term REC obligations. See Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for additional information.

PECO’s natural gas procurement contracts contain provisions that could require PECO to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon PECO’s credit rating from the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. As of March 31, 2015, PECO was not required to post collateral for any of these agreements. If PECO lost its investment grade credit rating as of March 31, 2015, PECO could have been required to post approximately $36 million of collateral to its counterparties.

PECO’s supplier master agreements that govern the terms of its DSP Program contracts do not contain provisions that would require PECO to post collateral.

BGE’s full requirements wholesale power agreements that govern the terms of its electric supply procurement contracts do not contain provisions that would require BGE to post collateral.

BGE’s natural gas procurement contracts contain provisions that could require BGE to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon BGE’s credit rating from the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. As of March 31, 2015, BGE was not required to post collateral for any of these agreements. If BGE lost its investment grade credit rating as of March 31, 2015, BGE could have been required to post approximately $111 million of collateral to its counterparties.

9.    Debt and Credit Agreements (Exelon, Generation, ComEd, PECO and BGE)

Short-Term Borrowings

Exelon, ComEd and BGE meet their short-term liquidity requirements primarily through the issuance of commercial paper. Generation and PECO meet their short-term liquidity requirements primarily through the issuance of commercial paper and borrowings from the intercompany money pool.

 

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The Registrants had the following amounts of commercial paper borrowings outstanding as of March 31, 2015 and December 31, 2014:

 

Commercial Paper Borrowings

   March 31,
2015
     December 31,
2014
 

Exelon Corporate

   $       $   

Generation

               

ComEd

     283         304   

PECO

               

BGE

             120   

Credit Facilities

Exelon had bank lines of credit under committed credit facilities at March 31, 2015 for short-term financial needs, as follows:

 

Type of Credit Facility

   Amount(a)      Expiration Dates    Capacity Type
     (In billions)            

Exelon Corporate

        

Syndicated Revolver(b)

   $ 0.5       May 2019    Letters of credit and cash

Generation

        

Syndicated Revolver

     5.1       May 2019    Letters of credit and cash

Syndicated Revolver

     0.2       August 2018    Letters of credit and cash

Bilateral

     0.3       December 2015 and April 2016    Letters of credit and cash

Bilateral

     0.1       January 2017    Letters of credit

Bilateral

     0.1       October 2015    Letters of credit and cash

ComEd

        

Syndicated Revolver

     1.0       March 2019    Letters of credit and cash

PECO

        

Syndicated Revolver(b)

     0.6       May 2019    Letters of credit and cash

BGE

        

Syndicated Revolver(b)

     0.6       May 2019    Letters of credit and cash
  

 

 

       

Total

   $ 8.5         
  

 

 

       

 

(a)

Excludes additional credit facility agreements for Generation, ComEd, PECO and BGE with aggregate commitments of $50 million, $34 million, $34 million and $5 million, respectively, arranged with minority and community banks located primarily within ComEd’s, PECO’s and BGE’s service territories. These facilities expire on October 16, 2015. These facilities are solely utilized to issue letters of credit. As of March 31, 2015, letters of credit issued under these agreements for Generation, ComEd, PECO and BGE totaled $7 million, $16 million, $21 million and $1 million, respectively. Also, excludes the unsecured bridge credit facility of $3.2 billion to support the PHI transaction discussed below.

(b)

Syndicated revolvers include credit facility commitments of $22 million, $27 million and $27 million for Exelon Corporate, PECO and BGE, respectively, which expire in August 2018.

As of March 31, 2015, there were no borrowings under the Registrants’ credit facilities.

Borrowings under Exelon Corporate’s, Generation’s, ComEd’s, PECO’s and BGE’s credit agreements bear interest at a rate based upon either the prime rate or a LIBOR-based rate, plus an adder based upon the particular Registrant’s credit rating. Exelon Corporate, Generation, ComEd, PECO and BGE have adders of 27.5, 27.5, 7.5, 0.0 and 0.0 basis points for prime based borrowings and 127.5, 127.5, 107.5, 90.0 and 100.0 basis points for LIBOR-based borrowings. The maximum adders for prime rate borrowings and LIBOR-based rate borrowings

 

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are 65 basis points and 165 basis points, respectively. The credit agreements also require the borrower to pay a facility fee based upon the aggregate commitments under the agreement. The fee varies depending upon the respective credit ratings of the borrower.

Credit Agreements

In May 2014, concurrently and in connection with entering into the agreement to acquire PHI, Exelon entered into a credit facility to which the lenders committed to provide Exelon a 364-day senior unsecured bridge credit facility of $7.2 billion to support the contemplated transaction and provide flexibility for timing of permanent financing. The bridge credit facility was subsequently reduced to $3.2 billion as a result of the June 2014 $1.15 billion Junior Subordinated note issuance and equity offering discussed below, as well as the net after-tax proceeds from generation asset divestitures during the second half of 2014. During the three months ended March 31, 2015, Exelon recorded $11 million to interest expense in connection with the bridge facility. It is not currently expected that Exelon will be required to draw upon this credit facility.

Long-Term Debt

Issuance of Long-Term Debt

During the three months ended March 31, 2015, the following long-term debt was issued:

 

Company

  Type   Interest Rate     Maturity   Amount    

Use of Proceeds

Generation

  Senior Unsecured  Notes(a)     2.95%      January 15, 2020   $ 750      Fund the optional redemption of Exelon’s $550 million, 4.550% Senior Notes and for general corporate purposes

Generation

  AVSR DOE Nonrecourse
Debt
    2.293 - 2.559%      January 5, 2037   $ 14      Antelope Valley solar development

Generation

  Energy Efficiency Project
Financing
    3.71%      October 1, 2035   $ 42      Funding to install energy conservation measures in Coleman, Florida

ComEd

  Mortgage Bonds Series
118
    3.70%      March 1, 2045   $ 400      Refinance maturing mortgage bonds, repay a portion of ComEd’s outstanding commercial paper obligations and for general corporate purposes

 

(a)

In connection with the issuance of Senior Unsecured Notes, Exelon terminated floating-to-fixed interest rate swaps that had been designated as cash flow hedges. See Note 8 — Derivative Financial Instruments for further information on the swap termination.

On April 1, 2015, Generation issued $7 million of 2.464% AVSR DOE nonrecourse debt, maturing on January 5, 2037. The proceeds are used to fund the Antelope Valley Solar development.

On April 28, 2015, Generation issued $18 million of 2.544% AVSR DOE nonrecourse debt, maturing on January 5, 2037. The proceeds are used to fund the Antelope Valley Solar development.

 

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During the three months ended March 31, 2014, the following long-term debt was issued:

 

Company

  Type   Interest Rate     Maturity   Amount    

Use of Proceeds

Generation

  ExGen Renewables I
Nonrecourse Debt
    LIBOR + 4.25%      February 6, 2021   $ 300      General corporate purposes

ComEd

  First Mortgage
Bonds Series 115
    2.15%      January 15, 2019   $ 300      Refinance maturing mortgage bonds and general corporate purposes

ComEd

  First Mortgage
Bonds Series 116
    4.70%      January 15, 2044   $ 350      Refinance maturing mortgage bonds and general corporate purposes

Retirement and Redemptions of Current and Long-Term Debt

During the three months ended March 31, 2015, the following long-term debt was retired and/or redeemed:

 

Company

  

Type

   Interest Rate      Maturity    Amount  

Exelon Corporate(a)

   Unsecured Notes      4.55%       June 15, 2015    $ 550   

Generation(a)

   Unsecured Notes      4.55%       June 15, 2015    $ 550   

Generation

   CEU Upstream Nonrecourse Debt      LIBOR + 2.25%       July 22, 2016    $ 2   

Generation

   AVSR DOE Nonrecourse Debt      2.29%-3.56%       January 5, 2037    $ 4   

Generation

   Kennett Square Capital Lease      7.83%       September 20, 2020    $ 1   

Generation

   Continental Wind Nonrecouse Debt      6.00%       February 28, 2033    $ 10   

Generation

   ExGen Texas Power Nonrecouse Debt      LIBOR + 4.75%       September 18, 2021    $ 2   

 

(a)

As part of the 2012 Constellation merger, Exelon and subsidiaries of Generation assumed intercompany loan agreements that mirrored the terms and amounts of external obligations held by Exelon, resulting in intercompany notes payable at Generation and Exelon Corporate.

On April 1, 2015, BGE retired $37 million aggregate principal of its 5.720% Rate Stabilization Bonds due 2017.

On April 6, 2015, Generation paid down $2 million of principal and interest of its 2.29% — 3.55% AVSR DOE Nonrecourse debt.

On April 15, 2015, ComEd retired $260 million aggregate principal of its 4.700% First Mortgage Bonds, Series 101.

During the three months ended March 31, 2014, the following long-term debt was retired and/or redeemed:

 

Company

  

Type

   Interest Rate     Maturity    Amount  

Generation

   2003 Senior Notes      5.350   January 15, 2014    $ 500   

Generation

   Pollution Control Loan      4.100   July 1, 2014    $ 20   

Generation

   Continental Wind Nonrecourse Debt      6.000   February 28, 2033    $ 11   

Generation

   Kennett Square Capital Lease      7.830   September 20, 2020    $ 1   

ComEd

   Mortgage Bonds Series 110      1.630   January 15, 2014    $ 600   

ComEd

   Pollution Control Series 1994C      5.850   January 15, 2014    $ 17   

Junior Subordinated Notes

In June 2014, Exelon issued $1.15 billion of junior subordinated notes in the form of 23 million equity units at a stated amount of $50.00 per unit. Net proceeds from the issuance were $1.11 billion, net of a $35 million underwriter fee. The net proceeds are being used to finance a portion of the acquisition of PHI and for general corporate purposes. Each equity unit represents an undivided beneficial ownership interest in Exelon’s 2.50% junior subordinated notes due in 2024 and a forward equity purchase contract which settles in 2017. The junior subordinated notes are expected to be remarketed in 2017.

 

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At the time of issuance, Exelon determined that the forward equity purchase contract had no value and therefore the entire $1.15 billion of junior subordinated notes were allocated to debt and recorded within Long-term debt on Exelon’s Consolidated Balance Sheet. Additionally, at the time of issuance, the present value of the contract payments of $131 million were recorded to Long-term debt, representing the obligation to make contract payments, with an offsetting reduction to Common stock. The obligation for the contract payments will be accreted to interest expense over the 3 year period ending in 2017 in Exelon’s Consolidated Statement of Operations and Comprehensive Income. The Long-term debt recorded for the contract payments is considered a non-cash financing transaction that was excluded from Exelon’s Consolidated Statements of Cash Flows. Until settlement of the equity purchase contract, earnings per share dilution resulting from the equity unit issuance will be determined under the treasury stock method.

For further information about the terms of the remarketing of the junior subordinated notes, see Note 13 — Debt and Credit Agreements of the Exelon 2014 Form 10-K.

10.   Income Taxes (Exelon, Generation, ComEd, PECO and BGE)

The effective income tax rate from continuing operations varies from the U.S. Federal statutory rate principally due to the following:

 

For the Three Months Ended March 31, 2015

  Exelon     Generation     ComEd     PECO     BGE  

U.S. Federal statutory rate

    35.0     35.0     35.0     35.0     35.0

Increase (decrease) due to:

         

State income taxes, net of Federal income tax benefit

    2.6        2.7        5.0        1.2        5.3   

Qualified nuclear decommissioning trust fund income

    1.9        3.0                        

Domestic production activities deduction

    (2.2     (3.4                     

Health care reform legislation

                                0.2   

Amortization of investment tax credit, net deferred taxes

    (0.9     (1.4     (0.3     (0.1       

Plant basis differences

    (1.3            (0.3     (6.7     (0.3

Production tax credits and other credits

    (1.8     (2.8                     

Noncontrolling interest

    (0.7     (1.1                     

Other

    0.4        (0.2     0.2               0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

    33.0     31.8     39.6     29.4     40.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the Three Months Ended March 31, 2014

  Exelon     Generation(a)     ComEd     PECO     BGE  

U.S. Federal statutory rate

    35.0     35.0     35.0     35.0     35.0

Increase (decrease) due to:

         

State income taxes, net of Federal income tax benefit

    (57.6     9.7        5.5        1.2        5.2   

Qualified nuclear decommissioning trust fund income

    44.2        (4.6                     

Domestic production activities deduction

    (27.8     2.9                        

Health care reform legislation

    1.3               0.1               0.2   

Amortization of investment tax credit, net deferred taxes

    (18.0     1.7        (0.3     (0.1     (0.2

Plant basis differences

    (31.4            (0.6     (8.7     (0.6

Production tax credits and other credits

    (36.5     3.8                        

Noncontrolling interest

                                  

Other

    (47.7     3.3        0.2        0.2        0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

    (138.5 )%      51.8     39.9     27.6     39.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Generation recognized a loss before income taxes for the three months ended March 31, 2014. As a result, positive percentages represent an income tax benefit for Generation for the three months ended March 31, 2014.

 

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Accounting for Uncertainty in Income Taxes

Exelon, Generation, ComEd, PECO, and BGE have $1,282 million, $733 million, $147 million, $0 million, and $120 million, of unrecognized tax benefits as of March 31, 2015, respectively, and $1,829 million, $1,357 million, $149 million, $44 million, and $0 million, of unrecognized tax benefits as of December 31, 2014, respectively. The unrecognized tax benefits as of March 31, 2015 reflect a decrease at Exelon, Generation, and PECO primarily attributable to the disallowed AmerGen claims discussed below. The unrecognized tax benefits as of March 31, 2015 reflect an increase at BGE and Generation attributable to a state income tax opportunity. A portion of the benefits associated with uncertain tax positions for utilities, if recognized, may be included in future base rates.

Nuclear Decommissioning Liabilities (Exelon and Generation)

AmerGen filed income tax refund claims taking the position that nuclear decommissioning liabilities assumed as part of its acquisition of nuclear power plants are taken into account in determining the tax basis in the assets it acquired. The additional basis results primarily in reduced capital gains or increased capital losses on the sale of assets in nonqualified decommissioning funds and increased tax depreciation and amortization deductions. The IRS disagrees with this position and disallowed AmerGen’s claims. In early 2009, Generation filed a complaint in the United States Court of Federal Claims to contest this determination. On September 17, 2013, the Court granted the government’s motion denying AmerGen’s claims for refund. In the first quarter of 2014, Exelon filed an appeal of the decision to the United States Court of Appeals for the Federal Circuit. On March 11, 2015, the Federal Circuit affirmed the lower court’s decision to deny AmerGen’s claims for refund. Exelon will not be pursuing further appeals with respect to this issue and, as a result, has reduced its total unrecognized tax benefits by $661 million. This change in unrecognized tax benefits had no impact on Exelon’s or Generation’s effective tax rate.

Reasonably possible the total amount of unrecognized tax benefits could significantly increase or decrease within 12 months after the reporting date

Settlement of Income Tax Audits

As of March 31, 2015, Exelon, Generation, and BGE have approximately $345 million, $225 million, and $120 million of unrecognized state tax benefits that could significantly decrease within the 12 months after the reporting date as a result of completing audits, potential settlements, and expected statute of limitation expirations. Of the above unrecognized tax benefits, Exelon and Generation have $225 million that, if recognized, would decrease the effective tax rate. The unrecognized tax benefit related to BGE, if recognized, may be included in future base rates and that portion would have no impact to the effective tax rate.

Other Income Tax Matters

Like-Kind Exchange

Exelon, through its ComEd subsidiary, took a position on its 1999 income tax return to defer approximately $1.2 billion of tax gain on the sale of ComEd’s fossil generating assets. The gain was deferred by reinvesting a portion of the proceeds from the sale in qualifying replacement property under the like-kind exchange provisions of the IRC. The like-kind exchange replacement property purchased by Exelon included interests in three municipal-owned electric generation facilities which were properly leased back to the municipalities. The IRS disagreed with this position and asserted that the entire gain of approximately $1.2 billion was taxable in 1999.

Exelon has been unable to reach agreement with the IRS regarding the dispute over the like-kind exchange position. The IRS has asserted that the Exelon purchase and leaseback transaction is substantially similar to a

 

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leasing transaction, known as a SILO, which the IRS does not respect as the acquisition of an ownership interest in property. A SILO is a “listed transaction” that the IRS has identified as a potentially abusive tax shelter under guidance issued in 2005. Accordingly, the IRS has asserted that the sale of the fossil plants followed by the purchase and leaseback of the municipal owned generation facilities does not qualify as a like-kind exchange and the gain on the sale is fully subject to tax. The IRS has also asserted a penalty of approximately $90 million for a substantial understatement of tax.

Exelon disagrees with the IRS and continues to believe that its like-kind exchange transaction is not the same as or substantially similar to a SILO. Although Exelon has been and remains willing to settle the disagreement on terms commensurate with the hazards of litigation, Exelon does not believe a settlement is possible. Because Exelon believed, as of December 31, 2012, that it was more-likely-than-not that Exelon would prevail in litigation, Exelon and ComEd had no liability for unrecognized tax benefits with respect to the like-kind exchange position.

On January 9, 2013, the U.S. Court of Appeals for the Federal Circuit reversed the U.S. Court of Federal Claims and reached a decision for the government in Consolidated Edison v. United States. The Court disallowed Consolidated Edison’s deductions stemming from its participation in a LILO transaction that the IRS also has characterized as a tax shelter.

In accordance with applicable accounting standards, Exelon is required to assess whether it is more-likely-than-not that it will prevail in litigation. Exelon continues to believe that its transaction is not a SILO and that it has a strong case on the merits. However, in light of the Consolidated Edison decision and Exelon’s current determination that settlement is unlikely, Exelon has concluded that subsequent to December 31, 2012, it is no longer more-likely-than-not that its position will be sustained. As a result, in the first quarter of 2013 Exelon recorded a non-cash charge to earnings of approximately $265 million, which represents the amount of interest expense (after-tax) and incremental state income tax expense for periods through March 31, 2013 that would be payable in the event that Exelon is unsuccessful in litigation. Of this amount, approximately $170 million was recorded at ComEd. Exelon intends to hold ComEd harmless from any unfavorable impacts of the after-tax interest amounts on ComEd’s equity. As such, ComEd recorded on its consolidated balance sheet as of March 31, 2013, a $172 million receivable and non-cash equity contributions from Exelon. Exelon and ComEd will continue to accrue interest on the unpaid tax liabilities related to the uncertain tax position, and the charges arising from future interest accruals are not expected to be material to the annual operating earnings of Exelon or ComEd. In addition, ComEd will continue to record non-cash equity contributions from Exelon in the amount of the net after-tax interest charges attributable to ComEd in connection with the like-kind exchange position. Exelon continues to believe that it is unlikely that the IRS’s assertion of penalties will ultimately be sustained and therefore no liability for the penalty has been recorded.

On September 30, 2013, the IRS issued a notice of deficiency to Exelon for the like-kind exchange position. Exelon filed a petition on December 13, 2013 to initiate litigation in the United States Tax Court and the trial has been scheduled for August of 2015. Exelon was not required to remit any part of the asserted tax or penalty in order to litigate the issue. The litigation could take three to five years including appeals, if necessary. Decisions in the Tax Court are not controlled by the Federal Circuit’s decision in Consolidated Edison.

In the event of a fully successful IRS challenge to Exelon’s like-kind exchange position, the potential tax and after-tax interest, exclusive of penalties, that could become currently payable as of March 31, 2015 may be as much as $810 million, of which approximately $310 million would be attributable to ComEd after consideration of Exelon’s agreement to hold ComEd harmless, and the balance at Exelon. Litigation could take several years such that the estimated cash and interest impacts would likely change by a material amount.

 

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In the first quarter of 2014, Exelon entered into an agreement to terminate its investment in one of the three municipal-owned electric generation properties in exchange for a net early termination amount of $335 million. The termination will result in a 2014 tax payment of approximately $285 million by Exelon, including approximately $155 million by ComEd representing the remaining gain deferred pursuant to the like-kind exchange transaction. In the event of a fully successful IRS challenge to Exelon’s like-kind exchange position, Exelon will be required to pay the full amount of tax and after-tax interest discussed in the preceding paragraph but will ultimately be entitled to a refund of the 2014 tax payment.

11.    Nuclear Decommissioning (Exelon and Generation)

Nuclear Decommissioning Asset Retirement Obligations

Generation has a legal obligation to decommission its nuclear power plants following the expiration of their operating licenses. To estimate its decommissioning obligation related to its nuclear generating stations for financial accounting and reporting purposes, Generation uses a probability-weighted, discounted cash flow model which, on a unit-by-unit basis, considers multiple outcome scenarios that include significant estimates and assumptions, and are based on decommissioning cost studies, cost escalation rates, probabilistic cash flow models and discount rates. Generation generally updates its ARO annually during the third quarter, unless circumstances warrant more frequent updates, based on its review of updated cost studies and its annual evaluation of cost escalation factors and probabilities assigned to various scenarios.

The following table provides a rollforward of the nuclear decommissioning ARO reflected on Exelon’s and Generation’s Consolidated Balance Sheets from December 31, 2014 to March 31, 2015:

 

Nuclear decommissioning ARO at December 31, 2014(a)

   $  6,961   

Net increase due to changes in, and timing of, estimated future cash flows(b)

     55   

Accretion expense

     94   
  

 

 

 

Nuclear decommissioning ARO at March 31, 2015(a)

   $ 7,110   
  

 

 

 

 

(a)

Includes $8 million as the current portion of the ARO at March 31, 2015 and December 31, 2014, which is included in Other current liabilities on Exelon’s and Generation’s Consolidated Balance Sheets.

(b)

Represents a purchase accounting adjustment to the fair value of the CENG ARO liability as of April 1, 2014, the date of consolidation. See Note 6 — Investment in Constellation Energy Nuclear Group, LLC for additional information.

Nuclear Decommissioning Trust Fund Investments

NDT funds have been established for each generating station unit to satisfy Generation’s nuclear decommissioning obligations. Generally, NDT funds established for a particular unit may not be used to fund the decommissioning obligations of any other unit.

The NDT funds associated with Generation’s nuclear units have been funded with amounts collected from the previous owners and their respective utility customers. PECO is authorized to collect funds, in revenues, for decommissioning the former PECO nuclear plants through regulated rates, and these collections are scheduled through the operating lives of the former PECO plants. The amounts collected from PECO customers are remitted to Generation and deposited into the NDT funds for the unit for which funds are collected. Every five years, PECO files a rate adjustment with the PAPUC that reflects PECO’s calculations of the estimated amount needed to decommission each of the former PECO units based on updated fund balances and estimated decommissioning costs. The rate adjustment is used to determine the amount collectible from PECO customers. The most recent rate adjustment occurred on January 1, 2013, and the effective rates currently yield annual

 

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collections of approximately $24 million. The next five-year adjustment is expected to be reflected in rates charged to PECO customers effective January 1, 2018. Aside from the former PECO units, Generation does not currently collect any amounts, nor is there any mechanism by which Generation can seek to collect additional amounts, from utility customers. Apart from the contributions made to the NDT funds from amounts previously collected from ComEd and currently collected from PECO customers, Generation has not made contributions to the NDT funds.

Any shortfall of funds necessary for decommissioning, determined for each generating station unit, is ultimately required to be funded by Generation, with the exception of a shortfall for the current decommissioning activities at Zion Station, where certain decommissioning activities have been transferred to a third party (see Zion Station Decommissioning below) and the CENG units, where any shortfall is required to be funded by both Generation and EDF. Generation, through PECO, has recourse to collect additional amounts from PECO customers related to a shortfall of NDT funds for the former PECO units, subject to certain limitations and thresholds, as prescribed by an order from the PAPUC. Generally, PECO, and likewise Generation, will not be allowed to collect amounts associated with the first $50 million of any shortfall of trust funds, compared to decommissioning costs, as well as 5% of any additional shortfalls, on an aggregate basis for all former PECO units. The initial $50 million and up to 5% of any additional shortfalls would be borne by Generation. No recourse exists to collect additional amounts for any of Generation’s other nuclear units, including the CENG units. With respect to the former ComEd and PECO units, any funds remaining in the NDTs after all decommissioning has been completed are required to be refunded to ComEd’s or PECO’s customers, subject to certain limitations that allow sharing of excess funds with Generation related to the former PECO units. With respect to Generation’s other nuclear units, Generation retains any funds remaining after decommissioning. However, in connection with CENG’s acquisition of the Nine Mile Point and Ginna plants and settlements with certain regulatory agencies, CENG is subject to certain conditions pertaining to nuclear decommissioning trust funds that, if met, could possibly result in obligations to make payments to certain third parties (clawbacks). For Nine Mile Point and Ginna, the clawback provisions are triggered only in the event that the required decommissioning activities are discontinued or not started or completed in a timely manner. In the event that the clawback provisions are triggered for Nine Mile Point, then, depending upon the triggering event, an amount equal to 50% of the total amount withdrawn from the funds for non-decommissioning activities or 50% of any excess funds in the trust funds above the amounts required for decommissioning (including spent fuel management and decommissioning) is to be paid to the Nine Mile Point sellers. In the event that the clawback provisions are triggered for Ginna, then an amount equal to any estimated cost savings realized by not completing any of the required decommissioning activities is to be paid to the Ginna sellers. Generation expects to comply with applicable regulations and timely commence and complete all required decommissioning activities.

At March 31, 2015 and December 31, 2014, Exelon and Generation had NDT fund investments totaling $10,712 million and $10,537 million, respectively.

 

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The following table provides unrealized gains on NDT funds for the three months ended March 31, 2015 and 2014:

 

     Exelon and Generation  
     Three Months Ended March 31,  
     2015      2014  

Net unrealized gains on decommissioning trust funds — Regulatory Agreement Units(a)

   $ 48       $ 61   

Net unrealized gains on decommissioning trust funds — Non-Regulatory Agreement Units(b)(c)

     40         13   

 

(a)

Net unrealized gains related to Generation’s NDT funds associated with Regulatory Agreement Units are included in Regulatory liabilities on Exelon’s Consolidated Balance Sheets and Noncurrent payables to affiliates on Generation’s Consolidated Balance Sheets.

(b)

Excludes $10 million of net unrealized gains related to the Zion Station pledged assets for the three months ended March 31, 2015 and 2014. Net unrealized gains related to Zion Station pledged assets are included in the Payable for Zion Station decommissioning on Exelon’s and Generation’s Consolidated Balance Sheets.

(c)

Net unrealized gains related to Generation’s NDT funds with Non-Regulatory Agreement Units are included within Other, net in Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income.

Interest and dividends on NDT fund investments are recognized when earned and are included in Other, net in Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income. Interest and dividends earned on the NDT fund investments for the Regulatory Agreement Units are eliminated within Other, net in Exelon’s and Generation’s Consolidated Statement of Operations and Comprehensive Income.

Refer to Note 3 — Regulatory Matters and Note 25 — Related Party Transactions of the Exelon 2014 Form 10-K for information regarding regulatory liabilities at ComEd and PECO and intercompany balances between Generation, ComEd and PECO reflecting the obligation to refund to customers any decommissioning-related assets in excess of the related decommissioning obligations.

Zion Station Decommissioning 

On September 1, 2010, Generation completed an Asset Sale Agreement (ASA) with EnergySolutions Inc. and its wholly owned subsidiaries, EnergySolutions, LLC (EnergySolutions) and ZionSolutions, under which ZionSolutions has assumed responsibility for decommissioning Zion Station, which is located in Zion, Illinois and ceased operation in 1998. See Note 15 — Asset Retirement Obligations of the Exelon 2014 Form 10-K for information regarding the specific treatment of assets, including NDT funds, and decommissioning liabilities transferred in the transaction.

ZionSolutions is subject to certain restrictions on its ability to request reimbursements from the Zion Station NDT funds as defined within the ASA. Therefore, the transfer of the Zion Station assets did not qualify for asset sale accounting treatment and, as a result, the related NDT funds were reclassified to Pledged assets for Zion Station decommissioning within Generation’s and Exelon’s Consolidated Balance Sheets and will continue to be measured in the same manner as prior to the completion of the transaction. Additionally, the transferred ARO for decommissioning was replaced with a Payable for Zion Station decommissioning in Generation’s and Exelon’s Consolidated Balance Sheets. Changes in the value of the Zion Station NDT assets, net of applicable taxes, will be recorded as a change in the Payable to ZionSolutions. At no point will the payable to ZionSolutions exceed the project budget of the costs remaining to decommission Zion Station. Generation has retained its obligation for the SNF. Following ZionSolutions’ completion of its contractual obligations and transfer of the NRC license

 

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to Generation, Generation will store the SNF at Zion Station until it is transferred to the DOE for ultimate disposal, and will complete all remaining decommissioning activities associated with the SNF dry storage facility. Generation has a liability of approximately $87 million, which is included within the nuclear decommissioning ARO at March 31, 2015. Generation also has retained NDT assets to fund its obligation to maintain the SNF at Zion Station until transfer to the DOE and to complete all remaining decommissioning activities for the SNF storage facility. Any shortage of funds necessary to maintain the SNF and decommission the SNF storage facility is ultimately required to be funded by Generation. Any Zion Station NDT funds remaining after the completion of all decommissioning activities will be returned to ComEd customers in accordance with the applicable orders. The following table provides the pledged assets and payables to ZionSolutions, and withdrawals by ZionSolutions at March 31, 2015 and December 31, 2014:

 

     Exelon and Generation  
     March 31,
2015
     December 31,
2014
 

Carrying value of Zion Station pledged assets

   $ 308       $ 319   

Payable to Zion Solutions(a)

     281         292   

Current portion of payable to Zion Solutions(b)

     145         137   

Cumulative withdrawals by Zion Solutions to pay decommissioning costs

     687         666   

 

(a)

Excludes a liability recorded within Exelon’s and Generation’s Consolidated Balance Sheets related to the tax obligation on the unrealized activity associated with the Zion Station NDT Funds. The NDT Funds will be utilized to satisfy the tax obligations as gains and losses are realized.

(b)

Included in Other current liabilities within Exelon’s and Generation’s Consolidated Balance Sheets.

NRC Minimum Funding Requirements

NRC regulations require that licensees of nuclear generating facilities demonstrate reasonable assurance that funds will be available in specified minimum amounts to decommission the facility at the end of its life.

Generation filed its biennial decommissioning funding status report with the NRC on March 31, 2015. This report reflects the status of decommissioning funding assurance as of December 31, 2014. Due to increased cost estimates received in the second half of 2014, Braidwood Unit 1, Braidwood Unit 2, and Byron Unit 2 did not meet the NRC’s minimum funding assurance criteria as of December 31, 2014. NRC guidance provides licensees with two years or by the time of submitting the next biennial report (on or before March 31, 2017) to resolve funding assurance shortfalls. During this period, Generation will monitor funding assurance and new developments, including the impact of a 20-year license renewal for Braidwood and Byron, to assess the status of funding assurance and to take steps, if necessary, to address any funding shortfall on these funds on or before March 31, 2017.

12.    Retirement Benefits (Exelon, Generation, ComEd, PECO and BGE)

Exelon sponsors defined benefit pension plans and other postretirement benefit plans for essentially all Generation, ComEd, PECO, BGE and BSC employees.

Defined Benefit Pension and Other Postretirement Benefits

During the first quarter of 2015, Exelon received an updated valuation of its pension and other postretirement benefit obligations to reflect actual census data as of January 1, 2015. This valuation resulted in an increase to the pension obligation of $45 million and an increase to the other postretirement benefit obligation of

 

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$57 million. Additionally, accumulated other comprehensive loss increased by approximately $27 million (after tax), regulatory assets increased by approximately $48 million, and regulatory liabilities decreased by approximately $11 million.

The majority of the 2015 pension benefit cost for Exelon-sponsored plans is calculated using an expected long-term rate of return on plan assets of 7.00% and a discount rate of 3.94%. The majority of the 2015 other postretirement benefit cost is calculated using an expected long-term rate of return on plan assets of 6.46% for funded plans and a discount rate of 3.92%. A portion of the net periodic benefit cost is capitalized within the Consolidated Balance Sheets. The following table presents the components of Exelon’s net periodic benefit costs, prior to any capitalization, for the three months ended March 31, 2015 and 2014.

 

     Pension Benefits
Three Months Ended
March 31,
    Other
Postretirement Benefits
Three Months Ended
March 31,
 
     2015(a)     2014(a)     2015(a)     2014(a)  

Service cost

   $ 82      $ 69      $ 30      $ 33   

Interest cost

     178        183        42        55   

Expected return on assets

     (257     (241     (38     (38

Amortization of:

        

Prior service cost (benefit)

     3        3        (43     (4

Actuarial loss

     143        105        20        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 149      $ 119      $ 11      $ 54   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

For the three months ended March 31, 2015, the cost for pension benefits and other postretirement benefits related to CENG were $3 million and $3 million, respectively. CENG is not included in the 2014 amounts.

The amounts below represent Generation’s, ComEd’s, PECO’s, BGE’s and BSC’s allocated portion of the pension and postretirement benefit plan costs, which were included in Property, plant and equipment within the respective Consolidated Balance Sheets and Operating and maintenance expense within the Consolidated Statement of Operations and Comprehensive Income during the three months ended March 31, 2015 and 2014.

 

     Three Months Ended March 31,  

Pension and Other Postretirement Benefit Costs

   2015      2014  

Generation(a)

   $ 67       $ 75   

ComEd

     52         56   

PECO

     10         12   

BGE

     17         16   

BSC(b)

     14         14   

 

(a)

For the three months ended March 31, 2015, the cost for pension benefits and other postretirement benefits related to CENG were $3 million and $3 million, respectively. CENG is not included in the 2014 amounts.

(b)

These amounts primarily represent amounts billed to Exelon’s subsidiaries through intercompany allocations. These amounts are not included in the Generation, ComEd, PECO or BGE amounts above.

 

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Defined Contribution Savings Plans

The Registrants participate in various 401(k) defined contribution savings plans that are sponsored by Exelon. The plans are qualified under applicable sections of the IRC and allow employees to contribute a portion of their pre-tax income in accordance with specified guidelines. All Registrants match a percentage of the employee contributions up to certain limits. The following table presents the matching contributions to the savings plans during the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 

Savings Plan Matching Contributions

   2015      2014  

Exelon(a)

   $ 22       $ 29   

Generation(a)

     13         14   

ComEd

     5         7   

PECO

     1         2   

BGE

     2         3   

BSC(b)

     1         3   

 

(a)

Includes $2 million related to CENG for the three months ended March 31, 2015. CENG is not included in the 2014 amounts.

(b)

These amounts primarily represent amounts billed to Exelon’s subsidiaries through intercompany allocations. These costs are not included in the Generation, ComEd, PECO or BGE amounts above.

13.    Severance (Exelon, Generation, ComEd, PECO and BGE)

The Registrants have an ongoing severance plan under which, in general, the longer an employee worked prior to termination the greater the amount of severance benefits. The Registrants record a liability and expense or regulatory asset for severance once terminations are probable of occurrence and the related severance benefits can be reasonably estimated. For severance benefits that are incremental to its ongoing severance plan (“one-time termination benefits”), the Registrants measure the obligation and record the expense at fair value at the communication date if there are no future service requirements, or, if future service is required to receive the termination benefit, ratably over the required service period.

Ongoing Severance Plans

The Registrants provide severance, health and welfare benefits under Exelon’s ongoing severance benefit plans to terminated employees in the normal course of business, which were not directly related to the merger with Constellation or with the integration of CENG. These benefits are accrued for when the benefits are considered probable and can be reasonably estimated.

For the three months ended March 31, 2015 and 2014, the Registrants recorded the following severance costs associated with these ongoing severance benefits within Operating and maintenance expense in their Consolidated Statements of Operations and Comprehensive Income:

 

Severance Benefits

   Exelon      Generation      ComEd      PECO      BGE  

Severance charges — 2015

   $ 20       $ 20       $       $       $   

Severance charges — 2014

   $ 4       $ 4       $       $       $   

The severance liability balances associated with these ongoing severance benefits as of March 31, 2015 and December 31, 2014 are not material.

