Early Plant Retirements (Exelon and Generation)

9 Months Ended

Sep. 30, 2021

Property, Plant and Equipment [Abstract]

Early Plant Retirements (Exelon and Generation)

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 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

On August 27, 2020, Generation announced that it intended to permanently cease generation operations at Byron in September 2021 and at Dresden in November 2021. Neither of these nuclear plants cleared in PJM’s capacity auction for the 2022-2023 planning year held in May 2021. Generation’s Braidwood and LaSalle nuclear plants in Illinois did clear in the capacity auction, but were also showing increased signs of economic distress.

On September 15, 2021, the Illinois Public Act 102-0662 was signed into law by the Governor of Illinois (“Clean Energy Law”). The Clean Energy Law is designed to achieve 100% carbon-free power by 2045 to enable the state’s transition to a clean energy economy. Among other things, the Clean Energy Law authorizes the IPA to procure up to 54.5 million CMCs from qualifying nuclear plants for a five-year period beginning on June 1, 2022 through May 31, 2027. CMCs are credits for the carbon-free attributes of eligible nuclear power plants in PJM. The Byron, Dresden, and Braidwood nuclear plants located in Illinois will be eligible to participate in the CMC procurement process and, if awarded contracts, would be committed to operate through May 31, 2027. See Note 3 — Regulatory Matters for additional information. Following enactment of the legislation, Generation announced on September 15, 2021, that it has reversed its previous decision to retire Byron and Dresden given the opportunity for additional revenue under the Clean Energy Law. In addition, Generation no longer considers the Braidwood or LaSalle nuclear plants to be at risk for premature retirement.

As a result of the decision to early retire Byron and Dresden, Exelon and Generation recognized certain one-time charges in the third and fourth quarters of 2020 related to materials and supplies inventory reserve adjustments, employee-related costs including severance benefit costs, and construction work-in-progress impairments, among other items. In addition, there were ongoing annual financial impacts stemming from shortening the expected economic useful lives of these nuclear plants primarily related to accelerated depreciation of plant assets (including any ARC), accelerated amortization of nuclear fuel, and changes in ARO accretion expense associated with the changes in decommissioning timing and cost assumptions to reflect an earlier retirement date.

In the third quarter of 2021, Exelon and Generation reversed $81 million of severance benefit costs and $13 million of other one-time charges initially recorded in Operating and maintenance expense in the third and fourth quarters of 2020 associated with the early retirements. In addition, Generation updated the expected economic useful life for both facilities to 2044 and 2046 for Byron Units 1 and 2, respectively, and to 2029 and 2031 for Dresden Units 2 and 3, respectively, the end of the respective NRC operating license for each unit. Depreciation was therefore adjusted beginning September 15, 2021, to reflect these extended useful life estimates. See Note 8 — Nuclear Decommissioning for additional detail on changes to the nuclear decommissioning ARO balances resulting from the initial decision and subsequent reversal of the decision to early retire Byron and Dresden.

The total impact for the three and nine months ended September 30, 2021 and 2020 in Exelon's and Generation's Consolidated Statements of Operations and Comprehensive Income resulting from the initial decision and subsequent reversal of the decision to early retire Byron and Dresden is summarized in the table below.

Income statement expense (pre-tax)	Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021		Three and Nine Months Ended September 30, 2020
Depreciation and amortization
Accelerated depreciation(a)	$	574	$	1,805	$	254
Accelerated nuclear fuel amortization	42		148		14
Operating and maintenance
One-time charges	(94)		(94)		220
Other charges	4		8		34
Contractual offset(b)	(60)		(451)		(129)
Total	$	466	$	1,416	$	393

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(a)Includes the accelerated depreciation of plant assets including any ARC.

(b)Reflects contractual offset for ARO accretion and ARC depreciation and excludes any changes in earnings in the NDT funds. Decommissioning-related impacts were not offset for the Byron units starting in the second quarter of 2021 due to the inability to recognize a regulatory asset at ComEd. With Generation’s September 15, 2021 reversal of the previous decision to retire Byron, Generation resumed contractual offset for Byron as of that date. Based on the regulatory agreement with the ICC, decommissioning-related activities are offset in Exelon's and Generation's Consolidated

Statements of Operations and Comprehensive Income as long as the net cumulative decommissioning-related activities result in a regulatory liability at ComEd. The offset resulted in an equal adjustment to the noncurrent payables to ComEd at Generation and an adjustment to the regulatory liabilities at ComEd. See Note 8 — Nuclear Decommissioning for additional information.

Generation remains committed to continued operations for its other nuclear plants receiving state-supported payments under the Illinois ZES (Clinton and Quad Cities), New Jersey ZEC program (Salem), and the New York CES (FitzPatrick, Ginna, and Nine Mile Point) assuming the continued effectiveness of such programs. To the extent such programs do not operate as expected over their full terms, each of these plants would be at heightened risk for early retirement, which could have a material impact on Exelon’s and Generation’s future financial statements. See Note 3 — Regulatory Matters for additional information on the New Jersey ZEC program and Note 3 — Regulatory Matters of the 2020 Form 10-K for additional information on the Illinois ZES and New York CES.

Exelon continues to work with stakeholders on state policy solutions to support continued operation of our nuclear fleet, while also advocating for broader market reforms at the regional and federal level. The absence of such solutions or reforms could have a material unfavorable impact on Exelon's and Generation's future results of operations.

Other Generation

In March 2018, Generation notified ISO-NE of its plans to early retire, among other assets, the Mystic Generating Station's units 8 and 9 (Mystic 8 and 9) absent regulatory reforms to properly value reliability and regional fuel security. Thereafter, ISO-NE identified Mystic 8 and 9 as being needed to ensure fuel security for the region and entered into a cost of service agreement with these two units for the period between June 1, 2022 - May 31, 2024. The agreement was approved by FERC in December 2018.

On June 10, 2020, Generation filed a complaint with FERC against ISO-NE stating that ISO-NE failed to follow its tariff with respect to its evaluation of Mystic 8 and 9 for transmission security for the 2024 to 2025 Capacity Commitment Period and that the modifications that ISO-NE made to its unfiled planning procedures to avoid retaining Mystic 8 and 9 should have been filed with FERC for approval. On August 17, 2020, FERC issued an order denying the complaint. As a result, on August 20, 2020, Exelon determined that Generation will permanently cease generation operations at Mystic 8 and 9 at the expiration of the cost of service commitment in May 2024. See Note 3 — Regulatory Matters for additional discussion of Mystic’s cost of service agreement.

As a result of the decision to early retire Mystic 8 and 9, Exelon and Generation recognized $43 million in the third quarter of 2020 of one-time charges related to an expected long-term contract termination and materials and supplies reserve adjustments, among other items. In addition, there are financial impacts stemming from shortening the expected economic useful life of Mystic 8 and 9 primarily related to accelerated depreciation of plant assets. Exelon and Generation recorded an immaterial amount of incremental Depreciation and amortization expense for the three months ended September 30, 2021 and $41 million for the nine months ended September 30, 2021. Exelon and Generation recorded incremental Depreciation and amortization expense of $6 million for the three and nine months ended September 30, 2020.