Early Plant Retirements (Exelon and Generation)

Exelon and Generation continuously evaluate factors that affect the current and expected economic value of Generation’s plants, including, but not limited to: market power prices, results of capacity auctions, potential legislative and regulatory solutions to ensure plants are fairly compensated for the benefits they provide through their carbon-free emissions, reliability, or fuel security, and the impact of potential rules from the EPA requiring reduction of carbon and other emissions and the efforts of states to implement those final rules. The precise timing of an early retirement date for any plant, and the resulting financial statement impacts, may be affected by many factors, including the status of potential regulatory or legislative solutions, results of any transmission system reliability study assessments, the nature of any co-owner requirements and stipulations, and NDT fund requirements for nuclear plants, among other factors. However, the earliest retirement date for any plant would usually be the first year in which the unit does not have capacity or other obligations, and where applicable, just prior to its next scheduled nuclear refueling outage.

Nuclear Generation

In 2015 and 2016, Generation identified the Clinton and Quad Cities nuclear plants in Illinois, Ginna and Nine Mile Point nuclear plants in New York and Three Mile Island nuclear plant in Pennsylvania as having the greatest risk of early retirement based on economic valuation and other factors.

On June 2, 2016, Generation announced it would shutdown the Clinton and Quad Cities nuclear plants on June 1, 2017 and June 1, 2018, respectively, given a lack of progress on Illinois energy legislation and MISO market reforms, and capacity auctions results that failed to cover cash operating costs and a risk-adjusted rate of return to shareholders.

On December 7, 2016, Illinois FEJA was signed into law by the Governor of Illinois and included a ZES that now provides compensation to Clinton and Quad Cities for the carbon-free attributes of their production through 2027. With the passage of the Illinois ZES in December 2016, Generation reversed its June 2016 decision to permanently cease generation operations at the Clinton and Quad Cities nuclear generating plants. Clinton and Quad Cities are currently licensed to operate through 2026 and 2032, respectively. See Note 4 - Regulatory Matters for additional information on the Illinois FEJA and the ZES.

In New York, the Ginna and Nine Mile Point nuclear plants faced similar economic challenges and on August 1, 2016, the NYPSC issued an order adopting the CES, which now provides payments to Ginna and Nine Mile Point, as well as FitzPatrick, for the environmental attributes of their production through 2029. Ginna and Nine Mile Point Unit 1 are currently licensed to operate through 2029, and Nine Mile Point Unit 2 through 2046. See Note 4 - Regulatory Matters for additional information on the New York CES.

Assuming the continued effectiveness of both the Illinois ZES and the New York CES, Generation and CENG, through its ownership of Ginna and Nine Mile Point, no longer consider Clinton, Quad Cities, Ginna or Nine Mile Point to be at heightened risk for early retirement. However, to the extent either the Illinois ZES or the New York CES programs do not operate as expected over their full terms, each of these plants could again be at heightened risk for early retirement, which could have a material impact on Exelon’s and Generation’s future financial statements.

In Pennsylvania, the TMI nuclear plant failed to clear in the May 2017 PJM capacity auction for the 2020-2021 planning year, the third consecutive year that TMI failed to clear in the PJM base residual capacity auction and on May 30, 2017, based on these capacity auction results, prolonged periods of low wholesale power prices, and the absence of federal or state policies that place a value on nuclear energy for its ability to produce electricity without air pollution, Exelon announced that Generation will permanently cease generation operations at TMI on or about September 30, 2019. TMI is currently committed to operate through May 2019 and is licensed to operate through 2034. Generation has filed the required market and regulatory notifications to shutdown the plant. PJM has subsequently notified Generation that it has not identified any reliability issues and has approved the deactivation of TMI as proposed.

In 2010, Generation announced that Oyster Creek would retire by the end of 2019 as part of an agreement with the State of New Jersey to avoid significant costs associated with the construction of cooling towers to meet the State's then new environmental regulations. Since then, like other nuclear sites, Oyster Creek continued to face rising operating costs amid a historically low wholesale power price environment. On February 2, 2018, Exelon announced that Generation will permanently cease generation operations at the Oyster Creek nuclear plant at the end of its current operating cycle and permanently ceased generation operations in September 2018.