 

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14.    Changes in Accumulated Other Comprehensive Income (Exelon, Generation, and PECO)

The following tables present changes in accumulated other comprehensive income (loss) (AOCI) by component for the three months ended March 31, 2015 and 2014:

 

Three Months Ended March 31, 2015

  Gains and
(Losses) on
Hedging
Activity
    Unrealized
Gains and
(Losses) on
Marketable
Securities
    Pension and
Non-Pension
Postretirement
Benefit Plan
Items
    Foreign
Currency
Items
    AOCI of
Equity
Investments
    Total  

Exelon(a)

           

Beginning balance

  $ (28   $ 3      $ (2,640   $ (19   $      $ (2,684
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OCI before reclassifications

    (11            (26     (12            (49

Amounts reclassified from AOCI(b)

    17               43                      60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period OCI

    6               17        (12            11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ (22   $ 3      $ (2,623   $ (31   $      $ (2,673
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Generation(a)

           

Beginning balance

  $ (18   $ 1      $      $ (19   $      $ (36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OCI before reclassifications

    (6                   (12            (18

Amounts reclassified from AOCI(b)

    1                                    1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period OCI

    (5                   (12            (17
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ (23   $ 1      $      $ (31   $      $ (53
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PECO(a)

           

Beginning balance

  $      $ 1      $      $      $      $ 1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OCI before reclassifications

                                         

Amounts reclassified from AOCI(b)

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period OCI

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $      $ 1      $      $      $      $ 1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

All amounts are net of tax. Amounts in parentheses represent a decrease in accumulated other comprehensive income.

(b)

See tables following changes in accumulated other comprehensive income tables for details about these reclassifications.

 

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Three Months Ended March 31, 2014

  Gains and
(Losses) on
Hedging
Activity
    Unrealized
Gains and
(Losses) on
Marketable
Securities
    Pension and
Non-Pension
Postretirement
Benefit Plan
Items
    Foreign
Currency
Items
    AOCI of
Equity
Investments
    Total  

Exelon(a)

           

Beginning balance

  $ 120      $ 2      $ (2,260   $ (10   $ 108      $ (2,040
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OCI before reclassifications

    (1            (13     (5     11        (8

Amounts reclassified from AOCI(b)

    (24            35               1        12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period OCI

    (25            22        (5     12        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 95      $ 2      $ (2,238   $ (15   $ 120      $ (2,036
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Generation(a)

           

Beginning balance

  $ 114      $ 2      $      $ (10   $ 108      $ 214   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OCI before reclassifications

    (1     (3            (5     11        2   

Amounts reclassified from AOCI(b)

    (24                          1        (23
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period OCI

    (25     (3            (5     12        (21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 89      $ (1   $      $ (15   $ 120      $ 193   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PECO(a)

           

Beginning balance

  $      $ 1      $      $      $      $ 1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OCI before reclassifications

                                         

Amounts reclassified from AOCI(b)

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period OCI

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $      $ 1      $      $      $      $ 1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

All amounts are net of tax. Amounts in parentheses represent a decrease in accumulated other comprehensive income.

(b)

See tables following changes in accumulated other comprehensive income tables for details about these reclassifications.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

ComEd, PECO, and BGE did not have any reclassifications out of AOCI to Net income during the three months ended March 31, 2015 and 2014. The following tables present amounts reclassified out of AOCI to Net income for Exelon and Generation during the three months ended March 31, 2015 and 2014.

Three Months Ended March 31, 2015

 

Details about AOCI components

   Items reclassified out of AOCI(a)     Affected line item in the Statements of
Operations and Comprehensive Income
     Exelon     Generation      

Gains (losses) on hedging activity

      

Terminated interest rate swaps(c)

   $ (26   $      Other, net

Energy related hedges

     2        2      Operating revenues

Other cash flow hedges

     (3     (3   Interest expense
  

 

 

   

 

 

   
     (27     (1   Total before tax
     10             Tax benefit
  

 

 

   

 

 

   
   $ (17   $ (1   Net of tax
  

 

 

   

 

 

   

Amortization of pension and other postretirement benefit plan items

      

Prior service costs(b)

   $ 19      $     

Actuarial losses(b)

     (90         
  

 

 

   

 

 

   
     (71          Total before tax
     28             Tax benefit
  

 

 

   

 

 

   
   $ (43   $      Net of tax
  

 

 

   

 

 

   

Total Reclassifications for the period

   $ (60   $ (1   Net of Tax
  

 

 

   

 

 

   

Three months ended March 31, 2014

 

Details about AOCI components

   Items reclassified out of AOCI(a)     Affected line item in the Statements of
Operations and Comprehensive  Income
     Exelon     Generation      

Gains on hedging activity

      

Energy related hedges

   $ 39      $ 39     

Operating revenues

  

 

 

   

 

 

   
     39        39      Total before tax
     (15     (15   Tax (expense)
  

 

 

   

 

 

   
   $ 24      $ 24      Net of tax
  

 

 

   

 

 

   

Amortization of pension and other postretirement benefit plan items

      

Prior service costs(b)

   $ (2   $     

Actuarial losses(b)

     (56         
  

 

 

   

 

 

   
     (58          Total before tax
     23             Tax benefit
  

 

 

   

 

 

   
   $ (35   $      Net of tax
  

 

 

   

 

 

   

Equity investments

      

Capital activity

   $ (1   $ (1   Equity in losses of
unconsolidated affiliates
  

 

 

   

 

 

   
     (1     (1   Total before tax
                 Tax benefit
  

 

 

   

 

 

   
   $ (1   $ (1   Net of tax
  

 

 

   

 

 

   

Total reclassifications for the period

   $ (12   $ 23      Net of Tax
  

 

 

   

 

 

   

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

 

(a)

All amounts are net of tax. Amounts in parentheses represent a decrease in net income.

(b)

This accumulated other comprehensive income component is included in the computation of net periodic pension and OPEB cost (see Note 12 — Retirement Benefits for additional details).

(c)

In January 2015, in connection with Generation’s $750 million issuance of five-year Senior Unsecured Notes, Exelon terminated certain floating-to-fixed interest rate swaps. As the original forecasted transactions were a series of future interest payments over a ten year period, a portion of the anticipated interest payments are probable not to occur. As a result, $26 million of anticipated payments were reclassified from Accumulated OCI to Other, net in Exelon’s Consolidated Statement of Operations and Comprehensive Income.

The following table presents income tax expense (benefit) allocated to each component of other comprehensive income (loss) during the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 
         2015             2014      

Exelon

    

Pension and non-pension postretirement benefit plans:

    

Prior service benefit reclassified to periodic benefit cost

   $ 8      $ (1

Actuarial gain (loss) reclassified to periodic cost

     (35     (23

Pension and non-pension postretirement benefit plans valuation adjustment

     17        7   

Change in unrealized gain (loss) on cash flow hedges

     (2     18   

Change in unrealized income on equity investments

            (7
  

 

 

   

 

 

 

Total

   $ (12   $ (6
  

 

 

   

 

 

 

Generation

    

Change in unrealized gain (loss) on cash flow hedges

   $ 5      $ 19   

Change in unrealized income on equity investments

            (7

Change in marketable securities

            (2
  

 

 

   

 

 

 

Total

   $ 5      $ 10   
  

 

 

   

 

 

 

15.    Common Stock (Exelon, Generation, ComEd, PECO and BGE)

Equity Securities Offering

In June 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 such offering, Exelon entered into forward sale agreements requiring Exelon to settle the transaction prior to October 29, 2015. No amounts have or will be recorded in Exelon’s consolidated financial statements with respect to the equity offering until settlement of the forward sale agreements occurs. Based on the average stock price for the quarter ended March 31, 2015, if Exelon had elected to net settle the contract, Exelon would have been required to issue approximately 2.5 million shares at a forward price of $33.21. If Exelon elects to cash settle the contract, the transaction costs will be recorded as a charge to earnings in the period in which it becomes probable that Exelon will cash settle. Otherwise, all transaction costs will be reflected as a reduction to the value of the common stock issued in Exelon’s Consolidated Balance Sheet. The net proceeds received upon settlement are expected to be used to finance a portion of the proposed acquisition of PHI and for general corporate purposes. Until settlement, earnings per share dilution resulting from the forward sales agreement, if any, will be determined under the treasury stock method. For further information on the options Exelon has to settle the transaction, refer to note 19 — Common Stock of the Exelon 2014 Form 10-K

Concurrent with the forward equity transaction, Exelon also issued $1.15 billion of junior subordinated notes in the form of 23 million equity units. See Note 9 — Debt and Credit Agreements for further information on the equity units.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

16.    Earnings Per Share and Equity (Exelon)

Earnings per Share (Exelon)

Diluted earnings per share is calculated by dividing Net income attributable to common shareholders by the weighted average number of shares of common stock outstanding adjusted to include the potentially dilutive effect of stock options, performance share awards and restricted stock outstanding under Exelon’s LTIPs. The following table sets forth the components of basic and diluted earnings per share and shows the effect of these stock options, performance share awards and restricted stock on the weighted average number of shares outstanding (in millions) used in calculating diluted earnings per share:

 

     Three Months Ended
March 31,
 
         2015              2014      

Net income attributable to common shareholders

   $ 693       $ 90   
  

 

 

    

 

 

 

Average common shares outstanding — basic

     862         858   

Potentially dilutive effect of stock options, performance share awards and restricted stock

     5         3   
  

 

 

    

 

 

 

Average common shares outstanding — diluted

     867         861   
  

 

 

    

 

 

 

The number of stock options not included in the calculation of diluted common shares outstanding due to their antidilutive effect was approximately 15 million and 18 million for the three months ended March 31, 2015 and 2014, respectively. The number of equity units related to the PHI merger not included in the calculation of diluted common shares outstanding due to their antidilutive effect was less than 1 million for the three months ended March 31, 2015 since issuance. Additionally, there were no forward units related to the PHI merger not included in the calculation of diluted common shares outstanding due to their antidilutive effect for the three months ended March 31, 2015 and since issuance. Refer to Note 15 — Common Stock for further information regarding the equity units and equity forward units.

Under share repurchase programs, 35 million shares of common stock are held as treasury stock with a cost of $2.3 billion as of March 31, 2015. In 2008, Exelon management decided to defer indefinitely any share repurchases.

17.    Commitments and Contingencies (Exelon, Generation, ComEd, PECO and BGE)

The following is an update to the current status of commitments and contingencies set forth in Note 22 of the Exelon 2014 Form 10-K.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Commitments

Energy Commitments

As of March 31, 2015, Generation’s commitments relating to its purchases from unaffiliated utilities and others of energy, capacity, transmission rights and RECs, are as indicated in the following table:

 

     Net  Capacity
Purchases(a)
     REC
Purchases(b)
     Transmission
Rights
Purchases(c)
     Total  

2015

   $ 317       $ 124       $ 13       $ 454   

2016

     287         258         15         560   

2017

     219         153         15         387   

2018

     109         52         16         177   

2019

     113         9         16         138   

Thereafter

     276         1         35         312   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,321       $ 597       $ 110       $ 2,028   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Net capacity purchases include PPAs and other capacity contracts including those that are accounted for as operating leases. Amounts presented in the commitments represent Generation’s expected payments under these arrangements at March 31, 2015, net of fixed capacity payments expected to be received (“capacity offsets”) by Generation under contracts to resell such acquired capacity to third parties under long-term capacity sale contracts. As of March 31, 2015, capacity offsets were $107 million, $133 million, $136 million, $137, million, $138 million, and $591 million for years 2015, 2016, 2017, 2018, 2019, and thereafter, respectively. Expected payments include certain fixed capacity charges which may be reduced based on plant availability.

(b)

The table excludes renewable energy purchases that are contingent in nature.

(c)

Transmission rights purchases include estimated commitments for additional transmission rights that will be required to fulfill firm sales contracts.

ComEd’s, PECO’s and BGE’s electric supply procurement, curtailment services, REC and AEC purchase commitments, as applicable, as of March 31, 2015 are as follows:

 

            Expiration within  
     Total      2015      2016      2017      2018      2019      2020
and beyond
 

ComEd

                 

Electric supply procurement(a)(b)

   $ 473       $ 182       $ 151       $ 140       $       $       $   

Renewable energy and RECs(c)

     1,498         56         76         77         78         84         1,127   

PECO

                 

Electric supply procurement(d)

     832         532         268         32                           

AECs(e)

     13         2         2         2         2         2         3   

BGE

                 

Electric supply procurement(f)

     1,074         538         448         88                           

Curtailment services(g)

     105         30         34         29         12                   

 

(a)

ComEd entered into various contracts for the procurement of electricity that started to expire in 2012, and will continue to expire through 2018. ComEd is permitted to recover its electric supply procurement costs from retail customers with no mark-up. As of March 31, 2015, ComEd has completed the ICC-approved procurement process for a portion of its energy requirements through the periods ending May 31, 2015, 2016 and 2017.

(b)

Excludes electric supply commitments associated with the Spring 2015 procurement process approved by the ICC on April 1, 2015, for the years 2015-2018 in the amount of $179 million, $112 million, $23 million, and $21 million, respectively.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

(c)

Primarily related to ComEd 20-year contracts for renewable energy and RECs that began in June 2012. ComEd is permitted to recover its renewable energy and REC costs from retail customers with no mark-up. The commitments represent the maximum settlements with suppliers for renewable energy and RECs under the existing contract terms.

(d)

PECO entered into various contracts for the procurement of electric supply to serve its default service customers that expire between 2015 and 2017. PECO is permitted to recover its electric supply procurement costs from default service customers with no mark-up in accordance with its PAPUC-approved DSP Programs. See Note 5 — Regulatory Matters for additional information.

(e)

PECO is subject to requirements related to the use of alternative energy resources established by the AEPS Act. See Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for additional information.

(f)

BGE entered into various contracts for the procurement of electricity that expire between 2015 through 2017. The cost of power under these contracts is recoverable under MDPSC approved fuel clauses. See Note 3 — Regulatory Matters of the Exelon 2014 10-K for additional information.

(g)

BGE has entered into various contracts with curtailment services providers related to transactions in PJM’s capacity market. See Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for additional information.

Fuel Purchase Obligations

In addition to the energy commitments described above, Generation has commitments to purchase fuel supplies for nuclear and fossil generation. Since the second quarter of 2014, 100% of CENG’s nuclear fuel commitments are disclosed within the Generation line below, since CENG is now fully consolidated by Generation. PECO and BGE have commitments to purchase natural gas related to transportation, storage capacity and services to serve customers in their gas distribution service territory. As of March 31, 2015, these net commitments were as follows:

 

            Expiration within  
     Total      2015      2016      2017      2018      2019      2020
and beyond
 

Generation

   $ 8,479       $ 1,015       $ 1,145       $ 1,151       $ 987       $ 869       $ 3,312   

PECO

     392         109         104         61         34         13         71   

BGE

     614         82         87         74         64         61         246   

Other Purchase Obligations

The Registrants’ other purchase obligations as of March 31, 2015, which primarily represent commitments for services, materials and information technology, are as follows:

 

            Expiration within  
     Total      2015      2016      2017      2018      2019      2020
and beyond
 

Exelon

   $ 840       $ 258       $ 279       $ 152       $ 38       $ 30       $ 83   

Generation(a)

     364         123         81         43         31         23         63   

ComEd(b)

     152         53         82         2         2         2         11   

PECO(b)

     11         5         6                                   

BGE(b)

     313         77         110         107         5         5         9   

 

(a)

Purchase obligations do not include commitments related to construction contracts. See Construction Commitments section below for additional information.

(b)

Purchase obligations include commitments related to smart meter installation. See Note 5 — Regulatory Matters for additional information.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Construction Commitments

Generation’s ongoing investments in renewables development and new natural gas construction illustrates Generation’s growth strategy to provide for diversification opportunities while leveraging its expertise and strengths.

On July 26, 2013, Generation executed an engineering procurement and construction contract to expand its Perryman, Maryland generation site with at least 120 MW of new natural gas-fired generation. The remaining commitment is approximately $17 million under the contract and achievement of commercial operations is expected in 2015. This project will satisfy a portion of Exelon’s commitment to Maryland. See Note 4 — Mergers, Acquisitions, and Dispositions of the Exelon 2014 Form 10-K for additional information on commitments to develop or assist in development of new generation in Maryland resulting from the Constellation merger.

During the third and fourth quarter of 2014, Generation executed contracts associated with the construction of new combined-cycle gas turbine units in Texas. The remaining commitment is approximately $816 million under these contracts and achievement of commercial operations is expected in 2017.

During the fourth quarter of 2014, Generation executed contracts associated with the construction of the 30 MW Fair Wind project in western Maryland. The remaining commitment is approximately $26 million under these contracts and achievement of commercial operations is expected in 2015. This project will satisfy a portion of Exelon’s 125 MW Tier I land-based renewables commitment made to Maryland. See Note 4 — Mergers, Acquisitions, and Dispositions of the Exelon 2014 Form 10-K for additional information on commitments to develop or assist in development of new generation in Maryland resulting from the Constellation merger.

During the fourth quarter of 2014, Generation executed contracts associated with the construction of the 78 MW Sendero Wind project in southern Texas. The remaining commitment is approximately $34 million under these contracts and achievement of commercial operations is expected in 2015.

Refer to Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for information on investment programs associated with regulatory mandates, such as ComEd’s Infrastructure Investment Plan under EIMA, PECO’s Smart Meter Procurement and Installation Plan and BGE’s comprehensive smart grid initiative.

Constellation Merger Commitments

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 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. Generation’s total commitments under the lease agreement are $0 million, $5 million, $12 million, $13 million, $13 million, and $285 million, related to 2015, 2016, 2017, 2018, 2019 and thereafter.

The direct investment commitment also includes $600 million to $650 million relating to Exelon and Generation’s development or assistance in the development of 285 — 300 MWs of new generation in Maryland,

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

which is 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. See Note 4 — Mergers, Acquisitions, and Dispositions of the Exelon 2014 Form 10-K for additional information regarding the Constellation merger commitments.

Equity Investment Commitments

As part of Generation’s recent investments in technology development, Generation has entered into equity purchase agreements that include commitments to purchase additional equity through incremental payments. The additional equity is provided by the agreements to fund the anticipated needs of the planned operations of the associated companies. The commitment includes approximately $20 million of in-kind services. As of March 31, 2015, Generation’s estimated commitment relating to its equity purchase agreements, including the in-kind services contributions, is anticipated to be as follows:

 

     Total  

2015

   $ 77   

2016

     37   

2017

     19   

2018

     14   
  

 

 

 

Total

   $ 147   
  

 

 

 

Contingencies

Commercial Commitments

The Registrants’ commercial commitments as of March 31, 2015, representing commitments potentially triggered by future events were as follows:

 

     Exelon     Generation     ComEd     PECO     BGE  

Letters of credit (non-debt)(a)

   $ 1,740      $ 1,673      $ 18      $ 22      $ 1   

Guarantees

     5,453 (b)      2,678 (c)      202 (d)      196 (e)      263 (f) 

Nuclear insurance premiums(g)

     3,014        3,014                        

Underwriters discount(h)

     60                               
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial commitments

   $ 10,267      $ 7,365      $ 220      $ 218      $ 264   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

 

(a)

Non-debt letters of credit maintained to provide credit support for certain transactions as requested by third parties.

(b)

Primarily reflects parental guarantees issued on behalf of Generation to allow the flexibility needed to conduct business with counterparties without having to post other forms of collateral. Also reflects guarantees issued to ensure performance under specific contracts, preferred securities of financing trusts, property leases, indemnifications, NRC minimum funding assurance requirements and miscellaneous guarantees. The estimated net exposure for obligations under commercial transactions covered by these guarantees was $642 million at March 31, 2015, which represents the total amount Exelon could be required to fund based on March 31, 2015 market prices.

(c)

Primarily reflects guarantees issued to ensure performance under energy marketing and other specific contracts. The estimated net exposure for obligations under commercial transactions covered by these guarantees was $429 million at March 31, 2015, which represents the total amount Generation could be required to fund based on March 31, 2015 market prices.

(d)

Primarily reflects full and unconditional guarantees of $200 million Trust Preferred Securities of ComEd Financing III, which is a 100% owned finance subsidiary of ComEd.

(e)

Primarily reflects full and unconditional guarantees of $178 million Trust Preferred Securities of PECO Trust III and IV, which are 100% owned finance subsidiaries of PECO.

(f)

Primarily reflects full and unconditional guarantees of $250 million Trust Preferred Securities of BGE Capital Trust II, which is a 100% owned finance subsidiary of BGE.

(g)

Represents the maximum amount that Generation would be required to pay for retrospective premiums in the event of nuclear disaster at any domestic site, including CENG sites, under the Secondary Financial Protection pool as required under the Price-Anderson Act as well as the current aggregate annual retrospective premium obligation that could be imposed by NEIL. See the Nuclear Insurance section within this note for additional details on Generation’s nuclear insurance premiums.

(h)

Represents the underwriters discount for Exelon’s forward equity transaction. See Note 15 — Common Stock for further details of the equity securities offering.

Nuclear Insurance (Exelon and Generation)

Generation is subject to liability, property damage and other risks associated with major incidents at any of its nuclear stations, including the CENG nuclear stations. Generation has mitigated its financial exposure to these risks through insurance and other industry risk-sharing provisions.

The Price-Anderson Act was enacted to ensure the availability of funds for public liability claims arising from an incident at any of the U.S. licensed nuclear facilities and also to limit the liability of nuclear reactor owners for such claims from any single incident. As of March 31, 2015, the current liability limit per incident was $13.6 billion and is subject to change to account for the effects of inflation and changes in the number of licensed reactors. An inflation adjustment must be made at least once every 5 years and the last inflation adjustment was made effective September 10, 2013. In accordance with the Price-Anderson Act, Generation maintains financial protection at levels equal to the amount of liability insurance available from private sources through the purchase of private nuclear energy liability insurance for public liability claims that could arise in the event of an incident. As of March 31, 2015, the amount of nuclear energy liability insurance purchased is $375 million for each operating site. Additionally, the Price-Anderson Act requires a second layer of protection through the mandatory participation in a retrospective rating plan for power reactors (currently 104 reactors) resulting in an additional $13.2 billion in funds available for public liability claims. Participation in this secondary financial protection pool requires the operator of each reactor to fund its proportionate share of costs for any single incident that exceeds the primary layer of financial protection. Under the Price-Anderson Act, the maximum assessment in the event of an incident for each nuclear operator, per reactor, per incident (including a 5% surcharge), is $127.3 million, payable at no more than $19 million per reactor per incident per year. Exelon’s maximum liability per incident is approximately $2.7 billion, including CENG’s related liability.

In addition, the U.S. Congress could impose revenue-raising measures on the nuclear industry to pay public liability claims exceeding the $13.6 billion limit for a single incident.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

As part of the execution of the NOSA on April 1, 2014, Generation executed an Indemnity Agreement pursuant to which Generation agreed to indemnify EDF and its affiliates against third-party claims that may arise from any future nuclear incident (as defined in the Price Anderson Act) in connection with the CENG nuclear plants or their operations. Exelon guarantees Generation’s obligations under this indemnity. See Note 6 — Investment in Constellation Energy Nuclear Group, LLC for additional information on Generation’s operations relating to CENG.

Generation is required each year to report to the NRC the current levels and sources of property insurance that demonstrates Generation possesses sufficient financial resources to stabilize and decontaminate a reactor and reactor station site in the event of an accident. The property insurance maintained for each facility is currently provided through insurance policies purchased from NEIL, an industry mutual insurance company of which Generation is a member.

NEIL provides “all risk” property damage, decontamination and premature decommissioning insurance for each station for losses resulting from damage to its nuclear plants, either due to accidents or acts of terrorism. If the decision is made to decommission the facility, a portion of the insurance proceeds will be allocated to a fund, which Generation is required by the NRC to maintain, to provide for decommissioning the facility. In the event of an insured loss, Generation is unable to predict the timing of the availability of insurance proceeds to Generation and the amount of such proceeds that would be available. In the event that one or more acts of terrorism cause accidental property damage within a twelve-month period from the first accidental property damage under one or more policies for all insured plants, the maximum recovery for all losses by all insureds will be an aggregate of $3.2 billion plus such additional amounts as the insurer may recover for all such losses from reinsurance, indemnity and any other source, applicable to such losses.

For its insured losses, Generation is self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. Uninsured losses and other expenses, to the extent not recoverable from insurers or the nuclear industry, could also be borne by Generation. Any such losses could have a material adverse effect on Exelon’s and Generation’s financial condition, results of operations and liquidity.

Environmental Issues

General.    The Registrants’ operations have in the past, and may in the future, require substantial expenditures in order to comply with environmental laws. Additionally, under Federal and state environmental laws, the Registrants are generally liable for the costs of remediating environmental contamination of property now or formerly owned by them and of property contaminated by hazardous substances generated by them. The Registrants own or lease a number of real estate parcels, including parcels on which their operations or the operations of others may have resulted in contamination by substances that are considered hazardous under environmental laws. In addition, the Registrants are currently involved in a number of proceedings relating to sites where hazardous substances have been deposited and may be subject to additional proceedings in the future.

ComEd, PECO and BGE have identified sites where former MGP activities have or may have resulted in actual site contamination. For almost all of these sites, there are additional PRPs that may share responsibility for the ultimate remediation of each location.

 

   

ComEd has identified 42 sites, 17 of which the remediation has been completed and approved by the Illinois EPA or the U.S. EPA and 25 that are currently under some degree of active study and/or remediation. ComEd expects the majority of the remediation at these sites to continue through at least 2019.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

   

PECO has identified 26 sites, 16 of which have been remediated in accordance with applicable PA DEP regulatory requirements. The remaining 10 sites are currently under some degree of active study and/or remediation. PECO expects the majority of the remediation at these sites to continue through at least 2021.

 

   

BGE has identified 13 former gas manufacturing or purification sites that it currently owns or owned at one time through a predecessor’s acquisition. Two gas manufacturing sites require some level of remediation and ongoing monitoring under the direction of the MDE. The required costs at these two sites are not considered material. An investigation of an additional gas purification site was completed during the first quarter of 2015 at the direction of the MDE. BGE has established a reserve, which is not material, representing the low end of a reasonably possible estimated range of loss. Management is unable to estimate the maximum exposure of potential remediation efforts at this time, which may have a material impact on BGE’s results of operations and cash flows.

ComEd, pursuant to an ICC order, and PECO, pursuant to settlements of natural gas distribution rate cases with the PAPUC, are currently recovering environmental remediation costs of former MGP facility sites through customer rates. ComEd and PECO have recorded regulatory assets for the recovery of these costs. See Note 5 — Regulatory Matters for additional information regarding the associated regulatory assets. BGE is authorized to recover, and is currently recovering, environmental costs for the remediation of the former MGP facility sites from customers; however, while BGE does not have a rider for MGP clean-up costs, BGE has historically received recovery of actual clean-up costs in distribution rates. BGE has not established a regulatory asset for the costs associated with the gas purification site as of March 31, 2015.

As of March 31, 2015 and December 31, 2014, the Registrants had accrued the following undiscounted amounts for environmental liabilities in other current liabilities and other deferred credits and other liabilities within their respective Consolidated Balance Sheets:

 

March 31, 2015

   Total Environmental
Investigation and
Remediation Reserve
     Portion of Total Related to
MGP Investigation and
Remediation
 

Exelon

   $ 340       $ 272   

Generation

     62           

ComEd

     231         228   

PECO

     44         42   

BGE

     3         2   

 

December 31, 2014

   Total Environmental
Investigation and
Remediation Reserve
     Portion of Total Related to
MGP Investigation  and
Remediation
 

Exelon

   $ 347       $ 277   

Generation

     63           

ComEd

     238         235   

PECO

     45         42   

BGE

     1           

The Registrants cannot reasonably estimate whether they will incur other significant liabilities for additional investigation and remediation costs at these or additional sites identified by the Registrants, environmental agencies or others, or whether such costs will be recoverable from third parties, including customers.

 

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Water Quality

Groundwater Contamination.    In October 2007, a subsidiary of Constellation entered into a consent decree with the MDE relating to groundwater contamination at a third-party facility that was licensed to accept fly ash, a byproduct generated by coal-fired plants. The consent decree required the payment of a $1 million penalty, remediation of groundwater contamination resulting from the ash placement operations at the site, replacement of drinking water supplies in the vicinity of the site, and monitoring of groundwater conditions. Generation’s remaining groundwater contamination reserve was $13 million at both March 31, 2015 and December 31, 2014. In addition, a private party asserted claims relating to groundwater contamination. In February 2014, Generation settled these private party claims for an amount that was not material to the financial condition of Generation.

Air Quality

Notices and Finding of Violations and Midwest Generation Bankruptcy.    In December 1999, ComEd sold several generating stations to Midwest Generation, LLC (Midwest Generation), a subsidiary of Edison Mission Energy (EME). Under the terms of the sale agreement, Midwest Generation and EME assumed responsibility for environmental liabilities associated with the ownership, occupancy, use and operation of the stations, including responsibility for compliance by the stations with environmental laws before their purchase by Midwest Generation. Midwest Generation and EME additionally agreed to indemnify and hold ComEd and its affiliates harmless from claims, fines, penalties, liabilities and expenses arising from third party claims against ComEd resulting from or arising out of the environmental liabilities assumed by Midwest Generation and EME under the terms of the agreement governing the sale. In connection with Exelon’s 2001 corporate restructuring, Generation assumed ComEd’s rights and obligations with respect to its former generation business, including its rights and obligations under the sale agreement with Midwest Generation and EME.

Under a supplemental agreement reached in 2003, Midwest Generation agreed to reimburse ComEd and Generation for 50% of the specific asbestos claims pending as of February 2003 and related expenses less recovery of insurance costs and agreed to a sharing arrangement for liabilities and expenses associated with future asbestos-related claims as specified in the agreement.

On December 17, 2012 (Petition Date), EME and certain of its subsidiaries, including Midwest Generation, filed for protection under Chapter 11 of the U.S. Bankruptcy Code.

In 2012, the Bankruptcy Court approved the rejection of an agency agreement related to a coal rail car lease under which Midwest Generation had agreed to reimburse ComEd for all obligations incurred under the coal rail car lease. The rejection left Generation as the party responsible for making all remaining payments under the lease and performing all other obligations thereunder. A settlement was reached in January 2015, to resolve the claims related to the coal rail car lease for approximately $14 million and Exelon recorded a gain upon receipt of the funds, within Operating and maintenance expense in Exelon and Generation’s Consolidated Statement of Operations and Comprehensive Income. No further action is expected related to the rail car lease.

On March 11, 2014, the Bankruptcy Court for the Northern District of Illinois entered its Order Confirming Debtors’ Joint Chapter 11 Plan of Reorganization. On April 1, 2014 (Effective Date), NRG Energy purchased EME’s portfolio of generation, including Midwest Generation and the Joint Chapter 11 Plan of Reorganization (Plan) became effective. As part of the Plan, the sale agreement, including the environmental indemnity, and the asbestos cost-sharing agreement were rejected.

Generation increased its reserve for asbestos-related bodily injury claims pertaining to Midwest Generations’ share of liability as a result of the rejection of the asbestos cost sharing agreement in the bankruptcy

 

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proceedings. Exelon and Generation may be entitled to damages associated with the rejection of the agreement and a claim has been filed by Exelon for such damages. These amounts are considered to be contingent gains and would not be recognized until realized.

As a prior owner of the generating stations, ComEd (and Generation, through its agreement in Exelon’s 2001 corporate restructuring to assume ComEd’s rights and obligations associated with its former generation business) could face liability (along with any other potentially responsible parties) for environmental conditions at the stations requiring remediation, with the determination of the allocation among the parties subject to many uncertain factors. ComEd and Generation are unable to predict whether and to what extent they may ultimately be held responsible for remediation and other costs relating to the generating stations and as a result no liability has been recorded as of March 31, 2015. Any liability imposed on ComEd or Generation for environmental matters relating to the generating stations could have a material adverse impact on their future results of operations and cash flows.

Solid and Hazardous Waste

Cotter Corporation.    The U.S. EPA has advised Cotter Corporation (Cotter), a former ComEd subsidiary, that it is potentially liable in connection with radiological contamination at a site known as the West Lake Landfill in Missouri. On February 18, 2000, ComEd sold Cotter to an unaffiliated third- party. As part of the sale, ComEd agreed to indemnify Cotter for any liability arising in connection with the West Lake Landfill. In connection with Exelon’s 2001 corporate restructuring, this responsibility to indemnify Cotter was transferred to Generation. On May 29, 2008, the U.S. EPA issued a Record of Decision approving the remediation option submitted by Cotter and the two other PRPs that required additional landfill cover. By letter dated January 11, 2010, the U.S. EPA requested that the PRPs perform a supplemental feasibility study for a remediation alternative that would involve complete excavation of the radiological contamination. On September 30, 2011, the PRPs submitted the final supplemental feasibility study to the U.S. EPA for review. In June 2012, the U.S. EPA requested that the PRPs perform additional analysis and groundwater sampling as part of the supplemental feasibility study, and subsequently requested additional analysis sampling and modeling that will be conducted throughout 2015. In light of these additional requests, it is unknown when the U.S EPA will propose a remedy for public comment, but will likely be sometime in 2016 at the earliest. Thereafter the U.S. EPA will select a final remedy and enter into a Consent Decree with the PRPs to effectuate the remedy. A complete excavation remedy would be significantly more expensive than the previously selected additional cover remedy; however, Generation believes the likelihood that the U.S. EPA would require a complete excavation remedy is remote. The current estimated cost of the landfill cover remediation for the site is approximately $50 million, which will be allocated among all PRPs. Generation has accrued what it believes to be an adequate amount to cover its anticipated share of such liability.

On August 8, 2011, Cotter was notified by the DOJ that Cotter is considered a PRP with respect to the government’s clean-up costs for contamination attributable to low level radioactive residues at a former storage and reprocessing facility named Latty Avenue near St. Louis, Missouri. The Latty Avenue site is included in ComEd’s indemnification responsibilities discussed above as part of the sale of Cotter. The radioactive residues had been generated initially in connection with the processing of uranium ores as part of the U.S. government’s Manhattan Project. Cotter purchased the residues in 1969 for initial processing at the Latty Avenue facility for the subsequent extraction of uranium and metals. In 1976, the NRC found that the Latty Avenue site had radiation levels exceeding NRC criteria for decontamination of land areas. Latty Avenue was investigated and remediated by the United States Army Corps of Engineers pursuant to funding under the Formerly Utilized Sites Remedial Action Program. The DOJ has not yet formally advised the PRPs of the amount that it is seeking, but it is believed to be approximately $90 million. The DOJ and the PRPs agreed to toll the statute of limitations until August 2015 so that settlement discussions could proceed. Based on Generation’s preliminary review, it appears probable that Generation has liability to Cotter under the indemnification agreement and has established an appropriate accrual for this liability.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

On February 28, 2012, and April 12, 2012, two lawsuits were filed in the U.S. District Court for the Eastern District of Missouri against 15 and 14 defendants, respectively, including Exelon, Generation and ComEd (the Exelon defendants) and Cotter. The suits allege that individuals living in the North St. Louis area developed some form of cancer due to the Exelon defendants’ negligent or reckless conduct in processing, transporting, storing, handling and/or disposing of radioactive materials. Plaintiffs have asserted claims for negligence, strict liability, emotional distress, medical monitoring, and violations of the Price-Anderson Act. The complaints do not contain specific damage claims. On May 30, 2012, the plaintiffs filed voluntary motions to dismiss the Exelon defendants from both lawsuits which were subsequently granted. Since May 30, 2012, several related lawsuits have been filed in the same court on behalf of various plaintiffs against Cotter and other defendants, but not Exelon. The allegations in these related lawsuits mirror the initially filed lawsuits. In the event of a finding of liability, it is reasonably possible that Exelon would be considered liable due to its indemnification responsibilities of Cotter described above. On March 27, 2013, the U.S. District Court dismissed all state common law actions brought under the initial two lawsuits; and also found that the plaintiffs had not properly brought the actions under the Price-Anderson Act. On July 8, 2013, the plaintiffs filed amended complaints under the Price-Anderson Act. Cotter moved to dismiss the amended complaints and has motions currently pending before the court. At this stage of the litigation, Exelon, Generation, and ComEd cannot estimate a range of loss, if any.

68th Street Dump.    In 1999, the U.S. EPA proposed to add the 68th Street Dump in Baltimore, Maryland to the Superfund National Priorities List, and notified BGE and 19 others that they are PRPs at the site. In March 2004, BGE and other PRPs formed the 68th Street Coalition and entered into consent order negotiations with the U.S. EPA to investigate clean-up options for the site under the Superfund Alternative Sites Program. In May 2006, a settlement among the U.S. EPA and 19 of the PRPs, including BGE, with respect to investigation of the site became effective. The settlement requires the PRPs, over the course of several years, to identify contamination at the site and recommend clean-up options. The PRPs submitted their investigation of the range of clean-up options in the first quarter of 2011. Although the investigation and options provided to the U.S. EPA are still subject to U.S. EPA review and selection of a remedy, the range of estimated clean-up costs to be allocated among all of the PRPs is in the range of $50 million to $64 million. On September 30, 2013, U.S. EPA issued the Record of Decision identifying its preferred remedial alternative for the site. The estimated cost for the alternative chosen by U.S. EPA is consistent with the PRPs estimated range of costs noted above. Based on Generation’s preliminary review, it appears probable that Generation has liability and has established an appropriate accrual for its share of the estimated clean-up costs. A wholly owned subsidiary of Generation has agreed to indemnify BGE for most of the costs related to this settlement and clean-up of the site.

Rossville Ash Site.    The Rossville Ash Site is a 32-acre property located in Rosedale, Baltimore County, Maryland, which was used for the placement of fly ash from 1983-2007. The property is owned by Constellation Power Source Generation, LLC (CPSG). In 2008, CPSG investigated and remediated the property by entering it into the Maryland Voluntary Cleanup Program (VCP) to address any historic environmental concerns and ready the site for appropriate future redevelopment. The site was accepted into the program in 2010 and is currently going through the process to remediate the site and receive closure from MDE. Exelon currently estimates the cost to close the site to be approximately $10 million, which has been fully reserved as of March 31, 2015.

Sauer Dump.    On May 30, 2012, BGE was notified by the U.S. EPA that it is considered a PRP at the Sauer Dump Superfund site in Dundalk, Maryland. The U.S. EPA offered BGE and three other PRPs the opportunity to conduct an environmental investigation and present cleanup recommendations at the site. In addition, the U.S. EPA is seeking recovery from the PRPs of $1.7 million for past cleanup and investigation costs at the site. On March 11, 2013, BGE and three other PRP’s signed an Administrative Settlement Agreement and Order on Consent with the U.S. EPA which requires the PRP’s to conduct a Remedial Investigation and Feasibility Study at the site to determine what, if any, are the appropriate and recommended cleanup activities for

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

the site. The ultimate outcome of this proceeding is uncertain. Since the U.S. EPA has not selected a cleanup remedy and the allocation of the cleanup costs among the PRPs has not been determined, an estimate of the range of BGE’s reasonably possible loss, if any, cannot be determined.

Litigation and Regulatory Matters

Except to the extent noted below, the circumstances set forth in Note 22 of the Exelon 2014 Form 10-K describe, in all material respects, the current status of litigation matters. The following is an update to that discussion.

Asbestos Personal Injury Claims (Exelon, Generation, PECO and BGE)

Exelon and Generation.    Generation maintains a reserve for claims associated with asbestos-related personal injury actions in certain facilities that are currently owned by Generation or were previously owned by ComEd and PECO. The reserve is recorded on an undiscounted basis and excludes the estimated legal costs associated with handling these matters, which could be material.

At March 31, 2015 and December 31, 2014, Generation had reserved approximately $97 million and $100 million, respectively, in total for asbestos-related bodily injury claims. As of March 31, 2015, approximately $20 million of this amount related to 224 open claims presented to Generation, while the remaining $77 million of the reserve is for estimated future asbestos-related bodily injury claims anticipated to arise through 2050, based on actuarial assumptions and analyses, which are updated on an annual basis. On a quarterly basis, Generation monitors actual experience against the number of forecasted claims to be received and expected claim payments and evaluates whether an adjustment to the reserve is necessary.

On November 22, 2013, the Supreme Court of Pennsylvania held that the Pennsylvania Workers Compensation Act does not apply to an employee’s disability or death resulting from occupational disease, such as diseases related to asbestos exposure, which manifests more than 300 weeks after the employee’s last employment-based exposure, and that therefore the exclusivity provision of the Act does not preclude such employee from suing his or her employer in court. The Supreme Court’s ruling reverses previous rulings by the Pennsylvania Superior Court precluding current and former employees from suing their employers in court, despite the fact that the same employee was not eligible for workers compensation benefits for diseases that manifest more than 300 weeks after the employee’s last employment-based exposure to asbestos. Currently, Exelon, Generation and PECO are unable to predict whether and to what extent they may experience additional claims in the future as a result of this ruling; as such no increase to the asbestos-related bodily injury liability has been recorded as of March 31, 2015. Increased claims activity resulting from this ruling could have a material adverse effect on Exelon’s, Generation’s and PECO’s future results of operations and cash flows.

BGE.    Since 1993, BGE and certain Constellation (now Generation) subsidiaries have been involved in several actions concerning asbestos. The actions are based upon the theory of “premises liability,” alleging that BGE and Generation knew of and exposed individuals to an asbestos hazard. In addition to BGE and Generation, numerous other parties are defendants in these cases.

Approximately 467 individuals who were never employees of BGE or certain Constellation subsidiaries have pending claims each seeking several million dollars in compensatory and punitive damages. Cross-claims and third-party claims brought by other defendants may also be filed against BGE and certain Constellation subsidiaries in these actions. To date, most asbestos claims which have been resolved have been dismissed or resolved without any payment by BGE or certain Constellation subsidiaries and a small minority of these cases has been resolved for amounts that were not material to BGE or Generation’s financial results.

 

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Discovery begins in these cases after they are placed on the trial docket. At present, only two of the pending cases are set for trial. Given the limited discovery in these cases, BGE and Generation do not know the specific facts that are necessary to provide an estimate of the reasonably possible loss relating to these claims; as such, no accrual has been made and a range of loss is not estimable. The specific facts not known include:

 

   

the identity of the facilities at which the plaintiffs allegedly worked as contractors;

 

   

the names of the plaintiffs’ employers;

 

   

the dates on which and the places where the exposure allegedly occurred; and

 

   

the facts and circumstances relating to the alleged exposure.

Insurance and hold harmless agreements from contractors who employed the plaintiffs may cover a portion of any awards in the actions.

Continuous Power Interruption (ComEd)

Section 16-125 of the Illinois Public Utilities Act provides that in the event an electric utility, such as ComEd, experiences a continuous power interruption of four hours or more that affects (in ComEd’s case) more than 30,000 customers, the utility may be liable for actual damages suffered by customers as a result of the interruption and may be responsible for reimbursement of local governmental emergency and contingency expenses incurred in connection with the interruption. Recovery of consequential damages is barred. The affected utility may seek from the ICC a waiver of these liabilities when the utility can show that the cause of the interruption was unpreventable damage due to weather events or conditions, customer tampering, or certain other causes enumerated in the law.

On August 18, 2011, ComEd sought from the ICC a determination that ComEd is not liable for damage compensation to customers in connection with the July 11, 2011 storm system that produced multiple power interruptions that in the aggregate affected more than 900,000 customers in ComEd’s service territory, as well as for five other storm systems that affected ComEd’s customers during June and July 2011 (Summer 2011 Storm Docket). In addition, on September 29, 2011, ComEd sought from the ICC a determination that it was not liable for damage compensation related to the February 1, 2011 blizzard (February 2011 Blizzard Docket).

On June 5, 2013, the ICC approved a complete waiver of liability for five of the six summer storms and the February 2011 blizzard. The ICC held that for the July 11, 2011 storm, 34,559 interruptions were preventable and therefore no waiver should apply. As required by the ICC’s Order, ComEd notified relevant customers that they may be entitled to seek reimbursement of incurred costs in accordance with a claims procedure established under ICC rules and regulations. On July 31, 2014, the Illinois Appellate Court reaffirmed the ICC’s decision in ComEd’s appeal of the Summer 2011 Storm Docket and dismissed ComEd’s appeal of the February 2011 Blizzard Docket. The Illinois Supreme Court denied ComEd’s request to hear the matter. The ICC’s order is now final and claims from impacted customers and municipalities are now eligible for review and reimbursement. ComEd is processing claims received to date.

In the second quarter of 2013, ComEd established a liability, which is not material, for potential reimbursements for actual damages incurred by the 34,559 customers covered by the ICC’s June 5, 2013 Order. The liability recorded represents the low end of a range of potential losses given that no amount within the range represents a better estimate. ComEd’s ultimate liability will be based on actual claims eligible for reimbursement. Although reimbursements for actual damages will differ from the estimated accrual recorded, at this time ComEd does not expect the difference to be material to ComEd’s results of operations or cash flows.

 

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ComEd has not recorded an accrual for reimbursement of local governmental emergency and contingency expenses as a range of loss, if any, cannot be reasonably estimated at this time, but may be material to ComEd’s results of operations and cash flows.

Telephone Consumer Protection Act Lawsuit (ComEd)

On November 19, 2013, a class action complaint was filed in the Northern District of Illinois on behalf of a single individual and a presumptive class that would include all customers that ComEd enrolled in its Outage Alert text message program. The complaint alleges that ComEd violated the Telephone Consumer Protection Act (TCPA) by sending approximately 1.2 million text messages to customers without first obtaining their consent to receive such messages. The complaint seeks certification of a class along with statutory damages, attorneys’ fees, and an order prohibiting ComEd from sending additional text messages. Such statutory damages could range from $500 to $1,500 per text. In February 2014, ComEd filed a motion to dismiss this class action complaint, which was denied in June 2014. On February 19, 2015, ComEd and the plaintiff agreed in principle to settle the suit for $5 million, which ComEd has recorded as a liability as of March 31, 2015. The parties are in process of obtaining the approval of the court and the class of customers represented in the suit. As ComEd is unable to predict the ultimate outcome of this proceeding, actual damages may differ from the estimated amount recorded, which may be material to ComEd’s results of operations, cash flows, and financial position.

Baltimore City Franchise Taxes (BGE)

The City of Baltimore claims that BGE has maintained electric facilities in the City’s public right-of-ways for over one hundred years without the proper franchise rights from the City. BGE has reviewed the City’s claim and believes that it lacks merit. BGE has not recorded an accrual for payment of franchise fees for past periods as a range of loss, if any, cannot be reasonably estimated at this time. Franchise fees assessed in future periods may be material to BGE’s results of operations and cash flows.

General (Exelon, Generation, ComEd, PECO and BGE)

The Registrants are involved in various other litigation matters that are being defended and handled in the ordinary course of business. The assessment of whether a loss is probable or a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. The Registrants maintain accruals for such losses that are probable of being incurred and subject to reasonable estimation. Management is sometimes unable to estimate an amount or range of reasonably possible loss, particularly where (1) the damages sought are indeterminate, (2) the proceedings are in the early stages, or (3) the matters involve novel or unsettled legal theories. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss.

Income Taxes (Exelon, Generation, ComEd, PECO and BGE)

See Note 10 — Income Taxes for information regarding the Registrants’ income tax refund claims and certain tax positions, including the 1999 sale of fossil generating assets.

 

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18.    Supplemental Financial Information (Exelon, Generation, ComEd, PECO and BGE)

Supplemental Statement of Operations Information

The following tables provide additional information about the Registrants’ Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2015 and 2014:

 

Three Months Ended March 31, 2015

   Exelon     Generation     ComEd      PECO      BGE  

Other, Net

            

Decommissioning-related activities:

            

Net realized income on decommissioning trust funds(a)

            

Regulatory agreement units

   $ 71      $ 71      $       $       $   

Non-regulatory agreement units

     29        29                          

Net unrealized gains on decommissioning trust funds

            

Regulatory agreement units

     48        48                          

Non-regulatory agreement units

     40        40                          

Net unrealized gains on pledged assets

            

Zion Station decommissioning

     10        10                          

Regulatory offset to decommissioning trust fund-related activities(b)

     (106     (106                       
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total decommissioning-related activities

     92        92                          
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Investment income (expense)

     1        1                        1 (c) 

Long-term lease income

     4                                 

Interest income related to uncertain income tax positions

            1                          

AFUDC — Equity

     5                       2         3   

Terminated interest rate swaps (d)

     (23     3                          

Other

     1        (3     3                   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Other, net

   $ 80      $ 94      $ 3       $ 2       $ 4   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

Three Months Ended March 31, 2014

   Exelon     Generation     ComEd      PECO      BGE  

Other, Net

            

Decommissioning-related activities:

            

Net realized income on decommissioning trust funds(a)

            

Regulatory agreement units

   $ 43      $ 43      $       $       $   

Non-regulatory agreement units

     25        25                          

Net unrealized gains on decommissioning trust funds

            

Regulatory agreement units

     61        61                          

Non-regulatory agreement units

     13        13                          

Net unrealized losses on pledged assets

            

Zion Station decommissioning

     10        10                          

Regulatory offset to decommissioning trust fund-related activities(b)

     (94     (94                       
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total decommissioning-related activities

     58        58                          
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Investment income (expense)

     1        1                        2 (c) 

Long-term lease income

     6                                 

Interest income related to uncertain income tax positions

     10        14                          

AFUDC — Equity

     6               3         1         3   

Other

     17        12        2         1         (1
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Other, net

   $ 98      $ 85      $ 5       $ 2       $ 4   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

 

(a)

Includes investment income and realized gains and losses on sales of investments of the trust funds.

(b)

Includes the elimination of NDT fund activity for the Regulatory Agreement Units, including the elimination of net income taxes related to all NDT fund activity for those units. See Note 15 — Asset Retirement Obligations of the Exelon 2014 Form 10-K for additional information regarding the accounting for nuclear decommissioning.

(c)

Relates to the cash return on BGE’s rate stabilization deferral. See Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for additional information regarding the rate stabilization deferral.

(d)

In January 2015, in connection with Generation’s $750 million issuance of five-year Senior Unsecured Notes, Exelon terminated certain floating-to-fixed interest rate swaps. As the original forecasted transactions were a series of future interest payments over a ten year period, a portion of the anticipated interest payments are probable not to occur. As a result, $26 million of anticipated payments were reclassified from Accumulated OCI to Other, net in Exelon’s Consolidated Statement of Operations and Comprehensive Income.

Supplemental Cash Flow Information

The following tables provide additional information regarding the Registrants’ Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014:

 

Three Months Ended March 31, 2015

   Exelon     Generation     ComEd      PECO      BGE  

Depreciation, amortization, accretion and depletion

            

Property, plant and equipment

   $ 540      $ 242      $ 154       $ 58       $ 71   

Regulatory assets

     58               21         4         35   

Amortization of intangible assets, net

     12        12                          

Amortization of energy contract assets and liabilities(a)

     (31     (32                       

Nuclear fuel(b)

     272        272                          

ARO accretion(c)

     97        97                          
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total depreciation, amortization, accretion and depletion

   $ 948      $ 591      $ 175       $ 62       $ 106   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

Three Months Ended March 31, 2014

   Exelon      Generation      ComEd      PECO      BGE  

Depreciation, amortization, accretion and depletion

              

Property, plant and equipment

   $ 481       $ 200       $ 143       $ 56       $ 70   

Regulatory assets

     72                 30         2         38   

Amortization of intangible assets, net

     11         11                           

Amortization of energy contract assets and liabilities(a)

     42         44                           

Nuclear fuel(b)

     234         234                           

ARO accretion(c)

     68         68                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation, amortization, accretion and depletion

   $ 908       $ 557       $ 173       $ 58       $ 108   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Included in Operating revenues or Purchased power and fuel expense on the Registrants’ Consolidated Statements of Operations and Comprehensive Income.

(b)

Included in Purchased power and fuel expense on the Registrants’ Consolidated Statements of Operations and Comprehensive Income.

(c)

Included in Operating and maintenance expense on the Registrants’ Consolidated Statements of Operations and Comprehensive Income.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Three Months Ended March 31, 2015

   Exelon     Generation     ComEd     PECO     BGE  

Other non-cash operating activities:

          

Pension and non-pension postretirement benefit costs

   $ 159      $ 67      $ 52      $ 10      $ 16   

Provision for uncollectible accounts

     84        4        22        33        25   

Stock-based compensation costs

     39                               

Other decommissioning-related activity(a)

     (44     (44                     

Energy-related options(b)

     9        9                        

Amortization of regulatory asset related to debt costs

     3               2        1          

Amortization of rate stabilization deferral

     25                             25   

Amortization of debt fair value adjustment

     (9     (4                     

Discrete impacts of EIMA(c)

     46               46                 

Amortization of debt costs

     18        4        1        1        1   

Lower of cost or market inventory adjustment

     10        10                        

Other

     4        (1     3        (1     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-cash operating activities

   $ 344      $ 45      $ 126      $ 44      $ 64   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in other assets and liabilities:

          

Under/over-recovered energy and transmission costs

   $ 65      $      $      $ 26      $ 39   

Other regulatory assets and liabilities

     92               2        (5     25   

Cash deposits(d)

     226        226                        

Other current assets

     (155     (100     (1     (95 )(e)      30   

Other noncurrent assets and liabilities

     (113     (41     (10     2        (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total changes in other assets and liabilities

   $ 115      $ 85      $ (9   $ (72   $ 93   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-cash investing and financing activities:

          

Indemnification of like-kind exchange position(f)

                   2                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-cash investing and financing activities:

   $      $      $ 2      $      $   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Three Months Ended March 31, 2014

   Exelon     Generation     ComEd     PECO     BGE  

Other non-cash operating activities:

          

Pension and non-pension postretirement benefit costs

   $ 173      $ 75      $ 56      $ 12      $ 16   

Equity method investments

     19        19                        

Provision for uncollectible accounts

     35        1        (11     35        11   

Stock-based compensation costs

     46                               

Other decommissioning-related activity(a)

     (35     (35                     

Energy-related options(b)

     31        31                        

Amortization of regulatory asset related to debt costs

     3               2        1          

Amortization of rate stabilization deferral

     20                             20   

Amortization of debt fair value adjustment

     (12     (5                     

Discrete impacts from EIMA(c)

     (4            (4              

Amortization of debt costs

     5        3        (5     1          

Increase in inventory reserve

     2        2                        

Other

     (7     (2     (2            (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-cash operating activities

   $ 276      $ 89      $ 36      $ 49      $ 43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in other assets and liabilities:

          

Under/over-recovered energy and transmission costs

   $ (15   $      $ 4      $ (17   $ 23   

Other regulatory assets and liabilities

     (4            (10     (3     6   

Other current assets

     (209     (80     (29     (105 )(e)      18   

Other noncurrent assets and liabilities

     (50     (23     11        (2     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total changes in other assets and liabilities

   $ (278   $ (103   $ (24   $ (127   $ 44   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-cash investing and financing activities:

          

Indemnification of like-kind exchange position(f)

                   2                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-cash investing and financing activities

   $      $      $ 2      $      $   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Includes the elimination of NDT fund activity for the Regulatory Agreement Units, including the elimination of operating revenues, ARO accretion, ARC amortization, investment income and income taxes related to all NDT fund activity for these units. See Note 15 — Asset Retirement Obligations of the Exelon 2014 Form 10-K for additional information regarding the accounting for nuclear decommissioning.

(b)

Includes option premiums reclassified to realized at the settlement of the underlying contracts and recorded to results of operations.

(c)

Reflects the change in distribution rates pursuant to EIMA, which allows for the recovery of costs by a utility through a pre-established performance-based formula rate tariff. See Note 5 — Regulatory Matters for more information.

(d)

Relates primarily to cash deposits recalled from ISOs/RTOs and replaced with letters of credit.

(e)

Relates primarily to prepaid utility taxes.

(f)

See Note 10 — Income Taxes for discussion of the like-kind exchange tax position.

DOE Smart Grid Investment Grant (Exelon and PECO).    For the three months ended March 31, 2014, PECO has included in the capital expenditures line item under investing activities of the cash flow statement capital expenditures of $2 million and reimbursements of $2 million related to PECO’s DOE SGIG programs. For the three months ended March 31, 2015 PECO had no capital expenditures or reimbursements, as the DOE SGIG program was completed during 2014. See Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for additional information regarding the DOE SGIG.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Supplemental Balance Sheet Information

The following tables provide additional information about assets and liabilities of the Registrants as of March 31, 2015 and December 31, 2014.

 

March 31, 2015

   Exelon     Generation     ComEd      PECO      BGE  

Property, plant and equipment:

            

Accumulated depreciation and amortization

   $ 15,207 (a)    $ 7,905 (a)    $ 3,247       $ 2,989       $ 2,905   

Accounts receivable:

            

Allowance for uncollectible accounts

   $ 365      $ 61      $ 100       $ 127       $ 84   

 

December 31, 2014

   Exelon     Generation     ComEd      PECO      BGE  

Property, plant and equipment:

            

Accumulated depreciation and amortization

   $ 14,742 (b)    $ 7,612 (b)    $ 3,432       $ 2,917       $ 2,868   

Accounts receivable:

            

Allowance for uncollectible accounts

   $ 311      $ 60      $ 84       $ 100       $ 67   

 

(a)

Includes accumulated amortization of nuclear fuel in the reactor core of $2,772 million.

(b)

Includes accumulated amortization of nuclear fuel in the reactor core of $2,673 million.

PECO Installment Plan Receivables (Exelon and PECO)

PECO enters into payment agreements with certain delinquent customers, primarily residential, seeking to restore their service, as required by the PAPUC. Customers with past due balances that meet certain income criteria are provided the option to enter into an installment payment plan, some of which have terms greater than one year, to repay past due balances in addition to paying for their ongoing service on a current basis. The receivable balance for these payment agreement receivables is recorded in accounts receivable for the current portion and other deferred debits and other assets for the noncurrent portion. The net receivable balance for installment plans with terms greater than one year was $14 million and $15 million as of March 31, 2015 and December 31, 2014, respectively. The allowance for uncollectible accounts reserve methodology and assessment of the credit quality of the installment plan receivables are consistent with the customer accounts receivable methodology discussed in Note 1 — Significant Accounting Policies of the Exelon 2014 Form 10-K. The allowance for uncollectible accounts balance associated with these receivables at March 31, 2015 of $14 million consists of $1 million, $4 million and $9 million for low risk, medium risk and high risk segments, respectively. The allowance for uncollectible accounts balance at December 31, 2014 of $15 million consists of $1 million, $3 million and $11 million for low risk, medium risk and high risk segments, respectively. The balance of the payment agreement is billed to the customer in equal monthly installments over the term of the agreement. Installment receivables outstanding as of March 31, 2015 and December 31, 2014 include balances not yet presented on the customer bill, accounts currently billed and an immaterial amount of past due receivables. When a customer defaults on its payment agreement, the terms of which are defined by plan type, the entire balance of the agreement becomes due and the balance is reclassified to current customer accounts receivable and reserved for in accordance with the methodology discussed in Note 1 — Significant Accounting Policies of the Exelon 2014 Form 10-K.

19.    Segment Information (Exelon, Generation, ComEd, PECO and BGE)

Operating segments for each of the Registrants are determined based on information used by the chief operating decision maker(s) (CODM) in deciding how to evaluate performance and allocate resources at each of the Registrants.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Exelon has nine reportable segments, ComEd, PECO, BGE and Generation’s six power marketing reportable segments consisting of the Mid-Atlantic, Midwest, New England, New York, ERCOT and all other power regions not considered individually significant and referred to collectively as “Other Power Regions” which includes activities in the South, West and Canada. ComEd, PECO and BGE each represent a single reportable segment; as such, no separate segment information is provided for these Registrants. Exelon’s CODM evaluates the performance of and allocates resources to ComEd, PECO and BGE based on net income and return on equity.

The CODMs for ComEd, PECO, and BGE evaluate performance and allocate resources for their respective companies based on net income and return on equity for ComEd, PECO, and BGE each as single integrated businesses.

The foundation of Generation’s six reportable segments is based on the geographic location of its assets, and is largely representative of the footprints of an ISO / RTO and/or NERC region. Descriptions of each of Generation’s six reportable segments are as follows:

 

   

Mid-Atlantic represents operations in the eastern half of PJM, which includes Pennsylvania, New Jersey, Maryland, Virginia, West Virginia, Delaware, the District of Columbia and parts of North Carolina.

 

   

Midwest represents operations in the western half of PJM, which includes portions of Illinois, Indiana, Ohio, Michigan, Kentucky and Tennessee, and the United States footprint of MISO excluding MISO’s Southern Region, which covers all or most of North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Wisconsin, the remaining parts of Illinois, Indiana, Michigan and Ohio not covered by PJM, and parts of Montana, Missouri and Kentucky.

 

   

New England represents the operations within ISO-NE covering the states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

 

   

New York represents operations within ISO-NY, which covers the state of New York in its entirety.

 

   

ERCOT represents operations within Electric Reliability Council of Texas, covering most of the state of Texas.

 

   

Other Power Regions not considered individually significant:

 

   

South represents operations in the FRCC, MISO’s Southern Region, and the remaining portions of the SERC not included within MISO or PJM, which includes all or most of Florida, Arkansas, Louisiana, Mississippi, Alabama, Georgia, Tennessee, North Carolina, South Carolina and parts of Missouri, Kentucky and Texas. Generation’s South region also includes operations in the SPP, covering Kansas, Oklahoma, most of Nebraska and parts of New Mexico, Texas, Louisiana, Missouri, Mississippi and Arkansas.

 

   

West represents operations in the WECC, which includes California ISO, and covers the states of California, Oregon, Washington, Arizona, Nevada, Utah, Idaho, Colorado, and parts of New Mexico, Wyoming and South Dakota.

 

   

Canada represents operations across the entire country of Canada and includes the AESO, OIESO and the Canadian portion of MISO.

The CODMs for Exelon and Generation evaluate the performance of Generation’s power marketing activities and allocate resources based on revenue net of purchased power and fuel expense. Generation believes that revenue net of purchased power and fuel expense is a useful measurement of operational performance. Revenue net of purchased power and fuel expense is not a presentation defined under GAAP and may not be comparable to other

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

companies’ presentations or deemed more useful than the GAAP information provided elsewhere in this report. Generation’s operating revenues include all sales to third parties and sales to its affiliates, ComEd, PECO and BGE. Purchased power costs include all costs associated with the procurement and supply of electricity including capacity, energy and ancillary services. Fuel expense includes the fuel costs for Generation’s owned generation and fuel costs associated with tolling agreements. Generation’s other business activities, including retail and wholesale gas, investments in gas and oil exploration and production activities, proprietary trading, compressed natural gas fueling stations, energy efficiency and cogeneration projects, sales of electric and gas appliances, servicing of heating, air conditioning, plumbing, electrical, indoor quality systems and home improvements, and investments in energy-related proprietary technology are not allocated to regions. Further, Generation’s other miscellaneous revenues, unrealized mark-to-market impact of economic hedging activities, and amortization of certain intangible assets relating to commodity contracts recorded at fair value from prior acquisitions are also not allocated to a region. Exelon and Generation do not use a measure of total assets in making decisions regarding allocating resources to or assessing the performance of these reportable segments.

An analysis and reconciliation of the Registrants’ reportable segment information to the respective information in the consolidated financial statements for the three months ended March 31, 2015 and 2014 is as follows:

 

     Generation(a)     ComEd      PECO      BGE      Other(b)     Intersegment
Eliminations
    Exelon  

Total revenues(c):

                 

2015

   $ 5,840      $ 1,185       $ 985       $ 1,036       $ 318      $ (534   $ 8,830   

2014

     4,390        1,134         993         1,054         290        (624     7,237   

Intersegment revenues(d):

                 

2015

   $ 210      $ 1       $       $ 7       $ 316      $ (533   $ 1   

2014

     316        1         1         16         290        (623     1   

Net income (loss):

                 

2015

   $ 485      $ 90       $ 139       $ 109       $ (84   $ (1   $ 738   

2014

     (185     98         89         88         4        (1     93   

Total assets:

                 

March 31, 2015

   $ 45,318      $ 25,731       $ 10,169       $ 8,130       $ 10,457      $ (12,414   $ 87,391   

December 31, 2014

     45,348        25,392         9,943         8,078         9,794        (11,741     86,814   

 

(a)

Generation includes the six power marketing reportable segments shown below: Mid-Atlantic, Midwest, New England, New York, ERCOT and Other Power Regions. Intersegment revenues for Generation for the three months ended March 31, 2015 include revenue from sales to PECO of $63 million and sales to BGE of $138 million in the Mid-Atlantic region, and sales to ComEd of $9 million in the Midwest. For the three months ended March 31, 2014, intersegment revenues for Generation include revenue from sales to PECO of $88 million and sales to BGE of $120 million in the Mid-Atlantic region, and sales to ComEd of $108 million in the Midwest region.

(b)

Other primarily includes Exelon’s corporate operations, shared service entities and other financing and investment activities.

(c)

For the three months ended March 31, 2015 and 2014, utility taxes of $27 million and $24 million, respectively, are included in revenues and expenses for Generation. For the three months ended March 31, 2015 and 2014, utility taxes of $62 million and $63 million, respectively, are included in revenues and expenses for ComEd. For the three months ended March 31, 2015 and 2014, utility taxes of $35 million and $35 million, respectively, are included in revenues and expenses for PECO. For the three months ended March 31, 2015 and 2014, utility taxes of $52 million and $20 million, respectively, are included in revenues and expenses for BGE.

(d)

Intersegment revenues exclude sales to unconsolidated affiliates. The intersegment profit associated with the Generation’s sale of certain products and services by and between Exelon’s segments is not eliminated in consolidation due to the recognition of intersegment profit in accordance with regulatory accounting guidance. For Exelon, these amounts are included in Operating revenues in the Consolidated Statements of Operations and Comprehensive Income.

 

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(Dollars in millions, except per share data, unless otherwise noted)

 

Generation total revenues:

 

     Three Months Ended March 31, 2015      Three Months Ended March 31, 2014  
     Revenues
from external
customers(b)
     Intersegment
revenues
    Total
Revenues(a)
     Revenues
from external
customers(b)
     Intersegment
revenues
    Total
Revenues
 

Mid-Atlantic

   $ 1,517       $ (4   $ 1,513       $ 1,441       $ (23   $ 1,418   

Midwest

     1,275         1        1,276         1,258         12        1,270   

New England

     858         1        859         545         4        549   

New York

     310                310         190         (3     187   

ERCOT

     182         (2     180         243                243   

Other Power Regions(c)

     212         2        214         334         7        341   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues for Reportable Segments

     4,354         (2     4,352         4,011         (3     4,008   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other(d)

     1,486         2        1,488         379         3        382   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total Generation Consolidated Operating Revenues

   $ 5,840       $      $ 5,840       $ 4,390       $      $ 4,390   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 financial results include CENG’s revenues on a fully consolidated basis.

(b)

Includes all wholesale and retail electric sales to third parties and affiliated sales to ComEd, PECO and BGE.

(c)

Other Power Regions include the South, West and Canada, which are not considered individually significant.

(d)

Other represents activities not allocated to a region. See text above for a description of included activities. Also includes amortization of intangible assets related to commodity contracts recorded at fair value of $40 million increase to revenues and $93 million decrease to revenues, for the three months ended March 31, 2015 and 2014, respectively, unrealized mark-to-market gains of $154 million and losses of $760 million for the three months ended March 31, 2015 and 2014, respectively, and elimination of intersegment revenues.

Generation total revenues net of purchased power and fuel expense:

 

     Three Months Ended March 31, 2015      Three Months Ended March 31, 2014  
     RNF
from external
customers(b)
     Intersegment
RNF
    Total
RNF(a)
     RNF
from external
customers(b)
    Intersegment
RNF
    Total
RNF
 

Mid-Atlantic

   $ 784       $ (2   $ 782       $ 784      $ (89   $ 695   

Midwest

     701         (1     700         530        26        556   

New England

     177         (19     158         154        (18     136   

New York

     174         14        188         (29     8        (21

ERCOT

     88         (33     55         155        (72     83   

Other Power Regions(c)

     99         (53     46         150        (45     105   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Revenues net of purchased power and fuel expense for Reportable Segments

     2,023         (94     1,929         1,744        (190     1,554   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other(d)

     384         94        478         (711     190        (521
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Generation Revenues net of purchased power and fuel expense

   $ 2,407       $      $ 2,407       $ 1,033      $      $ 1,033   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in millions, except per share data, unless otherwise noted)

 

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 financial results include CENG’s revenue net of purchased power and fuel expense on a fully consolidated basis.

(b)

Includes purchases and sales from third parties and affiliated sales to ComEd, PECO and BGE.

(c)

Other Power Regions include the South, West and Canada, which are not considered individually significant.

(d)

Other represents activities not allocated to a region. See text above for a description of included activities. Also includes amortization of intangible assets related to commodity contracts recorded at fair value of $38 million increase to RNF and $42 million decrease to RNF for the three months ended March 31, 2015 and 2014, respectively, unrealized mark-to-market gains of $162 million and losses of $730 million for the three months ended March 31, 2015 and 2014, respectively, and the elimination of intersegment revenue net of purchased power and fuel expense.

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars in millions except per share data, unless otherwise noted)

Exelon Corporation

General

Exelon, a utility services holding company, operates through the following principal subsidiaries:

 

   

Generation,    whose integrated business consists of the generation, physical delivery and marketing of power across multiple geographical regions through its customer-facing business, Constellation, which sells electricity and natural gas to both wholesale and retail customers. Generation also sells renewable energy and other energy-related products and services, and engages in natural gas and oil exploration and production activities (Upstream).

 

   

As a result of the Constellation merger, Generation owns a 50.01% interest in CENG. During 2014, Generation assumed the operating licenses and corresponding operational control of CENG’s nuclear fleet. As a result, Exelon and Generation fully consolidated CENG’s financial position and results of operations into their financial statements since April 1, 2014.

 

   

ComEd,    whose business consists of the purchase and regulated retail sale of electricity and the provision of electricity transmission and distribution services in northern Illinois, including the City of Chicago.

 

   

PECO,    whose business consists of the purchase and regulated retail sale of electricity and the provision of electricity distribution and transmission services in southeastern Pennsylvania, including the City of Philadelphia, and the purchase and regulated retail sale of natural gas and the provision of distribution services in the Pennsylvania counties surrounding the City of Philadelphia.

 

   

BGE,    whose business consists of the purchase and regulated retail sale of electricity and natural gas and the provision of electricity distribution and transmission and gas distribution services in central Maryland, including the City of Baltimore.

Exelon has nine reportable segments consisting of Generation’s six power marketing reportable segments (Mid-Atlantic, Midwest, New England, New York, ERCOT and Other Power Regions in Generation), ComEd, PECO and BGE. See Note 19 — Segment Information of the Combined Notes to Consolidated Financial Statements for additional information regarding Exelon’s reportable segments.

Through its business services subsidiary BSC, Exelon provides its operating subsidiaries with a variety of support services at cost. The costs of these services are directly charged or allocated to the applicable operating segments. Additionally, the results of Exelon’s corporate operations include costs for corporate governance and interest costs and income from various investment and financing activities.

Exelon’s consolidated financial information includes the results of its four separate operating subsidiary registrants, Generation, ComEd, PECO and BGE, which, along with Exelon, are collectively referred to as the Registrants. The following combined Management’s Discussion and Analysis of Financial Condition and Results of Operations is separately filed by Exelon, Generation, ComEd, PECO and BGE. However, none of the Registrants makes any representation as to information related solely to any of the other Registrants.

 

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Executive Overview

Financial Results.    The following consolidated financial results reflect the results of Exelon for the three months ended March 31, 2015 compared to the same period in 2014. All amounts presented below are before the impact of income taxes, except as noted.