As a result of these early nuclear plant retirement decisions, Exelon and Generation recognized one-time charges in Operating and maintenance expense related to materials and supplies inventory reserve adjustments, employee-related costs and CWIP impairments, among other items. In addition to these one-time charges, annual incremental non-cash charges to earnings stemming from shortening the expected economic useful lives primarily related to accelerated depreciation of plant assets (including any ARC), accelerated amortization of nuclear fuel, and additional ARO accretion expense associated with the changes in decommissioning timing and cost assumptions were also recorded. See Note 15 — Asset Retirement Obligations for additional information on changes to the nuclear decommissioning ARO balance. The total annual impact of these charges by year are summarized in the table below.



Income statement expense (pre-tax)	2018^(a)		2017^(b)		2016^(c)
Depreciation and Amortization
Accelerated depreciation^(d)	$	539	$	250	$	712
Accelerated nuclear fuel amortization	57		12		60
Operating and Maintenance
One-time charges^(e,f)	32		77		26
Change in ARO accretion, net of any contractual offset^(g)	—		—		2
Contractual offset for ARC depreciation^(g)	—		—		(86		)
Total	$	628	$	339	$	714

_________


(a)	Reflects incremental accelerated depreciation for TMI and Oyster Creek. The Oyster Creek year-to-date amounts are from February 2, 2018 through September 17, 2018.


(b)	Reflects incremental charges for TMI including incremental accelerated depreciation and amortization from May 30, 2017 through December 31, 2017.

(c)

Reflects incremental charges for Clinton and Quad Cities including incremental accelerated depreciation and amortization from June 2, 2016 through December 6, 2016. In December 2016, as a result of reversing its retirement decision for Clinton and Quad Cities, Exelon and Generation updated the expected economic useful life for both facilities, to 2027 for Clinton, commensurate with the end of the Illinois ZES, and to 2032 for Quad Cities, the end of its current operating license. Depreciation was therefore adjusted beginning December 7, 2016, to reflect these extended useful life estimates.


(d)	Reflects incremental accelerated depreciation of plant assets, including any ARC.


(e)	Primarily includes materials and supplies inventory reserve adjustments, employee related costs and CWIP impairments. Excludes the charge to Operating and maintenance expense from the ARO remeasurement due to the announced sale of Oyster Creek. See Note 5 — Mergers, Acquisitions and Dispositions for additional information.


(f)	In June 2016, as a result of the retirement decision for Clinton and Quad Cities, Exelon and Generation recognized one-time charges of $146 million. In December 2016, as a result of reversing its retirement decision for Clinton and Quad Cities, Exelon and Generation reversed approximately $120 million of these one-time charges initially recorded in June 2016.

(g)

For Quad Cities based on the regulatory agreement with the ICC, decommissioning-related activities are offset within Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income. The offset results in an equal adjustment to the noncurrent payables to ComEd at Generation and an adjustment to the regulatory liabilities at ComEd. Likewise, ComEd has recorded an equal noncurrent affiliate receivable from Generation and corresponding regulatory liability.

In 2017, PSEG made public similar financial challenges facing its New Jersey nuclear plants, including Salem, of which Generation owns a 42.59% ownership interest. PSEG is the operator of Salem and also has the decision making authority to retire Salem.

On May 23, 2018, New Jersey enacted legislation that established a ZEC program, similar to that in Illinois and New York, that will provide compensation for nuclear plants that demonstrate to the NJBPU that they meet certain requirements, including that they make a significant contribution to air quality in the state and that their revenues are insufficient to cover their costs and risks. The NJBPU must complete its processes for determining eligibility for, and participation in, the ZEC program by April 18, 2019. On December 19, 2018, PSEG submitted its application for Salem. Assuming the successful implementation of the New Jersey ZEC program and the selection of Salem as one of the qualifying facilities, the New Jersey ZEC program has the potential to mitigate the heightened risk of earlier retirement for Salem. See Note 4 - Regulatory Matters for additional information.

The following table provides the balance sheet amounts as of December 31, 2018 for Generation’s ownership share of the significant assets and liabilities associated with Salem that would potentially be impacted by a decision to permanently cease generation operations.