 

    Three Months Ended March 31,     Favorable
(Unfavorable)
Variance
 
    2015     2014    
    Generation(a)     ComEd     PECO     BGE     Other     Exelon(a)     Exelon    

Operating revenues

  $ 5,840      $ 1,185      $ 985      $ 1,036      $ (216   $ 8,830      $ 7,237      $ 1,593   

Purchased power and fuel

    3,433        327        438        487        (215     4,470        4,340        (130
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue net of purchased power and fuel(b)

    2,407        858        547        549        (1     4,360        2,897        1,463   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other operating expenses

               

Operating and maintenance

    1,311        378        222        182        (12     2,081        1,858        (223

Depreciation and amortization

    254        175        62        106        13        610        564        (46

Taxes other than income

    122        75        41        57        9        304        293        (11
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating expenses

    1,687        628        325        345        10        2,995        2,715        (280

Equity in losses of unconsolidated affiliates

                                              (19     19   

Gain on sales of assets

    (1            1               1        1        5        (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    719        230        223        204        (10     1,366        168        1,198   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (deductions)

               

Interest expense, net

    (102     (84     (28     (25     (106     (345     (227     (118

Other, net

    94        3        2        4        (23     80        98        (18
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (deductions)

    (8     (81     (26     (21     (129     (265     (129     (136
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    711        149        197        183        (139     1,101        39        1,062   

Income taxes

    226        59        58        74        (54     363        (54     (417
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    485        90        139        109        (85     738        93        645   

Net income attributable to noncontrolling interests, preferred security dividends and redemption and preference stock dividends

    42                      3               45        3        (42
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

  $ 443      $ 90      $ 139      $ 106      $ (85   $ 693      $ 90      $ 603   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 financial results include CENG’s results of operations on a fully consolidated basis.

(b)

The Registrants’ evaluate operating performance using the measure of revenue net of purchased power and fuel expense. The Registrants’ believe that revenue net of purchased power and fuel expense is a useful measurement because it provides information that can be used to evaluate its operational performance. Revenue net of purchased power and fuel expense is not a presentation defined under GAAP and may not be comparable to other companies’ presentations or deemed more useful than the GAAP information provided elsewhere in this report.

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    Exelon’s net income attributable to common shareholders was $693 million for the three months ended March 31, 2015 as compared to $90 million for the three months ended March 31, 2014, and diluted earnings per average common share were $0.80 for the three months ended March 31, 2015 as compared to $0.10 for the three months ended March 31, 2014.

 

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Operating revenue net of purchased power and fuel expense, which is a non-GAAP measure discussed below, increased by $1,463 million for the three months ended March 31, 2015 as compared to the same period in 2014. The year-over-year increase in operating revenue net of purchased power and fuel expense was primarily due to the following favorable factors:

 

   

Increase of $404 million at Generation primarily due to the inclusion of CENG’s results on a fully consolidated basis in 2015, the inclusion of Integrys’ results in 2015, the benefit of lower cost to serve load (including the absence of higher procurement costs for replacement power in 2014), and a decrease in fuel costs related to the cancellation of DOE spent nuclear fuel disposal fees; partially offset by a reduction in capacity credits, lower margins resulting from the 2014 sales of generating units, lower realized energy prices and the absence of 2014 fuel optimization opportunities in the South;

 

   

Increase of $81 million at Generation related to amortization of contracts recorded at fair value during prior acquisitions;

 

   

Increase of $892 million at Generation due to mark-to-market gains of $162 million in 2015 from economic hedging activities as compared to $730 million in mark-to-market losses in 2014;

 

   

Increase of $44 million at ComEd primarily due to increased cost recovery associated with energy efficiency programs and uncollectible accounts expense (both offset in Operating and maintenance expense), and increased distribution revenue, as a result of higher operating and maintenance expense (offset in Operating and maintenance expense) and increased capital investment, partially offset by lower return on common equity due to a decrease in treasury rates;

 

   

Increase of $18 million at PECO primarily due to favorable weather and volume; and

 

   

Increase of $24 million at BGE primarily due to increased distribution revenue as a result of the December 2014 electric and natural gas distribution rate case orders issued by the Maryland PSC.

Operating and maintenance expense increased by $223 million for the three months ended March 31, 2015 as compared to the same period in 2014 primarily due to the following unfavorable factors:

 

   

Increase in Generation’s labor, contracting and materials costs of $141 million primarily due to the inclusion of CENG’s results in 2015 and an increase of $44 million as a result of an increase in the number of planned nuclear refueling outage days in 2015 due to the inclusion of the CENG plants;

 

   

Increase in labor, contracting and materials of $16 million at ComEd related to increased contracting costs related to EIMA and other preventative and corrective maintenance projects and $13 million at PECO related to increased contracting costs for maintenance and vegetation management;

 

   

Increase in Generation’s accretion expense and regulatory fees and assessments of $23 million and $17 million, respectively, primarily due to the inclusion of CENG’s results in 2015;

 

   

Increased costs associated with energy efficiency programs and increased uncollectible accounts expense at ComEd of $39 million; and

 

   

Increased uncollectible accounts expense at BGE of $14 million.

The year-over-year increase in operating and maintenance expense was partially offset by the following favorable factors:

 

   

A decrease in pension and non-pension postretirement benefits expense of $16 million as a result of cost savings from plan design changes for certain OPEB plans in the second quarter of 2014, partially offset by the unfavorable impact of lower assumed pension and OPEB discount rates for 2015, an increase in the life expectancy assumption for plan participants in 2015, and at Generation, the inclusion of CENG’s results for the first quarter of 2015;

 

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A benefit of $14 million for the favorable settlement of a long-term railcar lease agreement pursuant to the Midwest Generation bankruptcy; and

 

   

Decreased storm costs at PECO and BGE of $75 million and $19 million, respectively.

Depreciation and amortization expense increased by $46 million primarily as a result of the inclusion of CENG’s results in 2015.

Equity in earnings of unconsolidated affiliates decreased by $19 million primarily due to CENG’s operating results being fully consolidated beginning April 1, 2014 and, as a result, are not reflected as equity method earnings in 2015.

Gains on sales of assets decreased by $4 million due to decreased asset divestiture activity in 2015.

Taxes other than income increased by $11 million primarily due to the inclusion of CENG’s results in 2015.

Interest expense increased by $118 million primarily as a result of higher outstanding debt at Generation, and financing agreements related to the pending PHI merger at Exelon Corporate.

Other, net decreased by $18 million primarily as a result of favorable settlements in 2014 of certain income tax positions on Constellation’s 2009-2012 tax returns and a loss of $26 million on the termination of forward-starting interest rate swaps in 2015 at Exelon Corporate, partially offset by the change in realized and unrealized gains and losses on NDT funds at Generation.

Exelon’s effective income tax rates for the three months ended March 31, 2015 and 2014 were 33% and (138.5)%, respectively. See Note 10 — Income Taxes of the Combined Notes to Consolidated Financial Statements for additional information regarding the components of the effective income tax rates.

For further detail regarding the financial results for the three months ended March 31, 2015, including explanation of the non-GAAP measure revenue net of purchased power and fuel expense, see the discussions of Results of Operations by Segment below.

Adjusted (non-GAAP) Operating Earnings.    Exelon’s adjusted (non-GAAP) operating earnings for the three months ended March 31, 2015 were $615 million, or $0.71 per diluted share, compared with adjusted (non-GAAP) operating earnings of $530 million, or $0.62 per diluted share for the same period in 2014. In addition to net income attributable to common shareholders, Exelon evaluates its operating performance using the measure of adjusted (non-GAAP) operating earnings because management believes it represents earnings directly related to the ongoing operations of the business. Adjusted (non-GAAP) operating earnings exclude certain costs, expenses, gains and losses and other specified items. This information is intended to enhance an investor’s overall understanding of year-to-year operating results and provide an indication of Exelon’s baseline operating performance. In addition, this information is among the primary indicators management uses as a basis for evaluating performance, allocating resources, setting incentive compensation targets and planning and forecasting of future periods. Adjusted (non-GAAP) operating earnings is not a presentation defined under GAAP and may not be comparable to other companies’ presentations or deemed more useful than the GAAP information provided elsewhere in this report.

 

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The following table provides a reconciliation between net income attributable to common shareholders as determined in accordance with GAAP and adjusted (non-GAAP) operating earnings for the three months ended March 31, 2015 as compared to the same period in 2014. The footnotes below the table provide tax expense (benefit) impacts:

 

     Three Months Ended March 31,  
     2015     2014  

(All amounts after tax)

         Earnings per
Diluted Share
          Earnings per
Diluted Share
 

Net Income Attributable to Common Shareholders

   $ 693      $ 0.80      $ 90      $ 0.10   

Mark-to-Market Impact of Economic Hedging Activities(a)

     (100     (0.11     443        0.52   

Unrealized Gains Related to NDT Fund Investments(b)

     (24     (0.03     (8     (0.01

Merger and Integration Costs(c)

     21        0.02        9        0.01   

Mark-to-Market Impact of PHI Merger Related Interest Rate Swaps(d)

     48        0.06                 

Amortization of Commodity Contract Intangibles(e)

     (24     (0.03     31        0.04   

Tax Settlements(f)

                   (35     (0.04

Midwest Generation Bankruptcy Recoveries(g)

     (6     (0.01              

CENG Noncontrolling Interest(h)

     7        0.01                 
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted (non-GAAP) Operating Earnings

   $ 615      $ 0.71      $ 530      $ 0.62   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Reflects the impact of (gains) losses for the three months ended March 31, 2015 and March 31, 2014 (net of taxes of $63 million and $287 million, respectively), on Generation’s economic hedging activities. See Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional detail related to Generation’s hedging activities.

(b)

Reflects the impact of unrealized (gains) losses for the three months ended March 31, 2015 and March 31, 2014 (net of taxes of $26 million and $18 million, respectively), on Generation’s NDT fund investments for Non-Regulatory Agreement Units. See Note 11 — Nuclear Decommissioning of the Combined Notes to Consolidated Financial Statements for additional detail related to Generation’s NDT fund investments.

(c)

Reflects certain costs incurred for the three months ended March 31, 2015 and March 31, 2014 (net of taxes of $13 million and $6 million, respectively), associated with the Constellation merger, pending PHI acquisition, and, at Generation, the CENG integration and Integrys acquisition, including professional fees, employee-related expenses, integration activities, upfront credit facilities fees, merger commitments, and certain pre-acquisition contingencies.

(d)

For 2015, reflects the impact of losses (gains) on forward-starting interest rate swaps at Exelon Corporate related to anticipated financing of the pending PHI acquisition (net of taxes of $31 million).

(e)

Reflects the non-cash impact for the three months ended March 31, 2015 and March 31, 2014 (net of taxes of $14 million and $20 million, respectively), of the amortization of intangible assets, net, related to commodity contracts recorded at fair value at the Constellation merger and the Integrys acquisition.

(f)

For 2014, reflects a benefit related to the favorable settlement of certain income tax positions on Constellation’s 2009-2012 tax returns (net of taxes of $18 million).

(g)

For 2015, reflects a benefit related to the favorable settlement of a long term lease agreement pursuant to the Midwest Generation bankruptcy (net of taxes of $4 million).

(h)

Represents Generation’s non-controlling interest related to CENG exclusion items, primarily related to the impact of unrealized gains and losses on NDT fund investments.

As discussed above, Exelon has incurred costs associated with the Constellation merger, CENG integration, Integrys acquisition and pending PHI acquisition including employee-related expenses (e.g. severance, retirement, relocation and retention bonuses), integration initiatives, and certain pre-acquisition contingencies.

 

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For the three months ended March 31, 2015 and 2014, expense has been recognized for costs incurred to achieve the Constellation merger, CENG integration and Integrys and pending PHI acquisitions as follows:

 

     Pre-tax Expense  
     Three Months Ended March 31, 2015  

Merger, Integration and Acquisition Costs:

   Generation      ComEd      PECO      BGE      Exelon  

Financing(a)

   $       $       $       $       $ 89   

Transaction(b)

                                     6   

Employee-Related(c)

     4                                 4   

Other(d)

     7         3         1         1         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11       $ 3       $ 1       $ 1       $ 112   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Pre-tax Expense  
     Three Months Ended March 31, 2014  

Merger and Integration Costs:

   Generation      ComEd      PECO      BGE      Exelon  

Employee-Related(c)

   $ 4       $       $       $       $ 4   

Other(d)

     10                                 10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14       $       $       $       $ 14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Reflects costs incurred at Exelon related to the financing of the PHI merger, including upfront credit facility fees.

(b)

External, third party costs paid to advisors, consultants, lawyers and other experts to assist in the due diligence and regulatory approval processes and in the closing of transactions.

(c)

Costs primarily for employee severance, pension and OPEB expense and retention bonuses.

(d)

Costs to integrate CENG and Constellation processes and systems into Exelon and to terminate certain Constellation debt agreements. For the three months ended March 31, 2015, also includes professional fees primarily related to integration for the proposed PHI acquisition.

As of March 31, 2015, Exelon projects incurring total PHI acquisition and integration related costs over the next five years of approximately $635 million, of which approximately $100 million is expected to be capitalized to property, plant and equipment excluding the direct investment Exelon and PHI have proposed to the PHI utilities respective customers.

Pursuant to the conditions set forth by the MDPSC in its approval of the Exelon and Constellation merger transaction, Exelon committed to provide a package of benefits to BGE customers, and make certain investments in 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 direct investment estimate includes $95 million to $120 million for the requirement to cause 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. Construction began late in the second quarter of 2014 and the building is expected to be ready for occupancy a minimum of two years from the start of construction. See Note 17 — Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for further information related to the lease commitments.

 

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Exelon’s Strategy and Outlook for the remainder of 2015 and Beyond

Exelon’s value proposition and competitive advantage come from its scope and scale across the energy value chain and its core strengths of operational excellence and financial discipline. Exelon’s strategy is to leverage its integrated business model to create value and diversify its business. Exelon’s competitive and regulated businesses feature a mix of attributes that, when combined, offer shareholders and customers a unique value proposition:

 

   

Generation’s competitive businesses provide commodity exposure and a platform to diversify into adjacent markets, while providing residual dividend support.

 

   

Exelon’s utilities provide a foundation for stable earnings and dividend support, which translates to a stable currency in our stock.

Exelon believes its strategy provides a platform for optimal success in an energy industry experiencing fundamental and sweeping change. While enhancing Exelon’s core value, it enables it to take advantage of a myriad of opportunities, rather than focusing on any one segment of the energy industry value chain.

Generation’s competitive businesses create value for customers by providing innovative solutions and reliable, clean and affordable energy. Generation’s electricity generation strategy is to pursue opportunities that provide generation to load matching and that diversify the generation fleet by expanding Generation’s regional and technological footprint. Generation leverages its energy generation portfolio to ensure delivery of energy to both wholesale and retail customers under long-term and short-term contracts, and in wholesale power markets. Generation’s customer facing activities foster development and delivery of other innovative energy-related products and services for its customers. Generation operates in well-developed energy markets and employs an integrated hedging strategy to manage commodity price volatility. Its generation fleet, including its nuclear plants which consistently operate at high capacity factors, also provide geographic and supply source diversity. These factors help Generation mitigate the current challenging conditions in competitive energy markets.

Exelon’s utility strategy is to improve reliability and operations and enhance the customer experience, while ensuring ratemaking mechanisms provide the utilities fair financial returns. The Exelon utilities only invest in rate base where it provides a net benefit to customers and the community by increasing reliability and the service experience or otherwise meeting customer needs. The Exelon utilities make these investments prudently and at the lowest reasonable cost to customers. Exelon seeks to leverage its scale and expertise across the utilities platform through enhanced standardization and sharing of best practices to achieve improved operational and financial results. Combined, the utilities plan to invest approximately $16 billion over the next five years in smart meter technology, transmission projects, gas infrastructure, and electric system improvement projects, providing greater reliability and improved service for our customers and a stable return for the company.

Exelon’s financial priorities are to maintain investment grade credit metrics at each of Exelon, Generation, ComEd, PECO and BGE, and to return value to Exelon’s shareholders with a sustainable dividend throughout the energy commodity market cycle and through earnings growth from attractive investment opportunities.

Various market, financial, and other factors could affect the Registrants’ success in pursuing their strategies. Exelon continues to assess infrastructure, operational, commercial, policy, and legal solutions to these issues. See ITEM 1A. RISK FACTORS of the Exelon 2014 Form 10-K for additional information regarding market and financial factors.

Proposed Merger with Pepco Holdings, Inc. (Exelon)

On April 29, 2014, Exelon and 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

 

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stock. Exelon intends to fund the all-cash transaction using a combination of approximately $3.5 billion of debt, up to $1 billion cash from asset sales primarily at Generation, and the remainder through issuance of equity (including mandatory convertible securities). In addition, Exelon entered into 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 $3.2 billion as a result of execution of the 2014 equity issuance and the net after-tax cash proceeds from generating asset divestitures during the second half of 2014. See Note 4 — Mergers, Acquisitions, and Dispositions, Note 9 — Debt and Credit Agreements, and Note 15 — Common Stock of the Combined Notes to Consolidated Financial Statements for further information related to these transactions. In connection with the Merger Agreement, Exelon entered into a subscription agreement under which it has purchased $144 million of a new class of nonvoting, nonconvertible and nontransferable preferred securities of PHI as of March 31, 2015, 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, under pending or final settlements reached to date, as well as other filings, Exelon and PHI have proposed a package to the PHI utilities’ respective customers, providing for direct investment in excess of approximately $300 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.

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 have cooperated with the DOJ regarding the proposed 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.

On February 13, 2015, Exelon and PHI announced that they had reached a settlement agreement in the proceeding before the Delaware Public Service Commission (DPSC) to review the proposed merger. The settlement, which was amended on April 7, 2015 and is subject to the approval of the DPSC, was signed and filed by Exelon, PHI, Delmarva Power & Light Company (DPL), the PSC Staff, the Delaware Public Advocate, the Delaware Department of Natural Resources and Environment Control, the Delaware Sustainable Energy Utility, the Mid-Atlantic Renewable Energy Coalition and the Clean Air Council. As part of this settlement, Exelon and PHI have proposed a package of benefits to DPL customers and the state of Delaware including the establishment of customer rate credits of $40 million for DPL customers in Delaware, $2 million of funding for energy efficiency programs for DPL low income customers, and $2 million of funding for workforce development.

On March 17, 2015, Exelon and PHI announced that they had reached a settlement agreement with Montgomery and Prince George’s Counties in the proceeding before the MDPSC to review the proposed merger. The settlement, which is subject to the approval of the MDPSC, was signed and filed by Exelon, PHI, Montgomery County, Prince George’s County, the National Consumer Law Center, National Housing Trust, Maryland Affordable Housing Coalition, the Housing Association of Nonprofit Developers and a consortium of nine recreational trail advocacy organizations led by the Mid-Atlantic Off-Road Enthusiasts. As part of this settlement, Exelon and PHI have proposed a package of benefits to Potomac Electric Power Company (Pepco) and DPL customers and the state of Maryland including the establishment of a customer investment fund of $94.4 million for utility customers in Maryland. A portion of the customer investment fund, representing

 

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approximately $36.8 million, will provide bill credits to Pepco and DPL customers in Maryland, with the remaining $57.6 million funding energy-efficiency programs, including programs targeted to help low income customers lower their energy bills. Exelon also agreed to establish a Green Sustainability Fund (GSF) of $50 million to be allocated across the service territories of Pepco, DPL and ACE, with $19.8 million allocated to Maryland. The GSF will be allocated within each state to state and local “green banks” and similar sponsoring organizations to make loans to finance public and private investment in renewable energy, microgrids, and other developing energy technologies. Loans made by sponsoring organizations from the GSF must mature within 20 years following the merger closing. At the end of that 20 year period, principal payments received by the sponsoring organizations must be returned to Exelon, but Exelon’s recovery of the entire GSF is not assured. In the settlement, Exelon also agreed to provide $4 million in funding for workforce development in Maryland and made various other commitments, including a commitment to develop 15 MW of commercial solar projects in Maryland. In a related agreement with Prince George’s County, Exelon agreed to develop an additional 5 MW of solar generation in Maryland, the output of which will be delivered to Prince George’s County under a 30-year PPA at no cost to the county for the first 15 years and at market pricing for the second 15 years. This agreement also requires Prince George’s County to purchase substantially all of its requirements for electricity and natural gas from an Exelon affiliate for a period of 15 years at competitive pricing. The County will be free to purchase its requirements for electricity and natural gas from other qualified alternative energy suppliers if and to the extent that competing bidders offer a lower price than that offered by the Exelon affiliate.

On March 10, 2015, Exelon and PHI announced that they had reached a settlement agreement with the Alliance for Solar Choice, a group of solar developers, in the proceeding before the MDPSC. The settlement, which is subject to the approval of the MDPSC, provides for enhancements to the interconnection process for behind-the-meter distributed generation and storage projects.

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. Exelon was also named in a federal court suit making similar claims. In September 2014, the parties reached a proposed settlement that would resolve all claims, which is subject to court approval. Final court approval of the proposed settlement is not anticipated until approximately 90 days after merger close. 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.

Including 2014 and through March 31, 2015, Exelon has incurred approximately $289 million of expense associated with the proposed merger, primarily $69 million related to acquisition and integration costs and $220 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 Merger Agreement is terminated 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, plus certain expenses.

Exelon has listed various potential risks relating to the pending merger with PHI (see ITEM 1A. RISK FACTORS of the Exelon 2014 Form 10-K), 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. Exelon and PHI continue to expect the merger to be completed late 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.

 

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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. As a result, 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. The proposal permits suppliers to include in capacity market offers additional costs and risk so they can meet these higher performance requirements. While offers are expected to put upward pressure on capacity clearing prices, operational improvements made as a result of PJM’s proposal are expected to improve reliability, to reduce energy production costs as a result of more efficient operations and to reduce the need for out of market energy payments to suppliers. Exelon participated actively in PJM’s stakeholder process through which PJM developed the proposal and is also actively participating in the FERC proceeding including filing comments. On March 31, 2015, the FERC issued a Deficiency Order seeking further details regarding various aspects of the proposed reforms, but focused on the proposed default offer cap. In response, PJM acquiesced to modifications suggested by the Market Monitor addressing concerns about the default offer cap. FERC could issue a final order any time between April 25, 2015 and June 9, 2015. PJM also sought approval from the FERC to delay the 2018/19 RPM Base Residual Auction that would otherwise be conducted in May, 2015. On April 24, 2015, the FERC issued an order allowing the delay. Thus, PJM is expected to conduct the 2018/19 capacity action within 30 to 75 days after the issuance of FERC’s final order on the proposed capacity market reforms. The specific parameters of that auction could change depending on the FERC determinations in that final order.

MISO Capacity Market Results.    On April 14, 2015, the Midcontinent Independent System Operator (MISO) released the results of its capacity auction covering the June 2015 through May 2016 delivery year. As a result of the auction, capacity prices for the downstate Illinois zone will increase to $150 MW per day beginning in June 2015, an increase from the current pricing of $16.75 MW per day that is in effect from June 2014 to May 2015. However, due to Generation’s ratable hedging strategy, the results of the capacity auction are not expected to have a material impact on Exelon and Generation’s consolidated results of operations and cash flows.

Subsidized Generation.    The rate of expansion of subsidized generation, including low-carbon generation such as wind and solar energy, in the markets in which Generation’s output is sold can negatively impact wholesale power prices, and in turn, Generation’s results of operations.

Various states have attempted to implement or propose legislation, regulations or other policies to subsidize new generation development which may result in artificially depressed wholesale energy and capacity prices. For example, the New Jersey legislature enacted in to law in January 2011, the Long Term Capacity Pilot Program Act (LCAPP). LCAPP provides eligible generators with 15-year fixed contracts for the sale of capacity in the PJM capacity market. Under LCAPP, the local utilities in New Jersey are required to pay (or receive) the difference between the price eligible generators receive in the capacity market and the price guaranteed under the 15-year contract. New Jersey ultimately selected three proposals to participate in LCAPP and build new generation in the state. In addition, on April 12, 2012, the MDPSC issued an order directing the Maryland electric utilities to enter into a 20-year contract for differences (CfD) with CPV Maryland, LLC (CPV), under which CPV will construct an approximately 700 MW combined cycle gas turbine in Waldorf, Maryland, that it projected will be in commercial operation by June 1, 2015. CPV has subsequently sought to extend that date. The CfD mandated that utilities (including BGE) pay (or receive) the difference between CPV’s contract price and the revenues it receives for capacity and energy from clearing the unit in the PJM capacity market.

 

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Exelon and others have challenged the constitutionality and other aspects of the New Jersey legislation and the actions taken by the MDPSC in state and federal courts. Ultimately, the Exelon parties prevailed in obtaining orders from the U.S. Court of Appeals for the Third Circuit and the U.S. Court of Appeals for the Fourth Circuit effectively undoing the actions taken by the New Jersey legislature and the MDPSC, respectively. The matter has been appealed to the U.S. Supreme Court, and while the Court of Appeals decisions are helpful, there remains risk the Supreme Court will overrule the lower Courts.

As required under their contracts, generator developers who were selected in the New Jersey and Maryland programs (including CPV) offered and cleared in PJM’s capacity market auctions held in May 2012, 2013, and 2014. In addition, CPV has announced its intention to move forward with construction of its New Jersey and Maryland plants, with or without the challenged state subsidy. Nonetheless to the extent that the state-required customer subsidies are included under their respective contracts, Exelon believes that these projects may have artificially suppressed capacity prices in PJM in these auctions and may continue to do so in future auctions to the detriment of Exelon’s market driven position. While the court decisions in New Jersey and Maryland are positive developments, continuation of these state efforts, if successful and unabated by an effective minimum offer price rule (MOPR) for future capacity auctions, could continue to result in artificially depressed wholesale capacity and/or energy prices. Other states could seek to establish programs, which could substantially impact Exelon’s market driven position and could have a significant effect on Exelon’s financial results of operations, financial position and cash flows. Exelon continues to monitor developments and participate in stakeholder and other processes to ensure that similar state subsidies are not developed. In addition, Exelon remains active in advocating for competitive markets, while opposing policies that require taxpayers and/ or consumers to subsidize or give preferential treatment to specific generation providers or technologies, or that would threaten the reliability and value of the integrated electricity grid.

Energy Demand.    Modest economic growth partially offset by energy efficiency initiatives is resulting in positive growth for electricity for PECO and BGE, and a decrease in projected load for electricity for ComEd. PECO, BGE and ComEd are projecting load volumes to increase (decrease) by 0.9%, 0.1% and (0.1)% respectively, in 2015 compared to 2014.

Retail Competition.    Generation’s retail operations compete for customers in a competitive environment, which affect the margins that Generation can earn and the volumes that it is able to serve. The market experienced high price volatility in the first quarter of 2014 which contributed to bankruptcies and consolidations within the industry during the year. However, forward natural gas and power prices are expected to remain low and thus we expect retail competitors to stay aggressive in their pursuit of market share, and that wholesale generators (including Generation) will continue to use their retail operations to hedge generation output.

Strategic Policy Alignment

Exelon routinely reviews its hedging policy, dividend policy, operating and capital costs, capital spending plans, strength of its balance sheet and credit metrics, and sufficiency of its liquidity position, by performing various stress tests with differing variables, such as commodity price movements, increases in margin-related transactions, changes in hedging practices, and the impacts of hypothetical credit downgrades.

Exelon and Generation evaluate the economic viability of each of their generating units on an ongoing basis. Decisions regarding the future of economically challenged generating assets will be based primarily on the economics of continued operation of the individual plants. If Exelon and Generation do not see a path to sustainable profitability in any of their plants, Exelon and Generation will take steps to retire those plants to avoid sustained losses. Retirement of plants could materially affect Exelon’s and Generation’s results of operations, financial position, and cash flows through, among other things, potential impairment charges, accelerated depreciation and decommissioning expenses over the plants remaining useful lives, and ongoing reductions to operating revenues, operating and maintenance expenses, and capital expenditures.

 

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Exelon’s board of directors declared the first quarter 2015 dividend of $0.31 per share on Exelon’s common stock. The first quarter dividend was paid on March 10, 2015, to shareholders of record on February 13, 2015.

Exelon’s board of directors declared the second quarter 2015 dividend of $0.31 per share on Exelon’s common stock. The second quarter dividend is payable on June 10, 2015 to shareholders of record on May 15, 2015. All future quarterly dividends require approval by Exelon’s board of directors.

Hedging Strategy

Exelon’s policy to hedge commodity risk on a ratable basis over three-year periods is intended to reduce the financial impact of market price volatility. Generation is exposed to commodity price risk associated with the unhedged portion of its electricity portfolio. Generation enters into non-derivative and derivative contracts, including financially-settled swaps, futures contracts and swap options, and physical options and physical forward contracts, all with credit-approved counterparties, to hedge this anticipated exposure. Generation has hedges in place that significantly mitigate this risk for 2015 and 2016. However, Generation is exposed to relatively greater commodity price risk in the subsequent years with respect to which a larger portion of its electricity portfolio is currently unhedged. As of March 31, 2015, the percentage of expected generation hedged for the major reportable segments is 94%-97%, 67%-70% and 37%-40% for 2015, 2016, and 2017, respectively. The percentage of expected generation hedged is the amount of equivalent sales divided by the expected generation. Expected generation is the volume of energy that best represents our commodity position in energy markets from owned or contracted for capacity based upon a simulated dispatch model that makes assumptions regarding future market conditions, which are calibrated to market quotes for power, fuel, load following products, and options. Equivalent sales represent all hedging products, such as wholesale and retail sales of power, options and swaps. Generation has been and will continue to be proactive in using hedging strategies to mitigate commodity price risk in subsequent years as well. See Note 4 — Mergers, Acquisitions, and Dispositions of the Exelon 2014 Form 10-K for more detail regarding the divestitures.

Generation procures oil and natural gas through long-term and short-term contracts and spot-market purchases. Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services. The supply markets for uranium concentrates and certain nuclear fuel services, coal, oil and natural gas are subject to price fluctuations and availability restrictions. Supply market conditions may make Generation’s procurement contracts subject to credit risk related to the potential non-performance of counterparties to deliver the contracted commodity or service at the contracted prices. Approximately 50% of Generation’s uranium concentrate requirements from 2015 through 2019 are supplied by three producers. In the event of non-performance by these or other suppliers, Generation believes that replacement uranium concentrates can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements. Non-performance by these counterparties could have a material adverse impact on Exelon’s and Generation’s results of operations, cash flows and financial position.

ComEd, PECO and BGE mitigate commodity price risk through regulatory mechanisms that allow them to recover procurement costs from retail customers.

Growth Opportunities

With an emphasis on innovation and entrepreneurship, Exelon is currently pursuing growth in both the utility and competitive energy businesses. Identifying and capitalizing on emerging trends and technologies, Exelon plans to invest in new innovative technologies to compete with a new breed of energy players, leverage new technologies to create new or expand existing businesses, and improve productivity and efficiencies within our existing businesses. Management continually evaluates growth opportunities aligned with Exelon’s businesses, assets and markets, leveraging Exelon’s expertise in those areas.

 

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Competitive Energy Businesses

Generation continues to pursue growth in its existing businesses and markets and further diversification across the competitive energy value chain.

 

   

Leveraging its competencies,

 

   

Generation’s 2014 acquisition of Integrys allows Generation to expand its retail footprint further in an industry sector that continues to mature and consolidate and provides hedging and diversification benefits to its existing portfolio.

 

   

Generation continues to pursue investment opportunities in renewables, in its nuclear uprate program and in the development of natural gas generation plants that is supported by the trend of increasing natural gas supply.

 

   

Investing in business diversification to position the company for the future,

 

   

Generation has launched a business in competitive distributed generation that capitalizes on the push toward a decentralized system.

 

   

Generation is also making investments across the natural gas value chain throughout North America, focusing initially on expansion of the existing Upstream and wholesale gas businesses, as well as entry into liquefied natural gas.

Regulated Energy Businesses

The proposed acquisition of PHI provides an opportunity to accelerate Exelon’s regulated growth and provide stable cash flows, earnings accretion, and dividend stability. Additionally, ComEd, PECO and BGE anticipate making significant future investments in infrastructure modernization, including smart meter and smart grid initiatives, storm hardening, and advanced reliability technologies. ComEd also plans to invest approximately $280 million to construct the Grand Prairie Gateway Transmission Line in Illinois alleviating identified congestion and enhancing reliability. ComEd, PECO and BGE invest in rate base where it provides a net benefit to customers and the community by increasing reliability and the service experience or otherwise meeting customer needs. These investments are made prudently and at the lowest reasonable cost to customers.

See Note 5 — Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information on the Smart Meter and Smart Grid Initiatives.

Liquidity

Each of the Registrants annually evaluates its financing plan, dividend practices and credit line sizing, focusing on maintaining its investment grade ratings while meeting its cash needs to fund capital requirements, retire debt, pay dividends, fund pension and OPEB obligations and invest in new and existing ventures. A broad spectrum of financing alternatives beyond the core financing options can be used to meet its needs and fund growth including monetizing assets in the portfolio via project financing, asset sales, and the use of other financing structures (e.g., joint ventures, minority partners, etc.). The Registrants expect cash flows to be sufficient to meet operating expenses, financing costs and capital expenditure requirements.

Exelon, Generation, ComEd, PECO and BGE have unsecured syndicated revolving credit facilities with aggregate bank commitments of $0.5 billion, $5.3 billion, $1.0 billion, $0.6 billion and $0.6 billion, respectively. Generation also has bilateral credit facilities with aggregate maximum availability of $0.5 billion. See Liquidity and Capital Resources — Credit Matters — Exelon Credit Facilities below.

Exposure to Worldwide Financial Markets.    Exelon has exposure to worldwide financial markets including European banks. Disruptions in the European markets could reduce or restrict the Registrants’ ability to

 

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secure sufficient liquidity or secure liquidity at reasonable terms. As of March 31, 2015, approximately 29%, or $2.5 billion, of the Registrants’ aggregate total commitments were with European banks, excluding the unsecured bridge facility to provide financing for the proposed PHI acquisition. The credit facilities include $8.5 billion in aggregate total commitments of which $6.5 billion was available as of March 31, 2015, due to outstanding letters of credit and commercial paper. There were no borrowings under the Registrants’ credit facilities as of March 31, 2015. See Note 9 — Debt and Credit Agreements of the Combined Notes to the Consolidated Financial Statements for additional information on the credit facilities.

Tax Matters

See Note 10 — Income Taxes of the Combined Notes to Consolidated Financial Statements for additional information.

Environmental Legislative and Regulatory Developments.

Exelon supports the promulgation of certain environmental regulations by the U.S. EPA, including air, water and waste controls for electric generating units. See discussion below for further details. The air and waste regulations will have a disproportionate adverse impact on fossil-fuel power plants, requiring significant expenditures of capital and variable operating and maintenance expense, and will likely result in the retirement of older, marginal facilities. Due to their low emission generation portfolios, Generation and CENG will not be significantly directly affected by these regulations, representing a competitive advantage relative to electric generators that are more reliant on fossil-fuel plants. Various bills have been introduced in the U.S. Congress that would prohibit or impede the U.S. EPA’s rulemaking efforts. The timing of the consideration of such legislation is unknown.

Air Quality.    In recent years, the U.S. EPA has been implementing a series of increasingly stringent regulations under the Clean Air Act relating to NAAQS for conventional air pollutants (e.g., NOx, SO2 and particulate matter) as well as stricter technology requirements to control HAPs (e.g., acid gases, mercury and other heavy metals) from electric generation units. The U.S. EPA continues to review and update its NAAQS with a tightened particulate matter NAAQS issued in December 2012 and a tightened ozone NAAQS, to be finalized in late 2015, proposed for public comment in December 2014. These recently finalized or proposed updates will potentially result in more stringent emissions limits on fossil-fuel electric generating stations. There continues to be opposition among fossil-fuel generation owners to the potential stringency and timing of these air regulations.

In July 2011, the U.S. EPA published CSAPR and in June 2012, it issued final technical corrections. CSAPR requires 28 upwind states in the eastern half of the United States to significantly improve air quality by reducing power plant emissions that cross state lines and contribute to ground- level ozone and fine particle pollution in downwind states. On August 21, 2012, a three-judge panel of the D.C. Circuit Court held that the U.S. EPA had exceeded its authority in certain material aspects with respect to CSAPR and vacated the rule and remanded it to the U.S. EPA for further rulemaking consistent with its decision. The Court also ordered that CAIR remain in effect pending finalization of CSAPR on remand. On April 29, 2014, the U.S. Supreme Court reversed the D.C. Circuit Court decision and upheld CSAPR, and remanded the case to the D.C. Circuit Court to resolve the remaining implementation issues. On November 21, 2014, the U.S. EPA issued an Interim Final Rule in which the Agency announced that it was tolling the effective dates for the CSAPR. The first phase of the CSAPR program started on January 1, 2015, with the second phase starting January 1, 2017. Also released on November 21, 2014, was a Notice of Data Availability under which the Agency proposed CSAPR allowance allocations to generating units for the first five years of the program, 2015- 2020; these were identical to those previously identified in prior final rules related to the CSAPR. Oral argument related to the residual CSAPR challenges, not addressed by the U.S. Supreme Court, occurred on February 25, 2015 before the D.C. Circuit Court.

 

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On December 16, 2011, the U.S. EPA signed a final rule to reduce emissions of toxic air pollutants from power plants and signed revisions to the NSPS for electric generating units. The final rule, known as MATS, requires coal-fired electric generation plants to achieve high removal rates of mercury, acid gases and other metals. To achieve these standards, coal units with no pollution control equipment installed (uncontrolled coal units) will have to make capital investments and incur higher operating expenses. It is expected that owners of smaller, older, uncontrolled coal units will retire the units rather than make these investments. Coal units with existing controls that do not meet the MATS rule may need to upgrade existing controls or add new controls to comply. Owners of oil units not currently meeting the proposed emission standards may choose to convert the units to light oils or natural gas, install control technologies, or retire the units. The MATS rule requires generating stations to meet the new standards three years after the rule takes effect, April 16, 2015, with specific guidelines for an additional one or two years in limited cases. Numerous entities challenged MATS in the D.C. Circuit Court, and Exelon intervened in support of the rule. On April 15, 2014, the D.C. Circuit Court issued an opinion upholding MATS in its entirety.

In November 2014, the U.S. Supreme Court granted a petition for review of the MATS Rule filed by 20 states and a coalition of coal-fired electric generators. The U.S. Supreme Court is reviewing a single, yet critical, aspect of the MATS Rule-whether the U.S. EPA properly considered compliance costs (e.g., pollution control capital expenditures and on-going operations and maintenance expense) in determining whether it is appropriate to regulate hazardous air pollutants emitted by electric utilities. If the Court finds that the U.S. EPA acted unreasonably, then implementation of the rule would be delayed until the U.S. EPA corrects any deficiencies. Oral argument was held on March 25, 2015 and it is likely that the U.S. Supreme Court will issue a decision sometime in 2015. Exelon has been participating in the case as an intervenor in support of the rule.

The U.S. EPA continued its regular, periodic review of the NAAQS standards. On November 25, 2014, the Agency proposed, for public comment, the establishment of a revised primary ozone standard in the range of 65-70 parts per billion (ppb) 8-hour average, a reduction from the 2008 ozone standard level of 75 ppb 8-hour average standard. The Agency is also requesting public comment on levels as low as 60 ppb 8-hour average. In its proposal, the Agency is also proposing to extend the “ozone season” monitoring period, starting in 2017, on a state-by-state basis from its current May-September five-month period to include months before, and after, the traditional ozone season, depending on air quality monitoring data. Most CSAPR states are proposed to be subjected to a March to October “ozone season.” In its proposed rule, the Agency also elected to set the secondary standard at the same level and form as the primary standard. The Agency is expected to issue its final ozone NAAQS revision in October 2015. In December 2012, the U.S. EPA issued its final revisions to the Agency’s particulate matter (PM) NAAQS. In its final rule, the U.S. EPA lowered the annual PM2.5 standard, but declined to issue a new secondary NAAQS to improve urban visibility. The U.S. EPA indicated in its final rule that by 2020 it expects most areas of the country will be in attainment of the new PM2.5 NAAQS based on currently expected regulations, such as the MATS regulation.

In addition to these NAAQS, the U.S. EPA also finalized nonattainment designations for certain areas in the United States for the 2010 one-hour SO2 standard on August 5, 2013, and indicated that additional nonattainment areas will be designated in a future rulemaking. U.S. EPA required states to submit state implementation plans (SIPs) for nonattainment areas by March 25, 2015. With regard to Texas and Maryland, no nonattainment areas were identified in EPA’s final designation rule. With regard to Illinois and Pennsylvania, several counties, or portions of counties, in each state were identified as nonattainment. Since the 2010 one-hour SO2 standard was finalized, EPA has issued a series of guidance documents, and proposed a Data Requirement Rule that will be finalized in the summer of 2015 related to requirements for states related to the application of air quality monitoring and modeling in state implementation plans. Nonattainment county compliance with the one-hour SO2 standard is required by March 25, 2018. While significant SO2 reductions will occur as a result of MATS compliance in 2015, Exelon is unable to predict the requirements of pending states’ SIPs to further reduce SO2 emissions in support of attainment of the one hour SO2 standard.

 

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The cumulative impact of these air regulations could be to require fossil fuel-fired power plant operators to expend significant capital to install pollution control technologies, including wet flue gas desulfurization technology for SO2 and acid gases, and selective catalytic reduction technology for NOx.

As of March 31, 2015, Exelon had a $365 million net investment in coal-fired plants in Georgia subject to long-term leases extending through 2028 and 2030. While Exelon currently estimates the value of these plants at the end of the lease term will be in excess of the recorded residual lease values, after the impairments recorded in the second quarter of 2013 and 2014, final applications of the CSAPR and MATS regulations could negatively impact the end-of-lease term values of these assets, which could result in a future impairment loss that could be material.

On January 15, 2013, EPA issued a final rule for NSPS and National Emissions Standards for Hazardous Air Pollutants (NESHAP) for reciprocating internal combustion engines (RICE NESHAP/ NSPS). The final rule allows diesel backup generators to operate for up to 100 hours annually under certain emergency circumstances without meeting emissions limitations, but requires units that operate over 15 hours to burn low sulfur fuel and report key engine information. The final rule eliminated, after May 2014, the 50 hour exemption for peak shaving and other non-emergency demand response that was included in the proposed rule and, therefore, is not expected to result in additional megawatts of demand response to be bid into the PJM capacity auction.

In the absence of Federal legislation, the U.S. EPA is also moving forward with the regulation of GHG emissions under the Clean Air Act. On June 25, 2013, President Obama announced “The President’s Climate Action Plan,” a summary of executive branch actions intended to: reduce carbon emissions; prepare the United States for the impacts of climate change; and lead international efforts to combat global climate change and prepare for its impacts. Concurrent with the announcement of the Administration’s plan, the President also issued a Memorandum for the Administrator of the Environmental Protection Agency that focused on power generation sector carbon reductions under the Section 111 New Source Performance Standards (NSPS) section of the federal Clean Air Act. The memorandum directs the U.S. EPA Administrator to issue two sets of proposed rulemakings with regard to power plant carbon emissions under Section 111 of the Clean Air Act.

The U.S. EPA proposed a Section 111(b) regulation for new units in September 2013 that may result in material costs of compliance for CO2 emissions for new fossil-fuel electric generating units, particularly coal-fired units. The Climate Action Plan also required the U.S. EPA to propose by June 2014 GHG emission regulations for existing stationary sources under Section 111(d) of the Clean Air Act, and to issue final regulations by June 2015. The proposed rule was published in the Federal Register on June 16, 2014. The proposed rule establishes emission reduction targets for each state and provides flexibility for each state to determine how to achieve its required reductions, including heat rate improvements at coal-fired power plants, fuel switching from coal to gas, renewable generation and new nuclear facilities, demand side energy efficiency, and the use of market-based instruments. The U.S. EPA anticipates that the final rule will issued in summer 2015. While the nature and impact of the final regulations is not yet known, to the extent that the rule results in emission reductions from fossil fuel fired plants, imposing some form of direct or indirect price of carbon in competitive electricity markets, Exelon’s overall low-carbon generation portfolio results would benefit.

Exelon supports comprehensive climate change legislation or regulation, including a cap-and-trade program for GHG emissions, which balances the need to protect consumers, business and the economy with the urgent need to reduce national GHG emissions.

Water Quality.    Section 316(b) of the Clean Water Act requires that cooling water intake structures at electric power plants reflect the best technology available to minimize adverse environmental impacts, and is implemented through state-level NPDES permit programs. All of Generation’s and CENG’s power generation facilities with cooling water systems are subject to the regulations. Facilities without closed-cycle recirculating systems (e.g., cooling towers) are potentially most affected by changes to the existing regulations. For Generation, those facilities are Clinton, Dresden, Eddystone, Fairless Hills, Gould Street, Handley, Mountain

 

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Creek, Mystic 7, Oyster Creek, Peach Bottom, Quad Cities, Riverside, Salem and Schuylkill. For CENG, those facilities are Calvert Cliffs, Nine Mile Point Unit 1 and R.E. Ginna. On October 14, 2014, the U.S. EPA’s final Section 316(b) rule became effective. The rule requires that a series of studies and analyses be performed at each facility to determine the best technology available, followed by an implementation period. The timing of the various requirements for each facility is related to the status of its current NPDES permit and the subsequent renewal period. There is no fixed compliance schedule, as this is left to the discretion of the state permitting director.

Until the compliance requirements are determined by the applicable state permitting director on a site-specific basis for each plant, the impact of compliance with the final rule is unknown. Should a state permitting director determine that a facility is required to install cooling towers to comply with the rule, that facility’s economic viability would be called into question. However, the likely impact of the rule has been significantly decreased since the final rule does not mandate cooling towers as a national standard, and the state permitting director is required to apply a cost-benefit test and take into consideration site-specific factors.

Hazardous and Solid Waste.    On December 19, 2014, the U.S. EPA issued the first federal regulation for the disposal of coal combustion residuals (CCR) from power plants, including the classification of CCR as non-hazardous waste under RCRA. The EPA ruling was published in the Federal Register on April 17, 2015, and becomes effective 180 days after publication. Under the regulation, CCR will continue to be regulated by most states subject to coordination with the federal regulations. Generation has previously recorded reserves consistent with state regulation for its owned coal ash sites, and as such, the regulation is not expected to impact Exelon’s and Generation’s financial results. Generation does not have sufficient information to reasonably assess the potential likelihood or magnitude of any remediation requirements that may be asserted under the new federal regulations for coal ash disposal sites formerly owned by Generation. For these reasons, Generation is unable to predict whether and to what extent it may ultimately be held responsible for remediation and other costs relating to formerly owned coal ash disposal sites under the new regulations, and as a result no new liability has been recorded as of March 31, 2015.

See Note 17 — Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for further detail related to environmental matters.

Other Regulatory and Legislative Actions

NRC Task Force Insights from the Fukushima Daiichi Accident (Exelon and Generation).    In July 2011, an NRC Task Force formed in the aftermath of the March 11, 2011, 9.0 magnitude earthquake and ensuing tsunami, that seriously damaged the nuclear units at the Fukushima Daiichi Nuclear Power Station, issued a report of its review of the accident, including tiered recommendations for future regulatory action by the NRC to be taken in the near and longer term. The Task Force’s report concluded that nuclear reactors in the United States are operating safely and do not present an imminent risk to public health and safety. The NRC and its staff have issued orders and implementation guidance for commercial reactor licensees operating in the United States. The NRC and its staff are continuing to evaluate additional requirements. Generation has assessed the impacts of the Tier 1 orders and information requests and will continue monitoring the additional recommendations under review by the NRC staff, both from an operational and a financial impact standpoint. A comprehensive review of the NRC Tier 1 orders and information requests, as well as preliminary engineering assumptions and analysis, indicate that the financial impact of compliance for Generation, net of expected co-owner reimbursements, for the period from 2015 through 2019 is expected to be between approximately $325 million and $350 million of capital (including approximately $75 million for the CENG plants) and $75 million of operating expense (including approximately $25 million for the CENG plants). As Generation completes the design and installation planning for its actions, Generation will update these estimates. Further, Generation estimates incremental costs of $15 to $20 million per unit at thirteen Mark I and II units (including two CENG units) for the installation of filters on vents, if ultimately required by the NRC. Generation’s current assessments are specific to the Tier 1 recommendations as the NRC has not taken specific action with respect to the Tier 2 and Tier 3

 

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recommendations. Exelon and Generation are unable to conclude at this time to what extent any actions to comply with the requirements of Tier 2 and Tier 3 will impact their future financial position, results of operations, and cash flows. Generation will continue to engage in nuclear industry assessments and actions and stakeholder input. See Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview of the Exelon 2014 Form 10-K, for additional information.

Financial Reform Legislation (Exelon, Generation, ComEd, PECO and BGE).    The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) was enacted in July 2010. The part of the Act that applies to Exelon is Title VII, which is known as the Dodd-Frank Wall Street Transparency and Accountability Act (Dodd-Frank). Dodd-Frank requires the creation of a new regulatory regime for over-the-counter swaps (Swaps), including mandatory clearing for certain categories of Swaps, incentives to shift Swap activity to exchange trading, margin and capital requirements, and other obligations designed to promote transparency. For non security-based Swaps including commodity Swaps, Dodd-Frank empowers the Commodity Futures Trading Commission (CFTC) to promulgate regulations implementing the law’s objectives. The primary aim of Dodd-Frank is to regulate the key intermediaries in the Swaps market, which entities are either swap dealers (SDs), major swap participants (MSPs), and certain other financial entities, but the law also applies to a lesser degree to end-users of Swaps. On January 12, 2015, President Obama signed into law a bill that exempts from margin requirements Swaps used by end-users to hedge or mitigate commercial risk. Moreover, the CFTC’s Dodd-Frank regulations preserve the ability of end users in the energy industry to hedge their risks using Swaps without being subject to mandatory clearing, and excepts or exempts end-users from many of the other substantive regulations. Accordingly, as an end-user, Generation is conducting its commercial business in a manner that does not require registration with the CFTC as an SD or MSP. Generation does not anticipate transacting in the future in a manner in which it would become a SD or MSP.

There are, however, some rulemakings that have not yet been finalized, including the capital and margin rules for (non-cleared) Swaps. Generation does not expect these rules to directly impact its collateral requirements. However, depending on the substance of these final rules in addition to certain international regulatory requirements still under development and that are similar to Dodd-Frank, Generation’s Swap counterparties could be subject to additional and potentially significant capitalization requirements. These regulations could motivate the SDs and MSPs to increase collateral requirements or cash postings from their counterparties, including Generation.

Generation continues to monitor the rulemaking proceedings with respect to the capital and margin rules, but cannot predict to what extent, if any, further refinements to Dodd-Frank requirements may impact its cash flows or financial position, but such impacts could be material.

ComEd, PECO and BGE could also be subject to some Dodd-Frank requirements to the extent they were to enter into Swaps. However, at this time, management of ComEd, PECO and BGE continue to expect that their companies will not be materially affected by Dodd-Frank.

Illinois Low Carbon Portfolio Standard (Exelon, Generation and ComEd).    In March 2015, the Low Carbon Portfolio Standard (LCPS) was introduced in the Illinois General Assembly. The legislation would require ComEd and Ameren to purchase low carbon energy credits to match 70 percent of the electricity used on the distribution system. The LCPS is a technology-neutral solution, so all generators of zero or low carbon energy would be able to compete in the procurement process, including wind, solar, hydro, clean coal and nuclear. Costs associated with purchasing the low carbon energy credits would be collected from customers. The LCPS proposal includes consumer protection such as a price cap that would limit the impact to a 2.015% percent increase based off 2009 monthly bills, or about $2 per month for the average residential electricity customer. The legislation also includes a separate customer rebate provision that would provide a direct bill credit to customers in the event wholesale prices exceed a specified level. If passed by the General Assembly, the legislation would be presented to the Governor, who would have 60 days to decide on the bill.

 

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Legislation to Maximize Smart Grid Investments and to Promote a Cleaner and Greener Illinois (Exelon and ComEd).    In March 2015, legislation was introduced in the Illinois General Assembly that would (1) build on ComEd’s investment in the Smart Grid to reinforce the resiliency and security of the electrical grid to withstand unexpected challenges, (2) expand energy efficiency programs to reduce energy waste and increase customer savings, (3) further integrate clean renewable energy onto the power system, and (4) introduce a new demand-based rate design for residential customers that would allow for a more equitable sharing of smart grid costs among customers. The legislation also provides for additional funding for customer assistance programs for low-income customers. If passed by the General Assembly, the legislation would be presented to the Governor, who would have 60 days to decide on the bill.

Distribution Formula Rate Update Filing (Exelon and ComEd).    On April 15, 2015, ComEd filed its annual distribution formula rate with the ICC, reflecting a decreased revenue requirement of $50 million, including an increase of $92 million for the initial revenue requirement and a decrease of $142 million related to the annual reconciliation for 2014. The filing establishes the revenue requirement used to set the rates that will take effect in January 2016 after the ICC’s review and approval, which is due by December 2015. See Note 5 — Regulatory Matters of the Combined Notes to Consolidated Financial Statements for further information related to distribution formula update.

2015 Pennsylvania Electric Distribution Rate Case (Exelon and PECO).    On March 27, 2015, PECO filed a petition with the PAPUC requesting an increase of $190 million to its annual service revenues for electric delivery, which would reflect a 4.4% increase on the basis of total Pennsylvania jurisdictional operating revenue. The requested rate of return on common equity is 10.95%. The new electric delivery rates would take effect no later than January 1, 2016. The results of the rate case are expected to be known in the fourth quarter of 2015. PECO cannot predict how much of the requested increase the PAPUC will ultimately approve.

Transmission Formula Rate Update Filing (Exelon, ComEd and BGE).    On April 15, 2015, ComEd filed its annual transmission formula rate update with the FERC, reflecting an increased revenue requirement of $91 million, including an increase of $73 million for the initial revenue requirement and an increase of $18 million related to the annual reconciliation for 2014. The filing establishes the revenue requirement used to set rates that will take effect in June 2015, subject to review by the FERC and other parties, which is due by October 2015. See Note 5 — Regulatory Matters of the Combined Notes to Consolidated Financial Statements for further information related to transmission formula update.

In April 2015, BGE filed its annual transmission formula rate update with the FERC, reflecting an increased revenue requirement of $10 million, including an increase of $13 million for the initial revenue requirement and a decrease of $3 million related to the annual reconciliation for 2014. The filing establishes the revenue requirement used to set rates that will take effect in June 2015, subject to review by the FERC and other parties, which is due by October 2015. See Note 5 — Regulatory Matters of the Combined Notes to Consolidated Financial Statements for further information related to the transmission formula update.

Grand Prairie Gateway Transmission Line (Exelon and ComEd).    On December 2, 2013, ComEd filed a request to obtain the ICC’s approval to construct a 60-mile overhead 345kV transmission line that traverses Ogle, DeKalb, Kane and DuPage Counties in Northern Illinois. On May 28, 2014, in a separate proceeding, FERC issued an order granting ComEd’s request to include 100% of the capital costs recorded to construction work in progress during construction of the line in ComEd’s transmission rate base. If the project is cancelled or abandoned for reasons beyond ComEd’s control, FERC approved the ability for ComEd to recover 100% of its prudent costs incurred after May 21, 2014 and 50% of its costs incurred prior to May 21, 2014 in ComEd’s transmission rate base. The costs incurred for the project prior to May 21, 2014 are immaterial. On October 22, 2014, the ICC issued an order approving ComEd’s Grand Prairie Gateway Project over the objection of numerous landowners and the City of Elgin. On January 15, 2015, the City of Elgin and other parties filed a Notice of Appeal in the Illinois Appellate Court. On April 8, 2015, the ICC issued a rehearing order denying the appeals filed to consider an alternate route for the transmission line. The rehearing order affirmed the route approved within the ICC’s October 22, 2014 order. ComEd expects to begin construction of the line in the second quarter of 2015 with an in-service date expected in the second quarter of 2017.

 

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FERC Ameren Order (Exelon and ComEd).    In July 2012, FERC issued an order to Ameren Corporation (Ameren) finding that Ameren had improperly included acquisition premiums/goodwill in its transmission formula rate, particularly in its capital structure and in the application of AFUDC. FERC also directed Ameren to make refunds for the implied increase in rates in prior years. Ameren filed for rehearing of the July 2012 order, which was denied in June 2014. FERC and Ameren are in the process of determining the amount of any potential refund. ComEd believes that the FERC order authorizing its transmission formula rate is distinguishable from the circumstances that led to the July 2012 FERC order in the Ameren case. However, if ComEd were required to exclude acquisition premiums/goodwill from its transmission formula rate, the impact could be material to ComEd’s results of operations and cash flows.

FERC Order No. 1000 Compliance (ComEd, PECO and BGE).    In FERC Order No. 1000, the FERC required public utility transmission providers to enhance their transmission planning procedures and their cost allocation methods applicable to certain new regional and interregional transmission projects. As part of the changes to the transmission planning procedures, the FERC required removal from all FERC-approved tariffs and agreements of a right of first refusal to build certain new transmission facilities. In compliance with the regional transmission planning requirements of Order No. 1000, PJM as the transmission provider submitted a compliance filing to FERC on October 25, 2012. On the same day, certain of the PJM transmission owners, including ComEd, PECO and BGE (collectively, the PJM Transmission Owners), submitted a filing asserting that their contractual rights embodied in the PJM governing documents continue to justify their right of first refusal to construct new reliability (and related) transmission projects and that the FERC should not be allowed to override such rights absent a showing that it is in the public interest to do so under the FERC’s “Mobile-Sierra” standard of review. This is a heightened standard of review which the PJM Transmission Owners argued could not be satisfied based on the facts applicable to them. On March 22, 2013, FERC issued an order on the PJM Compliance Filing and the filing of these PJM Transmission Owners (1) rejecting the arguments of those PJM Transmission Owners that changes to the PJM governing documents were entitled to review under the Mobile-Sierra standard, (2) accepting most of the PJM filing, removing the right-of-first refusal from the PJM tariffs, and (3) directing PJM to remove certain exceptions that it included in its compliance filing that FERC found did not comply with Order No. 1000. FERC’s order could enable third parties to seek to build certain regional transmission projects that had previously been reserved for the PJM Transmission Owners, potentially reducing ComEd’s, PECO’s and BGE’s financial return on new investments in energy transmission facilities. Numerous parties sought rehearing of the FERC’s March 22, 2013 order, including the PJM Transmission Owners who sought rehearing of the FERC’s rejection of their Mobile-Sierra and related arguments. PJM’s compliance filing was made on July 22, 2013. On May 15, 2014, FERC denied the rehearing requests except with respect to one issue on when PJM could consider state and local laws in evaluating projects. FERC generally accepted the July 22, 2013, Compliance Filing but required several minor additional changes. FirstEnergy and at least one other party filed an appeal of the May 15, 2014, Order upholding PJM’s right of first refusal language in the DC Circuit. Exelon has intervened in the FirstEnergy appeal. Several parties have filed requests for rehearing or clarification concerning the changes set forth in the May 15, 2014, Order. On January 22, 2015, FERC issued an order denying rehearing in part and requiring further changes by PJM. On December 18, 2014, FERC issued an order conditionally accepting part of the PJM-MISO interregional Order No. 1000 compliance filing, rejecting a MISO proposal concerning cost allocation for cross-border reliability projects and directing a further compliance filing by PJM and MISO.

FERC Transmission Complaint (Exelon and BGE).    On February 27, 2013, consumer advocates and regulators from the District of Columbia, New Jersey, Delaware and Maryland, and the Delaware Electric Municipal Cooperatives (the parties), filed a complaint at FERC against BGE and the PHI companies relating to their respective transmission formula rates. BGE’s formula rate includes a 10.8% base rate of return on common equity (ROE) and a 50 basis point incentive for participating in PJM (the latter of which is conditioned upon crediting the first 50 basis points of any incentive ROE adders). The parties seek a reduction in the base return on equity to 8.7% and changes to the formula rate process. FERC docketed the matter and set April 3, 2013 as the deadline for interventions, protests and answers. Under FERC rules, the revenues subject to refund are limited to a fifteen month period and the earliest date from which the base ROE could be adjusted and refunds required is the date of the complaint. On March 19, 2013, BGE filed a motion to dismiss or sever the complaint.

 

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On August 21, 2014, FERC issued an order in the BGE and PHI companies’ proceeding, which established hearing and settlement judge procedures for the complaint, and set a refund effective date of February 27, 2013. BGE, the PHI companies and the parties began settlement discussions under the guidance of a FERC administrative law judge on September 23, 2014. On November 24, 2014, the Settlement Judge informed FERC and the Chief Judge that the parties had reached an impasse and determined that a settlement was not possible. On November 26, 2014, the Chief Judge issued an order terminating the settlement proceeding, designating a presiding judge at the hearings and directing that an initial decision be issued by November 25, 2015.

On December 8, 2014, various state agencies in Delaware, Maryland, New Jersey, and D.C. filed a second complaint against BGE regarding the base ROE of the transmission business seeking a reduction from 10.8% to 8.8%. The filing of the second complaint creates a second refund window. By order issued on February 9, 2015, FERC established a hearing on the second complaint with the complainants’ requested refund effective date of December 8, 2014. On February 20, 2015, the Chief Judge issued an order consolidating the two complaint proceedings and established an Initial Decision issuance deadline of February 29, 2016. On March 2, 2015, the Presiding Administrative Law Judge issued an order establishing a procedural schedule for the consolidated proceedings that provides for the hearing to commence on October 20, 2015.

Based on the current status of the complaint filings, BGE believes it is probable that BGE’s base ROE rate will be adjusted, and that a refund to customers of transmission revenue for the two maximum fifteen month periods will be required. However, BGE is unable to estimate the most likely refund amount for either complaint at this time, and has therefore established a reserve, which is not material, representing the low end of a reasonably possible estimated range of loss. Additionally, management is unable to estimate the maximum exposure of a potential refund at this time, which may have a material impact on BGE’s results of operations and cash flows. The estimated annual ongoing reduction in revenues if FERC approved the ROEs requested by the parties in their filings is approximately $11 million. If FERC were to order a reduction of BGE’s base ROE to 8.7% as sought in the first complaint (while retaining the 50 basis points of any incentives that were credited to the base return on equity for certain new transmission investment), the result of the first fifteen month refund window would be a refund to customers of approximately $13 million. If FERC were to order a reduction in BGE’s base ROE to 8.8% as sought in the second complaint (while retaining 50 basis points of any incentives that were credited to the base return on equity for certain new transmission investment) and the refund period extended for a full fifteen months, the result would be a refund to customers of approximately $14 million. See Note 5 — Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information.

The Maryland Strategic Infrastructure Development and Enhancement Program (Exelon and BGE).    In February 2013, the Maryland General Assembly passed legislation intended to accelerate gas infrastructure replacements in Maryland by establishing a mechanism for gas companies to promptly recover reasonable and prudent costs of eligible infrastructure replacement projects separate from base rate proceedings. On May 2, 2013, the Governor of Maryland signed the legislation into law; which took effect June 1, 2013. Under the new law, following a proceeding before the MDPSC and with the MDPSC’s approval of the eligible infrastructure replacement projects along with a corresponding surcharge, BGE could begin charging gas customers a monthly surcharge for infrastructure costs incurred after June 1, 2013. The legislation includes caps on the monthly surcharges to residential and non-residential customers, and would require an annual true-up of the surcharge revenues against actual expenditures. Investment levels in excess of the cap would be recoverable in a subsequent gas base rate proceeding at which time all costs for the infrastructure replacement projects would be rolled into gas distribution rates. Irrespective of the cap, BGE is required to file a gas rate case every five years under this legislation. On August 2, 2013, BGE filed its infrastructure replacement plan and associated surcharge. On January 29, 2014, the MDPSC issued a decision conditionally approving the first five years of BGE’s plan and surcharge. On March 26, 2014, the MDPSC approved as filed BGE’s proposed 2014 project list, tariff and associated surcharge amounts, with a surcharge that became effective April 1, 2014. On November 17, 2014, BGE filed a surcharge update including a true-up of costs estimates included in the 2014 surcharge, along with its 2015 project list and cost estimates to be included in the 2015 surcharge. The filing was approved with a revised

 

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surcharge effective January 1, 2015. At its December 17, 2014 weekly Administrative Meeting, the MDPSC approved BGE’s 2015 project list and the proposed surcharge for 2015. As of March 31, 2015, BGE recorded a regulatory asset of $1 million, representing the difference between the surcharge revenues and program costs.

In February 2014, the residential consumer advocate in Maryland filed an appeal with the Baltimore City Circuit Court to the decision issued by the MDPSC on BGE’s infrastructure replacement plan. On September 5, 2014, the Baltimore City Circuit Court affirmed the MDPSC decision on BGE’s infrastructure replacement plan and associated surcharge. On October 10, 2014, the residential consumer advocate noticed its appeal to the Maryland Court of Special Appeals from the judgment entered by the Baltimore City Circuit Court. The Court of Special Appeals has issued a preliminary procedural schedule that sets oral argument in this matter for a date in the first two weeks of November 2015. See Note 5 — Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information.

PJM Minimum Offer Price Rule (Exelon and Generation).    PJM’s capacity market rules include a Minimum Offer Price Rule (MOPR) that is intended to preclude sellers from artificially suppressing the competitive price signals for generation capacity. The FERC orders approving the MOPR were upheld by the United States Court of Appeals for the Third Circuit in February 2014.

Exelon continues to work with PJM stakeholders and through the FERC process to implement several proposed changes to the PJM tariff aimed at ensuring that capacity resources (including those with state-sanctioned subsidy contracts and capacity market speculators) cannot inappropriately affect capacity auction prices in PJM.

Reliability Pricing Model (Exelon, Generation and BGE).    PJM’s RPM Base Residual Auctions take place approximately 36 months ahead of the scheduled delivery year. The most recent auction, for the delivery year ending May 31, 2018, occurred in May 2014. On December 12, 2014, PJM filed proposed revisions to its tariff to revise the PJM capacity market through the new “Capacity Performance” product. PJM proposed to implement Capacity Performance for the May 2015 base residual auction, but FERC issued a deficiency letter on the Capacity Performance Filing and PJM has now sought authorization to delay the 2015 Base Residual Auction until such time that FERC is able to rule on the merits of the Capacity Performance proposal. Under Capacity Performance, PJM proposes to redefine the capacity product, which would require resources to provide an enhanced assurance of delivery of energy and reserves during emergency conditions. It also would increase penalties on resources for non-performance and eliminate many excuses for non-performance. Under the PJM proposal, these changes would take effect for capacity in the 2018/2019 delivery year. Exelon filed comments in support of the PJM proposal, but also proposed several modifications to the PJM proposal including increasing the penalty rate for non-performance, increasing the amount of Capacity Performance that PJM procures for the 2016/2017 and 2017/2018 Delivery Years and making the mitigation mechanism less administratively burdensome and more reflective of risks facing resources that provide the Capacity Performance product.

Employees

During the first quarter of 2015, Generation successfully ratified the collective bargaining agreement (CBA) with the Security Officer union at Clinton through 2021, and the CBA with the Security Officer union at Braidwood through 2018. In addition, two union contracts at Mystic 7 and Mystic 8, 9 were successfully negotiated and ratified through 2021.

Critical Accounting Policies and Estimates

Management of each of the Registrants makes a number of significant estimates, assumptions and judgments in the preparation of its financial statements. See ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CRITICAL ACCOUNTING POLICIES AND ESTIMATES in Exelon’s, Generation’s, ComEd’s, PECO’s and BGE’s

 

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combined 2014 Form 10-K for a discussion of the estimates and judgments necessary in the Registrants’ accounting for AROs, goodwill, purchase accounting, unamortized energy assets and liabilities, asset impairments, depreciable lives of property, plant and equipment, defined benefit pension and other postretirement benefits, regulatory accounting, derivative instruments, taxation, contingencies, revenue recognition, and allowance for uncollectible accounts. At March 31, 2015, the Registrants’ critical accounting policies and estimates had not changed significantly from December 31, 2014.

Results of Operations

Net Income Attributable to Common Shareholders by Registrant

 

     Three Months Ended
March 31,
    Favorable
(Unfavorable)
Variance
 
          2015(a)              2014        

Exelon

   $ 693       $ 90      $ 603   

Generation

     443         (185     628   

ComEd

     90         98        (8

PECO

     139         89        50   

BGE

     106         85        21   

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 financial results include CENG’s results of operations on a fully consolidated basis.

Results of Operations — Generation

 

    Three Months Ended
March 31,
    Favorable
(Unfavorable)
Variance
 
         2015(a)             2014        

Operating revenues

  $ 5,840      $ 4,390      $ 1,450   

Purchased power and fuel expense

    3,433        3,357        (76
 

 

 

   

 

 

   

 

 

 

Revenue net of purchased power and fuel(b)

    2,407        1,033        1,374   

Other operating expenses

     

Operating and maintenance

    1,311        1,087        (224

Depreciation and amortization

    254        211        (43

Taxes other than income

    122        105        (17
 

 

 

   

 

 

   

 

 

 

Total other operating expenses

    1,687        1,403        (284
 

 

 

   

 

 

   

 

 

 

Equity in losses of unconsolidated affiliates

           (19     19   

Gain (loss) on sales of assets

    (1     5        (6
 

 

 

   

 

 

   

 

 

 

Operating income

    719        (384     1,103   
 

 

 

   

 

 

   

 

 

 

Other income and (deductions)

     

Interest expense

    (102     (85     (17

Other, net

    94        85        9   
 

 

 

   

 

 

   

 

 

 

Total other income and (deductions)

    (8            (8
 

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    711        (384     1,095   

Income taxes

    226        (199     (425
 

 

 

   

 

 

   

 

 

 

Net income (loss)

    485        (185     670   

Net income attributable to noncontrolling interests

    42               (42
 

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to membership interest

  $ 443      $ (185   $ 628   
 

 

 

   

 

 

   

 

 

 

 

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(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 financial results include CENG’s results of operations on a fully consolidated basis.

(b)

Generation evaluates its operating performance using the measure of revenue net of purchased power and fuel expense. Generation believes that revenue net of purchased power and fuel expense is a useful measurement because it provides information that can be used to evaluate its operational performance. Revenue net of purchased power and fuel expense is not a presentation defined under GAAP and may not be comparable to other companies’ presentations or deemed more useful than the GAAP information provided elsewhere in this report.

Net Income (Loss) Attributable to Membership Interest

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    Generation’s net income (loss) attributable to membership interest for the three months ended March 31, 2015 increased compared to the same period in 2014 primarily due to higher revenue net of purchased power and fuel expense, partially offset by an increase in operating and maintenance expense and income taxes. The increase in revenue net of purchased power and fuel expense primarily relates to the inclusion of CENG’s results on a fully consolidated basis in 2015, the inclusion of Integrys’ results in 2015, the benefit of lower cost to serve load (including the absence of higher procurement costs for replacement power in 2014), the cancellation of the DOE spent nuclear disposal fee and mark-to-market gains in 2015 compared to mark-to-market losses in 2014, partially offset by a reduction in capacity credits and lower margins resulting from the 2014 sales of generating assets, lower realized energy prices and the absence of the 2014 fuel optimization opportunities in the South. The increase in operating and maintenance expense is primarily related to the inclusion of CENG’s results on a fully consolidated basis in 2015. The increase in income taxes is primarily due to mark-to-market gains recorded in 2015 compared to market-to-market losses recorded in 2014.