	December 31, 2018
Asset Balances
Materials and supplies inventory	$	45
Nuclear fuel inventory, net	118
Completed plant, net	538
Construction work in progress	44
Liability Balances
Asset retirement obligation	(395		)

NRC License Renewal Term	2036 (unit 1)
	2040 (unit 2)

Generation’s Dresden, Byron, and Braidwood nuclear plants in Illinois are also showing increased signs of economic distress, which could lead to an early retirement, in a market that does not currently compensate them for their unique contribution to grid resiliency and their ability to produce large amounts of energy without carbon and air pollution. The May 2018 PJM capacity auction for the 2021-2022 planning year resulted in the largest volume of nuclear capacity ever not selected in the auction, including all of Dresden, and portions of Byron and Braidwood. Exelon continues to work with stakeholders on state policy solutions, while also advocating for broader market reforms at the regional and federal level.

Other Generation

On March 29, 2018, Generation notified grid operator ISO-NE of its plans to early retire its Mystic Generating Station assets absent regulatory reforms on June 1, 2022, at the end of the current capacity commitment for Mystic Units 7 and 8. Mystic Unit 9 is currently committed through May 2021.

The ISO-NE announced that it would take a three-step approach to fuel security.

•

First, on May 1, 2018, ISO-NE made a filing with FERC requesting waiver of certain tariff provisions to allow it to retain Mystic Units 8 and 9 for fuel security for the 2022 - 2024 capacity commitment periods. FERC denied the waiver request on procedural grounds on July 2, 2018 and ordered ISO-NE to (i) make a filing within 60 days providing for the filing of a short-term cost-of-service agreement to address fuel security concerns and (ii) make a filing by July 1, 2019 proposing permanent tariff revisions that would improve its market design to better address regional fuel security concerns.


•	Second, in accordance with FERC's July 2, 2018 order, on August 31, 2018, ISO-NE made a filing with FERC proposing short-term tariff changes to permit it to retain a resource for fuel security reliability reasons, which FERC accepted on December 3, 2018.

•

Third, ISO-NE stated its intention to work with stakeholders to develop long-term market rule changes to address system resiliency considering significant reliability risks identified in ISO-NE’s January 2018 fuel security report. Changes to market rules are necessary because critical units to the region, such as Mystic Units 8 and 9, cannot recover future operating costs, including the cost of procuring fuel. In its July 2, 2018 order, FERC ordered ISO-NE to make a filing by July 1, 2019 proposing permanent tariff revisions that would improve its market design to better address regional fuel security concerns. In January 2019, ISO-NE has indicated that it intends to seek an extension of the deadline for this filing to November 15, 2019.

On May 16, 2018, Generation made a filing with FERC to establish cost-of-service compensation and terms and conditions of service for Mystic Units 8 and 9 for the period between June 1, 2022 - May 31, 2024. Among the costs included in the filing are costs associated with the Everett Marine Terminal. On December 20, 2018, FERC issued an order accepting the cost of service agreement reflecting a number of adjustments to the annual fixed revenue requirement and allowing for recovery of a substantial portion of the costs associated with the Everett Marine Terminal. FERC also directed a paper hearing on ROE using a new methodology. Initial and reply briefs on ROE will be due on April 18, 2019 and July 18, 2019. These will be reflected in a compliance filing due February 18, 2019. On January 4, 2019, Generation notified ISO-NE that it will participate in the Forward Capacity Market auction for the 2022 - 2023 capacity commitment period. In addition, on January 22, 2019, Exelon and several other parties filed requests for rehearing of certain findings of the December 20, 2018 order. The request for rehearing does not alter Generation's commitment to participate in the Forward Capacity Auction for the 2022-2023 capacity commitment period.

The following table provides the balance sheet amounts as of December 31, 2018 for Generation’s significant assets and liabilities associated with the Mystic Units 8 and 9 and Everett Marine Terminal assets that would potentially be impacted by a decision to permanently cease generation operations.



	December 31, 2018
Asset Balances
Materials and supplies inventory	$	30
Fuel inventory	20
Completed plant, net	901
Construction work in progress	9
Liability Balances
Asset retirement obligation	(1		)

To ensure the continued reliable supply of fuel to Mystic Units 8 and 9 while they remain operating, on October 1, 2018, Generation acquired the Everett Marine Terminal in Massachusetts for a purchase price of $81 million, with the majority of the fair value allocated to Property, plant and equipment and no goodwill recorded. Generation also settled its existing long-term gas supply agreement, resulting in a pre-tax gain of $75 million, which is included within Purchased power and fuel expense in Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income.