Revenue Net of Purchased Power and Fuel Expense

Generation’s six reportable segments are based on the geographic location of its assets, and are largely representative of the footprints of an ISO / RTO and/or NERC region. Descriptions of each of Generation’s six reportable segments are as follows:

 

   

Mid-Atlantic represents operations in the eastern half of PJM, which includes Pennsylvania, New Jersey, Maryland, Virginia, West Virginia, Delaware, the District of Columbia and parts of North Carolina.

 

   

Midwest represents operations in the western half of PJM, which includes portions of Illinois, Indiana, Ohio, Michigan, Kentucky and Tennessee, and the United States footprint of MISO excluding MISO’s Southern Region, which covers all or most of North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Wisconsin, the remaining parts of Illinois, Indiana, Michigan and Ohio not covered by PJM, and parts of Montana, Missouri and Kentucky.

 

   

New England represents the operations within ISO-NE covering the states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

 

   

New York represents operations within ISO-NY, which covers the state of New York in its entirety.

 

   

ERCOT represents operations within Electric Reliability Council of Texas, covering most of the state of Texas.

 

   

Other Power Regions not considered individually significant:

 

   

South represents operations in the FRCC, MISO’s Southern Region, and the remaining portions of the SERC not included within MISO or PJM, which includes all or most of Florida, Arkansas, Louisiana, Mississippi, Alabama, Georgia, Tennessee, North Carolina, South Carolina and parts of Missouri, Kentucky and Texas. Generation’s South region also includes operations in the SPP, covering Kansas, Oklahoma, most of Nebraska and parts of New Mexico, Texas, Louisiana, Missouri, Mississippi and Arkansas.

 

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West represents operations in the WECC, which includes California ISO, and covers the states of California, Oregon, Washington, Arizona, Nevada, Utah, Idaho, Colorado, and parts of New Mexico, Wyoming and South Dakota.

 

   

Canada represents operations across the entire country of Canada and includes the AESO, OIESO and the Canadian portion of MISO.

The following business activities are not allocated to a region, and are reported under Other: retail and wholesale gas, investments in gas and oil exploration and production activities, proprietary trading, compressed natural gas fueling stations, energy efficiency and cogeneration projects, sales of electric and gas appliances, servicing of heating, air conditioning, plumbing, electrical, indoor quality systems and home improvements, and investments in energy-related proprietary technology. Further, the following activities are not allocated to a region, and are reported in Other: unrealized mark-to-market impact of economic hedging activities; amortization of certain intangible assets relating to commodity contracts recorded at fair value from mergers and acquisitions and other miscellaneous revenues.

Generation evaluates the operating performance of its power marketing activities using the measure of revenue net of purchased power and fuel expense which is a non-GAAP measurement. Generation’s operating revenues include all sales to third parties and affiliated sales to ComEd, PECO and BGE. Purchased power costs include all costs associated with the procurement and supply of electricity including capacity, energy and ancillary services. Fuel expense includes the fuel costs for owned generation and fuel costs associated with tolling agreements.

For the three months ended March 31, 2015 and 2014, Generation’s revenue net of purchased power and fuel expense by region were as follows:

 

     Three Months Ended
March 31,
    Variance     % Change  
          2015(a)              2014          

Mid-Atlantic(b)(f)

   $ 782       $ 695      $ 87        12.5

Midwest(c)

     700         556        144        25.9

New England

     158         136        22        16.2

New York(f)

     188         (21     209        n.m.   

ERCOT

     55         83        (28     (33.7 )% 

Other Power Regions(d)

     46         105        (59     (56.2 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

Total electric revenue net of purchased power and fuel expense

     1,929         1,554        375        24.1

Proprietary trading

     4         14        (10     (71.4 )% 

Mark-to-market gains (losses)

     162         (730     892        122.2

Other(e)

     312         195        117        60.0
  

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue net of purchased power and fuel expense

   $ 2,407       $ 1,033      $ 1,374        133.0
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 financial results include CENG’s results of operations on a fully consolidated basis.

(b)

Results of transactions with PECO and BGE are included in the Mid-Atlantic region.

(c)

Results of transactions with ComEd are included in the Midwest region.

(d)

Other Power Regions include South, West and Canada, which are not considered individually significant.

(e)

Other represents activities not allocated to a region. See text above for a description of included activities. Also includes amortization of intangible assets related to commodity contracts recorded at fair value of $38 million increase and $42 million decrease in revenue net of purchased power and fuel expense for the three months ended March 31, 2015 and 2014, respectively.

(f)

Includes $113 million and $169 million of purchased power from CENG prior to its consolidation on April 1, 2014 in the Mid-Atlantic and New York Regions, respectively, for the three months ended March 31, 2014.

 

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Generation’s supply sources by region are summarized below:

 

     Three Months Ended
March 31,
     Variance     % Change  

Supply source (GWh)

       2015              2014           

Nuclear Generation

          

Mid-Atlantic(a)

     15,718         12,136         3,582        29.5

Midwest

     22,427         23,125         (698     (3.0 )% 

New York(a)

     4,512                 4,512        n.m.   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Nuclear Generation

     42,657         35,261         7,396        21.0

Fossil and Renewables(a)

          

Mid-Atlantic

     559         3,207         (2,648     (82.6 )% 

Midwest

     432         417         15        3.6

New England

     600         1,734         (1,134     (65.4 )% 

New York

     1         1               

ERCOT

     1,422         1,656         (234     (14.1 )% 

Other Power Regions(c)

     1,973         1,630         343        21.0
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Fossil and Renewables

     4,987         8,645         (3,658     (42.3 )% 

Purchased Power

          

Mid-Atlantic(b)

     1,824         3,233         (1,409     (43.6 )% 

Midwest

     589         711         (122     (17.2 )% 

New England

     6,408         2,070         4,338        n.m.   

New York(b)

             2,857         (2,857     (100.0 )% 

ERCOT

     2,244         2,153         91        4.2

Other Power Regions(c)

     3,307         3,355         (48     (1.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Purchased Power

     14,372         14,379         (7    

Total Supply/Sales by Region(d)

          

Mid-Atlantic(e)

     18,101         18,576         (475     (2.6 )% 

Midwest(e)

     23,448         24,253         (805     (3.3 )% 

New England

     7,008         3,804         3,204        84.2

New York

     4,513         2,858         1,655        57.9

ERCOT

     3,666         3,809         (143     (3.8 )% 

Other Power Regions(c)

     5,280         4,985         295        5.9
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Supply/Sales by Region

     62,016         58,285         3,731        6.4
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(a)

Includes the proportionate share of output where Generation has an undivided ownership interest in jointly-owned generating plants and includes the total output of plants that are fully consolidated (e.g. CENG). Nuclear generation for the three months ended March 31, 2015 includes physical volumes of 3,284 GWh in the Mid-Atlantic region and 4,512 GWh in the New York region for CENG. Prior to the integration date of April 1, 2014, CENG volumes were included in purchased power.

(b)

Purchased power for the three months ended March 31, 2014 includes physical volumes of 2,489 GWh in the Mid-Atlantic and 2,857 GWh in the New York regions as a result of the PPA with CENG. As of the integration date of April 1, 2014, CENG volumes are included in nuclear generation.

(c)

Other Power Regions include South, West and Canada, which are not considered individually significant.

(d)

Excludes physical proprietary trading volumes of 1,808 GWh and 2,494 GWh for the three months ended March 31, 2015 and 2014, respectively.

(e)

Includes affiliate sales to PECO and BGE in the Mid-Atlantic region and affiliate sales to ComEd in the Midwest region.

Mid-Atlantic

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    The $87 million increase in revenue net of purchased power and fuel expense in the Mid-Atlantic was primarily due to the

 

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consolidation of CENG, benefit of lower cost to serve load (including the absence of higher procurement costs for replacement power in 2014), higher nuclear volumes (excluding CENG), and the cancellation of the DOE spent nuclear fuel disposal fee, partially offset by lower capacity revenues, lower generation volumes due to the sale of Keystone and Conemaugh, and lower realized energy prices.

Midwest

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    The $144 million increase in revenue net of purchased power and fuel expense in the Midwest was primarily due to higher capacity revenues, the acquisition of Integrys Energy Services. Inc., and the cancellation of the DOE spent nuclear fuel disposal fee, partially offset by lower nuclear volumes.

New England

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    The $22 million increase in revenue net of purchased power and fuel expense in New England was primarily due to the benefit of lower cost to serve load and higher generation volumes from power purchase agreements, partially offset by lower generation volumes due to the sale of Fore River.

New York

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    The $209 million increase in revenue net of purchased power and fuel expense in New York was primarily due to the consolidation of CENG.

ERCOT

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    The $28 million decrease in revenue net of purchased power and fuel expense in ERCOT was primarily due to lower realized energy prices and lower generation volumes due to the sale of Quail Run.

Other Power Regions

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    The $59 million decrease in revenue net of purchased power and fuel expense in Other Power Regions was primarily due to lower realized energy prices and the absence of the 2014 fuel optimization opportunities.

Mark-to-market

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    Generation is exposed to market risks associated with changes in commodity prices and enters into economic hedges to mitigate exposure to these fluctuations. Mark-to-market gains on economic hedging activities were $162 million for the three months ended March 31, 2015 compared to losses of $730 million for the three months ended March 31, 2014. See Notes 7 — Fair Value of Financial Assets and Liabilities and 8 — Derivative Financial Instruments of the Combined Notes to the Consolidated Financial Statements for information on gains and losses associated with mark-to-market derivatives.

Other

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    The $117 million increase in other revenue net of purchased power and fuel expense was primarily driven by the amortization of contracts recorded at fair value during prior acquisitions, and the addition of Integrys Energy Services, Inc.

 

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Nuclear Fleet Capacity Factor and Production Costs

The following table presents nuclear fleet operating data for the three months ended March 31, 2015 as compared to the same periods in 2014, for the Generation-operated plants. The nuclear fleet capacity factor presented in the table is defined as the ratio of the actual output of a plant over a period of time to its output if the plant had operated at full average annual mean capacity for that time period. Nuclear fleet production cost is defined as the costs to produce one MWh of energy, including fuel, materials, labor, contracting and other miscellaneous costs, but excludes depreciation, required capital investment, benefits costs associated with labor, insurance, property taxes, unit contingent costs, suspended DOE nuclear waste storage fee, and certain other non-production related overhead costs. Generation considers capacity factor and production costs useful measures comparatively to analyze the nuclear fleet performance between periods. Generation has included the analysis below as a complement to the financial information provided in accordance with GAAP. However, these measures are not a presentation defined under GAAP and may not be comparable to other companies’ presentations or be more useful than the GAAP information provided elsewhere in this report.

 

     Three Months Ended
March 31,
 
         2015             2014      

Nuclear fleet capacity factor(a)

     92.7     94.1

Nuclear fleet production cost per MWh(a)

   $ 20.55      $ 20.71   

 

(a)

Excludes Salem, which is operated by PSEG Nuclear, LLC. Reflects ownership percentage of stations operated by Exelon. On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet, and as a result, the 2015 financial results include CENG’s results of operations on a fully consolidated basis.

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    The nuclear fleet capacity factor, which excludes Salem, decreased primarily due to a higher number of unplanned outage days and non-outage energy losses during the three months ended March 31, 2015 compared to the same period in 2014. For the three months ended March 31, 2015 and 2014, refueling outage days totaled 89 (of which 41 are related to CENG plants) and 52, respectively, with the increase primarily attributable to the inclusion of CENG in 2015. During the same periods, non-refueling outage days totaled 32 (of which 5 were related to CENG) and 20, respectively. Production costs per MWh were lower for the three months ended March 31, 2015 as compared to the same period in 2014, due to the elimination of the SNF disposal fee in 2014, partially offset by the inclusion of CENG.

Operating and Maintenance

The changes in operating and maintenance expense for the three months ended March 31, 2015 compared to the same period in 2014, consisted of the following:

 

     Three Months Ended
March 31,
 
     Increase
(Decrease)(a)
 

Labor, other benefits, contracting, materials

   $ 141   

Nuclear refueling outage costs, including the co-owned Salem plants(b)

     44   

Accretion expense

     23   

Regulatory fees and assessment

     17   

Corporate allocations(c)

     7   

Merger and integration costs

     (2

Pension and non-pension postretirement benefits expense

     (7

Midwest Generation bankruptcy recoveries

     (14

Other

     15   
  

 

 

 

Increase in operating and maintenance expense

   $ 224   
  

 

 

 

 

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(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 financial results include CENG’s results of operations on a fully consolidated basis.

(b)

Reflects the impact of increased refueling outage days in 2015, due to the inclusion of CENG.

(c)

Reflects an increased share of corporate allocated costs primarily due to the CENG integration in the second quarter of 2014.

Depreciation and Amortization

The increase in depreciation and amortization expense for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 is primarily due the inclusion of CENG’s results.

Taxes Other Than Income

The increase in taxes other than income for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 is primarily due to the inclusion of CENG’s results.

Equity in Losses of Unconsolidated Affiliates

The decrease in equity in losses of unconsolidated affiliates for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 is primarily due to CENG’s operating results being fully consolidated beginning April 1, 2014 and, as a result, are not reflected as equity method earnings in 2015.

Gain (Loss) on Sales of Assets

The unfavorable change in gain (loss) on sales of assets is primarily due to decreased asset divestiture activity in 2015.

Interest Expense

The increase in interest expense for three months ended March 31, 2015 compared to same period in 2014 is primarily due to higher outstanding debt in 2015.

Other, Net

The increase in Other, net for the three months ended March 31, 2015 compared to the same period in 2014 primarily reflects the change in the realized and unrealized gains and losses related to the NDT funds of its Non-Regulatory Agreement Units as described in the table below. Other, net also reflects $23 million and $20 million for the three months ended March 31, 2015 and 2014, respectively, related to the contractual elimination of income tax expense (benefit) associated with the NDT funds of the Regulatory Agreement Units. Refer to Note 11 — Nuclear Decommissioning for additional information regarding NDT funds. The increase in Other, net was also partially offset by a benefit recorded in 2014 for the favorable settlement of certain income tax positions on Constellation’s 2009-2012 pre-acquisition tax returns.

The following table provides unrealized and realized gains on the NDT funds of the Non-Regulatory Agreement Units recognized in Other, net for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 
          2015(a)              2014      

Net unrealized gains on decommissioning trust funds

   $ 40       $ 13   

Net realized gains on sale of decommissioning trust funds

     6         13   

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 financial results include CENG’s results of operations on a fully consolidated basis.

 

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Effective Income Tax Rate

The effective income tax rate was 31.8% for the three months ended March 31, 2015, respectively, compared to 51.8% for the same period during 2014. See Note 10 — Income Taxes of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.

Results of Operations — ComEd

 

     Three Months Ended
March 31,
    Favorable
(Unfavorable)
Variance
 
         2015             2014        

Operating revenue

   $ 1,185      $ 1,134      $ 51   

Purchased power expense

     327        320        (7
  

 

 

   

 

 

   

 

 

 

Revenue net of purchased power expense(a)

     858        814        44   
  

 

 

   

 

 

   

 

 

 

Other operating expenses

      

Operating and maintenance

     378        326        (52

Depreciation and amortization

     175        173        (2

Taxes other than income

     75        77        2   
  

 

 

   

 

 

   

 

 

 

Total other operating expenses

     628        576        (52
  

 

 

   

 

 

   

 

 

 

Operating income

     230        238        (8
  

 

 

   

 

 

   

 

 

 

Other income and (deductions)

      

Interest expense, net

     (84     (80     (4

Other, net

     3        5        (2
  

 

 

   

 

 

   

 

 

 

Total other income and (deductions)

     (81     (75     (6
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     149        163        (14

Income taxes

     59        65        6   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 90      $ 98      $ (8
  

 

 

   

 

 

   

 

 

 

 

(a)

ComEd evaluates its operating performance using the measure of revenue net of purchased power expense. ComEd believes that revenue net of purchased power expense is a useful measurement because it provides information that can be used to evaluate its operational performance. In general, ComEd only earns margin based on the delivery and transmission of electricity. ComEd has included its discussion of revenue net of purchased power expense below as a complement to the financial information provided in accordance with GAAP. However, revenue net of purchased power expense is not a presentation defined under GAAP and may not be comparable to other companies’ presentations or deemed more useful than the GAAP information provided elsewhere in this report.

Net Income

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    ComEd’s net income for the three months ended March 31, 2015 was lower than the same period in 2014, primarily due to unfavorable weather and volume. Electric distribution earnings were flat, reflecting the impacts of increased capital investment, offset by lower allowed return on common equity due to a decrease in treasury rates.

Operating Revenue Net of Purchased Power Expense

There are certain drivers of Operating revenue that are fully offset by their impact on Purchased power expense, such as commodity procurement costs and participation in customer choice programs. ComEd is permitted to recover electricity procurement costs from retail customers without mark-up. Therefore, fluctuations

 

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in electricity procurement costs have no impact on revenue net of purchased power expense. See Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for additional information on ComEd’s electricity procurement process.

All ComEd customers have the choice to purchase electricity from a competitive electric generation supplier. Customer choice programs do not impact ComEd’s volume of deliveries, but do affect ComEd’s Operating revenue related to supplied energy, which is fully offset in Purchased power expense. Therefore, customer choice programs have no impact on Revenue net of purchased power expense.

The number of retail customers participating in customer choice programs was 2,406,289 and 2,655,909 at March 31, 2015, and 2014, representing 62% and 69% of total retail customers, respectively. Retail energy purchased from competitive electric generation suppliers represented 78% and 80% of ComEd’s retail kWh sales at March 31, 2015, and 2014, respectively.

The City of Chicago currently participates in ComEd’s customer choice program and purchases electricity from Constellation (formerly Integrys). Beginning in September 2015, the City of Chicago will no longer participate in the customer choice program and will begin purchasing its electricity from ComEd. It is anticipated that by the end of the fourth quarter 2015 approximately 45% of retail customers and 73% of kWh sales in the ComEd service territory will be supplied by competitive retail electric suppliers, reflecting the City of Chicago switching back to ComEd. ComEd’s Operating revenue will increase as a result of the City of Chicago switching, but will be fully offset in Purchased power expense.

The changes in ComEd’s Revenue net of purchased power expense for the three months ended March 31, 2015, compared to the same period in 2014 consisted of the following:

 

     Increase
(Decrease)
 

Weather

   $ (5

Volume

     (7

Electric distribution revenue

     6   

Transmission revenue

     4   

Regulatory required programs

     8   

Uncollectible accounts recovery, net

     32   

Pricing and customer mix

     7   

Other

     (1
  

 

 

 

Increase in revenue net of purchased power expense

   $ 44   
  

 

 

 

Weather.    The demand for electricity is affected by weather conditions. Very warm weather in summer months and very cold weather in other months are referred to as “favorable weather conditions” because these weather conditions result in increased customer usage. Conversely, mild weather reduces demand. For the three months ended March 31, 2015, unfavorable weather conditions reduced Operating revenue net of purchased power expense when compared to the same period in 2014.

 

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Heating and cooling degree days are quantitative indices that reflect the demand for energy needed to heat or cool a home or business. Normal weather is determined based on historical average heating and cooling degree days for a 30-year period in ComEd’s service territory with cooling degree days generally having a more significant impact to ComEd, particularly during the summer months. The changes in heating and cooling degree days in ComEd’s service territory for the three months ended March 31, 2015, and 2014, consisted of the following:

 

     Three Months Ended
March 31,
     Normal      % Change  

Heating and Cooling Degree-Days

       2015              2014             From 2014     From Normal  

Heating Degree-Days

     3,632         3,874         3,164         (6.2 )%      14.8

Cooling Degree-Days

                             n/a        n/a   

Volume.    Revenue net of purchased power expense decreased as a result of lower delivery volume, exclusive of the effects of weather, reflecting decreased average usage per customer as compared to the same three month period in 2014.

Electric Distribution Revenue.    EIMA provides for a performance-based rate formula, which requires an annual reconciliation of the revenue requirement in effect to the actual costs that the ICC determines are prudently and reasonably incurred in a given year. Under EIMA, distribution revenue varies from year to year based on fluctuations in the underlying costs, investments being recovered, allowed ROE, and other billing determinants. In addition, ComEd’s allowed rate of return on common equity is the annual average rate of 30-year treasury notes plus 580 basis points, subject to a collar of plus or minus 50 basis points. Therefore, the collar limits favorable and unfavorable impacts of weather and load on distribution revenue. During the three months ended March 31, 2015, ComEd recorded increased electric distribution revenue primarily due to higher operating and maintenance expense and increased capital investment, partially offset by lower allowed return on common equity due to a decrease in treasury rates. See Operating and Maintenance Expense below, and Note 5 — Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information on ComEd’s rate formula pursuant to EIMA.

Transmission Revenue.    Under a FERC-approved formula, transmission revenue varies from year to year based on fluctuations in the underlying costs, investments being recovered and other billing determinants, such as the highest daily peak load from the previous calendar year. For the three months ended March 31, 2015, ComEd recorded increased transmission revenue due to increased capital investment. See Note 5 — Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information.

Regulatory Required Programs.    This represents the change in Operating revenue collected under approved riders to recover costs incurred for regulatory programs such as ComEd’s energy efficiency and demand response and purchased power administrative costs. The riders are designed to provide full and current cost recovery. An equal and offsetting amount has been included in Operating and maintenance expense. Refer to the Operating and maintenance expense discussion below for additional information on included programs.

Uncollectible Accounts Recovery, Net.    Uncollectible accounts recovery, net represents recoveries under ComEd’s uncollectible accounts tariff. See the Operating and maintenance expense discussion below for additional information on this tariff.

Pricing and Customer Mix.    The increase in Revenue net of purchased power as a result of pricing and customer mix is primarily attributable to higher overall effective rates due to decreased usage across all major customer classes and change in customer mix for the three months ended March 31, 2015, as compared to the same period in 2014.

Other.    Other revenue, which can vary period to period, includes rental revenue, revenue related to late payment charges, revenue from other utilities for mutual assistance programs and recoveries of environmental costs associated with MGP sites, for which an equal and offsetting amount is reflected in Depreciation and amortization expense during the periods presented.

 

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Operating and Maintenance Expense

 

     Three Months Ended
March 31,
     Increase  
         2015              2014         

Operating and maintenance expense — baseline

   $ 322       $ 278       $ 44   

Operating and maintenance expense — regulatory required programs(a)

     56         48       $ 8   
  

 

 

    

 

 

    

 

 

 

Total operating and maintenance expense

   $ 378       $ 326       $ 52   
  

 

 

    

 

 

    

 

 

 

 

(a)

Operating and maintenance expenses for regulatory required programs are costs for various legislative and/or regulatory programs that are recoverable from customers on a full and current basis through approved regulated rates. An equal and offsetting amount has been reflected in operating revenue.

The changes in operating and maintenance expense for the three months ended March 31, 2015 compared to the same period in 2014, consisted of the following:

 

     Increase
(Decrease)
 

Baseline

  

Labor, other benefits, contracting and materials(a)

   $ 16   

Pension and non-pension postretirement benefits expense(b)

     (8

Storm-related costs

     (4

Uncollectible accounts expense — provision(c)

     1   

Uncollectible accounts expense — recovery, net(c)

     31   

Other

     8   
  

 

 

 
     44   

Regulatory required programs

  

Energy efficiency and demand response programs

     8   
  

 

 

 
     8   
  

 

 

 

Increase in operating and maintenance expense

   $ 52   
  

 

 

 

 

(a)

Primarily reflects increased contracting costs related to EIMA, and other preventative and corrective maintenance projects for the three months ended March 31, 2015. See Note 5 — Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information regarding EIMA.

(b)

Primarily reflects decreased non-pension costs associated with OPEB plan design changes during the second quarter of 2014. See Note 16 — Retirement Benefits of the Exelon 2014 Form 10-K for additional information regarding plan changes.

(c)

ComEd is allowed to recover from or refund to customers the difference between the utility’s annual uncollectible accounts expense and the amounts collected in rates annually through a rider mechanism. During the three months ended March 31, 2015, ComEd recorded a net increase in operating and maintenance expense related to uncollectible accounts due to the timing of regulatory cost recovery. An equal and offsetting increase has been recognized in operating revenue for the periods presented.

Depreciation and Amortization

Depreciation and amortization expense increased during the three months ended March 31, 2015, compared to the same period in 2014, primarily due to increased capital expenditures, partially offset by decreased amortization as a result of ComEd’s severance regulatory assets fully amortizing during the second quarter of 2014.

Taxes Other Than Income

Taxes other than income taxes, which can vary period to period, include municipal and state utility taxes, real estate taxes and payroll taxes. Taxes other than income taxes remained relatively flat during the three months ended March 31, 2015, compared to the same period in 2014.

 

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Interest Expense, Net

The changes in interest expense, net for the three months ended March 31, 2015, compared to the same period in 2014, consisted of the following:

 

     Increase
(Decrease)
 

Interest expense related to uncertain tax positions

   $ (1

Interest expense on debt (including financing trusts)(a)

     3   

Other

     2   
  

 

 

 

Increase in interest expense, net

   $ 4   
  

 

 

 

 

(a)

Primarily reflects an increase in interest expense due to the issuance of First Mortgage Bonds on November 10, 2014 and March 2, 2015. See Note 9 — Debt and Credit Agreements of the Combined Notes to Consolidated Financial Statements for additional information on ComEd’s debt obligations.

Effective Income Tax Rate

The effective income tax rate was 39.6% for the three months ended March 31, 2015 compared to 39.9% for the same period during 2014. See Note 10 — Income Taxes of the Combined Notes to Consolidated Financial Statements for additional information regarding the components of the effective income tax rates.

ComEd Electric Operating Statistics and Revenue Detail

 

     Three Months Ended
March 31,
     % Change     Weather-
Normal
% Change
 

Retail Deliveries to Customers (in GWhs)

   2015      2014       

Retail Deliveries(a)

          

Residential

     6,997         7,411         (5.6 )%      (3.2 )% 

Small commercial & industrial

     8,161         8,331         (2.0 )%      (0.4 )% 

Large commercial & industrial

     6,877         7,095         (3.1 )%      (2.2 )% 

Public authorities & electric railroads

     379         397         (4.5 )%      (2.8 )% 
  

 

 

    

 

 

      

Total retail deliveries

     22,414         23,234         (3.5 )%      (1.9 )% 
  

 

 

    

 

 

      
     As of March 31,               

Number of Electric Customers

   2015      2014               

Residential

     3,511,271         3,488,204        

Small commercial & industrial

     369,424         367,282        

Large commercial & industrial

     1,966         2,028        

Public authorities & electric railroads

     4,843         4,852        
  

 

 

    

 

 

      

Total

     3,887,504         3,862,366        
  

 

 

    

 

 

      
     Three Months Ended March 31,        

Electric Revenue

   2015      2014      % Change        

Retail Sales(a)

          

Residential

   $ 568       $ 508         11.8  

Small commercial & industrial

     338         344         (1.7 )%   

Large commercial & industrial

     109         115         (5.2 )%   

Public authorities & electric railroads

     12         13         (7.7 )%   
  

 

 

    

 

 

      

Total retail

     1,027         980         4.8  
  

 

 

    

 

 

      

Other revenue(b)

     158         154         2.6  
  

 

 

    

 

 

      

Total electric revenue

   $ 1,185       $ 1,134         4.5  
  

 

 

    

 

 

      

 

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(a)

Reflects delivery revenue and volumes from customers purchasing electricity directly from ComEd and customers purchasing electricity from a competitive electric generation supplier, as all customers are assessed delivery charges. For customers purchasing electricity from ComEd, revenue also reflects the cost of energy and transmission.

(b)

Other revenue primarily includes transmission revenue from PJM. Other items include rental revenue, revenue related to late payment charges, revenue from other utilities for mutual assistance programs and recoveries of environmental costs associated with MGP sites.

Results of Operations — PECO

 

     Three Months Ended
March 31,
    Favorable
(Unfavorable)
Variance
 
         2015             2014        

Operating revenue

   $ 985      $ 993      $ (8

Purchased power and fuel

     438        464        26   
  

 

 

   

 

 

   

 

 

 

Revenue net of purchased power and fuel expense(a)

     547        529        18   
  

 

 

   

 

 

   

 

 

 

Other operating expenses

      

Operating and maintenance

     222        280        58   

Depreciation and amortization

     62        58        (4

Taxes other than income

     41        42        1   
  

 

 

   

 

 

   

 

 

 

Total other operating expenses

     325        380        55   
  

 

 

   

 

 

   

 

 

 

Gain on sale of assets

     1               1   
  

 

 

   

 

 

   

 

 

 

Operating income

     223        149        74   
  

 

 

   

 

 

   

 

 

 

Other income and (deductions)

      

Interest expense, net

     (28     (28       

Other, net

     2        2          
  

 

 

   

 

 

   

 

 

 

Total other income and (deductions)

     (26     (26       
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     197        123        74   

Income taxes

     58        34        (24
  

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholder

   $ 139      $ 89      $ 50   
  

 

 

   

 

 

   

 

 

 

 

(a)

PECO evaluates its operating performance using the measures of revenue net of purchased power expense for electric sales and revenue net of fuel expense for gas sales. PECO believes revenue net of purchased power expense and revenue net of fuel expense are useful measurements of its performance because they provide information that can be used to evaluate its net revenue from operations. PECO has included the analysis below as a complement to the financial information provided in accordance with GAAP. However, revenue net of purchased power expense and revenue net of fuel expense figures are not a presentation defined under GAAP and may not be comparable to other companies’ presentations or more useful than the GAAP information provided elsewhere in this report.

Net Income Attributable to Common Shareholder

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014.    The increase in net income attributable to common shareholder was driven primarily by a decrease in operating and maintenance expense due to a decrease in storm costs and favorable weather included in Revenue net of purchased power and fuel expense.

Operating Revenue Net of Purchased Power and Fuel Expense

Electric and gas revenue and purchased power and fuel expense are affected by fluctuations in commodity procurement costs. PECO’s electric supply and natural gas cost rates charged to customers are subject to adjustments at least quarterly that are designed to recover or refund the difference between the actual cost of

 

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electric supply and natural gas and the amount included in rates in accordance with the PAPUC’s GSA and PGC, respectively. Therefore, fluctuations in electric supply and natural gas procurement costs have no impact on electric and gas revenue net of purchased power and fuel expense.

Electric and gas revenue and purchased power and fuel expense are also affected by fluctuations in participation in the Customer Choice Program. All PECO customers have the choice to purchase electricity and gas from competitive electric generation and natural gas suppliers, respectively. The customer’s choice of suppliers does not impact the volume of deliveries, but affects revenue collected from customers related to supplied energy and natural gas service. Customer choice program activity has no impact on electric and gas revenue net of purchased power and fuel expense. The number of retail customers purchasing electricity from a competitive electric generation supplier was 551,000 and 545,000 at March 31, 2015 and 2014, respectively. Retail deliveries purchased from competitive electric generation suppliers represented 67% and 68% of PECO’s retail kWh sales for the three months ended March 31, 2015 and 2014, respectively. The number of retail customers purchasing natural gas from a competitive natural gas supplier was 80,200 and 72,600 at March 31, 2015 and 2014, respectively. Retail deliveries purchased from competitive natural gas suppliers represented 23% and 21% of PECO’s mmcf sales for the three months ended March 31, 2015 and 2014, respectively.

The changes in PECO’s operating revenue net of purchased power and fuel expense for the three months ended March 31, 2015 compared to the same period in 2014 consisted of the following:

 

     Increase (Decrease)  
     Electric     Gas      Total  

Weather

   $ 4      $ 4       $ 8   

Volume

     4        3         7   

Pricing

     (1     1           

Regulatory required programs

     5                5   

Other

     (3     1         (2
  

 

 

   

 

 

    

 

 

 

Total increase (decrease)

   $ 9      $ 9       $ 18   
  

 

 

   

 

 

    

 

 

 

Weather.    The demand for electricity and gas is affected by weather conditions. With respect to the electric business, very warm weather in summer months and, with respect to the electric and gas businesses, very cold weather in winter months are referred to as “favorable weather conditions” because these weather conditions result in increased deliveries of electricity and gas. Conversely, mild weather reduces demand. During the three months ended March 31, 2015 compared to the same period in 2014, operating revenue net of purchased power and fuel expense was higher due to the impact of favorable winter weather conditions in PECO’s service territory.

Heating and cooling degree days are quantitative indices that reflect the demand for energy needed to heat or cool a home or business. Normal weather is determined based on historical average heating and cooling degree days for a 30-year period in PECO’s service territory. The changes in heating and cooling degree days in PECO’s service territory for the three months ended March 31, 2015 compared to the same period in 2014 and normal weather consisted of the following:

 

     Three Months Ended
March  31,
            % Change  

Heating and Cooling Degree-Days

       2015              2014          Normal      From 2014     From Normal  

Heating Degree-Days

     2,934         2,844         2,477         3.2     18.4

Cooling Degree-Days

                     1         n/a        (100.0 )% 

Volume.    The increase in operating revenue net of purchased power and fuel expense related to delivery volume, exclusive of the effects of weather, for the three months ended March 31, 2015 compared to the same period in 2014, primarily reflects the impact of moderate economic and customer growth partially offset by

 

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energy efficiency initiatives on customer usages for electric and gas and a shift in the volume profile across classes from lower priced classes to higher priced classes for electric.

Pricing.    Pricing for the three months ended March 31, 2015 compared to the same period in 2014 remained relatively constant.

Regulatory Required Programs.    This represents the change in operating revenue collected under approved riders to recover costs incurred for regulatory programs such as smart meter, energy efficiency and the GSA. The riders are designed to provide full and current cost recovery as well as a return. The costs of these programs are included in Operating and maintenance expense, Depreciation and amortization expense and Income taxes. Refer to the Operating and maintenance expense discussion below for additional information on included programs.

Other.    Other revenue for electric primarily reflects the impact of lower wholesale transmission revenue for the three months ended March 31, 2015 compared to the same period in 2014. Wholesale transmission revenue is impacted by the previous year’s peak demand, which was lower in 2014 than in 2013.

Operating and Maintenance Expense

 

     Three Months Ended
March 31,
     Increase
(Decrease)
 
         2015              2014         

Operating and maintenance expense — baseline

   $ 196       $ 259       $ (63

Operating and maintenance expense — regulatory required programs(a)

     26         21         5   
  

 

 

    

 

 

    

 

 

 

Total operating and maintenance expense

   $ 222       $ 280       $ (58
  

 

 

    

 

 

    

 

 

 

 

(a)

Operating and maintenance expenses for regulatory required programs are costs for various legislative and/or regulatory programs that are recoverable from customers on a full and current basis through approved regulated rates. An equal and offsetting amount has been reflected in operating revenue.

The changes in operating and maintenance expense for the three months ended March 31, 2015 compared to the same period in 2014, consisted of the following:

 

     Increase
(Decrease)
 

Baseline

  

Labor, other benefits, contracting and materials

   $ 13   

Storm-related costs

     (75 )(a) 

Pension and non-pension postretirement benefits expense

     (1

Uncollectible accounts expense

     (2

Other

     2   
  

 

 

 
     (63

Regulatory required programs

  

Smart meter

     (1

Energy efficiency

     5   

Other

     1   
  

 

 

 
     5   
  

 

 

 

Increase in operating and maintenance expense

   $ (58
  

 

 

 

 

(a)

Reflects a reduction of $66 million in incremental storm costs in the first quarter of 2015 as a result of the February 5, 2014 ice storm.

 

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Depreciation and Amortization Expense

The increase in depreciation and amortization expense for the three months ended March 31, 2015 compared to the same period in 2014 was primarily due to ongoing capital expenditures.

Taxes Other Than Income

Taxes other than income for the three months ended March 31, 2015 compared to the same period in 2014 remained relatively constant.

Interest Expense, Net

Interest expense, net for the three months ended March 31, 2015 compared to the same period in 2014 remained relatively constant.

Other, Net

Other, net for the three months ended March 31, 2015 compared to the same period in 2014 remained constant.

Effective Income Tax Rate

PECO’s effective income tax rate was 29.4% and 27.6% for the three months ended March 31, 2015 and 2014, respectively. See Note 10 — Income Taxes of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in effective income tax rate.

 

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PECO Electric Operating Statistics and Revenue Detail

 

     Three Months Ended
March 31,
     % Change     Weather-
Normal
% Change
 

Retail Deliveries to Customers (in GWhs)

   2015      2014       

Retail Deliveries(a)

          

Residential

     3,968         3,848         3.1     1.5

Small commercial & industrial

     2,162         2,055         5.2     3.9

Large commercial & industrial

     3,734         3,777         (1.1 )%      (1.5 )% 

Public authorities & electric railroads

     228         259         (12.0 )%      (12.0 )% 
  

 

 

    

 

 

      

Total retail deliveries

     10,092         9,939         1.5     0.4
  

 

 

    

 

 

      
     As of March 31,               

Number of Electric Customers

   2015      2014               

Residential

     1,439,005         1,428,798        

Small commercial & industrial

     149,192         149,285        

Large commercial & industrial

     3,102         3,114        

Public authorities & electric railroads

     9,771         9,671        
  

 

 

    

 

 

      

Total

     1,601,070         1,590,868        
  

 

 

    

 

 

      
     Three Months Ended
March 31,
              

Electric Revenue

   2015      2014      % Change        

Retail Sales(a)

          

Residential

   $ 450       $ 444         1.4  

Small commercial & industrial

     115         111         3.6  

Large commercial & industrial

     53         63         (15.9 )%   

Public authorities & electric railroads

     8         8          
  

 

 

    

 

 

      

Total retail

     626         626          
  

 

 

    

 

 

      

Other revenue(b)

     51         52         (1.9 )%   
  

 

 

    

 

 

      

Total electric revenue

   $ 677       $ 678         (0.1 )%   
  

 

 

    

 

 

      

 

(a)

Reflects delivery volumes and revenue from customers purchasing electricity directly from PECO and customers purchasing electricity from a competitive electric generation supplier as all customers are assessed distribution charges. For customers purchasing electricity from PECO, revenue also reflects the cost of energy and transmission.

(b)

Other revenue includes transmission revenue from PJM and wholesale electric revenue.

 

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PECO Gas Operating Statistics and Revenue Detail

 

     Three Months Ended
March 31,
     % Change     Weather-
Normal
% Change
 

Deliveries to Customers (in mmcf)

   2015      2014       

Retail Delivery

          

Retail sales(a)

     34,863         33,170         5.1     2.9

Transportation and other

     8,696         8,369         3.9     (1.2 )% 
  

 

 

    

 

 

      

Total gas deliveries

     43,559         41,539         4.9     2.0
  

 

 

    

 

 

      
     As of March 31,               

Number of Gas Customers

   2015      2014               

Residential

     464,344         459,627        

Commercial & industrial

     42,941         42,385        
  

 

 

    

 

 

      

Total retail

     507,285         502,012        

Transportation

     847         898        
  

 

 

    

 

 

      

Total

     508,132         502,910        
  

 

 

    

 

 

      
     Three Months Ended
March 31,
     % Change        

Gas Revenue

   2015      2014           

Retail Sales

          

Retail sales(a)

   $ 296       $ 302         (2.0 )%   

Transportation and other

     12         13         (7.7 )%   
  

 

 

    

 

 

      

Total gas revenue

   $ 308       $ 315         (2.2 )%   
  

 

 

    

 

 

      

 

(a)

Reflects delivery volumes and revenue from customers purchasing natural gas directly from PECO and customers purchasing natural gas from a competitive natural gas supplier as all customers are assessed distribution charges. For customers purchasing natural gas from PECO, revenue also reflects the cost of natural gas.

 

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Results of Operations — BGE

 

     Three Months Ended
March 31,
    Favorable
(Unfavorable)
Variance
 
         2015             2014        

Operating revenue

   $ 1,036      $ 1,054      $ (18

Purchased power and fuel

     487        529        42   
  

 

 

   

 

 

   

 

 

 

Revenue net of purchased power and fuel expense(a)

     549        525        24   
  

 

 

   

 

 

   

 

 

 

Other operating expenses

      

Operating and maintenance

     182        188        6   

Depreciation and amortization

     106        108        2   

Taxes other than income

     57        60        3   
  

 

 

   

 

 

   

 

 

 

Total other operating expenses

     345        356        11   
  

 

 

   

 

 

   

 

 

 

Operating income

     204        169        35   
  

 

 

   

 

 

   

 

 

 

Other income and (deductions)

      

Interest expense, net

     (25     (27     2   

Other, net

     4        4          
  

 

 

   

 

 

   

 

 

 

Total other income and (deductions)

     (21     (23     2   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     183        146        37   

Income taxes

     74        58        (16
  

 

 

   

 

 

   

 

 

 

Net income

     109        88        21   

Preference stock dividends

     3        3          
  

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholder

   $ 106      $ 85      $ 21   
  

 

 

   

 

 

   

 

 

 

 

(a)

BGE evaluates its operating performance using the measure of revenue net of purchased power expense for electric sales and revenue net of fuel expense for gas sales. BGE believes revenue net of purchased power and fuel expense are useful measurements of its performance because they provide information that can be used to evaluate its net revenue from operations. BGE has included the analysis below as a complement to the financial information provided in accordance with GAAP. However, revenue net of purchased power and fuel expense figures are not a presentation defined under GAAP and may not be comparable to other companies’ presentations or more useful than the GAAP information provided elsewhere in this report.

Net Income attributable to common shareholder

Three Months Ended March 31, 2015, Compared to Three Months Ended March 31, 2014.    BGE’s net income attributable to common shareholder for the three months ended March 31, 2015 was higher than the same period in 2014, primarily due to an increase in revenue net of purchased power and fuel expense as a result of the December 2014 electric and gas distribution rate order issued by the MDPSC and an decrease in operating and maintenance expense.

Operating Revenue Net of Purchased Power and Fuel Expense

There are certain drivers to operating revenue that are offset by their impact on purchased power expense and fuel expense, such as commodity procurement costs and programs allowing customers to select a competitive electric or natural gas supplier. Electric and gas revenue and purchased power and fuel expense are affected by fluctuations in commodity procurement costs. BGE’s electric and natural gas rates charged to customers are subject to periodic adjustments that are designed to recover or refund the difference between the actual cost of purchased electric power and purchased natural gas and the amount included in rates in accordance with the MDPSC’s market-based SOS and gas commodity programs, respectively.

 

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The number of customers electing to select a competitive electric generation supplier affects electric SOS revenue and purchased power expense. The number of customers electing to select a competitive natural gas supplier affects gas cost adjustment revenue and purchased natural gas expense. All BGE customers have the choice to purchase energy from a competitive electric generation supplier. This customer choice of electric generation suppliers does not impact the volume of deliveries, but affects revenue collected from customers related to SOS. The number of retail customers purchasing electricity from a competitive electric generation supplier was 355,000 and 394,100 at March 31, 2015 and 2014, respectively, representing 28% and 32% of total retail customers at March 31, 2015 and 2014, respectively. Retail deliveries purchased from competitive electric generation suppliers represented 56% and 58% of BGE’s retail kWh sales for the three months ended March 31, 2015 and 2014, respectively. The number of retail customers purchasing natural gas from a competitive natural gas supplier was 158,000 and 172,200 at March 31, 2015 and 2014, respectively, representing 24% and 26% of total retail customers at March 31, 2015 and 2014, respectively. Retail deliveries purchased from competitive natural gas suppliers represented 45% and 47% of BGE’s retail mmcf sales for the three months ended March 31, 2015 and 2014, respectively.

The changes in BGE’s operating revenue net of purchased power and fuel expense for the three months ended March 31, 2015, compared to the same period in 2014, consisted of the following:

 

     Increase
(Decrease)
 
     Electric     Gas      Total  

Distribution rate increase

   $ 9      $ 16       $ 25   

Regulatory required programs

     (4     2         (2

Other

     1                1   
  

 

 

   

 

 

    

 

 

 

Total increase

   $ 6      $ 18       $ 24   
  

 

 

   

 

 

    

 

 

 

Revenue Decoupling.    The demand for electricity and gas is affected by weather and usage conditions. The MDPSC has allowed BGE to record a monthly adjustment to its electric and gas distribution revenue from all residential customers, commercial electric customers, the majority of large industrial electric customers, and all firm service gas customers to eliminate the effect of abnormal weather and usage patterns per customer on BGE’s electric and gas distribution volumes, thereby recovering a specified dollar amount of distribution revenue per customer, by customer class, regardless of changes in consumption levels. This means BGE recognizes revenue at MDPSC-approved levels per customer, regardless of what actual distribution volumes were for a billing period. Therefore, while these revenues are affected by customer growth, they will not be affected by actual weather or usage conditions. BGE bills or credits customers in subsequent months for the difference between approved revenue levels under revenue decoupling and actual customer billings.

Heating degree days are quantitative indices that reflect the demand for energy needed to heat a home or business. Normal weather is determined based on historical average heating and cooling degree days for a 30-year period in BGE’s service territory. The changes in heating degree days in BGE’s service territory for the three months ended March 31, 2015 compared to the same period in 2014 consisted of the following:

 

     Three Months
Ended
March 31,
            % Change  

Heating and Cooling Degree-Days

   2015      2014      Normal      From 2014     From Normal  

Heating Degree-Days

     2,950         2,861         2,395         3.1     23.2

Cooling Degree-Days

                             n/a        n/a   

Distribution Rate Increase.    The increase in distribution rates for the three months ended March 31, 2015, compared to the same period in 2014, was primarily due to the impact of the new electric and natural gas distribution rates charged to customers that became effective in December 2014 in accordance with the MDPSC

 

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approved electric and natural gas distribution rate case orders. See Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for additional information.

Regulatory Required Programs.    This represents the change in revenue collected under approved riders to recover costs incurred for the energy efficiency and demand response programs as well as administrative and commercial and industrial customer bad debt costs for SOS. The riders are designed to provide full recovery, as well as a return in certain instances. The costs of these programs are included in operating and maintenance expense, depreciation and amortization expense and taxes other than income taxes. The decrease in revenue related to regulatory required programs for the three months ended March 31, 2015 compared to the same period in 2014 was primarily due to the recovery of lower energy efficiency program costs.

Other.    Other revenue increased during the three months ended March 31, 2015 compared to the same period in 2014. Other revenue, which can vary from period to period, includes miscellaneous revenue such as service application and late payment fees.

Operating and Maintenance Expense

The changes in operating and maintenance expense for the three months ended March 31, 2015 compared to the same period in 2014, consisted of the following:

 

     Increase
(Decrease)
 

Storm-related costs

   $ (19

Uncollectible accounts expense

     14   

Other

     (1
  

 

 

 

Increase in operating and maintenance expense

   $ (6
  

 

 

 

Depreciation and Amortization

Depreciation and amortization expense decreased for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to a reduction in regulatory asset amortization related to demand response programs.

Taxes Other Than Income

Taxes other than income decreased for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to decreased gross receipts tax as a result of lower revenues and a decrease in payroll taxes.

Interest Expense, Net

Interest expense, net for the three months ended March 31, 2015 compared to the same period in 2014 remained relatively constant.

Effective Income Tax Rate

BGE’s effective income tax rate was 40.4% for the three months ended March 31, 2015 as compared to 39.7% for the same period during 2014. See Note 10 — Income Taxes of the Combined Notes to Consolidated Financial Statements for further discussion of the change in effective income tax rate.

 

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BGE Electric Operating Statistics and Revenue Detail

 

     Three Months Ended
March 31,
     % Change     Weather-
Normal
% Change
 

Retail Deliveries to Customers (in GWhs)

   2015      2014       

Retail Deliveries(a)

          

Residential

     4,173         4,092         2.0     n.m.   

Small commercial & industrial

     845         834         1.3     n.m.   

Large commercial & industrial

     3,439         3,470         (0.9 )%      n.m.   

Public authorities & electric railroads

     75         78         (3.8 )%      n.m.   
  

 

 

    

 

 

      

Total electric deliveries

     8,532         8,474         0.7     n.m.   
  

 

 

    

 

 

      
     As of March 31,               

Number of Electric Customers

   2015      2014               

Residential

     1,131,621         1,124,174        

Small commercial & industrial

     112,811         112,623        

Large commercial & industrial

     11,777         11,661        

Public authorities & electric railroads

     286         292        
  

 

 

    

 

 

      

Total

     1,256,495         1,248,750        
  

 

 

    

 

 

      
     Three Months Ended
March 31,
     % Change        

Electric Revenue

   2015      2014           

Retail Sales(a)

          

Residential

   $ 449       $ 436         3.0  

Small commercial & industrial

     76         71         7.0  

Large commercial & industrial

     120         123         (2.4 )%   

Public authorities & electric railroads

     8         8          
  

 

 

    

 

 

      

Total retail

     653         638         2.4  
  

 

 

    

 

 

      

Other revenue

     60         71         (15.5 )%   
  

 

 

    

 

 

      

Total electric revenue

   $ 713       $ 709         0.6  
  

 

 

    

 

 

      

 

(a)

Reflects delivery volumes and revenue from customers purchasing electricity directly from BGE and customers purchasing electricity from a competitive electric generation supplier as all customers are assessed distribution charges. For customers purchasing electricity from BGE, revenue also reflects the cost of energy and transmission.

 

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BGE Gas Operating Statistics and Revenue Detail

 

     Three Months Ended
March 31,
     % Change     Weather-
Normal
% Change
 

Deliveries to Customers (in mmcf)

       2015              2014           

Retail Deliveries(b)

          

Retail sales

     46,877         46,388         1.1     n.m.   

Transportation and other

     3,325         6,330         (47.5 )%      n.m.   
  

 

 

    

 

 

      

Total gas deliveries

     50,202         52,718         (4.8 )%      n.m.   
  

 

 

    

 

 

      
     As of March 31,               

Number of Gas Customers

   2015      2014               

Residential

     612,814         613,469        

Commercial & industrial

     44,199         44,266        
  

 

 

    

 

 

      

Total

     657,013         657,735        
  

 

 

    

 

 

      
     Three Months Ended
March 31,
     % Change        

Gas Revenue

   2015      2014       

Retail Sales(b)

          

Retail sales

   $ 299       $ 285         4.9  

Transportation and other(c)

     24         60         (60.0 )%   
  

 

 

    

 

 

      

Total gas revenue

   $ 323       $ 345         (6.4 )%   
  

 

 

    

 

 

      

 

(b)

Reflects delivery volumes and revenue from customers purchasing natural gas directly from BGE and customers purchasing natural gas from a competitive natural gas supplier as all customers are assessed distribution charges. The cost of natural gas is charged to customers purchasing natural gas from BGE.

(c)

Transportation and other gas revenue includes off-system revenue of 3,325 mmcfs ($23 million) and 6,330 mmcfs ($53 million) for the three months ended March 31, 2015 and 2014, respectively.

Liquidity and Capital Resources

Exelon’s and Generation’s prior year activity presented below includes the activity of CENG from the integration date effective April 1, 2014 through December 31, 2014. All results included throughout the liquidity and capital resources section are presented on a GAAP basis.

The Registrants’ operating and capital expenditures requirements are provided by internally generated cash flows from operations as well as funds from external sources in the capital markets and through bank borrowings. The Registrants’ businesses are capital intensive and require considerable capital resources. Each Registrant’s access to external financing on reasonable terms depends on its credit ratings and current overall capital market business conditions, including that of the utility industry in general. If these conditions deteriorate to the extent that the Registrants no longer have access to the capital markets at reasonable terms, Exelon Corporate, Generation, ComEd, PECO and BGE have access to unsecured revolving credit facilities with aggregate bank commitments of $0.5 billion, $5.3 billion, $1.0 billion, $0.6 billion and $0.6 billion, respectively. Exelon Corporate, Generation, ComEd, PECO and BGE’s revolving credit facilities expire in 2018 and 2019. In addition, Generation has $0.5 billion in bilateral credit facilities with banks which have various expirations dates between October 2015 and January 2017. The Registrants utilize their credit facilities to support their commercial paper programs, provide for other short-term borrowings and issue letters of credit. See the “Credit Matters” section below for further discussion. The Registrants expect cash flows to be sufficient to meet operating expenses, financing costs and capital expenditure requirements.

 

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The Registrants primarily use their capital resources, including cash, to fund capital requirements, including construction expenditures, retire debt, pay dividends, fund pension and other postretirement benefit obligations and invest in new and existing ventures. The Registrants spend a significant amount of cash on capital improvements and construction projects that have a long-term return on investment. Additionally, ComEd, PECO and BGE operate in rate-regulated environments in which the amount of new investment recovery may be delayed or limited and where such recovery takes place over an extended period of time. See Note 9 — Debt and Credit Agreements of the Combined Notes to Consolidated Financial Statements for further discussion of the Registrants’ debt and credit agreements.

Cash Flows from Operating Activities

General

Generation’s cash flows from operating activities primarily result from the sale of electric energy and energy-related products and services to customers. Generation’s future cash flows from operating activities may be affected by future demand for and market prices of energy and its ability to continue to produce and supply power at competitive costs as well as to obtain collections from customers.

ComEd’s, PECO’s and BGE’s cash flows from operating activities primarily result from the transmission and distribution of electricity and, in the case of PECO and BGE, gas distribution services. ComEd’s, PECO’s and BGE’s distribution services are provided to an established and diverse base of retail customers. ComEd’s, PECO’s and BGE’s future cash flows may be affected by the economy, weather conditions, future legislative initiatives, future regulatory proceedings with respect to their rates or operations, competitive suppliers, and their ability to achieve operating cost reductions.

See Note 3 — Regulatory Matters and Note 22 — Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements of the Exelon 2014 Form 10-K for further discussion of regulatory and legal proceedings and proposed legislation.

Pension and Other Postretirement Benefits

Management considers various factors when making pension funding decisions, including actuarially determined minimum contribution requirements under ERISA, contributions required to avoid benefit restrictions and at-risk status as defined by the Pension Protection Act of 2006, management of the pension obligation and regulatory implications. On July 6, 2012, President Obama signed into law the Moving Ahead for Progress in the Twenty-first Century Act, which contains a pension funding provision that results in lower pension contributions in the near term while increasing the premiums pension plans pay to the Pension Benefit Guaranty Corporation. Certain provisions of the law were applied in 2012 while the others took effect in 2013. On August 8, 2014, this funding relief was extended for five years. The estimated impacts of the law are reflected in Exelon’s projected pension contributions.

To the extent interest rates decline significantly or the pension plans do not earn the expected asset return rates, annual pension contribution requirements in future years could increase, especially in years 2018 and beyond. Additionally, expected contributions could change if Exelon changes its pension funding strategy.

Tax Matters

The Registrants’ future cash flows from operating activities may be affected by the following tax matters:

 

   

In the event of a fully successful IRS challenge to Exelon’s like-kind exchange position, the potential tax and after-tax interest, exclusive of penalties, that could become currently payable as of March 31, 2015 may be as much as $810 million, of which approximately $310 million would be attributable to ComEd after consideration of Exelon’s agreement to hold ComEd harmless, and the balance at Exelon. Litigation could take several years such that the estimated cash and interest impacts will increase by a material amount.

 

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Exelon, Generation, and ComEd expect to receive tax refunds of approximately $430 million, $190 million, $260 million, respectively, in 2015. PECO expects to make tax payments of approximately $6 million related to IRS positions settling in 2015.

 

   

State and local governments continue to face increasing financial challenges, which may increase the risk of additional income tax levies, property taxes and other taxes or the imposition, extension or permanence of temporary tax levies.

The following table provides a summary of the major items affecting Exelon’s cash flows from operations for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
       
         2015(c)             2014         Variance  

Net income

   $ 738      $ 93      $ 645   

Add (subtract):

      

Non-cash operating activities(a)

     1,282        1,836        (554

Pension and other postretirement benefit contributions

     (269     (472     203   

Income taxes

     174        17        157   

Changes in working capital and other noncurrent assets and liabilities(b)

     (471     (647     176   

Option premiums received, net

     5        15        (10

Counterparty collateral received (posted), net

     31        (677     708   
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by operations

   $ 1,490      $ 165      $ 1,325   
  

 

 

   

 

 

   

 

 

 

 

(a)

Represents depreciation, amortization and accretion, impairment of long-lived assets, mark-to-market gains and losses on derivative transactions, deferred income taxes, provision for uncollectible accounts, pension and other postretirement benefit expense, equity in losses of unconsolidated affiliates and investments, decommissioning-related items, stock compensation expense and other non-cash charges.

(b)

Changes in working capital and other noncurrent assets and liabilities exclude the changes in commercial paper, income taxes and the current portion of long-term debt.

(c)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 activity includes CENG on a fully consolidated basis.

Cash flows from operations for the three months ended March 31, 2015 and 2014 by Registrant were as follows:

 

     Three Months Ended
March 31,
 
         2015              2014      

Exelon(a)

   $ 1,490       $ 165   

Generation(a)

     837         (169

ComEd

     251         (9

PECO

     158         143   

BGE

     281         235   

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 activity includes CENG on a fully consolidated basis.

 

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Changes in Exelon’s, Generation’s, ComEd’s, PECO’s and BGE’s cash flows from operations were generally consistent with changes in each Registrant’s respective results of operations, as adjusted by changes in working capital in the normal course of business, except as discussed below. In addition, significant operating cash flow impacts for the Registrants for the three months ended March 31, 2015 and 2014 were as follows:

Generation

 

   

Depending upon whether Generation is in a net mark-to-market liability or asset position, collateral may be required to be posted with or collected from its counterparties. In addition, the collateral posting and collection requirements differ depending on whether the transactions are on the exchange or in the OTC markets. During the three months ended March 31, 2015 and 2014, Generation had net collections/(payments) of counterparty collateral of $62 million and $(699) million, respectively, primarily due to market conditions that resulted in changes to Generation’s net mark-to-market position. In addition, since the fourth quarter of 2014, the exchanges increased initial margin rates, which required Generation to post higher amounts of initial margin.

 

   

During the three months ended March 31, 2015 and 2014, Generation had net collections of approximately $5 million and $15 million, respectively, related to purchases and sales of options. The level of option activity in a given period may vary due to several factors, including changes in market conditions as well as changes in hedging strategy.

ComEd

 

   

As of March 31, 2015 and 2014, ComEd had a working capital deficit of $139 million and $399 million, respectively. The working capital deficit is primarily attributable to the increase in short-term borrowings and short-term debt due within one year. Cash flows from operating activities are sufficient to meet operating requirements; however, increased capital investment in infrastructure improvements and modernization pursuant to EIMA, transmission upgrades and expansions may require external debt financing or additional capital contributions from parent.

 

   

During the three months ended March 31, 2015 and 2014, ComEd’s payables for Generation energy purchases increased/(decreased) by $9 million and $(4) million, respectively, and payables to other energy suppliers for energy purchases increased/(decreased) by $(4) million and $37 million, respectively.

PECO

 

   

During the three months ended March 31, 2015 and 2014, PECO’s payables to Generation for energy purchases increased by $7 million and $4 million, respectively, and payables to other electric and gas suppliers for energy purchases increased by $23 million and $39 million, respectively.

BGE

 

   

During the three months ended March 31, 2015 and 2014, BGE’s payables to Generation for energy purchases increased/(decreased) by $(14) million and $14 million, respectively, and payables to other electric and gas suppliers for energy purchases increased by $5 million and $23 million, respectively.

 

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Cash Flows from Investing Activities

Cash flows used in investing activities for the three months ended March 31, 2015 and 2014 by Registrant were as follows:

 

     Three Months Ended
March 31,
 
     2015      2014  

Exelon(a)

   $ (1,751    $ (1,011

Generation(a)

     (899      (594

ComEd

     (523      (330

PECO

     (144      (182

BGE

     (132      (187

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 activity includes CENG on a fully consolidated basis.

Generation

Generation has entered into several agreements to acquire equity interests in privately held and development stage entities which develop energy-related technologies. The agreements contain a series of scheduled investment commitments, including in-kind service contributions. There are approximately $147 million of anticipated expenditures remaining through 2018 to fund anticipated planned capital and operating needs of the associated companies.

Generation has executed, or expects to execute, several construction and services contracts. The total estimated remaining expenditures for these projects are approximately $1.8 billion and achievement of commercial operations is expected between 2015 and 2018 for all these projects.

Capital expenditures by Registrant for the three months ended March 31, 2015 and 2014 and projected amounts for the full year 2015 are as follows:

 

     Projected
Full Year
2015(e)
     Three Months Ended
March 31,
 
            2015              2014      

Exelon(a)

   $ 7,400       $ 1,784       $ 1,217   

Generation(a)(b)

     3,625         937         535   

ComEd(c)

     2,425         530         341   

PECO

     550         148         184   

BGE

     700         136         146   

Other(d)

     100         33         11   

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, CENG is included on a fully consolidated basis in the 2015 results above.

(b)

Includes nuclear fuel.

(c)

The projected capital expenditures include approximately $672 million of expected incremental spending pursuant to EIMA, ComEd has committed to invest approximately $2.6 billion over a ten year period to modernize and storm-harden its distribution system and to implement smart grid technology.

(d)

Other primarily consists of corporate operations and BSC.

(e)

Total projected capital expenditures do not include adjustments for non-cash activity.

Projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.

 

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In 2014, Exelon and its affiliates initiated a comprehensive project to ensure corporate-wide compliance with Version 5 of the North American Electric Reliability Corporation (NERC) Critical Infrastructure Protection Standards (CIP V.5) which will become effective on April 1, 2016. Generation, ComEd, PECO and BGE will be incurring incremental capital expenditures in 2015 through 2016 associated with the CIP V.5 compliance implementation project.

Generation

Approximately 34% and 6% of the projected 2015 capital expenditures at Generation are for the acquisition of nuclear fuel and investments in renewable energy and natural gas generation, respectively, with the remaining amounts reflecting additions and upgrades to existing facilities (including material condition improvements during nuclear refueling outages). Generation anticipates that they will fund capital expenditures with internally generated funds and borrowings.

ComEd, PECO and BGE

Approximately 84%, 91% and 96% of the projected 2015 capital expenditures at ComEd, PECO and BGE, respectively, are for continuing projects to maintain and improve operations, including enhancing reliability and adding capacity to the transmission and distribution systems such as ComEd’s reliability related investments required under EIMA, and ComEd’s, PECO’s and BGE’s construction commitments under PJM’s RTEP. In addition to the capital expenditure for continuing projects, ComEd’s total expenditures include smart grid/smart meter technology required under EIMA and for PECO and BGE, total capital expenditures related to their respective smart meter program and SGIG project.

In 2010, NERC provided guidance to transmission owners that recommends ComEd, PECO and BGE perform assessments of all their transmission lines. In compliance with this guidance, ComEd, PECO and BGE submitted their final bi-annual reports to NERC in January 2014. ComEd, PECO and BGE will be incurring incremental capital expenditures associated with this guidance following the completion of the assessments. Specific projects and expenditures are identified as the assessments are completed. ComEd’s, PECO’s and BGE’s forecasted 2015 capital expenditures above reflect capital spending in 2015 for remediation to be completed through 2017.

ComEd, PECO and BGE anticipate that they will fund their capital expenditures with internally generated funds and borrowings, including ComEd’s capital expenditures associated with EIMA as further discussed in Note 5 — Regulatory Matters of the Combined Notes to Consolidated Financial Statements.

 

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Cash Flows from Financing Activities

Cash flows provided by (used in) financing activities for the three months ended March 31, 2015 and 2014 by Registrant were as follows:

 

     Three Months Ended
March 31,
 
         2015              2014      

Exelon(a)

   $ 208       $ 151   

Generation(a)

     (186      71   

ComEd

     314         344   

PECO

     (6      (80

BGE

     (172      (56

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 activity includes CENG on a fully consolidated basis.

Debt

See Note 9 — Debt and Credit Agreements of the Combined Notes to Consolidated Financial Statements for further details of the Registrants’ debt issuances and retirements.

Dividends

Cash dividend payments and distributions during the three months ended March 31, 2015 and 2014 by Registrant were as follows:

 

     Three Months Ended
March 31,
 
         2015              2014      

Exelon(a)

   $ 269       $ 266   

Generation(a)

     1,356         30   

ComEd

     75         76   

PECO

     70         80   

BGE (b)

     39         3   

 

(a)

On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, the 2015 activity includes CENG on a fully consolidated basis.

(b)

Includes dividends paid on BGE’s preference stock.

First Quarter 2015 Dividend

On January 27, 2015, the Exelon Board of Directors declared a first quarter 2015 regular quarterly dividend of $0.31 per share on Exelon’s common stock payable on March 10, 2015, to shareholders of record of Exelon at the end of the day on February 13, 2015.

Second Quarter 2015 Dividend

On April 28, 2015, the Exelon Board of Directors declared a second quarter 2015 regular quarterly dividend of $0.31 per share on Exelon’s common stock payable on June 10, 2015, to shareholders of record of Exelon at the end of the day on May 15, 2015.

Short-Term Borrowings

During the three months ended March 31, 2015, ComEd and BGE repaid $21 million and $120 million of commercial paper, respectively, and Generation repaid $1 million in short-term notes payable. During the three

 

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months ended March 31, 2014, Generation and ComEd issued $352 million and $350 million of commercial paper, respectively. Further, BGE repaid $66 million of commercial paper and Generation issued $3 million in short-term notes payable during the three months ended March 31, 2014.

Contributions from Parent/Member

During the three months ended March 31, 2015 and 2014, ComEd received $14 million and $38 million from Parent (Exelon), respectively.

Other

For the three months ended March 31, 2015, other financing activities primarily consists debt issuance costs. See Note 9 — Debt and Credit Agreements of the Combined Notes to the Consolidated Financial Statements for additional information.

Credit Matters

The Registrants fund liquidity needs for capital investment, working capital, energy hedging and other financial commitments through cash flows from continuing operations, public debt offerings, commercial paper markets and large, diversified credit facilities. The credit facilities include $8.5 billion in aggregate total commitments of which $6.5 billion was available as of March 31, 2015, and of which no financial institution has more than 8% of the aggregate commitments. Exelon, Generation, ComEd, PECO and BGE had access to the commercial paper market during the first quarter of 2015 to fund their short-term liquidity needs, when necessary. The Registrants routinely review the sufficiency of their liquidity position, including appropriate sizing of credit facility commitments, by performing various stress test scenarios, such as commodity price movements, increases in margin-related transactions, changes in hedging levels and the impacts of hypothetical credit downgrades. The Registrants have continued to closely monitor events in the financial markets and the financial institutions associated with the credit facilities, including monitoring credit ratings and outlooks, credit default swap levels, capital raising and merger activity. See Part I. Item 1A. Risk Factors of Exelon’s 2014 Form 10-K for further information regarding the effects of uncertainty in the capital and credit markets.

The Registrants believe their cash flow from operating activities, access to credit markets and their credit facilities provide sufficient liquidity. If Generation lost its investment grade credit rating as of March 31, 2015, it would have been required to provide incremental collateral of $2.3 billion to meet collateral obligations for derivatives, non-derivatives, normal purchase normal sales contracts and applicable payables and receivables, net of the contractual right of offset under master netting agreements, which is well within its current available credit facility capacities of $4.1 billion. If ComEd lost its investment grade credit rating as of March 31, 2015, it would have been required to provide incremental collateral of $15 million, which is well within its current available credit facility capacity of $715 million, which takes into account commercial paper borrowings as of March 31, 2015. If PECO lost its investment grade credit rating as of March 31, 2015, it would not be required to provide collateral pursuant to PJM’s credit policy and would have been required to provide collateral of $36 million related to its natural gas procurement contracts, which, in the aggregate, are well within PECO’s current available credit facility capacity of $599 million. If BGE lost its investment grade credit rating as of March 31, 2015, it would have been required to provide collateral of $2 million pursuant to PJM’s credit policy and would have been required to provide collateral of $111 million related to its natural gas procurement contracts, which, in the aggregate, are well within BGE’s current available credit facility capacity of $600 million.

Exelon Credit Facilities

Exelon, ComEd and BGE meet their short-term liquidity requirements primarily through the issuance of commercial paper. Generation and PECO meet their short-term liquidity requirements primarily through the issuance of commercial paper and borrowings from the intercompany money pool. The Registrants may use their respective credit facilities for general corporate purposes, including meeting short-term funding requirements and

 

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the issuance of letters of credit. See Note 9 — Debt and Credit Agreements of the Combined Notes to the Consolidated Financial Statements for further information regarding the Registrants’ credit facilities.

The following table reflects the Registrants’ commercial paper programs supported by the revolving credit agreements and bilateral credit agreements at March 31, 2015:

Commercial Paper Programs

 

Commercial Paper Issuer

   Maximum Program Size      Outstanding
Commercial Paper at
March 31, 2015
     Average Interest Rate on
Commercial Paper
Borrowings for the three
months ended
March 31, 2015
 

Exelon Corporate

   $ 500       $        

Generation

     5,600                

ComEd

     1,000         283         0.51

PECO

     600                

BGE

     600                 0.45

In order to maintain their respective commercial paper programs in the amounts indicated above, each Registrant must have credit facilities in place, at least equal to the amount of its commercial paper program. While the amount of its commercial paper outstanding does not reduce available capacity under a Registrant’s credit agreement, a Registrant does not issue commercial paper in an aggregate amount exceeding the available capacity under its credit agreement.

Credit Agreements

 

Borrower

   Facility Type    Aggregate Bank
Commitment(a)
     Facility
Draws
     Outstanding
Letters of
Credit(b)
     Available Capacity at
March 31, 2015
 
               Actual      To Support
Additional
Commercial
Paper(c)
 

Exelon Corporate

   Syndicated Revolver    $ 500       $       $ 26       $ 474       $ 474   

Generation

   Syndicated Revolver      5,300                 1,240         4,060         4,060   

Generation

   Bilaterals      500                 380         120         36   

ComEd

   Syndicated Revolver      1,000                 2         998         715   

PECO

   Syndicated Revolver      600                 1         599         599   

BGE

   Syndicated Revolver      600                         600         600   

 

(a)

Excludes $123 million of credit facility agreements arranged with minority and community banks at Generation, ComEd, PECO and BGE. These facilities expire on October 16, 2015. These facilities are solely utilized to issue letters of credit. See Note 9 — Debt and Credit Agreements of the Combined Notes to the Consolidated Financial Statements for further information.

(b)

Excludes nonrecourse debt letters of credit, see Note 13 — Debt and Credit Agreements in the Exelon 2014 Form 10-K for further information on Continental Wind nonrecourse debt.

(c)

Excludes $200 million bilateral credit facilities that do not back Generation’s commercial paper program.

As of March 31, 2015, there were no borrowings under the Registrants’ credit facilities.

Borrowings under Exelon Corporate’s, Generation’s, ComEd’s, PECO’s and BGE’s credit facilities bear interest at a rate based upon either the prime rate or a LIBOR-based rate, plus an adder based upon each Registrant’s credit rating. Exelon Corporate, Generation, ComEd, PECO and BGE have adders of 27.5, 27.5, 7.5, 0.0 and 0.0 basis points, respectively, for prime based borrowings and 127.5, 127.5, 107.5, 90.0 and 100.0 basis points, respectively, for LIBOR-based borrowings. The maximum adders for prime rate borrowings and LIBOR-

 

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based rate borrowings are 65 basis points and 165 basis points, respectively. The credit agreements also require the borrower to pay a facility fee based upon the aggregate commitments under the agreement. The fee varies depending upon the respective credit ratings of the borrower.

Each revolving credit agreement for Exelon, Generation, ComEd, PECO and BGE requires the affected borrower to maintain a minimum cash from operations to interest expense ratio for the twelve-month period ended on the last day of any quarter. The following table summarizes the minimum thresholds reflected in the credit agreements for the three months ended March 31, 2015:

 

     Exelon      Generation      ComEd      PECO      BGE  

Credit agreement threshold

     2.50 to 1         3.00 to 1         2.00 to 1         2.00 to 1         2.00 to 1   

At March 31, 2015, the interest coverage ratios at the Registrants were as follows:

 

     Exelon      Generation      ComEd      PECO      BGE  

Interest coverage ratio

     8.09         11.81         7.23         9.28         9.88   

An event of default under any Registrant’s indebtedness will not constitute an event of default under any of the other Registrants’ credit facilities, except that a bankruptcy or other event of default in the payment of principal, premium or indebtedness in principal amount in excess of $100 million in the aggregate by Generation will constitute an event of default under the Exelon Corporate credit facility.

Security Ratings

The Registrants’ access to the capital markets, including the commercial paper market, and their respective financing costs in those markets, may depend on the securities ratings of the entity that is accessing the capital markets.

The Registrants’ borrowings are not subject to default or prepayment as a result of a downgrading of securities, although such a downgrading of a Registrant’s securities could increase fees and interest charges under that Registrant’s credit agreements.

As part of the normal course of business, the Registrants enter into contracts that contain express provisions or otherwise permit the Registrants and their counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable contracts law, if the Registrants are downgraded by a credit rating agency, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance, which could include the posting of collateral. See “Credit Matters” above and Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information on collateral provisions.

 

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Intercompany Money Pool

To provide an additional short-term borrowing option that will generally be more favorable to the borrowing participants than the cost of external financing, Exelon operates an intercompany money pool. Maximum amounts contributed to and borrowed from the money pool by participant and the net contribution or borrowing as of March 31, 2015, are presented in the following table:

 

     Three Months Ended
March 31, 2015
     As of
  March 31, 2015  
 

Participant

   Maximum
Contributed
     Maximum
Borrowed
     Contributed
(Borrowed)
 

Generation

   $       $ 1,709       $ (936

PECO

             80         (65

BSC

             413         (321

Exelon Corporate

     2,008         N/A         1,322   

Investments in Nuclear Decommissioning Trust Funds

Exelon Generation and CENG maintain trust funds, as required by the NRC, to fund certain costs of decommissioning nuclear plants. The mix of securities in the trust funds is designed to provide returns to be used to fund decommissioning and to offset inflationary increases in decommissioning costs. Generation actively monitors the investment performance of the trust funds and periodically reviews asset allocations in accordance with Generation’s NDT fund investment policy. Generation’s and CENG’s investment policies establish limits on the concentration of holdings in any one company and also in any one industry. See Note 11 — Nuclear Decommissioning of the Combined Notes to Consolidated Financial Statements for further information regarding the trust funds, the NRC’s minimum funding requirements and related liquidity ramifications.

Shelf Registration Statements

The Registrants have a currently effective combined shelf registration statement unlimited in amount, filed with the SEC, that will expire in May 2017. The ability of each Registrant to sell securities off the shelf registration statement or to access the private placement markets will depend on a number of factors at the time of the proposed sale, including other required regulatory approvals, as applicable, the current financial condition of the Registrant, its securities ratings and market conditions.

Regulatory Authorizations

As of March 31, 2015, ComEd had $442 million available in long-term debt refinancing authority and $803 million available in new money long-term debt financing authority from the ICC. As of March 31, 2015, PECO had $1.1 billion available in long-term debt financing authority from the PAPUC. As of March 31, 2015, BGE had $1.4 billion available in long-term financing authority from MDPSC.

As of March 31, 2015, ComEd, PECO and BGE had short-term financing authority from FERC, which expires on December 31, 2015, of $2.5 billion, $2.5 billion, and $700 million, respectively. Generation currently has blanket financing authority from FERC, which was granted in connection with its market-based rate authority.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual obligations represent cash obligations that are considered to be firm commitments and commercial commitments triggered by future events. See Note 17 — Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for discussion of the Registrants’ commitments.

 

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Generation, ComEd, PECO and BGE have obligations related to contracts for the purchase of power and fuel supplies, and ComEd, PECO and BGE have obligations related to their financing trusts. The power and fuel purchase contracts and the financing trusts have been considered for consolidation in the Registrants’ respective financial statements pursuant to the authoritative guidance for VIEs. See Note 1 — Basis of Presentation of the Combined Notes to Consolidated Financial Statements for further information.

For an in-depth discussion of the Registrant’s contractual obligations and off-balance sheet arrangements, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Off-Balance Sheet Arrangements in the Exelon 2014 Form 10-K.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Registrants are exposed to market risks associated with adverse changes in commodity prices, counterparty credit, interest rates and equity prices. Exelon’s RMC approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval, and the monitoring and reporting of risk exposures. The RMC is chaired by the chief executive officer and includes the chief risk officer, chief strategy officer, chief executive officer of Exelon Utilities, chief commercial officer, chief financial officer and chief executive officer of Constellation. The RMC reports to the Finance and Risk Committee of the Exelon Board of Directors on the scope of the risk management activities. The following discussion serves as an update to ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK of the Registrants’ 2014 Annual Report on Form 10-K incorporated herein by reference.

Commodity Price Risk (Exelon, Generation, ComEd, PECO and BGE)

Commodity price risk is associated with price movements resulting from changes in supply and demand, fuel costs, market liquidity, weather conditions, governmental regulatory and environmental policies, and other factors. To the extent the amount of energy Exelon generates differs from the amount of energy it has contracted to sell, Exelon has price risk from commodity price movements. Exelon seeks to mitigate its commodity price risk through the sale and purchase of electricity, fossil fuel, and other commodities.

Generation

Normal Operations and Hedging Activities.    Electricity available from Generation’s owned or contracted generation supply in excess of Generation’s obligations to customers, including portions of ComEd’s, PECO’s and BGE’s retail load, is sold into the wholesale markets. To reduce price risk caused by market fluctuations, Generation enters into non-derivative contracts as well as derivative contracts, including forwards, futures, swaps, and options, with approved counterparties to hedge anticipated exposures. Generation believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices. Generation expects the settlement of the majority of its economic hedges will occur during 2015 through 2017.

In general, increases and decreases in forward market prices have a positive and negative impact, respectively, on Generation’s owned and contracted generation positions that have not been hedged. Exelon’s hedging program involves the hedging of commodity risk for Exelon’s expected generation, typically on a ratable basis over a three-year period. As of March 31, 2015, the proportion of expected generation hedged is 94%-97%, 67%-70% and 37%-40% for 2015, 2016 and 2017, respectively. The percentage of expected generation hedged is the amount of equivalent sales divided by the expected generation. Expected generation is the volume of energy that best represents our commodity position in energy markets from owned or contracted for capacity based upon a simulated dispatch model that makes assumptions regarding future market conditions, which are calibrated to market quotes for power, fuel, load following products, and options. Equivalent sales represent all hedging products, which include economic hedges and certain non-derivative contracts including Generation’s sales to ComEd, PECO and BGE to serve their retail load. See Note 4 — Mergers, Acquisitions, and Dispositions of the combined Notes to Consolidated Financial Statement for more detail regarding divestitures.

A portion of Generation’s hedging strategy may be accomplished with fuel products based on assumed correlations between power and fuel prices, which routinely change in the market. Market price risk exposure is the risk of a change in the value of unhedged positions. The forecasted market price risk exposure for Generation’s entire non-proprietary trading portfolio associated with a $5 reduction in the annual average around-the-clock energy price based on March 31, 2015 market conditions and hedged position would be an $10 million increase in pre-tax net income for 2015 and a decrease in pre-tax net income of approximately $280 million and $630 million, respectively, for 2016 and 2017. Power price sensitivities are derived by adjusting power price assumptions while keeping all other price inputs constant. Generation expects to actively manage its portfolio to mitigate market price risk exposure for its unhedged position. Actual results could differ depending on the specific timing of, and markets affected by, price changes, as well as future changes in Generation’s portfolio.

 

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Proprietary Trading Activities.    Generation also enters into certain energy-related derivatives for proprietary trading purposes. Proprietary trading includes all contracts entered into with the intent of benefiting from shifts or changes in market prices as opposed to those entered into with the intent of hedging or managing risk. Proprietary trading activities are subject to limits established by Exelon’s RMC. The proprietary trading portfolio is subject to a risk management policy that includes stringent risk management limits, including volume, stop loss and Value-at-Risk (VaR) limits to manage exposure to market risk. Additionally, the Exelon risk management group and Exelon’s RMC monitor the financial risks of the proprietary trading activities. The proprietary trading activities, which included physical volumes of 1,808 GWhs and 2,494 GWhs for the three months ended March 31, 2015 and 2014, respectively, are a complement to Generation’s energy marketing portfolio, but represent a small portion of Generation’s overall revenue from energy marketing activities. Proprietary trading portfolio activity for the three months ended March 31, 2015 resulted in pre-tax gains of $4 million due to net mark-to-market gains of $3 million and realized gains of $1 million. Generation uses a 95% confidence interval, assuming standard normal distribution, one day holding period, and a one-tailed statistical measure in calculating its VaR. The daily VaR on proprietary trading activity averaged $0.3 million of exposure during the quarter. Generation has not segregated proprietary trading activity within the following discussion because of the relative size of the proprietary trading portfolio in comparison to Generation’s total revenues net of purchased power and fuel expense from continuing operations for the three months ended March 31, 2015 of $2,407 million.

Fuel Procurement.    Generation procures oil and natural gas through long-term and short-term contracts and spot-market purchases. Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services. The supply markets for uranium concentrates and certain nuclear fuel services, coal, oil and natural gas are subject to price fluctuations and availability restrictions. Supply market conditions may make Generation’s procurement contracts subject to credit risk related to the potential non-performance of counterparties to deliver the contracted commodity or service at the contracted prices. Approximately 50% of Generation’s uranium concentrate requirements from 2015 through 2019 are supplied by three producers. In the event of non-performance by these or other suppliers, Generation believes that replacement uranium concentrates can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements. Non-performance by these counterparties could have a material adverse impact on Exelon’s and Generation’s results of operations, cash flows and financial position. See Note 17 — Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information regarding uranium and coal supply agreement matters.

ComEd

ComEd entered into 20-year contracts for renewable energy and RECs beginning in June 2012. ComEd is permitted to recover its renewable energy and REC costs from retail customers with no mark-up. The annual commitments represent the maximum settlements with suppliers for renewable energy and RECs under the existing contract terms. Pursuant to the ICC’s Order on December 19, 2012, ComEd’s commitments under the existing long-term contracts were reduced for the June 2013 through May 2014 procurement period. In addition, the ICC’s December 18, 2013 Order approved the reduction of ComEd’s commitments under those contracts for the June 2014 through May 2015 procurement period, and the amount of the reduction was approved by the ICC in March 2014. See Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements in this report and Note 3 — Regulatory Matters of the Exelon 2014 Form 10-K for additional information regarding energy procurement and derivatives.

PECO

PECO has contracts to procure electric supply that were executed through the competitive procurement process outlined in its PAPUC-approved DSP Programs, which are further discussed in Note 5 — Regulatory Matters of the Combined Notes to the Consolidated Financial Statements. PECO has certain full requirements

 

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contracts and block contracts which are considered derivatives and qualify for the normal purchases and normal sales scope exception under current derivative authoritative guidance, and as a result are accounted for on an accrual basis of accounting. Under the DSP Programs, PECO is permitted to recover its electric supply procurement costs from retail customers with no mark-up.

PECO has also entered into derivative natural gas contracts, which either qualify for the normal purchases and normal sales exception or have no mark-to-market balances because the derivatives are index priced, to hedge its long-term price risk in the natural gas market. PECO’s hedging program for natural gas procurement has no direct impact on its financial position or results of operations as natural gas costs are fully recovered from customers under the PGC.

PECO does not enter into derivatives for speculative or proprietary trading purposes. For additional information on these contracts, see Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements.

BGE

BGE procures electric supply for default service customers through full requirements contracts pursuant to BGE’s MDPSC-approved SOS program. BGE’s full requirements contracts that are considered derivatives qualify for the normal purchases and normal sales scope exception under current derivative authoritative guidance, and as a result, are accounted for on an accrual basis of accounting. Under the SOS program, BGE is permitted to recover its electricity procurement costs from retail customers, plus an administrative fee which includes a shareholder return component and an incremental cost component. However, through December 2016, BGE provides all residential electric customers a credit for the residential shareholder return component of the administrative charge.

BGE has also entered into derivative natural gas contracts, which qualify for the normal purchases and normal sales scope exception, to hedge its price risk in the natural gas market. The hedging program for natural gas procurement has no direct impact on BGE’s financial position. However, under BGE’s market-based rates incentive mechanism, BGE’s actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between BGE’s actual cost and the market index is shared equally between shareholders and customers.

BGE does not enter into derivatives for speculative or proprietary trading purposes. For additional information on these contracts, see Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements.

Trading and Non-Trading Marketing Activities.    The following detailed presentation of Exelon’s, Generation’s and ComEd’s trading and non-trading marketing activities is included to address the recommended disclosures by the energy industry’s Committee of Chief Risk Officers (CCRO).

The following table provides detail on changes in Exelon’s, Generation’s and ComEd’s commodity mark-to-market net asset or liability balance sheet position from December 31, 2014 to March 31, 2015. It indicates the drivers behind changes in the balance sheet amounts. This table incorporates the mark-to-market activities that are immediately recorded in earnings as well as the settlements from OCI to earnings and changes in fair value for the cash flow hedging activities that are recorded in accumulated OCI on the Consolidated Balance Sheets. This table excludes all normal purchase and normal sales contracts and does not segregate proprietary trading activity. See Note 8 — Derivative Financial Instruments of the Combined Notes to the Consolidated Financial Statements for additional information on the balance sheet classification of the mark-to-market energy contract net assets (liabilities) recorded as of March 31, 2015 and December 31, 2014.

 

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    Generation     ComEd     Exelon  

Total mark-to-market energy contract net assets (liabilities) at December 31, 2014(a)

  $ 1,712      $ (207   $ 1,505   

Total change in fair value during 2015 of contracts recorded in results of operations

    85               85   

Reclassification to realized at settlement of contracts recorded in results of operations

    69               69   

Reclassification to realized at settlement from accumulated OCI

    (2            (2

Changes in fair value — energy derivatives(b)

           (34     (34

Changes in allocated collateral

    (60            (60

Changes in net option premium paid/(received)

    (5            (5

Option premium amortization

    (9            (9

Other balance sheet reclassifications

    3               3   
 

 

 

   

 

 

   

 

 

 

Total mark-to-market energy contract net assets (liabilities) at March 31, 2015(a)

  $ 1,793      $ (241   $ 1,552   
 

 

 

   

 

 

   

 

 

 

 

(a)

Amounts are shown net of cash collateral paid to and received from counterparties.

(b)

For ComEd, the changes in fair value are recorded as a change in regulatory assets or liabilities. As of March 31, 2015, ComEd recorded a $241 million regulatory asset related to its mark-to-market derivative liabilities with unaffiliated suppliers. For the three months ended March 31, 2015, ComEd also recorded $36 million of decreases in fair value and $2 million of realized gains due to settlements associated with floating-to-fixed energy swap contracts with unaffiliated suppliers.

Fair Values.    The following tables present maturity and source of fair value for Exelon, Generation and ComEd mark-to-market commodity contract net assets (liabilities). The tables provide two fundamental pieces of information. First, the tables provide the source of fair value used in determining the carrying amount of the Registrants’ total mark-to-market net assets (liabilities), net of allocated collateral. Second, the tables show the maturity, by year, of the Registrants’ commodity contract net assets (liabilities), net of allocated collateral, giving an indication of when these mark-to-market amounts will settle and either generate or require cash. See Note 7 — Fair Value of Financial Assets and Liabilities of the Combined Notes to Consolidated Financial Statements for additional information regarding fair value measurements and the fair value hierarchy.

Exelon

 

    Maturities Within     Total Fair
Value
 
    2015     2016     2017     2018     2019     2020 and
Beyond
   

Normal Operations, Commodity derivative contracts(a)(b)

             

Actively quoted prices (Level 1)

  $ (144   $ (11   $ 10      $ (17   $ (14   $ (9   $ (185

Prices provided by external sources (Level 2)

    526        330        39        8               8        911   

Prices based on model or other valuation methods (Level 3)(c)

    419        332        196        5        (6     (120     826   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 801      $ 651      $ 245      $ (4   $ (20   $ (121   $ 1,552   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Mark-to-market gains and losses on other economic hedge and trading derivative contracts that are recorded in results of operations.

(b)

Amounts are shown net of cash collateral paid to and received from counterparties (and offset against mark-to-market assets and liabilities) of $1,346 million at March 31, 2015.

(c)

Includes ComEd’s net assets (liabilities) associated with the floating-to-fixed energy swap contracts with unaffiliated suppliers.

 

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Generation

 

     Maturities Within     Total Fair
Value
 
     2015     2016     2017      2018     2019     2020 and
Beyond
   

Normal Operations, Commodity derivative contracts(a)(b)

               

Actively quoted prices (Level 1)

   $ (144   $ (11   $ 10       $ (17   $ (14   $ (9   $ (185

Prices provided by external sources (Level 2)

     526        330        39         8               8        911   

Prices based on model or other valuation methods (Level 3)

     435        351        214         22        12        33        1,067   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 817      $ 670      $ 263       $ 13      $ (2   $ 32      $ 1,793   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Mark-to-market gains and losses on other economic hedge and trading derivative contracts that are recorded in the results of operations.

(b)

Amounts are shown net of cash collateral paid to and received from counterparties (and offset against mark-to-market assets and liabilities) of $1,346 million at March 31, 2015.

ComEd

 

     Maturities Within     Total Fair
Value
 
     2015     2016     2017     2018     2019     2020 and
Beyond
   

Prices based on model or other valuation methods(a) (Level 3)

   $ (16   $ (19   $ (18   $ (17   $ (18   $ (153   $ (241

 

(a)

Represents ComEd’s net liabilities associated with the floating-to-fixed energy swap contracts with unaffiliated suppliers.

Credit Risk, Collateral, and Contingent Related Features (Exelon, Generation, ComEd, PECO and BGE)

The Registrants would be exposed to credit-related losses in the event of non-performance by counterparties that enter into derivative instruments. The credit exposure of derivative contracts, before collateral, is represented by the fair value of contracts at the reporting date. See Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for a detailed discussion of credit risk, collateral, and contingent related features.

 

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Generation

The following tables provide information on Generation’s credit exposure for all derivative instruments, normal purchase normal sales agreements, and applicable payables and receivables, net of collateral and instruments that are subject to master netting agreements, as of March 31, 2015. The tables further delineate that exposure by credit rating of the counterparties and provide guidance on the concentration of credit risk to individual counterparties and an indication of the duration of a company’s credit risk by credit rating of the counterparties. The figures in the tables below exclude credit risk exposure from individual retail customers, uranium procurement contracts, and exposure through RTOs, ISOs, NYMEX, ICE and Nodal commodity exchanges, which are discussed below. Additionally, the figures in the tables below exclude exposures with affiliates, including net receivables with ComEd, PECO and BGE of $52 million, $36 million and $26 million, respectively. See Note 25 — Related Party Transactions of the Exelon 2014 Form 10-K for additional information.

 

Rating as of March 31, 2015

   Total Exposure
Before
Credit Collateral
     Credit
Collateral(a)
     Net
Exposure
     Number of
Counterparties
Greater than  10%
of Net Exposure
     Net Exposure of
Counterparties
Greater than
10% of Net
Exposure
 

Investment grade

   $ 1,570       $ 56       $ 1,514         1       $ 442   

Non-investment grade

     63         16         47                   

No external ratings

              

Internally rated — investment grade

     495                 495                   

Internally rated — non-investment grade

     68         3         65                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,196       $ 75       $ 2,121         1       $ 442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Maturity of Credit Risk Exposure  

Rating as of March 31, 2015

   Less than
2 Years
     2-5 Years      Exposure
Greater than
5 Years
     Total Exposure
Before Credit
Collateral
 

Investment grade

   $ 1,105       $ 430       $ 35       $ 1,570   

Non-investment grade

     34         24         5         63   

No external ratings

           

Internally rated — investment grade

     392         97         6         495   

Internally rated — non-investment grade

     68                         68   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,599       $ 551       $ 46       $ 2,196   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Net Credit Exposure by Type of Counterparty

   As of March 31,
2015
 

Financial institutions

   $ 324   

Investor-owned utilities, marketers, power producers

     897   

Energy cooperatives and municipalities

     869   

Other

     31   
  

 

 

 

Total

   $ 2,121   
  

 

 

 

 

(a)

As of March 31, 2015, credit collateral held from counterparties where Generation had credit exposure included $62 million of cash and $14 million of letters of credit.

 

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ComEd

There have been no significant changes or additions to ComEd’s exposures to credit risk that are described in ITEM 1A. RISK FACTORS of Exelon’s 2014 Annual Report on Form 10-K.

See Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for information regarding credit exposure to suppliers.

PECO

There have been no significant changes or additions to PECO’s exposures to credit risk as described in ITEM 1A. RISK FACTORS of Exelon’s 2014 Annual Report on Form 10-K.

See Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for information regarding credit exposure to suppliers.

BGE

There have been no significant changes or additions to BGE’s exposures to credit risk as described in ITEM 1A. RISK FACTORS of Exelon’s 2014 Annual Report on Form 10-K.

See Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for information regarding credit exposure to suppliers.

Collateral (Exelon, Generation, ComEd, PECO and BGE)

Generation

As part of the normal course of business, Generation routinely enters into physical or financial contracts for the sale and purchase of electricity, fossil fuel and other commodities. These contracts either contain express provisions or otherwise permit Generation and its counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable law, if Generation is downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance. Depending on Generation’s net position with a counterparty, the demand could be for the posting of collateral. In the absence of expressly agreed-to provisions that specify the collateral that must be provided, collateral requested will be a function of the facts and circumstances of the situation at the time of the demand. In this case, Generation believes an amount of several months of future payments (i.e. capacity payments) rather than a calculation of fair value is the best estimate for the contingent collateral obligation, which has been factored into the disclosure below. See Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for information regarding collateral requirements.

Generation transacts output through bilateral contracts. The bilateral contracts are subject to credit risk, which relates to the ability of counterparties to meet their contractual payment obligations. Any failure to collect these payments from counterparties could have a material impact on Exelon’s and Generation’s results of operations, cash flows and financial position. As market prices rise above contracted price levels, Generation is required to post collateral with purchasers; as market prices fall below contracted price levels, counterparties are required to post collateral with Generation. In order to post collateral, Generation depends on access to bank credit facilities, which serve as liquidity sources to fund collateral requirements. See Note 9 — Debt and Credit Agreements of the Combined Notes to Consolidated Financial Statements for additional information.

As of March 31, 2015, Generation had cash collateral of $1,428 million posted and cash collateral held of $69 million for counterparties with derivative positions, of which $1,346 million and $8 million in net cash

 

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collateral posted were offset against commodity mark-to-market and interest rate and foreign exchange derivative assets and liabilities related to underlying commodity contracts, respectively. As of March 31, 2015, $5 million of cash collateral posted was not offset against net derivative positions because it was not associated with commodity-related derivatives, were associated with accrual positions, or as of the balance sheet date there were no positions to offset. See Note 17 — Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for information regarding the letters of credit supporting the cash collateral.

ComEd

As of March 31, 2015, ComEd held approximately $2 million of collateral from suppliers in association with energy procurement contracts and held approximately $19 million in the form of cash and letters of credit for both annual and long-term renewable energy contracts. See Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements in this report and Note 3 — Regulatory Matters of the 2014 Exelon Form 10-K for additional information.

PECO

As of March 31, 2015, PECO was not required to post collateral under its energy and natural gas procurement contracts. See Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information.

BGE

BGE is not required to post collateral under its electric supply contracts. As of March 31, 2015, BGE was not required to post collateral under its natural gas procurement contracts. See Note 8 — Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information.

RTOs and ISOs (Exelon, Generation, ComEd, PECO and BGE)

Generation, ComEd, PECO and BGE participate in all, or some, of the established, real-time energy markets that are administered by PJM, ISO-NE, ISO-NY, CAISO, MISO, SPP, AESO, OIESO and ERCOT. In these areas, power is traded through bilateral agreements between buyers and sellers and on the spot markets that are operated by the RTOs or ISOs, as applicable. In areas where there is no spot market, electricity is purchased and sold solely through bilateral agreements. For sales into the spot markets administered by an RTO or ISO, the RTO or ISO maintains financial assurance policies that are established and enforced by those administrators. The credit policies of the RTOs and ISOs may, under certain circumstances, require that losses arising from the default of one member on spot market transactions be shared by the remaining participants. Non-performance or non-payment by a major counterparty could result in a material adverse impact on the Registrants’ results of operations, cash flows and financial positions.

Exchange Traded Transactions (Exelon and Generation)

Generation enters into commodity transactions on NYMEX, ICE and the Nodal exchange. The NYMEX, ICE and Nodal exchange clearinghouses act as the counterparty to each trade. Transactions on the NYMEX, ICE and Nodal exchange must adhere to comprehensive collateral and margining requirements. As a result, transactions on NYMEX, ICE and Nodal exchange are significantly collateralized and have limited counterparty credit risk. Since the fourth quarter of 2014, the exchanges increased initial marginal rates, which required Generation to post higher amounts of initial margin collateral. Generation believes that increased market volatility and extreme weather events, such as the Polar Vortex, contributed to the rate increases.

Long-Term Leases (Exelon)

Exelon’s Consolidated Balance Sheet, as of March 31, 2015, included a $365 million net investment in coal-fired plants in Georgia subject to long-term leases. This investment represents the estimated residual value of

 

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leased assets at the end of the respective lease terms of $685 million, less unearned income of $320 million. As of December 31, 2014, Exelon’s Consolidated Balance sheet included a $361 million net investment in coal-fired plants in Georgia subject to long-term leases, which represented the estimated residual value of leased assets at the end of the respective lease terms of $685 million, less unearned income of $324 million. The lease agreements provide the lessees with fixed purchase options at the end of the lease terms. If the lessee does not exercise the fixed purchase options, Exelon has the ability to operate the stations and keep or market the power itself or require the lessee to arrange for a third party to bid on a service contract for a period following the lease term. Exelon will be subject to residual value risk if the lessee does not exercise the fixed purchase options. This risk is partially mitigated by the fair value of the scheduled payments under the service contract. However, such payments are not guaranteed. Further, the term of the service contract is less than the expected remaining useful life of the plants and, therefore, Exelon’s exposure to residual value risk will not be mitigated by payments under the service contract in this remaining period. Lessee performance under the lease agreements is supported by collateral and credit enhancement measures. Management regularly evaluates the creditworthiness of Exelon’s counterparties to these long-term leases. Exelon monitors the continuing credit quality of the credit enhancement party.

Interest Rate and Foreign Exchange Risk (Exelon, Generation, ComEd, PECO and BGE)

The Registrants use a combination of fixed-rate and variable-rate debt to manage interest rate exposure. The Registrants may also utilize fixed-to-floating interest rate swaps, which are typically designated as fair value hedges, as a means to manage their interest rate exposure. In addition, the Registrants may utilize interest rate derivatives to lock in rate levels in anticipation of future financings, which are typically designated as cash flow hedges. These strategies are employed to manage interest rate risks. At March 31, 2015, Exelon had $900 million of notional amounts of fixed-to-floating hedges outstanding and Exelon and Generation had $3,068 million and $768 million of notional amounts of floating-to-fixed hedges outstanding, respectively. Assuming the fair value and cash flow interest rate hedges are 100% effective, a hypothetical 50 bps increase in the interest rates associated with unhedged variable-rate debt (excluding Commercial Paper) and fixed-to-floating swaps would result in approximately a $1 million decrease in Exelon Consolidated pre-tax income for the three months ended March 31, 2015. To manage foreign exchange rate exposure associated with international energy purchases in currencies other than U.S. dollars, Generation utilizes foreign currency derivatives, which are typically designated as economic hedges.

Equity Price Risk (Exelon and Generation)

Exelon and Generation maintain trust funds, as required by the NRC, to fund certain costs of decommissioning Generation’s nuclear plants. As of March 31, 2015, Generation’s decommissioning trust funds are reflected at fair value on its Consolidated Balance Sheets. The mix of securities in the trust funds is designed to provide returns to be used to fund decommissioning and to compensate Generation for inflationary increases in decommissioning costs; however, the equity securities in the trust funds are exposed to price fluctuations in equity markets, and the value of fixed-rate, fixed-income securities are exposed to changes in interest rates. Generation actively monitors the investment performance of the trust funds and periodically reviews asset allocation in accordance with Generation’s NDT fund investment policy. A hypothetical 10% increase in interest rates and decrease in equity prices would result in a $629 million reduction in the fair value of the trust assets. This calculation holds all other variables constant and assumes only the discussed changes in interest rates and equity prices. See ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of equity price risk as a result of the current capital and credit market conditions.

 

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Item 4. Controls and Procedures

During the first quarter of 2015, each Registrant’s management, including its principal executive officer and principal financial officer, evaluated the effectiveness of that Registrant’s disclosure controls and procedures related to the recording, processing, summarizing and reporting of information in its periodic reports that it files with the SEC. These disclosure controls and procedures have been designed by each Registrant to ensure that (a) information relating to that Registrant, including its consolidated subsidiaries, that is required to be included in filings under the Securities Exchange Act of 1934, is accumulated and made known to that Registrant’s management, including its principal executive officer and principal financial officer, by other employees of that Registrant and its subsidiaries as appropriate to allow timely decisions regarding required disclosure, and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people.

Consistent with guidance issued by the Securities and Exchange Commission that an assessment of internal controls over financial reporting of a recently acquired business may be omitted from management’s evaluation of disclosure controls and procedures, management is excluding an assessment of such internal controls of Integrys, which was acquired on November 1, 2014, from its evaluation of the effectiveness of Exelon’s and Generation’s disclosure controls and procedures. The total assets related to Integrys are approximately 0.74% and 1.43%, respectively, and total revenues related to Integrys are 8.24% and 12.46%, respectively, of Exelon’s and Generation’s related consolidated financial statement amounts as of and for the three months ended March 31, 2015.

Accordingly, as of March 31, 2015, the principal executive officer and principal financial officer of each Registrant concluded that such Registrant’s disclosure controls and procedures were effective to accomplish its objectives. All Registrants continually strive to improve its disclosure controls and procedures to enhance the quality of its financial reporting and to maintain dynamic systems that change as conditions warrant. There have been no changes in internal control over financial reporting that occurred during the first quarter of 2015 that have materially affected, or are reasonably likely to materially affect, any of the Registrant’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1 Legal Proceedings

The Registrants are parties to various lawsuits and regulatory proceedings in the ordinary course of their respective businesses. For information regarding material lawsuits and proceedings, see (a) ITEM 3. LEGAL PROCEEDINGS of Exelon’s 2014 Form 10-K and (b) Note 5 — Regulatory Matters and Note 17 — Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements in PART I, ITEM 1. FINANCIAL STATEMENTS of this Report. Such descriptions are incorporated herein by these references.

 

Item 1A Risk Factors

Risks Related to Exelon

At March 31, 2015, the Registrant’s risk factors were consistent with the risk factors described in Exelon’s 2014 Form 10-K.

 

Item 4 Mine Safety Disclosures

Exelon, Generation, ComEd, PECO and BGE

Not applicable to the Registrants.

 

Item 6 Exhibits

Certain of the following exhibits are incorporated herein by reference under Rule 12b-32 of the Securities and Exchange Act of 1934, as amended. Certain other instruments which would otherwise be required to be listed below have not been so listed because such instruments do not authorize securities in an amount which exceeds 10% of the total assets of the applicable Registrant and its subsidiaries on a consolidated basis and the relevant Registrant agrees to furnish a copy of any such instrument to the Commission upon request.

 

Exhibit

No.

  

Description

    4.1    Supplemental Indenture dated as of February 18, 2015 from ComEd to BNY Mellon Trust Company of Illinois, as trustee, and D.G. Donovan, as co-trustee (file no. 1-1839, Form 8-K dated March 2, 2015, Exhibit 4.1).
101.INS    XBRL Instance
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation
101.DEF    XBRL Taxonomy Extension Definition
101.LAB    XBRL Taxonomy Extension Labels
101.PRE    XBRL Taxonomy Extension Presentation

 

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Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934 as to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 filed by the following officers for the following companies:

 

31-1    — Filed by Christopher M. Crane for Exelon Corporation
31-2    — Filed by Jonathan W. Thayer for Exelon Corporation
31-3    — Filed by Kenneth W. Cornew for Exelon Generation Company, LLC
31-4    — Filed by Bryan P. Wright for Exelon Generation Company, LLC
31-5    — Filed by Anne R. Pramaggiore for Commonwealth Edison Company
31-6    — Filed by Joseph R. Trpik, Jr. for Commonwealth Edison Company
31-7    — Filed by Craig L. Adams for PECO Energy Company
31-8    — Filed by Phillip S. Barnett for PECO Energy Company
31-9    — Filed by Calvin G. Butler, Jr. for Baltimore Gas and Electric Company
31-10    — Filed by David M. Vahos for Baltimore Gas and Electric Company

Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes — Oxley Act of 2002) as to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 filed by the following officers for the following companies:

 

32-1    — Filed by Christopher M. Crane for Exelon Corporation
32-2    — Filed by Jonathan W. Thayer for Exelon Corporation
32-3    — Filed by Kenneth W. Cornew for Exelon Generation Company, LLC
32-4    — Filed by Bryan P. Wright for Exelon Generation Company, LLC
32-5    — Filed by Anne R. Pramaggiore for Commonwealth Edison Company
32-6    — Filed by Joseph R. Trpik, Jr. for Commonwealth Edison Company
32-7    — Filed by Craig L. Adams for PECO Energy Company
32-8    — Filed by Phillip S. Barnett for PECO Energy Company
32-9    — Filed by Calvin G. Butler, Jr. for Baltimore Gas and Electric Company
32-10    — Filed by David M. Vahos for Baltimore Gas and Electric Company

 

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SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXELON CORPORATION

 

/s/    CHRISTOPHER M. CRANE

  

/s/    JONATHAN W. THAYER

Christopher M. Crane    Jonathan W. Thayer

President and Chief Executive Officer

(Principal Executive Officer) and Director

  

Senior Executive Vice President and Chief Financial
Officer

(Principal Financial Officer)

/s/    DUANE M. DESPARTE

  
Duane M. DesParte   

Senior Vice President and Corporate Controller

(Principal Accounting Officer)

  

April 29, 2015

Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXELON GENERATION COMPANY, LLC

 

/s/    KENNETH W. CORNEW

  

/s/    BRYAN P. WRIGHT

Kenneth W. Cornew    Bryan P. Wright

President and Chief Executive Officer

(Principal Executive Officer)

  

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

/s/    ROBERT M. AIKEN

  
Robert M. Aiken   
Chief Accounting Officer   
(Principal Accounting Officer)   

April 29, 2015

 

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Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMMONWEALTH EDISON COMPANY

 

/s/    ANNE R. PRAMAGGIORE

  

/s/    JOSEPH R. TRPIK, JR.

Anne R. Pramaggiore    Joseph R. Trpik, Jr.

President and Chief Executive Officer

(Principal Executive Officer)

  

Senior Vice President, Chief Financial Officer and
Treasurer

(Principal Financial Officer)

/s/    GERALD J. KOZEL

  
Gerald J. Kozel   

Vice President and Controller

(Principal Accounting Officer)

  

April 29, 2015

Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PECO ENERGY COMPANY

 

/s/    CRAIG L. ADAMS

  

/s/    PHILLIP S. BARNETT

Craig L. Adams    Phillip S. Barnett

President and Chief Executive Officer

(Principal Executive Officer)

  

Senior Vice President, Chief Financial Officer and
Treasurer

(Principal Financial Officer)

/s/    SCOTT A. BAILEY

  
Scott A. Bailey   

Vice President and Controller

(Principal Accounting Officer)

  

April 29, 2015

Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BALTIMORE GAS AND ELECTRIC COMPANY

 

/s/    CALVIN G. BUTLER, JR.

  

/s/    DAVID M. VAHOS

Calvin G. Butler, Jr.    David M. Vahos

Chief Executive Officer

(Principal Executive Officer)

   Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)

/s/    MATTHEW N. BAUER

  
Matthew N. Bauer   

Vice President and Controller

(Principal Accounting Officer)

  

April 29, 2015

 

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